United States General Accounting Office

GAO Report to the Honorable

Byron Dorgan, U.S. Senate

October 1998 U.S. AGRICULTURAL

TRADE

Canadian Wheat Issues

GAO/NSIAD-99-21

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-280949 

October 16, 1998

The Honorable Byron Dorgan

United States Senate

Dear Senator Dorgan:

As you requested, we have reviewed issues involving Canadian grain exports to the United

States. Our review focused on the operations of the Canadian Wheat Board and the trade

remedies applicable to the activities of state trading enterprises.

As you requested, we plan no further distribution of this report until 30 days after its issue date,

unless you publicly announce its contents earlier. At that time, we will send copies of this

report to the Secretary of Agriculture, the U.S. Trade Representative, the Commissioner of

Customs, the U.S. Attorney General, the Secretary of Commerce, the Chairman of the

International Trade Commission, Canadian government officials, and other interested parties.

We will also make copies available to others on request.

This report was done under the direction of JayEtta Z. Hecker, Associate Director. If you have

any questions concerning this report, please contact her on (202) 512-8984. The major

contributors to this report are listed in appendix VIII.

Sincerely yours,

Benjamin F. Nelson

Director, International Relations

 and Trade Issues
Executive Summary

Purpose U.S.-Canadian grain trade has been a source of contentious debate

between the two countries over the past dozen years as Canadian wheat

exports to the United States have increased. Some U.S. grain industry

participants and observers have been concerned about this development,

partially because grain sales are handled differently in the two countries.

In the United States, private grain companies compete to buy and sell

grain. These grain companies typically transact their own overseas sales

on an individual basis. In Canada, the majority of the grain trade is handled

by the Canadian Wheat Board (CWB), a government-backed entity referred

to as a state trading enterprise (STE), to which western Canadian farmers

must sell their wheat and barley for domestic human consumption or

export.

Some critics and U.S. officials are concerned about the CWB’s unique status

as a quasi-governmental entity and its possible effects on U.S. grain

farmers and sellers in international markets. Some grain industry

observers say that the CWB engages in unfair trade practices. There is also

some concern about data limitations and legal remedies available to the

United States to counteract these practices.

In response to concerns about the CWB’s impact in the international grain

market, Senator Byron Dorgan asked GAO to review some key issues

relative to the CWB. In response, this report discusses the following:

(1) CWB operations, government assistance to the CWB and the Canadian

farmer, and ongoing changes to the environment in which the CWB

operates; (2) the availability of data to ascertain CWB pricing practices, and

efforts to increase the amount of data available; and (3) the nature of trade

remedies available to address the operations of STEs, and the frequency

with which these remedies have been applied to STEs. In addition, GAO is

providing information on the CWB’s role in commodities and futures

markets, a summary of studies on the CWB’s effect on the Canadian farmer,

and the applicability of U.S. antitrust laws to the CWB (see apps. II, III, and

VII).

Background STEs, such as the CWB, are enterprises that are authorized to engage in

trade and are owned, sanctioned, or otherwise supported by the

government. STEs are legitimate trading entities under the World Trade

Organization (WTO) and are subject to rules established by the General

Agreement on Tariffs and Trade (GATT).1

 The WTO Agreement requires that

1

The WTO was created in 1994 by the WTO Agreement to be the formal organization that encompasses

all disciplines (practices) established by the GATT. As an organization, GATT officially ended on

December 31, 1995.

Page 2 GAO/NSIAD-99-21 U.S. Agricultural Trade
Executive Summary

STEs purchase and sell their goods solely on the basis of “commercial

considerations,” including factors such as quality, price, market, and

transportation. In addition, countries must report certain types of

information on the operations of their STEs to the WTO annually to provide

members with information to help assure that STEs operate in accordance

with WTO disciplines.2

The CWB, Canada’s fifth largest export earner, was established in 1935 to

regulate Canada’s grain trade. It is currently the largest grain marketing

board in the world, handling about 20 percent of the world wheat and

barley trade. The CWB has a monopoly on certain Canadian grain sales. It

has statutory authority to acquire all western Canadian wheat and barley

sold for domestic human consumption or export. Western Canadian

farmers are required to sell their wheat and barley for domestic human

consumption or export to the CWB, which then markets the commodity in

domestic and foreign markets. Generally, the CWB pays the farmers an

initial payment for their wheat, sells the wheat, and then may pay the

farmers an interim and a final payment by the end of the marketing year.3

The Canadian government backs the CWB operations through the CWB’s

status as a crown corporation.4

Changing rules under trade agreements and increases in Canadian grain

imports into the United States have contributed to concerns about

U.S.-Canadian grain trade over the past 10 years. The 1989 U.S.-Canada

Free Trade Agreement (CFTA), the 1994 North American Free Trade

Agreement (NAFTA), and the WTO agreements modified the rules regarding

U.S.-Canadian grain trade and provided additional dispute resolution

mechanisms to address concerns. Between 1990 and 1997, U.S. imports of

Canadian red spring wheat increased by more than 2,000 percent to

1,449,600 tons, and imports of Canadian durum wheat increased by

57 percent to 427,600 tons.

2

The 1994 Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and

Trade defines STEs as “governmental and non-governmental enterprises, including marketing boards,

which have been granted exclusive or special rights or privileges, including statutory or constitutional

powers, in the exercise of which they influence through their purchases or sales the level or direction

of imports or exports.” STEs are also defined in U.S. law at 19 U.S.C. 2906(6).

3

If the net value of the grain is greater than the initial payment to the farmers, the farmers receive the

difference in interim and/or final payments.

4

A crown corporation, or a semiautonomous government organization, is used to administer and

manage public services in which enterprise and public accountability are combined.

Page 3 GAO/NSIAD-99-21 U.S. Agricultural Trade
Executive Summary

Results in Brief The CWB is a state trading enterprise with a monopoly on certain Canadian

grain sales and receives Canadian government subsidies in a number of

direct and indirect ways. The Canadian government also provides other

assistance to its wheat and barley farmers. The CWB’s operating

environment is undergoing changes, some of which are expected to make

the United States a more attractive market for Canadian grain. At the same

time, there is a greater presence of U.S. grain companies operating in

Canada, and the CWB is dealing more frequently with private companies in

the sale of Canadian grain.

Little information on actual CWB contracts is publicly available. Although

U.S. Customs and the U.S. Department of Agriculture (USDA) collect a great

deal of information on imports of Canadian grain into the United States,

these data cannot be used to ascertain CWB export prices. The format that

countries use to report on their state trading enterprises’ activities to the

WTO has recently been revised. However, U.S. officials are concerned that

it does not go far enough to increase the openness of the pricing practices

of certain state trading enterprises, such as the CWB.

Trade remedies to combat disruptive or trade-distorting imports under

U.S. trade laws do not treat STEs any differently from other entities

involved in international trade. These U.S. trade laws can address trade

issues such as dumping,5

 actionable subsidies,6 and surges in imports.

In addition, STE activities may be subject to dispute settlement provisions

under international trade agreements if the activities are inconsistent with

an obligation agreed to by the government of the STE. Relatively few trade

remedy actions have been taken involving STEs—15 since 1980—with 8

actions involving an export STE and 7 actions involving an import STE.

5

“Dumping” is generally defined as the sale of an exported product at a price lower than that charged

for a like product in the “home” market of the exporters or at a price below cost.

6

As used in this report, an “actionable” subsidy is a subsidy for which U.S. law provides a remedy in

the form of an increased or “countervailing” duty. Not all benefits that governments confer on their

products are actionable or countervailable subsidies. Rather, in general, subsidies must be limited to a

specific group of firms or industries or to a firm’s export activities in order to be covered under the

countervailing duty law.

Page 4 GAO/NSIAD-99-21 U.S. Agricultural Trade
Executive Summary

Principal Findings

CWB Operations and

Government Assistance

Besides operating as a state-sanctioned monopoly, the CWB receives

Canadian government subsidies in a number of direct and indirect ways.

The government guarantees the CWB’s initial payments to farmers, finances

overseas credit sales, and provides research and development funding and

marketing assistance through the Canadian International Grains Institute.

Also, the CWB’s government backing allows it to borrow money at

favorable interest rates. In addition, rail shipment costs for CWB grains are

reduced by the government’s provision of hopper cars to the sector.

Through its status as an STE, the CWB has a system of reimbursing farmers

in multiple payments, rather than in a lump sum at the time of delivery.

According to the government of Canada, the CWB pays farmers an initial

payment of 70-75 percent of the expected final return for their grain. This

payment system gives the CWB flexibility in setting its export prices and

protects it from operating losses due to decreases in market prices.

The Canadian government also provides other assistance to its wheat and

barley farmers, including payment of the costs associated with insurance

programs and one-time payments that compensate agricultural

landowners for the removal of a long-standing subsidy on railroad

shipments. In 1996, the combined subsidies for wheat and barley farmers

amounted to $922 million, or 19 percent of production valued at

$4.8 billion.7

The CWB’s operating environment is undergoing change. Canadian

Parliament Bill C-4, which passed on June 11, 1998, will make a number of

structural changes to the CWB’s mandate, including the establishment of a

producer-majority Board of Directors. Other changes to the CWB’s

operating environment include (1) the removal of a transportation subsidy

in 1995, changes to freight charges, and the privatization of the railcar fleet

in 2002, all of which are expected to make the United States a more

attractive market for Canadian grain; and (2) a reduction in

import-oriented STEs to conduct business with the CWB, compelling the CWB

to deal with private companies more frequently.

7

Unless otherwise noted, all Canadian dollars have been converted to constant 1997 U.S. dollars using

a market exchange rate and the U.S. gross domestic product deflator.

Page 5 GAO/NSIAD-99-21 U.S. Agricultural Trade
Executive Summary

CWB Export Pricing

Information Is Limited

Little information is available on CWB sales transactions. The CWB discloses

limited details about its prices for the wheat and barley that it sells to its

trading partners. USDA officials believe that the lack of transparency

(openness) in the CWB’s pricing methods provides the CWB with a greater

ability to distort trade than is found among private grain traders. The CWB

states that it reveals as much about its prices as its competitors in the

private sector. Some U.S. government officials and U.S. farmers believe

that nontransparent CWB prices make it difficult to assess whether the

CWB’s practices are consistent with its international obligations under

trade agreements. The data collected by Customs and USDA, which include

origin, volume, and value of the grain, cannot be used as part of such an

assessment. This is because the data lack certain details on the quality of

the grain and other specifics of the transaction.

Officials from USDA and U.S. Customs Service are discussing the possibility

of gathering more details on Canadian wheat when it comes into the

United States. However, USDA acknowledges that it would be difficult for

Customs to collect at the border the detailed information that would be

useful in determining whether the CWB is engaging in improper pricing, i.e.

pricing that would justify the use of a trade remedy based on U.S. law or

through the dispute settlement process available under international

agreements. For example, the international tariff classification system

would have to be expanded to take into account variation in wheat protein

levels. The United States is also working through the WTO to increase the

amount of information STEs, such as the CWB, must report on pricing and

other activities. Thus far, the United States and other countries’ efforts to

expand STE reporting requirements on pricing have had limited success.

The WTO has recently updated its format for STE reporting to require more

information on STE pricing practices. However, U.S. officials believe that

the newer format does not require the level of detail necessary to

determine if the CWB and other STEs are engaging in improper pricing.

Trade Remedies Have Been

Applied to STE Activities

Some U.S. grain industry observers have questioned whether trade

remedies under U.S. law and international trade agreements are applicable

to STEs, such as the CWB. In fact, a wide range of trade remedies are

available and have been used to address trade issues involving STEs. Trade

remedies available under U.S. law to combat the effects of disruptive or

trade-distorting imports do not accord STEs special treatment or

recognition. Regardless of whether events or actions giving rise to a trade

remedy were caused by STEs, these remedies may be applied to address

trade issues such as dumping of goods in the U.S. market, actionable

Page 6 GAO/NSIAD-99-21 U.S. Agricultural Trade
Executive Summary

subsidies, or import levels that injure U.S. industry. In addition, because of

the quasi-governmental nature of STEs, their activities may be subject to

dispute settlement procedures under international trade agreements, if

those activities are inconsistent with an obligation agreed to by the

government of the STE.

GAO found that 15 trade remedy actions have been taken since 1980

involving an STE. Three of the actions involving an export STE, including

one dumping investigation and two investigations regarding actionable

subsidies, resulted in the United States imposing additional duties as a

remedy. The United States prevailed in all four of the GATT dispute

settlement procedures it invoked challenging an import STE’s restrictive

trade practices. The United States believed that these practices had

impeded U.S. exporters’ ability to sell in the foreign market; the GATT

dispute panels found that they violated GATT prohibitions against

quantitative restrictions. The panel rulings prompted the countries in

which the import STEs in question operated to either remove the

restrictions in question or sign an agreement with the United States to

work toward resolving the problem.

Recommendations GAO is not making recommendations in this report.

Agency and Country

Comments

GAO requested comments on a draft of this product from USDA, the U.S.

Trade Representative (USTR), the U.S. Department of Commerce, the U.S.

Customs Service, the U.S. Department of Justice, and the U.S.

International Trade Commission. USDA, USTR, and Commerce found the

report to be accurate, fair, and balanced. In addition, USDA noted that the

calculations in the report on Canadian rail subsidies and the value of the

CWB’s lower interest rates constituted new and useful information.

However, USDA emphasized that the CWB, as the sole buyer of Canadian

wheat for domestic human consumption and for export, is able to engage

in trade-distorting actions. USDA believes that GAO did not sufficiently

emphasize the CWB’s pricing flexibility due to its practice of making initial

payments to its farmers of only 70-75 percent of the expected value of

their grain. GAO believes that point was sufficiently established in the draft.

However, GAO did not attempt to quantify the impact of CWB activities on

grain trade.

GAO received technical comments from USDA, USTR, the U.S. Department of

Commerce, the U.S. Customs Service, the U.S. Department of Justice, and

Page 7 GAO/NSIAD-99-21 U.S. Agricultural Trade
Executive Summary

the U.S. International Trade Commission. These technical comments were

incorporated into the report where appropriate.

GAO also discussed portions of the draft report with embassy

representatives from Canada and the CWB. The CWB did not agree with

GAO’s observation regarding the CWB’s pricing flexibility as compared to

private firms. Rather, the CWB stated that it has a competitive disadvantage

in obtaining grain because private grain traders know the CWB’s acquisition

cost. GAO has included the CWB’s statement in its discussion of this issue.

Canada and the CWB also provided technical comments that were

incorporated into the report where appropriate.

Page 8 GAO/NSIAD-99-21 U.S. Agricultural Trade
Page 9 GAO/NSIAD-99-21 U.S. Agricultural Trade
Contents

Executive Summary 2

Chapter 1 

Introduction

14

STEs Are Established for a Variety of Reasons 14

Previous GAO Reports on STEs 14

CWB History 15

CWB Is a Major Grain Trader in the World Market 15

U.S.-Canadian Relations—Grain Trade and the CWB 18

Objectives, Scope, and Methodology 21

Chapter 2 

CWB Operations and

Government Support

for the Grain Sector

26

Operational Characteristics Offer CWB Unique Status 26

Canadian Government Assistance to the CWB 29

Canadian Government Assistance to the Wheat and Barley

Producers

33

Canadian Grain System Is Undergoing Changes 35

Conclusions 40

Agency and Country Comments 40

Chapter 3 

CWB Export Prices

Have Limited

Transparency

41

CWB Provides Limited Information on Its Export Prices 41

Efforts to Increase CWB Pricing Transparency 44

Conclusions 50

Agency and Country Comments 50

Chapter 4 

Trade Remedy

Enforcement

Affecting STEs

51

Trade Remedies Under U.S. Law and International Trade

Agreements

51

CWB and Other STE Involvement in Trade Remedy Actions 53

Conclusions 60

Agency Comments 60

Appendixes Appendix I: Chronology of U.S.-Canadian Grain Trade 62

Appendix II: CWB Usage of the U.S. Futures Markets and

Commodity Exchanges

69

Appendix III: Effect of the CWB on the Canadian Farmer 70

Appendix IV: How U.S. Data on Canadian Grain Are Collected 79

Appendix V: STE Notifications to the WTO for 1995-97 88

Appendix VI: Legal Remedies 95

Page 10 GAO/NSIAD-99-21 U.S. Agricultural Trade
Contents

Appendix VII: Application of U.S. Antitrust Laws and the CWB 102

Appendix VIII: Major Contributors to This Report 108

Related GAO Products 110

Tables Table 2.1: Occurrences of CWB Wheat and Barley Price Pooling

Deficits Covered by Government Assistance, 1943-97

30

Table 2.2: Canadian Wheat and Barley Subsidies in 1996 33

Table 2.3: Comparison Between the 1935 Canadian Wheat Board

Act and the 1998 C-4 Bill

36

Table 4.1: Number of Trade Remedy Actions Involving STEs

Since 1980

54

Table 4.2: U.S. Antidumping and Countervailing Duty

Investigations Involving STEs Notified to the WTO, 1980 to the

Present

56

Table V.1: STE Notifications, 1995-97 89

Table V.2: WTO State Trading Enterprise Notifications by

Country, 1995-97

91

Figures Figure 1.1: Share of World Exports of Wheat by Country, 1994-97 16

Figure 1.2: Share of World Exports of Barley by Country, 1994-97 17

Figure 1.3: U.S. Imports of Canadian Wheat, 1990-97 21

Figure I.1: Time Line of U.S.-Canadian Grain Trade Related

Events

63

Figure IV.1: End Use of Canadian Wheat,

March 1995-December 1997

83

Figure V.1: State Trading Notifications by Product Sector, 1995-97 93

Page 11 GAO/NSIAD-99-21 U.S. Agricultural Trade
Contents

Abbreviations

ABI Automated Broker Interface

AE accredited exporter

AWB Australian Wheat Board

CBOT Chicago Board of Trade

CFTA U.S.-Canadian Free Trade Agreement

CFTC Commodity Futures Trading Commission

CWB Canadian Wheat Board

EC European Community

EEP Export Enhancement Program

FAS Foreign Agricultural Service

GATT General Agreement on Tariffs and Trade

HTS Harmonized Tariff System

ITC International Trade Commission

KCBOT Kansas City Board of Trade

MGE Minneapolis Grain Exchange

MOU memorandum of understanding

NAFTA North American Free Trade Agreement

OECD Organization for Economic Cooperation and Development

PSE producer subsidy equivalent

STE State trading enterprise

USDA U.S. Department of Agriculture

USTR U.S. Trade Representative

WTO World Trade Organization

Page 12 GAO/NSIAD-99-21 U.S. Agricultural Trade
Page 13 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

State trading enterprises (STE)1 have existed for some time and have been

considered legitimate trading entities by the General Agreement on Tariffs

and Trade (GATT) since 1947. STEs2

 have developed in various countries for

various reasons at different points in history. The current Canadian Wheat

Board (CWB) was formally established in 1935, after other cooperative-like

organizations disbanded. It is one of the largest grain traders in the world,

and the largest exporter of wheat and barley to the United States.

STEs Are Established

for a Variety of

Reasons

STEs have been formed for various reasons. For example, the Australian

Wheat Board (AWB) was created in 1939 to help Australian farmers manage

difficulties in marketing wheat during wartime conditions, while Cyprus’

Carrot and Beetroot Marketing Board was established in 1966 because

competition among producers was depressing the domestic and export

prices of carrots and beetroot. Generally, a goal of export-oriented STEs is

to maximize financial returns through the regulation of commodity sales

from a particular country or region. The level of government involvement

and overall size of the STEs’ operations vary widely; thus, it is difficult to

generalize about STE operations or motivations on a global basis.

Previous GAO Reports

on STEs

We have already published a number of reports on state trading issues,

including (1) a July 1995 report that provides a brief summary of trade

remedy laws available to investigate and respond to activities of entities

trading with the United States, including STEs;3

 (2) an August 1995 report

on the General Agreement on Tariffs and Trade/World Trade Organization

(WTO) practices that apply to STEs and the effectiveness of those disciplines

to date;4

 and (3) a June 1996 report that focuses on the activities of three

1

STEs are generally considered to be governmental or nongovernmental enterprises that are

authorized to engage in trade and are owned, sanctioned, or otherwise supported by the government.

The 1994 Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and

Trade defines STEs as “governmental and non-governmental enterprises, including marketing boards,

which have been granted exclusive or special rights or privileges, including statutory or constitutional

powers, in the exercise of which they influence through their purchases or sales the level or direction

of imports or exports.” STEs are also defined in U.S. law at 19 U.S.C. 2906(6).

2

Two different types of STEs exist in world markets—those that regulate exports and those that

regulate imports of commodities. In this report, any references to STEs allude to export STEs unless

specifically stated otherwise.

3

Summary of Trade Remedy Laws Available to Investigate State Trading Enterprises and Encourage

Behavior Consistent With Fair Trade (GAO/OGC-95-24, July 28, 1995).

4

State Trading Enterprises: Compliance With the General Agreement on Tariffs and Trade

(GAO/GGD-95-208, Aug. 30, 1995).

Page 14 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

STEs, including the CWB, and their potential capabilities to distort trade in

their respective commodity markets.5

CWB History In Canada, prairie provincial wheat pools were formed in 1924 but went

into temporary receivership after the stock market crash of 1929.

Following the financial hardship faced by farmers during the Depression,

the Canadian government passed the Canadian Wheat Board Act of 1935,

establishing the CWB. The CWB was also given control of marketing oats and

barley, although oats were removed from the CWB’s purview in 1989.

The CWB is currently managed by three commissioners, who are appointed

by the government of Canada. A producer advisory committee, composed

of 11 farmer-elected representatives from the prairie provinces, provides

the CWB with advice on operational matters.6

 The CWB employs over 500

people and has annual revenues of over $4.4 billion.7

CWB Is a Major Grain

Trader in the World

Market

Although Canada produced only 5 percent of the world’s wheat and

10 percent of the world’s barley in 1996, it held a 20-percent share of the

world’s wheat export market and about 20 percent of the world’s barley

export market in that year (see figs. 1.1 and 1.2.) In 1996, the United States

ranked fourth in the world in both wheat and barley production, while

Canada ranked fifth in wheat and third in barley production.

5

Canada, Australia, and New Zealand: Potential Ability of Agricultural State Trading Enterprises to

Distort Trade (GAO/NSIAD-96-94, June 24, 1996).

6

On June 11, 1998, the Canadian Parliament passed legislation that will lead to changes in the CWB’s

corporate structure and operations. For more details, see our discussion on changes in the Canadian

grain system, in chapter 2.

7

Unless otherwise noted, all Canadian dollars have been converted to constant 1997 U.S. dollars using

a market exchange rate and the U.S. gross domestic product deflator.

Page 15 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

Figure 1.1: Share of World Exports of Wheat by Country, 1994-97

United States

Argentina

Australia

Canada

European Union

Others

0 10 20 30 40

Exporting country

Share of market (percent)

'94-'95 '95-'96 '96-'97 (Preliminary)

Note: Wheat includes wheat flour; shares based on volume.

Sources: Statistics Canada and the U.S. Department of Agriculture (USDA).

Page 16 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

Figure 1.2: Share of World Exports of Barley by Country, 1994-97

United States

Australia

Canada

European Union

Others

0 10 20 30 40

Exporting country

Share of market (percent)

'94-'95 '95-'96 '96-'97 (Preliminary)

Note: Shares based on volume.

Sources: Statistics Canada and USDA.

The United States imports more red spring wheat, durum wheat, and

barley from Canada than from any other country. These imports constitute

a significant share of the U.S. market. In crop year 1996-97, about

14 percent of the durum wheat and 7 percent of the red spring wheat

supply in the United States came from Canada. The United States imported

this wheat in part because of problems with disease, adverse weather

conditions, and a shortfall in domestic supply. Also, U.S. food use of

Page 17 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

durum has risen 125 percent over the past 2 decades; thus, as the demand

for durum wheat has increased, so too have U.S. imports of this wheat

from Canada. The vast majority of durum wheat, red spring wheat, and

barley arrives in the United States from Canada by rail direct from

Thunder Bay, Ontario, and the Canadian western prairie provinces of

Manitoba, Saskatchewan, Alberta, and the Peace River district of British

Columbia. In 1997, 70 percent of these Canadian grains were shipped by

rail, 18 percent by vessel, and 13 percent by truck.

For some export sales, the CWB relies on “accredited exporters” (AE), who

are national and multinational companies authorized to purchase grain

from the CWB for resale to customers. Some of the AEs are subsidiaries of

U.S.-based multinational firms; some of the transactions that the AEs

facilitate involve selling grain to other subsidiaries of the same company.

Although the majority of the CWB’s sales are made directly to an end user,

CWB officials told us that AEs facilitate all wheat sales to buyers in the

United States.

U.S.-Canadian

Relations—Grain

Trade and the CWB

With the rise in U.S. imports of Canadian wheat beginning in the

mid-1980s, U.S. wheat farmers became increasingly concerned about what

they perceived as Canadian wheat export subsidies and unfair barriers to

U.S. wheat exports. U.S. wheat farmers thought that Canadian

transportation subsidies gave Canadian wheat farmers an unfair advantage

in foreign markets. Canadian wheat and barley producers have historically

received transportation subsidies that reduced shipping costs. U.S. wheat

farmers’ market access concerns centered on Canadian import permits, or

license requirements, which essentially prevented U.S. farmers from

selling their grain to Canada without a permit. In addition, the U.S.

government was concerned that the CWB might be selling its grain in an

unfair manner.

Specific provisions of the U.S.-Canada Free Trade Agreement (CFTA),

effective January 1, 1989, dealt with several of these aspects of

U.S.-Canadian grain trade. For example, under the CFTA, Canada agreed to

eliminate Canadian transportation subsidies for agricultural goods

originating in Canada and shipped via West Coast ports for consumption in

the United States. CFTA called for ending Canadian import permits for grain

pending changes in the comparative level of U.S. and Canadian support for

producers. CFTA also dealt with the pricing of agricultural products,

including wheat, providing that neither the United States nor Canada could

export agricultural goods to the other at a price below the acquisition

Page 18 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

price of the goods plus any storage, handling, and other costs. Differences

in U.S. and Canadian interpretations of this provision eventually led the

United States to invoke CFTA dispute settlement procedures in May 1992.

The subsequent 1993 CFTA dispute panel decision called for an audit of CWB

pricing. An audit was conducted and its findings were reported in

December 1993 (see ch. 4 for a discussion of the CFTA dispute panel

decision).

The Canada-United States Joint Commission on Grains, mandated by a

1994 U.S.-Canadian memorandum of understanding (MOU), released its

final report in October 1995. Comprised of 10 nongovernment U.S. and

Canadian officials with equal representation, it was formed to assist the

two governments in reaching long-term solutions to existing problems in

the grains sector. The report addressed policy coordination, cross-border

trade, grain grading and regulatory issues, infrastructure, and domestic

and export programs and institutions (see app. I for a chronology of

U.S.-Canadian grain trade relations).

While some areas of debate have been resolved, recent events have shown

that difficulties remain in U.S-Canadian relations regarding the grains

trade. Neither CFTA nor the use of trade remedies has resolved U.S.

producer concerns about U.S. access to the Canadian wheat market, CWB

practices, and increasing Canadian wheat imports into the United States.

Despite CFTA’s gradual elimination of all duties between Canada and the

United States by January 1, 1998, and the removal of Canadian import

license requirements in 1995, some barriers continue to impede trade.

Canada still requires an end-use certificate and subsidizes grain

transportation through its ownership of railcars, and reciprocal access to

grain handling and transportation systems in the two countries is yet to be

achieved. In addition, the U.S. Trade Representative (USTR) remains

concerned that the CWB may be using its monopoly to undercut U.S. wheat

prices and that U.S. farmers continue to be hurt by increased Canadian

wheat imports.

Regarding market access, Canada removed its import license requirement

in 1991 but still requires that U.S. wheat be accompanied by an end-use

certificate to maintain Canada’s varietal controls and quality standards.

The U.S. requirement that imports be accompanied by an end-use

certificate is a direct response to Canada’s requirement and will remain in

effect until Canada removes its end-use requirement. It also serves as a

method to prevent imports from being used in U.S. foreign aid, export, and

Page 19 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

credit guarantee programs. The Canada-United States Joint Commission

on Grains recommended that both countries remove these requirements.

Another long-standing issue involves U.S. wheat exporters’ access to

Canada’s primary grain elevator system. Canadian access to U.S. elevators,

on the other hand, is relatively less impeded. In addition, Canada provides

its wheat farmers with government railcars to transport their wheat. The

Canada-United States Joint Commission on Grains recommended that

both countries pursue the long-term goal of providing reciprocal access to

each other’s grain infrastructure. In January 1998, the United States and

Canada announced plans to implement a pilot program to facilitate U.S.

wheat exports to Canada that would enable the United States to ship its

grain directly to Canadian grain elevators.8

 The United States is

negotiating with Canada over Canada’s current requirement that U.S. grain

be accompanied by a phytosanitary certificate—an assurance that the

grain is disease free.9

 The United States is also concerned about the costs

of the pilot program and how it will be applied to imports.

The United States continues to disagree with Canada’s interpretation of

CFTA provisions defining the acquisition price of grains and the decision of

the CFTA durum panel. In her May 1998 testimony before the Senate

Agriculture Committee, the U.S. Trade Representative stated that there

was a problem with CFTA in this regard and that the United States may try

to revisit this issue in the upcoming 1999 WTO multilateral trade

negotiations involving agriculture. In March 1998, the United States

requested a new audit of the CWB’s grain pricing related to the acquisition

price. Canada agreed to the new audit but disagreed with the United States

on its terms. Canada wants to maintain the audit terms both countries

agreed to after the 1993 CFTA dispute settlement panel decision. The United

States wants to (1) deviate from the panel decision by applying a broader

definition of “acquisition price”; (2) expand the audit to cover not only

durum but also spring wheat and barley; and (3) include in the audit

Canadian grain export prices to countries other than the United States.

Wheat imports from Canada into the United States have risen since 1990,

as shown in figure 1.3. Since the early 1990s, durum and red spring wheat

imports have increased. Between 1990 and 1997, Canadian red spring

8

Currently U.S. wheat can only enter Canadian elevators on a case-by-case basis requiring approval

from the Canadian Grain Commission.

9

Sanitary and phytosanitary measures are regulations or other measures taken to protect human,

animal, or plant life or health. The Agreement on the Application of Sanitary and Phytosanitary

Measures in the 1989-95 Uruguay Round of GATT contains disciplines (practices) in the use of such

measures. NAFTA contains similar disciplines.

Page 20 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

wheat imports grew by more than 2,106 percent to 1,449,600 tons, while

Canadian durum wheat imports have risen by 57 percent to 427,600 tons.

Figure 1.3: U.S. Imports of Canadian Wheat, 1990-97

1990 1991 1992 1993 1994 1995 1996 1997

0

500

1,000

1,500

2,000

2,500

3,000

Years

Thousands of metric tons

Durum Red Spring Other

Note: “Other” wheat category includes seed (durum and other wheat) and all wheat other than

durum and red spring wheat.

Source: U.S. Census Bureau, imports for consumption.

Objectives, Scope,

and Methodology

In our 1996 report on STEs, we developed an economic framework to

assess the capabilities of three STEs, given their relationships to domestic

producers, governments, and foreign buyers. In this report, at the request

of Senator Byron Dorgan, we look more closely at one of those three

STEs—the CWB—and review a number of issues regarding its exports to the

United States. We reviewed the following: (1) CWB operations, government

Page 21 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

assistance to the CWB and the Canadian farmer, and ongoing changes to the

environment in which the CWB operates; (2) the availability of data to

ascertain CWB pricing practices, and efforts to increase the amount of data

available; and (3) the nature of trade remedies available to address the

operations of STEs, and the frequency with which these remedies have

been applied to STEs. In addition, we are providing information on the

CWB’s role in commodities and futures markets, a summary of studies on

the CWB’s effect on the Canadian farmer, and the applicability of U.S.

antitrust laws to the CWB.

To explore the operations of the CWB and the government assistance

available to the CWB and Canadian farmers, and ongoing changes to the

environment in which CWB operates, we reviewed background documents

on the CWB and the North American grain trade provided by officials in the

Canadian embassy in Washington, D.C., the CWB, the USDA’s Foreign

Agricultural Service (FAS), the Department of Commerce, and USTR. We

also traveled to Canada to gather documents and interview officials from

various agencies within the Canadian government who are involved with

the Canadian grain trade, including Agriculture Canada, the Department of

Foreign Affairs and International Trade, the Canadian Grain Commission,

Finance Canada, the Canadian International Grains Institute, and

Transport Canada. In addition, we interviewed officials from the CWB,

representatives from the Canadian railroad industry, and private sector

representatives in the grain trade.

To learn about the CWB from the U.S. government perspective, we

interviewed officials from FAS and USTR. We also travelled to North Dakota

to speak with state government officials, local farmers’ groups, private

grain traders, and academics about the impact of Canadian grain imports

on the U.S. grain industry.

To learn about the availability of data on CWB pricing practices and

determine the efforts to increase the amount of data available, we built

upon the information we gathered by reviewing the data collected by the

U.S. Customs Service, the U.S. Bureau of the Census, and USDA on

Canadian wheat imports. Specifically, we obtained Customs’ detailed data

base on all wheat and barley shipments from Canada entered from 1992

through 1996. From Census, we obtained aggregate import data for 1992

through 1997.10 We also obtained information collected and compiled by

USDA on the end use of wheat imported from Canada for the most recent 

3 marketing years. We then reviewed all of the data to determine what they

10The Census import data are the official import data of the U.S. government.

Page 22 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

revealed about Canadian wheat imports. We requested a variety of data

from the CWB, including transactional data, but were denied access.

We also interviewed officials from Customs, Census, and USDA about their

import data. Our discussions included what procedures they use for

collecting and compiling the data and for ensuring quality control, how the

data are used by government agencies and private industry, and what the

strengths and limitations of the data are. We also reviewed the agencies’

written procedures and regulations governing the collection and

compilation of the data as well as internal evaluations of their data

programs. In addition, we relied on previous GAO evaluations of the

systems and processes for measuring U.S. trade with other countries.

To identify efforts to increase the amount of data available we evaluated

whether the WTO has made progress in increasing the amount of

information available on the CWB and other STEs as well as WTO members’

compliance with STE reporting requirements. We reviewed the annual

reports and minutes of formal meetings of the WTO Working Party on STEs,

and WTO members’ STE reporting submissions for 1995-97, as well as USDA

and USTR documents. We also interviewed WTO Secretariat officials,

individual members of the Working Party on STEs, and USDA and USTR

officials. In addition, we reviewed relevant documents, including the 1994

Understanding on the Interpretation of GATT article XVII, which deals with

STEs.

To identify the nature of trade remedies available to address the

operations of STEs, we reviewed relevant U.S. statutes and documents

published by the International Trade Commission (ITC), the Congressional

Research Service, and GAO. We also reviewed the dispute settlement

mechanisms within the CFTA, the 1994 North American Free Trade

Agreement (NAFTA), and the WTO. We reviewed appropriate provisions of

international trade agreements.

To determine the frequency with which dispute settlement procedures

have been used for matters involving the CWB and other STEs, we reviewed

appropriate provisions of international trade agreements. We identified

WTO member country STEs; the type of information available about STEs;

and STEs’ compliance with the WTO’s article XVII, by reviewing article XVII

STE notifications11 submitted to the WTO Secretariat from 1995 to 1997. We

also reviewed past GAO work. We requested that USTR identify all disputes

11WTO members are expected to provide responses, called “notifications,” to questionnaires collecting

information about their STEs. Ideally, the notifications should provide enough transparency

(openness) about STEs to determine whether or not they are adhering to GATT disciplines.

Page 23 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

under international agreements that involved an STE that had been notified

to the WTO.

To determine the frequency with which U.S. trade remedy laws have been

applied to matters involving the CWB and other STEs, we reviewed those

laws and spoke with officials at USTR, the ITC, the Department of

Commerce, USDA, the Department of Justice, and the NAFTA Secretariat. We

obtained a list of STEs that provided notifications to the WTO Secretariat.

We then asked USTR, the ITC, and Commerce to search their trade remedy

enforcement records for any actions involving those STEs, going back to

1980. We asked the agencies to provide us with a description of the actions

and their outcomes. All of the agencies responded to our request by

identifying trade remedy actions that, according to their records, had

involved STEs. The agencies stated, however, that it was difficult to

determine conclusively whether the cases the agencies had identified

represented the entire universe of such matters involving STEs. The

agencies provided several reasons for this difficulty: (1) the voluminous

amount of documentation on some types of cases coupled with an absence

of electronic records to facilitate searches; (2) the possibility that an STE’s

foreign name translation in a case file would differ from the translation on

our STE list; (3) the fact that under U.S. law, STEs as institutions would not

be the primary subject of a trade remedy action; and (4) the fact that the

trade remedy action may not be country or foreign exporter specific; that

is, it may involve imports of a particular product from all sources. We also

examined Federal Register notices and reports issued by the agencies on

their findings.

To review CWB participation in U.S. futures and commodity

markets/exchanges, we met with CWB officials and reviewed CWB

documents concerning CWB objectives in participating in U.S. markets. We

also discussed the participation of STEs in these markets with the U.S.

Commodity Futures Trading Commission (CFTC) and officials representing

the Minneapolis Grain Exchange (MGE), the Chicago Board of Trade

(CBOT), and the Kansas City Board of Trade (KCBOT).

To gather information on the CWB’s impact on the Canadian farmer, we

reviewed Canadian and U.S. studies that measured the economic impact of

the CWB and spoke with some of the authors of those studies. We also

spoke with private grain traders and Canadian farm groups that

represented both general farmers’ interests and specific commodity

interests.

Page 24 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 1 

Introduction

To determine the applicability of U.S. antitrust law to the CWB, we

interviewed officials at the Department of Justice’s Antitrust Division and

the Federal Trade Commission and reviewed the Antitrust Enforcement

Guidelines for International Operations, issued by those agencies in 1995.

We also reviewed statutes and case law relevant to the extraterritorial

applicability of U.S. antitrust law.

We conducted our review from September 1997 to June 1998 in

accordance with generally accepted government auditing standards.

We requested comments on a draft of this report from the Secretary of

Agriculture, the U.S. Trade Representative, the Secretary of Commerce,

the Commissioner of Customs, the U.S. Attorney General, and the

Chairman of the ITC. We received technical comments from all six

agencies, and incorporated them into the report where appropriate. USDA,

USTR, and Commerce found the report to be accurate, fair, and balanced.

We also discussed the factual content of the report as it related to the CWB

and the Canadian government with embassy representatives from Canada

and with representatives from the CWB. Canada and the CWB provided

technical comments, which were incorporated into the report where

appropriate.

Page 25 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 2 

CWB Operations and Government Support

for the Grain Sector

As an STE, the CWB has certain marketing characteristics and government

support. These include a monopoly over most sales of Canadian wheat and

barley and pricing flexibility through guaranteed supply and delayed

payments to farmers. It also enjoys government guarantees of its financial

operations and favorable interest rates on loans. Through other programs,

the Canadian government provides additional subsidies to wheat and

barley producers. However, the CWB faces changes in its structure and

operations due to recently completed legislative reforms. These alter its

corporate governance and relations to the government. Additionally, other

changes in the Canadian grain marketing system are underway, including

potential changes in rail regulation, U.S. investment in the industry, and

the decline of import STEs in other countries.

Operational

Characteristics Offer

CWB Unique Status

The CWB has the sole authority to market for export and for domestic

human consumption wheat and barley grown in the western prairie

provinces of Manitoba, Saskatchewan, Alberta, and the Peace River

district of British Columbia.1

 The CWB controls all exports of wheat and

barley products through an export licensing process and directly markets

most of its exports, including those made to import STEs. The operating

costs of the CWB are deducted from payments made to producers. It enjoys

pricing flexibility due to its assured supply of grain and ability to price

discriminate. This assurance of supply is not absolute, however, as

producers are free to plant non-CWB crops. In addition, the CFTA

established that CWB sales into the United States could not fall below the

acquisition price.

CWB Monopoly Status The CWB reports that its monopoly status as a “single-desk seller” of

western Canadian wheat allows it to extract more money from the world

market on behalf of farmers than would be the case without this

government-mandated status.2

 This status allows the CWB to capture

premiums through price differentiation, a practice in which the CWB sells

grain at differing prices into different markets and to different customers.

CWB-contracted economic studies have concluded that the single-desk

status of the CWB gives it market power in the world wheat and barley

trade and increases farmer revenue through price discrimination. One

1

The small quantities of wheat and barley grown outside of this area are not handled by the CWB. For

example, white winter wheat grown in Ontario is marketed by the Ontario Wheat Producers Marketing

Board under provincial legislation. In addition, feed wheat and feed barley grown throughout Canada

can be sold by the producer domestically. However, wheat and barley produced in eastern Canada

requires permission of the CWB for interprovincial or export sales.

2

See appendix III for details concerning the costs and benefits of the CWB for the Canadian farmer.

Page 26 GAO/NSIAD-99-21 U.S. Agricultural Trade
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CWB Operations and Government Support

for the Grain Sector

study3 found that for 1981-94, the CWB on average increased wheat

revenues by $14.56 per ton, or $289 million per year when compared to a

system of multiple sellers offering wheat in competition with each other.4

These premiums represent about 8 percent of CWB wheat revenues for

those years. A second study found that the CWB increased barley producer

revenues on average by $70.5 million per year (1986 to 1995) when

compared to what they would have received in a system of multiple

sellers.5

 These premiums represent about 15 percent of the CWB barley

revenues for those years.

In contrast, a study financed by the provincial government of Alberta

concludes that the CWB lacks market power and finds that the Canadian

grain system is more costly than the comparable U.S. system.6

 The study

concluded that Japan is the only market where a single-desk premium may

exist, and that, based on Japan’s share of CWB sales, the single-desk seller

premium is small.

As a single-desk seller, the CWB has market power and can price

discriminate, according to officials at six grain companies located in the

United States and in Canada. “Price discrimination” is the practice of

charging a higher price to some buyers and a lower price to others in order

to maximize profits. CWB contracts include a provision that stipulates that

the grain is for shipment to and consumption in a specific country. Grain

companies reported that this stipulation prevents the AEs from competing

against each other on price. One grain company characterized this as

being good for Canadian and foreign producers but bad for consumers.

As a single-desk seller, the CWB may also choose to sell quantities to a

certain market that differ from what would be supplied by the private

trade. Several grain industry officials representing grain companies, grain

consumers, and industry organizations reported that they believe the CWB

withholds grain sales to the United States, with some citing the sales’

political sensitivity. An implication of withheld sales is that exports to the

United States would increase in the absence of the CWB. Representatives of

3

Daryl F. Kraft, W. Hartley Furtan, and Edward W. Tyrchniewicz, “Performance Evaluation of the

Canadian Wheat Board” (Winnipeg, Canada: Canadian Wheat Board, Jan. 1996) covers CWB sales of

Canadian hard red spring wheat.

4

Unless otherwise noted, all Canadian dollars have been converted to constant 1997 U.S. dollars using

a market exchange rate and the U.S. gross domestic product deflator.

5

CWB sales of feed and malting barley are analyzed by Drs. Andrew Schmitz, Richard Gray, Troy

Schmitz, and Gary Storey in “The CWB and Barley Marketing: Price Pooling and Single-Desk Selling”

(Winnipeg, Canada: Canadian Wheat Board, Jan. 1997).

6

Colin A. Carter and R.M.A. Loyns, “The Economics of Single Desk Selling of Western Canadian Grain”

(Edmonton, Canada: Alberta Agriculture, Food and Rural Development, Mar. 1996).

Page 27 GAO/NSIAD-99-21 U.S. Agricultural Trade
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CWB Operations and Government Support

for the Grain Sector

wheat farmers in Canada and the United States, as well as Canadian

government officials, also believe that grain exports to the United States

would be greater if the CWB ceased to exist.

CWB Pricing Flexibility As the sole buyer of most Canadian wheat, the CWB has pricing flexibility

and can deal in long-term contracts. The CWB has an assured supply of

grain that it does not compete for and, according to a Canadian

government official, acquires the grain from farmers at about

70-75 percent of the expected final return.7

 This provides the CWB with a

large margin within which to set prices and absorb any risk from changes

in market conditions.8

 The Canadian government confirms that, within its

mandate to maximize returns to producers, the CWB has a certain latitude

in pricing grain to customers. In contrast, private grain companies

compete to acquire farmer-held stocks of grains and then compete to

market it to buyers. Their profits and operations are funded from this

margin between the two, and they encounter considerable risk from

changes in market conditions.9

CWB officials note that the CWB engages in price discrimination to benefit

from differing market conditions around the world. Certain customers

may be willing to pay more for CWB grain than other customers, so the CWB

could charge them a higher price. In turn, the CWB may be able to lower its

price to certain importing countries without affecting its sales to premium

customers.10 We were not able to analyze the conditions under which this

occurred, since we did not have access to CWB transactions, which the CWB

considers commercially sensitive.

7

Testimony of Mike Gifford, Director General, International Trade Policy Directorate, Market and

Industry Services Branch, Agriculture and Agri-Food Canada, before the Standing Committee of the

Canadian Senate on Agriculture and Forestry (Dec. 4, 1997). According to Canadian government

officials, producers will grow other crops if they are not satisfied with the performance of the CWB.

Oilseed and specialty crop areas have expanded in recent years.

8

Producers receive an initial payment based on grade and quality when they deliver grain to a primary

elevator and a final payment at the end of the marketing year after marketing and CWB administrative

costs are deducted. During the crop year, the CWB may increase the initial payment if forecasted

revenues rise. The CWB may also make an interim payment to producers following the end of a crop

year but prior to closing the accounts on the marketing year.

9

In addition, with assured supply, the CWB is able to market some of its grain under long-term

contracts. Canadian government officials report that the CWB markets very little grain under long-term

agreements at this time.

10USDA has charged the CWB with engaging in noncommercial activities such as dumping wheat on

world markets and undercutting exporting countries’ prices. See “Non-Commercial CWB Pricing

Activities: Some Examples of Unfair CWB Practices,” Staff Paper prepared for the Canada-United

States Joint Commission on Grains by the USDA Support Staff (Washington, D.C.: USDA, Mar. 29,

1995). This is reprinted in volume II of the Commission’s 1995 Final Report.

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CWB Operations and Government Support

for the Grain Sector

CWB pricing flexibility into the U.S. market was restricted as part of the

CFTA, which went into effect in 1989. According to the agreement, sales

into the United States could not be for less than the acquisition price plus

the cost of transportation and handling of the grain. The United States and

Canada disagreed on what constituted the Canadian acquisition price. A

CFTA dispute resolution panel determined that the acquisition price is the

initial payment the CWB gives farmers when they deliver their grain (see 

ch. 4). The initial payment is set by the government of Canada in

consultation with the CWB. However, changes in how the government

establishes the initial payment since the CFTA went into effect may have

increased CWB flexibility in pricing grain headed into the United States.

A USTR negotiator of the CFTA recalls that during the 1980s the initial

payment was established close to 90 percent of the expected final payment

to producers. During the early 1990s, the CWB initial payments were set at

80 percent while, according to an official of the government of Canada, the

initial payment is now set at between 70 and 75 percent. We requested data

on the expected final payment to producers from the government of

Canada to confirm this trend, but the request was declined. According to a

Canadian government official, the decisions on the amount of the initial

payment are considered to be “Advice to Ministers” and thus confidential.

A USTR official believes that the reduction in the initial payment gives

Canada more latitude in lowering its prices to the U.S. market. This

effectively lowers the pricing floor established by the CFTA. The

government of Canada interprets these changes differently. According to

government officials, while the events during the 1980s and early 1990s

may well have influenced the subsequent judgments of those involved in

making decisions concerning initial payment levels, to attribute any trend

in government decision making in this area to the CFTA or the relationship

to acquisition prices would be misleading.

Canadian Government

Assistance to the

CWB

The Canadian government provides important financial assistance to the

CWB. The government has covered CWB wheat and barley pool deficits on

seven occasions over the course of its 63 year history. The government of

Canada guarantees certain export credit sales of the CWB and compensates

the CWB in case of losses or defaults. As a crown corporation,11 the CWB’s

financing activities are guaranteed by the government. Thus the CWB is able

to show net profits on its financing activities.

11A crown corporation, or a semiautonomous government organization, is used to administer and

manage public services in which enterprise and public accountability are combined.

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CWB Operations and Government Support

for the Grain Sector

Direct Canadian

Government Support of the

CWB

The Canadian government offers direct financial support to the CWB under

certain conditions. The Canadian government guarantees CWB initial

payments and adjustments to initial payments as paid to farmers. In any

year that sales revenue is insufficient to cover the initial payments,

including any adjustments to the initial payment, the government pays the

shortfall. Since the first CWB deficit in 1969, the government has provided

monies in 6 other years for deficits in the wheat and barley pools.12 The

total value of these transfers for losses in wheat and/or barley marketing

operations is $1.3 billion.13 See table 2.1 for more details on these deficit

payments.

Table 2.1: Occurrences of CWB Wheat

and Barley Price Pooling Deficits

Covered by Government Assistance,

1943-97

U.S. dollars in millions (1997 constant dollars)

Crop year Wheat deficit Barley deficit Total deficit

1968-69 $142.9 $35.3 $178.3

1970-71 0 38.0 38.0

1971-72 0 12.9 12.9

1982-83 0 6.9 6.9

1985-86 23.1 172.0 195.1

1986-87 0 112.8 112.8

1990-91a 749.0 1.0 750.0

Total $915.0 $378.9 $1,293.9b

Note: The CWB maintains separate pool accounts for wheat, durum wheat, barley, and malting

barley. However, in order to simplify the presentation, we have combined the two wheat accounts

and the two barley accounts.

aNo pooling deficits have occurred since 1990-91.

bTotals may not add due to rounding.

Source: Canada’s Department of Foreign Affairs and International Trade.

Indirect Canadian

Government Support of the

CWB

In addition to direct government support in cases of operational deficits,

the government provides indirect support through guarantees of CWB

borrowings. These guarantees allow the CWB to borrow in commercial

markets at favorable interest rates. In parliamentary testimony, a CWB

12The CWB experienced deficits that were covered by government payments in 12 of its 63 years when

deficits in the oats pool are also considered. Oats are no longer controlled by the CWB and those

payments are not included in our calculations.

13In October 1995, the Canada-United States Joint Commission on Grains reported that the pool

deficits have accounted for 1.1 percent of the total sales of wheat, durum, feed barley, malting barley,

and oats made by the CWB over the approximately 50 year period when initial payment guarantees

have been in effect.

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CWB Operations and Government Support

for the Grain Sector

official estimated that in 1995, CWB borrowing costs were $30 million lower

than if the CWB had borrowed at the rate faced by a large multinational

grain company and $46 million lower when compared to the normal

commercial business rate of borrowing.14 The effect of this difference

varies over time. In order to update the estimated interest savings, we

recomputed the savings based on data provided by the CWB on the interest

difference between rates the CWB posts to investors on its commercial

paper and market rates of commercial paper from highly rated,

nongovernment-guaranteed issuers. As of December 1997, the annual

interest savings on CWB borrowing were between $9.4 million and

$14 million, substantially lower than the 1995 value.

The CWB is in a position to profit from the interest rate differential between

government borrowing costs and commercial rates on behalf of producers.

In addition to enjoying reduced borrowing costs, the CWB can also earn

interest on funds held following a grain sale but before making final

payment to the producers. During the interim, the CWB can invest the funds

at market rates and earn interest. The CWB does not distinguish in its public

reporting between its earnings related to the indirect government support

of below market rates of interest and its earnings from the reinvestment of

sales revenues on behalf of producers. The latter earnings do not

represent a benefit of the CWB since individual producers could also have

invested the revenues at market rates if the CWB paid them at the time of

sale. In 1997, the net interest from both of these sources was reported by

the CWB to be about $61 million, nearly double the CWB’s $34 million in

administration costs.15

In addition to the contributions of the government to the CWB’s operational

borrowing, the government also provides guarantees for export credit

sales. The government of Canada provides export credit guarantees for

government buyers of CWB wheat through the Credit Grain Sales Program.

As of March 1998, the CWB had outstanding loans to foreign countries of

$4.7 billion. At the end of the 1997 marketing year, the CWB accounts

receivable from foreign customers was $4.6 billion. Of those loans, only 

3.6 percent were classified as current, with 83 percent rescheduled, 

14Testimony of Lorne Hehn, Chief Commissioner of the CWB, before the Standing Committee of the

Canadian House of Commons on Agriculture and Agri-Food (Dec. 12, 1995).

15The CWB declined to provide us with any information on the composition or values of the

components of “net interest” beyond what is available in the CWB’s annual report, due to its

confidentiality.

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CWB Operations and Government Support

for the Grain Sector

9.1 percent overdue, and 4.5 percent subject to a Paris Club rescheduling.16

 In certain cases, the government of Canada negotiates debt relief

agreements with nations as do other exporting countries under the Paris

Club process. Where there has been a rescheduling, this occurred for

reasons of national policy, including reasons related to humanitarian

concerns. In cases where a country with outstanding CWB exposure under

the Credit Grain Sales Program receives concessional (favorable)

treatment, the government of Canada makes up the difference owed to the

CWB by the debtor country. For the CWB, both the principal and the interest

are guaranteed by the government. Over the last 6 years, the government

has reimbursed the CWB $918 million for lost principal and interest under

Paris Club debt relief.

The Export Development Corporation, another Canadian crown

corporation, provides export insurance and financing services for export

sales; for example, providing insurance against the risk of nonpayment by

a foreign bank in export transactions involving a letter of credit.17 The

Export Development Corporation does not release information by

commodity for reasons of commercial confidentiality; thus, we are unable

to report on what share of its business involves CWB exports. Public

reporting of government export finance subsidies is limited to the

aggregate costs of the negotiated debt relief that is published in Canada’s

Main Estimates. The structure of Canadian credit guarantees by

commodity or by nation is not released by the government to the public or

to GAO for reasons of commercial confidentiality.

The government’s support of the CWB is supplemented by the fact that the

CWB is not taxed on its activities. The CWB is exempt from tax on its income

and capital because it is a crown corporation. The returns paid to the

farmers are taxed as regular income.

16The Paris Club is an informal group of creditor countries that meets, as needed, to negotiate debt

rescheduling and relief efforts for public or publicly guaranteed loans. In addition to the 18 countries

that regularly participate in the Paris Club, other countries are invited to the negotiations on an ad hoc

basis if they hold a significant share of the debt being discussed.

17A letter of credit is a financial document issued by a bank at the request of the consignee

guaranteeing payment to the shipper for cargo if certain terms and conditions are fulfilled.

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Canadian Government

Assistance to the

Wheat and Barley

Producers

The Canadian government also provides other subsidies to the grain sector

through income support policies, income and crop insurance, and

provision of railroad hopper cars. While Canadian government support for

wheat and barley is substantial, it has fallen significantly in the last several

years.

Many nations, including Canada and the United States, support their

agricultural producers through direct and indirect assistance and

subsidies. The government of Canada provides an annual estimate of this

support for wheat and barley.18 The reported Canadian subsidies include

costs associated with insurance programs19 for farmers; one-time

payments that compensate agricultural landowners for the removal of the

long-standing subsidy of railroad shipments of western agricultural

products; other federal government expenditures on research and

development, marketing, and promotion; and subsidies provided by

provincial governments. In 1996, the combined subsidies for wheat and

barley amounted to $922 million, or 19 percent of production valued at

$4.8 billion. (See table 2.2 for the breakout by category.) This reflects a

substantial reduction from 1990, when the combined subsidies for wheat

and barley amounted to $3.2 billion, or 68 percent of production valued at

$4.7 billion.

Table 2.2: Canadian Wheat and Barley

Subsidies in 1996

Government sectoral subsidies

U.S. dollars in millions

(1997 constant dollars)

Insurance $162.9

Payments for end of rail subsidies 470.3

Other federal subsidies 117.0

Provincial government subsidies 172.0

Total $922.2

Source: OECD.

18Canada submits data on its agricultural policies to the Organization for Economic Cooperation and

Development (OECD). These are included in the OECD’s computation of the “producer subsidy

equivalent” (PSE). The PSE is an indicator of the value of monetary transfers to agricultural

production from consumers of agricultural products and from taxpayers resulting from a given set of

agricultural policies in a given year.

19For example, the Canadian government established a program to stabilize farmers’ net income under

the Net Income Stabilization Act. The program allows farmers to make contributions to individual

accounts, which are matched by the federal and provincial governments. Producer deposits earn a

3-percent interest bonus over and above the competitive rates. When income is low, the program

triggers farmer withdrawals from their accounts.

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Moreover, the payments to landowners for the end of Canada’s subsidy for

the transport of western grain ended with the 1996 payments. Thus,

according to a Canadian official, for 1997 Canada projects that the

reported subsidies will be about half of the 1996 rate and will be

10 percent of the farmgate value of production.

The subsidy data provided by Canada are, however, incomplete, as several

government subsidies are not included.20 These consist of the previously

discussed lower interest loans of the CWB and government reimbursements

for losses on credit sales, as well as government support of the Canadian

International Grains Institute. In addition to these excluded CWB subsidies,

Canadian government data also exclude the value of government-provided

hopper railcars that are supplied to transport prairie grains.

The government of Canada acquired 13,120 hopper cars during the 1970s

and early 1980s, with 12,780 now in service. According to a Transport

Canada official, these cars are an indirect subsidy to western grain

producers, because producers are not charged for their services. This

subsidy applies to all prairie grains, including the CWB grains. In addition to

the federal government-owned hopper cars, the government leases

another 1,982 hopper cars, and two provincial governments contribute

another 1,973 cars. In total, government-provided cars constitute about

two-thirds of the 25,000 grain cars in Canada.21 The government of Canada

does not have an estimate of the subsidy value of the government-owned

and -leased cars that it provides to the western grain industry. We estimate

that the government grain car fleet, if procured through private sector

leases, would cost between $61 million and $68 million per year. This

subsidy benefits all western grain producers, including barley and wheat

producers. The proportion of this subsidy accruing to wheat and barley

producers is about 64 percent, so the subsidy to wheat and barley

producers is between $39 million and $44 million.22

20The OECD data submissions do not include indirect subsidies related to the issuance of credit.

21Hopper cars purchased and owned by the CWB are not included in the subsidy calculations.

22The annual rental value of the railcars was based on recent, long-term (2 to 5 years) lease rates

available in the North American railcar rental market. Three leasing companies were contacted for

estimates of the rental value of grain hopper cars of the same size, age, condition, and terms of

maintenance as those in the CWB fleet. Railcar maintenance is not provided by the government. The

proportion of the estimated subsidy attributed to wheat and barley is based on Agriculture Canada

apportionment of other government subsidies among different western grains.

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Canadian Grain

System Is Undergoing

Changes

Changes to the Canadian grain system are ongoing, and several events

have the potential to alter the U.S.-Canadian grain trading environment.

The Canadian government has recently enacted legislation that alters the

operational structure of the CWB. Also, recent changes in government

subsidies for the transportation system and proposed further deregulation

may have an impact on grain flows to the United States. Meanwhile,

increasing foreign investment and consolidation of the grain distribution

and handling system in Canada, as well as privatization of grain import

functions by many of the CWB’s customers, are changing the CWB’s

operating environment.

Legislative Change to the

CWB’s Mandate

A law to amend the Canadian Wheat Board Act of 1935 was passed by the

Canadian parliament on June 11, 1998. This law, known as Bill C-4,23

provides for a number of changes to the CWB in the areas of corporate

governance and operational flexibility (see table 2.3), although it is too

early to speculate about the legislation’s effects on Canadian farmers and

the Canadian grain system as a whole.24 Bill C-4 was first put before the

Canadian House of Commons on September 25, 1997, after more than 

2 years of consultation with farmers and the Canadian grain industry. The

bill builds on the principle of increasing direct producer input into the

priorities and operations of the CWB while retaining the reporting

mechanisms that allow the Canadian government to provide the CWB with

financial guarantees and monopoly exporter status.

23Now known as “Statutes of Canada 1998, Chapter 17.”

24See appendix III for a summary of studies on the effect of the CWB on Canadian farmers and

comments from some farmers’ groups on this effect.

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Table 2.3: Comparison Between the 1935 Canadian Wheat Board Act and the 1998 C-4 Bill

Provision Canadian Wheat Board Act Bill C-4

Status CWB qualifies as an agent of Her Majesty and a

crown corporation

CWB ceases to be an agent of Her Majesty or a

crown corporation

Governance structure and

operations

Consists of three to five commissioners appointed

by the government

Consists of a part-time, 15-member board of

directors (10 producer-elected representatives and

5 government appointees, including a full-time

President; the board also designates a chairperson)

The board may authorize cash purchasing,

expedited adjustment payments, early pool

cash-outs, negotiable producer certificates, and

use of modern risk management tools

Monopoly Holds monopoly on wheat and barley marketed for

export and domestic human consumption

No change

Contingency fund None Establishes a producer-funded contingency fund

to provide financial support for

certain operations

Initial payments Adjustments to initial payments guaranteed by the

government

Eliminates government guarantee on adjustments

to initial payments; the contingency fund may be

used to guarantee adjustments

Borrowing Repayment with interest of loans and advances

guaranteed by the government

No change

Pool period Is defined as a crop year Is defined as any period(s) not exceeding 1 year in

total

Note: The inclusion and exclusion clauses that would allow the board to add or remove crops

from the CWB’s jurisdiction did not pass. Under Bill C-4, no changes to the CWB’s marketing

jurisdiction can be made without first gaining approval from producers.

Source: GAO analysis of Canadian legislation.

A key provision in the new law replaces the CWB’s commissioner structure

of management with a President and board of directors. Ten

representatives on the 15-member board will be directly elected by

producers; 5 board members, including the President, will be government

appointees. Since the directors will not be elected until later this year, the

new management structure of the CWB is unlikely to be in place in time to

affect this year’s sales policy. Under Bill C-4, the board has numerous

administrative powers, including the authority to designate its own

chairperson; determine the salaries of the directors, chairperson, and

President; and review the performance of the President. Furthermore, all

directors will have full access to information about CWB operations,

including audited financial statements; they will also be able to review the

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for the Grain Sector

efficiency of the CWB with respect to grain sale prices, price premiums

achieved, and operating costs.

Bill C-4 also grants the CWB the ability to buy grain and reimburse

producers for grain on more flexible terms. The CWB can now offer new

payment options for farmers and enhance producers’ cash flows.25 For

instance, the CWB will be able to close pool accounts before January 1 and

thereby make final payments to producers before the beginning of the

calendar year. These actions will be at the discretion of the new board.

Changes in Canadian

Transportation System

Canadian wheat and barley producers have historically received

transportation subsidies that reduced shipping costs. The direct subsidies

paid to the railroads under the 1983 Western Grain Transportation Act

peaked at $925 million in 1986-87 and declined to $445 million in 1994-95,

their last year. The subsidy, since the CFTA in 1989, did not apply to

shipments to the United States from Canadian west coast ports, but to

shipments traveling overseas and to the United States through Thunder

Bay, Ontario. The cash subsidy ended in 1995 with its elimination due to

internal budget constraints and Canada’s need to meet its obligations

under the WTO agreements. With the removal of the subsidy in 1995, freight

rates were capped until at least the year 2000.26 Owners of prairie land

received a $1.2-billion payment paid out in 1995-96 to compensate them for

the removal of the subsidy.27

The CWB expects the end of the grain transportation subsidies to make the

United States a more attractive export market.28 According to a CWB

official, the shipping costs of moving grain to Canadian coastal ports more

25Currently, the CWB is a participant in the U.S. futures exchanges for grain and currency. See

appendix II for a discussion of this participation.

26The rates can be adjusted for inflation and a partial reduction in cost due to branch line

abandonment.

27The $1.2 billion payment was treated as capital rather than income for tax purposes, so the effective

value of the subsidy was about $1.7 billion, according to a Canadian official. An additional one-time

adjustment assistance fund of $224 million was established to partially offset other changes in the

transportation system.

28This view is shared by academic researchers. See Demcey Johnson and William W. Wilson, “Canadian

Rail Subsidies and Continental Barley Flows: A Spatial Analysis,” Logistics and Transportation Review

(Mar. 1995). The Western Grain Transportation Act elimination may also affect livestock production

and trade; the ITC calculated that the maximum effect of a drop in feed grain prices in the Canadian

prairies due to the elimination of the Western Grain Transportation Act would result in a 1 to 2 percent

increase in beef supply and an equivalent 3 percent increase in Canadian beef exports to the United

States. See Cattle and Beef: Impact of NAFTA and URA on U.S. Trade, ITC publication 3048

(July 1997).

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than doubled when the subsidy ended, while costs to ship to the United

States were left unchanged. The observed impact of the removal of the

subsidies has been obscured by concurrent factors that have influenced

export volumes and destinations. The CWB official in charge of U.S.

marketing explained that at the same time the end of the rail subsidies

made the United States a more attractive market, the decline of U.S. usage

of the USDA’s Export Enhancement Program was working in an offsetting

fashion, making the United States a less attractive market.29 According to a

Canadian transportation official, it is too soon after the changes in the rail

subsidy to see the effect, but Transport Canada anticipates the changes

will lead to greater shipments to the United States or increased Canadian

grain processing.

During the same period in which the government rail subsidies ended, the

CWB changed the way it computes the freight charges that it deducted from

the payments it made to individual producers when they delivered their

grain. This change in the pooling points for computing freight rate changes

raised the shipping costs of grain for producers in the eastern prairies,

making the United States a more attractive market. The impact of the

subsidy elimination and of the CWB changes in freight charges is estimated

to have a significant impact on the Canadian exports to the United States.

The Producer Payment Panel, a Canadian government-appointed group

representing industry, government, and academics, used an economic

model of Canadian agriculture to estimate the impact. The panel estimated

that the two changes would increase export shipments of wheat to the

United States by 46 percent and barley by 44 percent.30 This assumed that

commodity flows are allowed to respond to market signals and do not face

U.S. border restrictions or diversion by the CWB.

The government of Canada gave notice in 1997 that by 2002, the fleet of

government-owned rail hopper cars would be privatized. The privatization

of these hoppers is expected to change the attractiveness of shipment to

the U.S. market relative to shipments to Canadian ports in a way

reminiscent of the impact of ending the direct transportation subsidies.

29The Export Enhancement Program raised U.S. domestic prices for grain above world prices, which

made the United States an attractive destination for Canadian grain. For discussions of this

relationship, see Kenneth Hanson, Stephen Vogel, and Sherman Robinson, “Sectoral and Economywide

Impacts of Eliminating the Export Enhancement Program” (Washington D.C.: USDA, Economic

Research Service, Nov. 1995); and Richard Gray and Bruce Gardner, “The Impact of Canadian and U.S.

Farm Policies on Grain Production and Trade,” in Canada-United States Joint Commission on Grains,

Final Report, Vol. II (Winnipeg, Canada, and Washington D.C.: Oct. 1995).

30“Delivering the Western Grain Transportation Act Benefit to Producers: Technical Appendix,”

Producer Payment Panel (government of Canada: June 1994).

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Currently, railcars are provided to the industry without cost31 for rail

movements east, north, or west, but charges are levied if the cars are used

for shipments to the United States. According to a Canadian rail manager,

the application to rail shipments of full costs for the railcars will make it

relatively cheaper to move grain to the United States than to port positions

once privatization takes place.

Recently, the Canadian government began a review of the grain handling

and transportation system, with completion scheduled by the end of 1998.

The grain review secretariat describes its scope as comprehensive,

covering all handling and transportation actions between the farm bin and

the loading of vessels for export. The objectives of the review are to

ensure that the Canadian system meets expectations of customers;

maximizes system efficiency, competitiveness, and capacity utilization;

provides cost-effectiveness; promotes necessary investment; and

establishes roles, responsibilities, and accountability for each system

participant. A Montana State University study reviewed changes underway

in the Canadian grain handling and transportation system and concluded

that any reduction in freight costs due to system improvements is unlikely

to fully offset the large increase in shipping costs due to the end of the

direct subsidies and change in pooling costs.32 This suggests that changes

in the transportation system will provide increased economic incentives

for Canada to ship to the U.S. market.33

Other Changes to the

CWB’s Operating

Environment

U.S. companies have been investing more heavily in the Canadian grain

system, both in new infrastructure and the commercial operations of the

system, in recent years. This shift in ownership reflects U.S. business’

interest in the Canadian grain system. For example, officials at ConAgra,

Inc., told us that their company has invested in terminal operations in

western Canada; and Archer-Daniels-Midland purchased a 43-percent

share of a Canadian grain company, United Grain Growers. This change

means the CWB interacts on more levels with U.S.-based companies within

Canada.

31The government does not pay for maintenance of the railcar fleet.

32Linda M. Young, “Changing Canadian Grain Policies: Implications for Montana’s Grain Industry,”

Northern Plains and Rockies Center for the Study of Western Hemisphere Trade, Policy Issues Paper

No. 1 (Bozeman, Montana: Montana State University, undated).

33Recent rail mergers are improving the links of the Canadian rail system to ports on the U.S. Gulf

Coast. This may facilitate exports of Canadian grain through U.S. ports.

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Historically, the CWB completed a lot of business on a state-to-state basis,

especially with nonmarket economies, such as China; this trade involved

working with other STEs. The decline of import-oriented STEs in other

countries has changed the way the CWB does business with these countries,

however. While some countries, such as China, still conduct business with

the CWB through an STE, the majority of the CWB’s sales involves private

companies. According to CWB officials, sales to other STEs now only

comprise 10 to 15 percent of their entire business; at one time, this figure

was as high as 35 percent. A Canadian farmers’ organization noted that

private entities tend to prefer trading with other private entities as

opposed to STEs; so the CWB increasingly uses its AEs to facilitate

transactions with these private companies.

Conclusions As an STE, the CWB receives direct and indirect government support, and it

has some flexibility in setting its export prices. Moreover, wheat and

barley producers also enjoy other government subsidies. The CWB faces

structural changes due to recently completed legislative reforms, and

other changes in the Canadian grain marketing system are underway;

however, it is unclear how these changes will affect the way that the CWB

conducts its business.

Agency and Country

Comments

We received technical comments from USDA, USTR, ITC, the government of

Canada, and the CWB on a draft of this chapter. We incorporated their

suggestions where appropriate.

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Transparency

The United States collects extensive information on imports of Canadian

grain, including the value of each shipment entering the United States, but

because this information lacks important details on such grain aspects as

quality, it reveals little about the CWB’s prices. The CWB discloses only

limited information about its prices for the wheat and barley that it sells to

its trading partners. U.S. officials believe that the lack of transparency in

the CWB’s prices may provide it with more flexibility than is found among

private grain traders. The CWB states that it reveals as much about its

prices as its competitors in the private sector. U.S. government officials

and U.S. farmers believe that nontransparent CWB prices make it difficult

to assess whether the CWB’s practices are consistent with its international

obligations under trade agreements. Officials from USDA and

Customs—agencies that gather import data—are discussing the possibility

of collecting more details on Canadian grain prices; however, they

acknowledge that much of the information necessary to determine pricing

practices would be difficult for Customs to readily collect at the border.

The United States is also working through the WTO to increase the amount

of information STEs, such as the CWB, must report on pricing and other

activities. Thus far, the United States’ and other countries’ efforts to

expand STE reporting requirements on pricing have had limited success.

For example, while the WTO has recently introduced a new format for STE

reporting that requires more information on STE pricing practices, that

format does not go as far as the United States would like in increasing the

pricing transparency of STEs such as the CWB.

CWB Provides

Limited Information

on Its Export Prices

The United States and other grain trading nations, and members of the

U.S. grain industry, are concerned that without greater transparency, the

CWB may be able to price its grain exports unfairly. The CWB makes public

some aspects of its pricing methods, such as its use of prices on U.S. grain

markets as the basis for sales into the United States. However, the CWB

declines to reveal other important information, such as the actual contract

prices for its sales to foreign grain buyers. The nontransparency makes it

difficult for farmers to review CWB operations or to identify contract prices

for individual sales. These contract prices could be useful in determining

whether the CWB is engaging in pricing practices for which a trade remedy

would be available, either through dispute settlement procedures under

international agreements or through U.S. trade law. The CWB has recently

made its contract records available to economists performing reviews of

the CWB’s marketing performance under contracts with the CWB.

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Transparency

The CWB and the government of Canada defend the lack of full price

transparency by noting that the CWB behaves like other private sector grain

companies that also do not reveal their sales prices. The CWB believes that

it should not be held to higher pricing disclosure standards than its

competitors in the private sector. The CWB reports that revealing

transactional data violates its confidentiality agreement with its

customers.

CWB Pricing Some aspects of CWB pricing are better known than others. The CWB

allocates sales between Canada, the United States, the Caribbean and

Latin America, Europe, the Middle East, the former Soviet Union, and the

Asia-Pacific area based on expected returns, using different pricing

strategies in different markets. According to CWB officials, prices for sales

into the Canadian and U.S. markets are based on the trading values of

grain on the MGE, adjusted for commercial freight. During hours when the

MGE is closed, the price is based on the prior day’s closing price. The CWB

sends its daily mill closing price to all mill customers, and it is published in

several publications. According to the CWB, the objective of this strategy is

to assure that Canadian domestic millers have grain prices that are

consistent with what the wheat price would be in an open market. A

Canadian grain company confirmed that sales to Canadian consumers are

based on the MGE prices. The CWB’s domestic sales practices have created

substantial domestic price transparency, although quantity information is

only provided on an aggregate annual basis.

The CWB established a program that provides daily price quotes based on

the MGE’s futures and cash markets for Canadian farmers wishing to

market directly to the United States. These prices are posted daily for CWB

producers. Without access to CWB transactional data, we were not able to

confirm that sales into the United States were at the published prices.

Several U.S. companies we spoke with reported that the CWB appeared to

use prices based on the MGE.

CWB sales to other markets are less transparent, with the CWB reporting

that sales reflect conditions of supply and demand in the various export

markets. The CWB publishes daily export prices for its grains that are

available at various port locations along the St. Lawrence Seaway and

in-store at Vancouver, British Columbia. According to CWB officials, these

“card” prices represent the prices paid by the top-paying customers for top

grain and represent 10-12 percent of CWB sales volume. Of the

1.7 million-1.9 million tons sold at “card” prices, about 1.4 million tons

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Transparency

were sold to Japan. In other cases where grain purchases are done through

public tender, similar transparency is achieved. Remaining CWB sales are

nontransparent.

Views of Interested Parties

on CWB Transparency

There are mixed views on CWB price transparency. Some U.S. government

officials and U.S. farmers believe that nontransparent CWB prices make it

difficult to assess whether the CWB’s practices are consistent with its

international obligations under trade agreements. Representatives of the

Western Canadian Wheat Growers Association reported that the lack of

transparency hampers their ability to evaluate the performance of the CWB

as their grain marketer. Moreover, critics of the CWB believe that it is

erroneous to compare a government-sponsored monopoly with a private

company. In parliamentary hearings, some farmers testified that they do

not trust the CWB, which they believe lacks transparency and

accountability, and advocate that the Auditor General of Canada be the

auditor of the CWB.

1

Officials at USDA emphasize that U.S. export prices are more readily

available than those of Canada and other exporters. As an example, they

cite an analysis of reported sales and export prices published by the

International Grains Council that they prepared for the Canada-United

States Joint Commission on Grains. They found that for a study period

during the early 1990s, there were over 1,000 entries for the United States,

220 for the European Union, 71 for Canada, 44 for Argentina, and 11 for

Australia on reported sales of grain and products.

Several grain industry experts believe that differences in price

transparency between the U.S. and Canadian systems may give the CWB

strategic advantages when compared to private grain traders. Studies

prepared for the Canada-United States Joint Commission on Grains

highlighted differences in price transparency between the grain systems of

the two countries. According to one analysis, private export and domestic

grain pricing in the United States is done in a transparent manner, with

government-subsidized export sales also open to public view, while in

Canada the prices of export sales by the CWB are closely held, though the

price of grain in the domestic Canadian market is transparent.2

 This

1

Report on Bill C-4, Standing Committee of the Canadian Senate on Agriculture and Forestry (May 14,

1998). Recent Canadian legislation permits the Auditor General to conduct an audit of the accounts

and financial transactions of the CWB.

2

Martin Abel, “A Comparison of the U.S. and Canadian Marketing Systems for Wheat and Barley:

Transparency, Differential Pricing, and Monopolistic Behavior,” Canada-United States Joint

Commission on Grains, Final Report, Vol. II (Winnipeg, Canada, and Washington, D.C.: Oct. 1995).

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difference in transparency between the U.S. and Canadian pricing

practices places U.S. firms at a strategic disadvantage when competing

with the CWB. Another Commission analysis concluded that the single-desk

seller, with more knowledge of pricing behavior by U.S. firms, can win

more bids and can expect to earn a higher profit.3

In comparing the CWB with private firms, the CWB is further benefited by its

monopoly sourcing requirement. Because it does not compete in procuring

grain, it has the ability to undertake longer contracts and has a larger

margin between the price at which it acquires its product and the price it

asks for its grain. This advantage in sourcing gives the CWB considerable

flexibility and latitude in pricing in comparison with private firms. The

CWB, however, disputes this and believes that it may have a competitive

disadvantage in grain procurement since private traders know the CWB

acquisition cost and can use this information as a competitive advantage

over the CWB.

Efforts to Increase

CWB Pricing

Transparency

U.S. concerns that the CWB has an unfair pricing advantage have led to

efforts to increase the transparency of CWB pricing practices. USDA and

Customs officials are discussing the possibility of collecting more detailed

price information on Canadian wheat imports. The data that Customs

currently collects on Canadian grain, as well as on all other imports, lack

the transactional detail necessary to be useful in determining whether the

CWB engages in pricing practices for which a trade remedy may be

available. For example, this information could be important to the United

States in determining whether the CWB’s exports to the United States are

priced below the acquisition price, and thus, not consistent with Canada’s

obligations under CFTA and NAFTA. However, given the limited availability

of detailed contract information, USDA officials acknowledge that

expanded data collection at the Canadian border would be of only limited

benefit in revealing CWB pricing practices, because much of the

information necessary to determine these practices cannot be readily

collected by Customs. The United States is also working through the WTO

to increase the amount of pricing information the CWB and other STEs are

required to submit in notifications to the WTO on their activities. So far, the

United States has had limited success in achieving this objective. The WTO

has changed its STE reporting format to include more information on

pricing, but the United States does not believe that the changes are

3

William W. Wilson, Demcey Johnson, and Bruce Dahl, “Pricing to Value: U.S. Analysis and Issues,”

Canada-United States Joint Commission on Grains, Final Report, Vol. II (Winnipeg, Canada, and

Washington, D.C.: Oct. 1995).

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sufficient to determine if the CWB and other STEs are engaging in improper

pricing.

Grain Import Data Are

Insufficient to Determine

CWB Pricing Practices

In general, the information on the value of imported merchandise

collected by Customs on the entry forms submitted by importers is used to

calculate duties4

 as well as to compile U.S. trade statistics (see app. IV for

a detailed discussion of processes for collecting and compiling import

data). However, most imports from Canada, including wheat and barley,

are duty free under NAFTA. Therefore, the value information collected by

Customs on Canadian wheat and barley shipments is used only for

statistical purposes. Census aggregates this value information to show the

total value of wheat and barley entering the United States from Canada.

Further aggregations allow Census to determine the U.S. trade balance

with Canada as well as the overall U.S. trade balance.

While the value information collected by Customs is used for calculating

duties and compiling trade data, there are several reasons why this

information lacks the detail that would be useful to determine whether the

CWB is engaging in pricing practices for which a remedy may be available,

either through use of dispute settlement procedures or through U.S. law.

The entered value data currently collected by Customs do not provide

specific detail on all of the elements affecting the price of a shipment, for

example, protein content and payment terms. According to the

Department of Commerce, additional information regarding imports may

be useful in assessing whether foreign exporters are engaging in unfair

pricing practices. However, Commerce officials state that the lack of

additional information should not prevent a domestic industry from

seeking relief under U.S. trade laws since petitions filed under those laws,

in most cases, need not provide specific price information. Commerce

states that while pricing information is an important element of a dumping

petition, such information has been compiled from a variety of alternative

sources by the petitioning industry. Moveover, Customs’ aggregate data

have often been used by domestic industries when filing an antidumping

petition.

In addition, the value information collected by Customs is of only limited

use in determining the competitiveness of the price of Canadian grain in

the U.S. market. In order to make an accurate determination of the price of

Canadian grain, detailed information about the nature of the grain is

4

It is important to note that the duty rate for some merchandise, such as wheat from countries not

covered by trade preference programs such as NAFTA, is based on quantity rather than value; for

example, the duty rate for durum wheat is $0.71 per kilogram.

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required. For example, wheat’s protein and moisture content as well the

amount of foreign material it contains are important pricing determinants

in the wheat market. The price of durum wheat, for instance, can vary

significantly depending on its protein level. In the 1996-97 marketing year,

the CWB paid Canadian farmers $198 for a metric ton of a particular grade

of durum wheat at a 14-percent protein level as compared to $188 for a

metric ton of the same grade of wheat at a 12.5-percent protein level.

Customs’ import entry form does not require this level of detail. The form

only requires that wheat be classified according to the Harmonized Tariff

Schedule (HTS), which provides separate classifications for varieties of

wheat such as durum and red spring. The HTS also divides some wheat

varieties, such as red spring, into broad grade categories.

Customs’ entry information, therefore, can only be used to estimate the

border price per metric ton of varieties of Canadian wheat, such as durum.

Without the detailed quality information, Canadian wheat import prices

are not comparable to U.S. market prices.

Customs’ entry information also does not reflect important information

about the contract between the exporter and importer, which is necessary

for determining the competitiveness of the price of Canadian grain

entering the U.S. market. For example, the value of a shipment of durum

wheat entering the United States from Canada in October could be based

on a contract that was signed in February. The contract price is usually

based on the current price of durum on the Minneapolis grain market. The

market price of durum wheat can vary considerably from month to month.

Therefore, a direct comparison of Canadian durum import prices and

market prices on the date of importation is often inappropriate. Moreover,

Customs’ entry form does not require information on payment terms, such

as credit.

Customs and USDA

Discussing Expanding

Amount of Data Collected

on Canadian Wheat

Shipments

Customs and USDA recently began discussions on increasing the amount of

information Customs collects on wheat shipments. USDA has asked

Customs to consider the feasibility of collecting more detail on wheat

protein levels on Customs’ entry forms. According to Customs, some

invoices for wheat presented to Customs at entry contain quality and

protein information. Customs can also obtain such information by sending

a “request for information” (form CF28) to the importer, although the

information is not part of Customs’ automated reporting system, and, thus,

not publicly available.

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USDA wants the HTS classifications for wheat to be expanded to take into

account variations in protein levels.5

 Customs told us that the HTS

classifies durum and some other types of wheat merely by the name of the

wheat, with no consideration of various quality levels being imported.

Currently, the HTS only allows for reporting varying grades for red spring

wheat. USDA hopes that expanding the HTS classification for wheat would

allow it to better estimate the price of Canadian wheat entering the U.S.

market. However, USDA acknowledges that even if such an expansion of

the HTS occurs, estimates of Canadian wheat prices entering the United

States would still be limited. USDA notes that these estimates would still

lack important wheat pricing information such as moisture and foreign

substance content, as well as contract details such as the prevailing

market price at the time of the contract. In addition, USDA does not believe

it is feasible for Customs to collect such detailed information on the

automated import entry form. Customs officials expect opposition to such

changes from some importers and Customs brokers who would consider

the additional information requirements to be burdensome.

New STE Notification

Questionnaire May Not

Sufficiently Increase CWB

Pricing Transparency

The issue of the potential trade-distorting practices and lack of

transparency of STEs, such as the CWB, is being discussed multilaterally

through the WTO.

6

 The WTO will soon implement a new questionnaire for

collecting information on STE activities, including their pricing practices. In

negotiations on the format of the new questionnaire, the United States

argued strongly for adding questions that would help bring greater

transparency to the pricing activities of STEs and therefore be of use in

determining whether STEs such as the CWB are engaging in improper

pricing.7

 U.S. officials believe that the new questionnaire does not go far

enough in increasing the pricing transparency of the CWB and other STEs.

The United States plans to continue pursuing the issue of STE transparency

in the WTO.

5

To expand the HTS to take into account wheat protein levels, USDA must petition the ITC.

Administrative changes to the HTS are carried out through an interagency committee, the Committee

for the Statistical Annotation of the Tariff Schedule, composed of the ITC, Census, and Customs.

6

Regional forums, including ongoing negotiations under the Free Trade Area of the Americas and the

OECD, are discussing STE activities, but their endeavors are mostly in support of WTO efforts.

Discussions in these forums are focused on various issues that can relate to STE activities, including

anticompetitive business conduct; price pooling, export subsidies, and other export practices; and

export credit guarantees.

7

While U.S. concerns regarding the CWB relate to the pricing activities of export STEs, the United

States also sought to obtain greater pricing transparency for import STEs through a revised

questionnaire.

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The WTO agreement provided for the creation of a Working Party on STEs

tasked with ensuring and, in the long run, improving the transparency of

STE activities. The agreement also established a formal STE definition.8 The

Working Party has allowed the WTO to better track the activities of STEs but

has had mixed success in increasing their transparency. One of the tasks

of the Working Party has been to revise the WTO’s questionnaire on STEs.

After over 2 years of negotiation, in April 1998 the Working Party reached

agreement on a revised questionnaire that will now be used as the basis

for WTO members’ STE notifications (for more information on WTO

members’ recent STE notifications, see app. V.) While the new

questionnaire requests more descriptive information about the functioning

of WTO members’ STEs and additional quantitative information on STE

import and export activities, it may not increase the transparency of the

CWB.

Obtaining detailed information on STE pricing activities has been a major

U.S. objective for revising the questionnaire because U.S. officials think

that such data may assist the United States in determining whether certain

STEs use their special status to operate unfairly. To this end, the United

States forwarded several proposals to the Working Party. One proposal

requested that members be asked to provide transaction-level pricing data

on an ad hoc basis; that is, at the request of another member. Another

proposal asked that members provide, on a quarterly basis, information on

average prices for STE imports and exports, broken down by country of

origin or destination. However, while supported by some Working Party

members, the United States faced significant opposition from other

Working Party members, including Canada, to these proposals. Opposing

WTO members were concerned about providing commercially confidential

information and about the possible administrative burden this would

impose on countries. Ultimately the Working Party could not agree that

this more detailed pricing data should be provided; instead, the new

questionnaire asks for information on STEs’ average annual prices for

individual commodities.

U.S. government and WTO officials believe that the new questionnaire

represents an improvement over the 1960 questionnaire. According to USDA

and USTR officials, the new version provides greater “organizational clarity”

for WTO members to make their notifications. Specifically, the new

questionnaire sets forth detailed guidelines and a structure for presenting

8

These provisions were included in the Understanding on the Interpretation of Article XVII of the

General Agreement on Tariffs and Trade 1994, which was annexed to the WTO agreement.

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descriptive and statistical information on members’ STE practices. In

addition, the questionnaire now asks members to submit information on

their STEs’ domestic pricing practices, something that was not previously

required. The new questionnaire may be particularly useful in obtaining

more information on the STE practices of prospective WTO members with

market transition economies. In these countries, such as China or Russia,

public information on their STEs is not always readily available. According

to a WTO Secretariat official, the new questionnaire asks for information on

STE practices in a much clearer way; the more precise language in the new

questionnaire will “discourage one-line answers” and may result in less

variation in the level of detail members provide on their STEs. Other

Working Party members we spoke with echoed this view.

According to USDA officials, whether the new questionnaire is able to bring

greater transparency specifically to the CWB’s activities will largely depend

on how Canada responds to the questionnaire. USDA officials told us that if

Canada acts in the spirit of the new questionnaire, Canada could use its

new notification to provide new information on the CWB’s activities.

However, one USDA official also told us that the new questionnaire may

provide virtually no new information about CWB pricing. This official told

us that the CWB has provided much more information and transparency on

domestic prices in recent years; Canada now publishes prices daily in

various publications, and these data are essentially the same kind of price

data that are available in the United States for U.S. grain prices. Therefore,

according to this official, the new questionnaire does not necessarily

provide for new information on Canada’s domestic grain prices. In

addition, this official could not identify any sections of the new

questionnaire that would definitely constitute new information that is not

in the public domain with respect to the CWB. Canadian officials did not

respond to our request to identify areas where the new questionnaire will

require them to provide additional information on the CWB.

In addition to the questionnaire, the Working Party has been developing an

illustrative list of state trading activities. This list will be used in

conjunction with the new questionnaire to help WTO members identify

what entities in their trading regimes should be reported in the notification

questionnaire.

Working Party members have agreed to continue work defining possible

further information needed to enhance the transparency of STEs.

According to one WTO member we spoke with, it may be appropriate for

the Working Party to review the adequacy of the new questionnaire and

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the list after a few years, because countries may initially “report the bare

minimum” in the first trial run of the questionnaire. However, the working

party has only met twice since the questionnaire was approved and,

according to the WTO Secretariat,9

 the Working Party has not begun

discussing any future work program beyond continuing the review of

notifications and finalizing the illustrative list. USDA and USTR officials told

us they intend to pursue obtaining greater transparency of STEs through

the Working Party, but they have not yet outlined their strategy for doing

so. These officials stated that the United States is beginning to “think

beyond transparency” about the need to develop disciplines on STEs in

agriculture; they anticipate that STEs will be a significant focus in the WTO

negotiations on agriculture set to begin at the end of 1999 or shortly

thereafter.

Conclusions While the United States collects extensive Canadian grain import data, it

has been unable to shed light on the CWB’s grain export prices. Although

the existing grain import data are insufficient to determine CWB export

prices, expanding the amount of data collected on Canadian wheat import

shipments would be difficult and may not provide the desired pricing

information. The United States has worked closely with the STE Working

Party at the WTO but has had limited success in increasing STE pricing

transparency in that forum, as well.

Agency and Country

Comments

In comments on our draft report, USDA emphasized that, in its view, the

CWB, as the sole buyer of Canadian wheat for domestic human

consumption and for export, is able to engage in trade-distorting actions.

USDA also said that we did not sufficiently emphasize the CWB’s pricing

flexibility that comes from its practice of making initial payments to its

farmers of only 70-75 percent of the expected value of their grain. We

believe that point was sufficiently established in the draft. However, we

did not attempt to quantify the impact of CWB activities on grain trade.

The CWB did not agree with GAO’s assertion that the CWB has flexibility in

pricing compared to private firms because it does not compete to procure

grain. Rather, the CWB believes that it has a competitive disadvantage in

obtaining grain because private grain traders know the CWB’s acquisition

cost. GAO included the CWB’s statement in its discussion of this issue.

9

The WTO Secretariat is responsible for servicing WTO delegate bodies, including individual working

parties within WTO.

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The CWB and other STEs are allowable under the WTO Agreements and

NAFTA. They operate throughout the world in various forms and for various

purposes. Trade remedies have not been fashioned specifically to deal

with imports from STEs. However, products imported into the United

States that are manufactured, produced, or marketed by STEs are subject

to the same laws regulating imports as any other product, including laws

that restrict imports or provide remedies to U.S. industry competing with

unfairly traded goods. We asked the U.S. government entities charged with

enforcing international trade agreements and U.S. trade laws, including

USTR, Commerce, and the ITC, to search their records from 1980 to the

present to determine how trade laws have been applied to STEs. We found

a total of 15 trade remedy actions involving an STE, the most recent taken

in 1995. Some of the trade remedy actions resulted in increased duties,

while others prompted the country in which the import STE was operating

to remove import restrictions that limited U.S. exports.

Trade Remedies

Under U.S. Law and

International Trade

Agreements

Trade remedies under U.S. law allow government and private parties to

seek redress for disruptive, trade-distorting, or unfair trade practices.1

 The

United States has various trade remedy laws at its disposal to deal with

trade issues, dumping,2

 actionable subsidies,3 or increased imports causing

domestic injury. Dispute settlement provisions under international trade

agreements, including the WTO4

 and NAFTA, provide a means of seeking

relief from measures or actions taken by other governments, which could

include actions by STEs. The following is a brief summary of the relevant

U.S. laws (for a more detailed description of each trade remedy, see app.

VI).

1

For a catalog of available trade sanctions or other remedies that may be used to ensure that other

countries’ STEs operate fairly, see the Related GAO Products list at the end of this report.

2

“Dumping” is generally defined as the sale of an exported product at a price lower than that charged

for a like product in the “home” market of the exporters or at a price below cost.

3

As used in this report, an “actionable” subsidy is a subsidy for which U.S. law provides a remedy in

the form of an increased or “countervailing” duty. Not all benefits that governments confer on their

products are actionable or countervailable subsidies. Rather, in general, subsidies must be limited to a

specific group of firms or industries or to a firm’s export activities in order to be covered under the

countervailing duty law. Subsidies provided by a government or public body may confer benefits on

the recipient that provide an unfair advantage in international trade, such as allowing a producer to

sell its products at a lower price than that of the competition.

4

With the establishment of the WTO in 1995, the GATT dispute settlement mechanism was

strengthened.

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• Title VII of the Tariff Act of 1930, as amended,5 provides the most common

means of dealing with antidumping issues. Under title VII, private parties

can petition the Department of Commerce and the ITC on behalf of a U.S.

industry to determine whether a class or kind of merchandise is being sold

in the United States at “dumped” prices and whether a U.S. industry is

materially injured or threatened with material injury by reason of such

dumped imports. If the agencies find that both dumping and injury or

threat of injury exist, Commerce then calculates the amount of duties

imposed on each importer to offset the price difference between the U.S.

price and the normal value of the imported merchandise.

• Title VII of the Tariff Act of 1930, as amended,6 also provides for the

imposition of countervailing (or equalizing) duties whenever a government

or public entity provides certain subsidies for the manufacture,

production, or export of articles subsequently imported into the United

States and a U.S. industry is materially injured or threatened with material

injury by reason of such subsidized imports. As in the case of antidumping

law, petitions are filed with Commerce and the ITC, and countervailing

duties are imposed if Commerce finds a subsidy and the ITC finds that a

U.S. industry is materially injured or threatened with material injury by

reason of imports of such subsidized imports.

• Under section 332 of the Tariff Act of 1930, as amended,7 the ITC has broad

authority to investigate matters pertaining to U.S. customs laws, foreign

competition with domestic industry, and international trade relations.

Most ITC investigations under section 332 are conducted at the request of

USTR or the House Committee on Ways and Means or the Senate

Committee on Finance.

• Section 22 of the Agricultural Adjustment Act of 1933, as amended,8

authorizes the President to impose fees or quotas on imported products

that undermine any USDA domestic commodity support or stabilization

program. Since 1995, such actions may be applied only against imports

from non-WTO countries.

• Sections 201 to 204 of the Trade Act of 1974, as amended,9 authorize the

ITC to conduct investigations concerning whether an article is being

imported into the United States in such increased quantities as to be a

substantial cause of serious injury, or the threat thereof, to the domestic

5

19 U.S.C. 1673 et seq.

6

19 U.S.C. 1671 et seq.

7

19 U.S.C. 1332.

8

7 U.S.C. 624.

9

19 U.S.C. 2251-54.

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industry producing a like or directly competitive article. If the ITC makes

an affirmative determination, it recommends a remedy to the President,

who makes the final decision as to whether to impose a remedy and, if so,

in what form and amount. Remedies generally take the form of increased

tariffs and import quotas.

• Sections 301-309 of the Trade Act of 1974, as amended,10 commonly

referred to as “Section 301,” give the President broad discretion to enforce

U.S. trade rights granted by trade agreements and to attempt to eliminate

acts, policies, or practices of a foreign government that violate a trade

agreement or are unjustifiable, discriminatory, or unreasonable and

burdensome or restrict U.S. commerce.

CWB and Other STE

Involvement in Trade

Remedy Actions

The CWB and other STEs have been involved in investigations under U.S.

trade law, and their activities have been the subject of formal disputes

under international trade agreements. As shown in table 4.1, the CWB has

been involved in three different trade remedy actions since 1980. The ITC

conducted two investigations involving U.S. imports of Canadian grain,

and USTR reported one CFTA dispute settlement action about CWB export

pricing. As for other STEs, the Department of Commerce found that five

STEs had been involved in antidumping or countervailing duty

investigations or reviews. The ITC reported no actions involving STEs under

sections 201 to 204. USTR identified three Section 301 investigations

involving STEs,11 which led to three GATT dispute settlement procedures.

USTR found one additional dispute settlement procedure involving an STE,

not preceded by a Section 301 investigation. USTR found no WTO or NAFTA

disputes involving STEs. All of the GATT dispute settlement cases involved

restrictive practices of import STEs, whose actions impeded U.S. exporters’

access to foreign markets.

1019 U.S.C. 2411 et seq.

11USTR identified four additional section 301 cases and two GATT dispute cases that we did not

include in our analysis. Given the products and countries involved, these cases could have involved an

STE, but either no STE was identified by name or the STE mentioned in the case was not one notified

to GATT. In addition, one of the four countries was not a GATT member.

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Table 4.1: Number of Trade Remedy

Actions Involving STEs Since 1980

Trade remedy type

Number of

actions

U.S. agency

overseeing

Type of STE

involved

U.S. antidumping law 1 Commerce/

ITC

Export

U.S. countervailing duty law 4 Commerce/

ITC

Export

Section 332 1a ITC Export

Section 22 1a ITC/USDA Export

Sections 201 to 204 0 ITC

Section 301 3 USTR Import

Dispute settlement - GATT 4 USTR Import

Dispute settlement - CFTA 1a USTR Export

Note: There were no WTO or NAFTA dispute settlement cases involving STEs.

aThe STE involved was the CWB.

Sources: USTR, Department of Commerce, and the ITC.

Use of Trade Remedies

Involving the CWB

The CWB was involved in three trade remedy actions, including two ITC

investigations and one CFTA formal dispute. The ITC investigations both

involved Canadian wheat imports into the United States—one looking at

the competitiveness of the two markets, and the other examining the

effect of those imports on U.S. farm sector support programs. The CFTA

dispute involved the interpretation of provisions in the agreement on

export prices of agricultural goods.

ITC Investigations of U.S. Grain

Imports

The increase in imports of Canadian grain to the United States prompted

two ITC investigations. In 1990, the ITC began a section 332 investigation on

the conditions of competition between the U.S. and Canadian durum

wheat industries. The ITC found that it was not apparent that prices paid by

U.S. processors during 1986-89 for Canadian durum wheat were

significantly different than prices paid for similar quality U.S. durum.

At the President’s request, the ITC launched an investigation in

January 1994 under section 22 of the Agricultural Adjustment Act to

determine whether wheat, wheat flour, and semolina were being imported

into the United States under such conditions and such quantities as to

“render or tend to render ineffective, or materially interfere with, the price

support, payment and production adjustment program conducted by. . .”

USDA for wheat. Canada was the principal source of wheat imports into the

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United States, Canadian production and U.S. production being the two

most important sources of supply.

The ITC completed its section 22 review in July 1994. The six

commissioners rendered a split decision: three commissioners found that

wheat was not being imported under such conditions and in such

quantities as to materially interfere with USDA wheat programs; three

Commissioners found that wheat was being imported under such

conditions and in such quantities as to materially interfere with USDA

wheat programs. The commissioners had differing recommendations.

Previous negotiations and the ITC investigation resulted in a 1-year MOU

between the two countries (see app. I).

CFTA Dispute Panel Ruling on

Canadian Durum Wheat

Exports

In May 1992, the United States requested that a binational dispute panel

under CFTA consider pricing policies for Canadian durum wheat exports.

The United States believed that Canada was acting contrary to the CFTA

requirement that neither country export agricultural goods to the other

country at a price below the acquisition price. Among other things, the

panel was asked to determine whether the acquisition price included

solely the initial payments made to farmers by the CWB—the Canadian

position—or all payments made to farmers with respect to a durum wheat

crop (initial plus interim and final payments, if any)—the U.S. position.

The United States was concerned that the Canadians’ more narrow

definition would allow Canada to undercut U.S. grain prices and still meet

the terms of CFTA.

The panel’s final report12 supported Canada’s definition of the term but

stated that it was not possible or desirable for the panel to determine

whether the CWB had violated the CFTA provision. However, the panel

recommended that a bilateral working group should be established for the

general purpose of overseeing an audit of the CWB. An initial audit was

conducted, which found that out of the 105 contracts or durum wheat

sales to the United States CWB signed and completed from January 1, 1989,

to July 31, 1992, 3 contracts were not in compliance with the CFTA

prohibition against selling below acquisition price. By volume, the 

3 contracts represented 13,985 metric tons in durum wheat sales, or 

1.34 percent of the 1.04 million metric tons in total sales for the 105

contracts.

12In the Matter of the Interpretation of and Canada’s Compliance With Article 701.3 With Respect to

Durum Wheat Sales, Final Report, Before the Panel Convened Pursuant to Chapter 18 of the

Canada-United States Free Trade Agreement, CDA-92-1807-01 (Washington, DC: NAFTA Secretariat,

Feb. 8, 1993).

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Use of Trade Remedies

Under U.S. Law

STEs have been involved in trade remedy actions under U.S. law. These

actions included products exported to the United States through STEs, and

actions addressing STEs’ alleged unfair trade practices restricting U.S.

exporters’ access to foreign markets.

Antidumping and

Countervailing Duty

Investigations

Commerce reported that it had conducted one antidumping investigation

and four countervailing duty investigations involving STEs (see table 4.2).

The 1990-91 antidumping investigation was prompted by a petition from

the Ad Hoc Committee for Fair Trade of the California Kiwifruit

Commission. Commerce found that fresh kiwifruit was being dumped at

less than fair value by a New Zealand STE, the New Zealand Kiwifruit

Marketing Board, through which all New Zealand kiwifruit for export must

pass, except for such exports to Australia. The ITC then found that U.S.

industry was injured/threatened by the imports. As a result, the United

States imposed a dumping duty of 98.6 percent on those imports, effective

November 1991. In two out of the four countervailing duty investigations,

Commerce concluded that the STEs in the case, the New Zealand Meat

Producers Board in one case and the Turkish Grain Board in the other

case, were providing actionable subsidies. Commerce subsequently

required Customs to levy a countervailing duty on imports from these two

STEs.13 In the two remaining countervailing duty investigations, the

petitioners terminated one, and the ITC found no injury on the other, and

therefore no countervailing duties were levied.

Table 4.2: U.S. Antidumping and Countervailing Duty Investigations Involving STEs Notified to the WTO, 1980 to the

Present

STE

Case type

(initiated) Commerce and ITC determinations Outcome

New Zealand Kiwifruit

Marketing Board (NZKMB)

AD

(1991)

Commerce: fresh kiwifruit from New Zealand is being, or

is likely to be, sold in the United States at less than fair

value

ITC: made affirmative determination on injury

Customs initially charged

NZKMB a

weighted-average dumping

margin of 98.6 percenta

(continued)

13The ITC found injury in the countervailing duty case on pasta from Turkey. However, the ITC was not

required to find injury in the second countervailing duty case—lamb meat from New Zealand. This is

because, at the time, New Zealand was not a “country under the Agreement” with respect to the GATT

countervailing duty code and thus was not entitled to an injury finding.

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STE

Case type

(initiated) Commerce and ITC determinations Outcome

(Israeli) Production and

Marketing Board of

Ornamental Plants (PMBOP);

and

Flower Board

CVD

(1980)

In a 1980 countervailing duty investigation, Commerce

found no government support of PMBOP 

In a 1986 countervailing duty investigation, Commerce

found the Flower Boardb had received funds from the

Ministry of Agriculture and that this financial support was

countervailable 

ITC: made negative determination on injury

No CVD order issued due to

Commerce finding no

improper subsidy (1980)

No CVD order issued due to

ITC negative determination

on injury (1986)

Australian Meat and

Live-stock Corporation

(AMLC)

CVD

(1981)

Commerce: preliminarily determined that funds from

AMLC to Australian producers, processors, and

exporters of lamb meat qualify as subsidies

ITC: no ruling due to termination of case

Investigation was

terminated at petitioners’

requestc

New Zealand Meat

Producers Board

CVD

(1985)

Commerce: certain benefits that constitute subsidies

within the meaning of countervailing duty law are being

provided to producers 

The net subsidy amount is NZ$0.3602/lb

ITC: not required to rule

Customs charged a CVD

duty on subject products

entering the United States,

equal to the net subsidy

Turkish Soil Product Office

(Turkish Grain Board)

CVD

(1995)

Commerce: one company, Filiz, received free wheat

from the Turkish Grain Board in exchange for exporting

a certain amount of its product. This was found to be a

countervailable subsidy

ITC: made affirmative determination on injury

Customs initially charged a

CVD duty of 3.87 percent

ad valorem from Filizd

Legend

AD= Antidumping

CVD= Countervailing duty

a The “dumping margin” is the fair market value minus the U.S. price divided by the U.S. price.

The fair market value can have one of three meanings: (1) the price of a like product in the home

market, (2) the cost of production in the home market, or (3) the price of a like product in a

surrogate market. In this case, the fair market value is the price in a surrogate market—Japan.

Once Commerce issues an antidumping order, Customs requires that the importer post a cash

deposit in an amount equal to the previously found margin of dumping. The amount of these

deposits is periodically adjusted as a result of administrative reviews of antidumping orders

conducted by Commerce. Any extra deposits are refunded.

bCommerce stated that the Flower Board was an entity established by the Ornamental Plants

Production and Marketing Board Law of 1976 and that the record of its investigation did not

indicate what relationship, if any, existed between the Flower Board and the PMBOP.

cBy the withdrawal of the petition and termination of the investigation, this determination is without

legal force or effect.

dPercent ad valorem means percent of value of the subject merchandise entering the United

States.

Source: U.S. Department of Commerce, International Trade Administration.

Page 57 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 4 

Trade Remedy Enforcement Affecting STEs

A Commerce official reiterated that Commerce does not make a

determination regarding STE status and that STEs are not accorded special

treatment or recognition under U.S. antidumping and countervailing duty

law. However, Commerce said that to the extent that an STE sells goods

into the United States that are dumped or unfairly subsidized, U.S.

antidumping and countervailing duty laws could provide a potential

remedy. The official cautioned that it was difficult to determine

conclusively which STEs had been the subject of antidumping or

countervailing duty investigations or reviews, due to the length and

complexity of the cases, the possible involvement of an STE in a case in an

indirect or insubstantial way, and potential difficulties in translating

foreign STE names.

Section 301 Cases Leading

to a GATT Dispute

Settlement

Canada - Restrictions on Beer

Imports

USTR initiated a Section 301 investigation in June 1990 related to alleged

discriminatory distribution and pricing practices of the provincial liquor

boards of Ontario, including an STE, the Ontario Liquor Control Board. The

USTR investigation was prompted by petitions filed by two U.S. brewing

companies. These practices included listing requirements, discriminatory

mark-ups, and restrictions upon distribution. After negotiations between

Canada and the United States failed to resolve the issue, USTR requested

that a GATT dispute settlement panel examine Canadian practices. In

October 1991, the GATT panel reported that many of the Canadian practices

were inconsistent with GATT prohibitions on quantitative restrictions and

recommended they be removed. Because Canada did not discontinue the

practices, in December of that year USTR determined that, consistent with

the GATT panel finding, duties should be increased on beer and malt

beverages from Canada. After resuming negotiations with Canada and

again failing to reach agreement, the United States did increase duties by

50 percent ad valorem.14 Canada responded in kind by raising duties on

beer imports from the two U.S. brewing companies that had originally

submitted the Section 301 petitions. USTR initiated new negotiations with

Canada in 1993, and the two countries ultimately signed an MOU in August

of 1993. The MOU, among other things, increased U.S. brewers’ access to

Canadian stores and reduced the Ontario Liquor Board’s fees for handling

U.S. beer and removed the duties imposed earlier.

14Percent ad valorem means percent of value of the subject merchandise entering the United States.

Page 58 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 4 

Trade Remedy Enforcement Affecting STEs

Thailand - Restrictions on

Cigarette Imports

The U.S. Cigarette Export Association filed a Section 301 petition in 1989

alleging that the Royal Thai Government and its state-controlled import

monopoly and STE, the Thailand Tobacco Monopoly, engaged in taxing and

licensing practices that effectively prohibited the importation and sale of

cigarettes into Thailand. USTR initiated a Section 301 investigation and, on

February 5, 1990, requested that a GATT panel be formed to consider the

issue. The GATT panel issued a report in September 1990 concluding that

Thai cigarette import restrictions violated GATT prohibitions on

quantitative restrictions. The panel recommended that Thailand bring its

practices into conformity with its obligations under GATT. In October 1990,

the Thai government said that it would remove its import restrictions and,

in response, USTR terminated the Section 301 investigation.

Korea - Restrictions on Beef

Imports

The United States challenged quantitative import restrictions imposed by

Korea’s STE, the Livestock Products Marketing Organization, arguing that

they violated GATT prohibitions against quantitative restrictions. The

United States also argued that the very existence of an import monopoly

controlled by domestic producers constituted a prohibited import

restriction. The GATT panel concluded that the existence of a

producer-controlled monopoly was not a GATT violation but found that the

Livestock Products Marketing Organization import restrictions did violate

GATT prohibitions against import restrictions. In 1989, a GATT panel report

was adopted recommending that the two countries consult and that Korea

conform to GATT. Pursuant to the panel recommendation, the United States

and Korea signed a bilateral agreement. Two subsequent agreements, one

in 1993 and one under the Uruguay Round, were entered into force to

achieve free market conditions for the importation and distribution of U.S.

beef in Korea. Each year, both countries meet quarterly to ensure full

implementation of the beef agreement provisions.

Use of GATT Dispute

Settlement Provisions

Under International

Agreements

Japan - Restrictions on Certain

Agricultural Products

In 1988, a GATT dispute settlement panel’s report was adopted on a GATT

dispute case. The United States alleged that a variety of quantitative

restrictions maintained by Japan on 11 agricultural categories were

inconsistent with Japan’s GATT obligations. Some of these restrictions were

imposed by an STE - the Livestock Industry Promotion Corporation. The

Page 59 GAO/NSIAD-99-21 U.S. Agricultural Trade
Chapter 4 

Trade Remedy Enforcement Affecting STEs

Livestock Industry Promotion Corporation is an import monopoly that

regulates imports of beef and certain dairy products, including condensed

skim milk, whole milk powder, skimmed milk powder, whey powder, and

buttermilk powder, into Japan. Japan acknowledged that the Livestock

Industry Promotion Corporation maintained import restrictions but argued

that the GATT prohibition on quantitative restrictions did not apply to

state-trading monopolies. The dispute settlement panel concluded that

GATT provisions, including those prohibiting quantitative restrictions, apply

to all import restrictions, whether or not they are instituted through quotas

or by STEs. The panel further ruled that while GATT permits measures such

as those limiting private imports necessary to enforce the exclusive

trading rights of import monopolies, it does not permit quantitative

restrictions otherwise inconsistent with GATT obligations.

On August 2, 1988, the United States and Japan signed an agreement to

resolve the GATT dispute. Japan partially lifted its quotas and provided

increased access as compensation. Japan eliminated quotas on 7 of the 11

product categories by April 1, 1990.

Conclusions While relatively few trade remedy actions have been taken involving

STEs—15 since 1980— some of these actions have resulted in increased

duties on imports found to be injurious to U.S. industry. In addition, the

United States prevailed in all of the GATT dispute settlement cases

involving STEs. In every case, the GATT dispute panel found that the import

STE’s restrictions that limited U.S. exports had violated GATT rules. A wide

range of trade remedies can be applied to STEs, such as those seeking

redress for dumping, actionable subsidies, and sufficiently injurious

imports, and those seeking relief, through dispute settlement, from actions

taken by other governments as well as by STEs.

Agency Comments We received technical comments from USDA, USTR, the U.S. Department of

Commerce, the U.S. Department of Justice, and the ITC on a draft of this

chapter. We incorporated their suggestions, where appropriate.

Page 60 GAO/NSIAD-99-21 U.S. Agricultural Trade
Page 61 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix I 

Chronology of U.S.-Canadian Grain Trade

The United States and Canada have addressed many issues related to grain

trade between the two countries, through bilateral and multilateral trade

agreements, including dispute resolution procedures, domestic trade laws,

and other venues. The following is a chronology of the major events

affecting U.S-Canadian grain trade over the past dozen years. Figure I.1 is

a time line of those major events.

Page 62 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix I 

Chronology of U.S.-Canadian Grain Trade

Figure I.1: Time Line of U.S.-Canadian Grain Trade Related Events

The Export Enhancement Program established

U.S. imports of durum wheat begin to rise

(January) U.S.- Canadian Free Trade Agreement (CFTA) goes into force 

International Trade Commission (ITC) investigates competitiveness in U.S.-Canadian durum wheat trade

1985

1986

1989

1990

1991

1992

1993

1994

1995

 

 1996

1997

1998 (January) United States and Canada announce plans to implement a pilot program to facilitate U.S.

 wheat exports to Canada

(January) Canada unilaterally suspends application of tariff-rate quotas to import of U.S. barley products

(March) United States requests new audit of CWB wheat pricing

Canada removes its import license requirement but implements end-use certificate requirement on wheat imports

(February) CFTA dispute panel issues final report on Canadian durum wheat pricing

(December) Audit Committee established per CFTA dispute panel recommendation

(January) North American Free Trade Agreement (NAFTA) goes into force 

(July) ITC concludes an investigation under section 22 of the Agricultural Adjustment Act of 1933

(September) United States and Canada sign Memorandum of Understanding (MOU) on grain trade

(January) United States agrees to limit use of section 22, per Uruguay Round Agreements Act

(January) Canada converts its import license requirement for U.S. imports of barley to a tariff-rate quota

(February) United States implements end-use certificate requirement on wheat imports 

(July) United States requests NAFTA dispute panel on Canadian barley tariff-rate quotas

(September) MOU between United States and Canada expires

(October) Canada-United States Joint Commission on Grains releases its final report

(July) Western Grain Marketing Panel releases report

(December) NAFTA dispute settlement panel issues final report, upholding Canadian barley 

tariff-rate quotas

(May) United States requests CFTA dispute panel on Canadian Wheat Board (CWB) durum wheat pricing

(November) Canada unilaterally suspends application of tariff-rate quotas to import of U.S. barley products

Source: GAO.

Page 63 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix I 

Chronology of U.S.-Canadian Grain Trade

1985—The Export

Enhancement

Program

By 1985, the prices of many U.S. commodities, including wheat, had

become significantly higher than those of foreign commodities,

particularly from the European Community (EC), and were no longer

competitive in the international marketplace. In May 1985, the U.S.

Secretary of Agriculture announced the establishment of the targeted

Export Enhancement Program (EEP), providing subsidies in kind to U.S.

exporters to enable them to lower prices of their commodities to be

competitive with subsidized foreign agricultural exports. Although EEP did

not specifically target U.S. exports to Canada, Canadians contended that

EEP sales artificially raised the supply of wheat on world markets, thereby

causing lower world prices. They also said that EEP displaced Canadian

exports.

1986—U.S. Imports of

Canadian Wheat Rise

In 1986, U.S. imports of Canadian wheat began to rise from previously very

low levels. American farmers blamed these higher imports on the grain

selling practices of the CWB and on Canadian transportation subsidies.

Canadian agricultural officials attributed the rise to U.S. commodity

programs, including U.S. Department of Agriculture (USDA) supply

management programs and EEP.

1989—U.S.-Canada

Free Trade Agreement

The U.S.-Canada Free Trade Agreement, implemented on January 1, 1989,

addressed the pricing of agricultural products, including wheat, Canadian

transportation subsidies, market access, and the imposition of import

restrictions. To allay U.S. concerns that the CWB might be selling its wheat

to the United States at below Canadian farmers’ cost of production, CFTA

stated that neither country could sell agricultural goods to the other at a

price “below the acquisition price of the goods plus any storage, handling

or other costs incurred by it with respect to those goods.” However, this

provision did not ultimately resolve U.S. concerns on the matter, primarily

because CFTA did not define “acquisition price.” The United States believed

that the CWB was continuing to offer wheat export prices below the cost of

acquisition. The United States eventually requested a disute resolution

panel under CFTA in May 1992. The subsequent 1993 panel decision

recommended an audit of CWB pricing of durum wheat sales to the United

States. The panel ruled in favor of the Canadian interpretation of

acquisition price. An audit was concluded, and its findings were reported

in December 1992 (for a discussion of the CFTA dispute, see ch. 4).

In its Statement of Administrative Action accompanying the CFTA

implementing legislation, the United States called for consultations with

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Appendix I 

Chronology of U.S.-Canadian Grain Trade

Canada directed toward establishing a method to determine the price at

which the CWB was selling agricultural goods to the United States. The

Statement of Administrative Action said that the United States would

review agricultural commodities sales for export to the United States by

the Canadian government and public entities, including necessary price,

quantity, and quality information, to ensure compliance with CFTA. To

assist in this review, the U.S. Customs Service was to provide information

in its possession as necessary (for a discussion of U.S. data collection

efforts, see ch. 3).

Regarding transportation subsidies, CFTA eliminated those established

under the 1984 Western Grain Transportation Act for agricultural goods

originating in Canada and shipped via west coast ports for consumption in

the United States. CFTA did not remove the so-called “Canadian Crow’s

Nest” subsidies at eastern Canadian ports, such as Thunder Bay, Ontario.

A U.S. Department of Agriculture official at the time stated that this

subsidy was not removed because it was generally available and not

conditioned upon exports.

As for market access, CFTA called for a staged elimination of all U.S. and

Canadian tariffs, with a phase-out for most grains, and duty-free status by

January 1, 1998. Canada agreed to eliminate any import permit

requirements when the level of government support for any of the

grains—wheat, oats, or barley—in the United States became equal to or

less than the level of government support for that grain in Canada.

However, Canada could require that the grain be accompanied by an

end-use certificate completed by the importer, declaring that it is to be

imported for consumption in Canada.1

Finally, CFTA restricted both countries’ ability to impose import restrictions

for grain products, such as under section 22 of the U.S. Agricultural

Adjustment Act of 1933. CFTA provided that each country could

reintroduce import restrictions or import fees on grains only if “imports

increase significantly as a result of a substantial change in either Party’s

support programs for that grain (includes wheat, oats, barley, rye, corn,

triticale and sorghum).” The Uruguay Round of the General Agreement on

Tariffs and Trade (GATT) further restricted U.S. use of section 22 in 1995

(see later discussion in this app.).

1

Canada removed its import license requirement in 1991, under the terms of CFTA—when U.S.

government support programs for wheat declined below the Canadian support program levels. To

date, however, Canada has retained its end-use certificate requirement for wheat. The United States

implemented its own end-use certificate requirement in February 1995.

Page 65 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix I 

Chronology of U.S.-Canadian Grain Trade

1990—International

Trade Commission

Section 332

Investigation

In 1990, the ITC conducted a section 332 investigation on the

competitiveness between the U.S. and Canadian durum wheat businesses.

The ITC found that it was not apparent that prices paid by U.S. processors

for Canadian durum were significantly different than prices paid for U.S.

durum (see ch. 4).

1994—North

American Free Trade

Agreement

The North American Free Trade Agreement, effective on January 1, 1994,

retained the previously negotiated CFTA market access provisions affecting

Canada and the United States, while adding new bilateral commitments on

agriculture between the two countries and Mexico. NAFTA provisions

applicable to trade among all three countries included dispute settlement

provisions based on those contained in CFTA.

1994—U.S.-Canadian

Memorandum of

Understanding

Following the July 1994 ITC section 22 decision on wheat, wheat flour, and

semolina imports (see ch. 4), the United States and Canada signed an MOU

in September 1994. The United States stated that it would apply a new

schedule of tariffs on the importation of wheat, for a 12-month period. The

two countries also agreed to establish a joint commission on grains to

further examine their mutual grain problems and to set a 12-month hold on

all countermeasures under either NAFTA or GATT.

The MOU set an overall limit on Canadian wheat exports to the United

States of 1.5 million metric tons, with separate limits on durum wheat and

all other wheat, excluding eastern soft wheat. Up to 300,000 metric tons of

durum wheat could enter the United States with a preferential tariff, with

an additional 150,000 metric tons allowed into the United States at a higher

tariff level. Imports of other wheat would be limited to 1.05 million metric

tons.

Upon the expiration of the MOU in September 1995, the United States

ended import restrictions and continued monitoring Canadian grain

exports, stating that it would apply its trade remedy laws should Canadian

wheat imports cause market disruption.

Page 66 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix I 

Chronology of U.S.-Canadian Grain Trade

1995—United States

Agrees to Limit Use of

Section 22, Per

Uruguay Round

Agreements

In January 1995, WTO members agreed, as part of the Uruguay Round

Agreement on Agriculture, to convert quotas, such as those maintained by

the United States under section 22 of the Agricultural Adjustment Act, to

tariff-rate equivalents such as tariff-rate quotas.2

 These tariff equivalents

would initially offer the same level of protection as quotas but would be

reduced over time. In addition, the Agreement on Agriculture prohibited

WTO members from imposing quantitative restrictions on products whose

non-tariff barriers had to be converted to tariffs. The U.S. implementing

legislation, the Uruguay Round Agreements Act, amended section 22 to

prohibit the use of section 22 for products of WTO members.

1995—Canada’s

Imposition of Duties

on Barley Prompts

Dispute

In January 1995, Canada increased duties on imports of certain

agricultural goods, including barley. Canada converted its quotas and

import license requirements to tariff-rate quotas as part of its

implementation of the WTO agreements. In 1995, the United States

requested a dispute settlement panel under NAFTA claiming that these new

duties violated NAFTA.

In December 1996, the NAFTA dispute panel issued its final report,

concluding that Canadian tariffs of up to 350 percent on such goods

qualified under an exception to NAFTA’s general prohibition against raising

or imposing import tariffs on other member countries’ products.

1995—Canada-United

States Joint

Commission on

Grains

The Canada-United States Joint Commission on Grains released its final

report in October 1995. Comprised of 10 nongovernment U.S. and

Canadian officials with equal representation, it was formed to assist the

two governments in reaching long-term solutions to existing problems in

the grains sector. The report addressed policy coordination, cross-border

trade, grain grading and regulatory issues, infrastructure, and domestic

and export programs and institutions. The report noted that “the use of

discretionary pricing by governments, directly through their programs or

entities, had led to trade distortions.” The report recommended that both

countries “eliminate the excessive discretionary pricing practices of their

institutions; and . . . modify their domestic agricultural policies to remove

trade distorting effects . . .” To do so, the report recommended that both

countries consult regularly and create a bilateral producer/industry-based

consultative committee for cross-border issues.

2

A tariff-rate quota is the application of a lower tariff rate for a specified quantity of imported goods.

Imports above this specified quantity face a higher tariff rate.

Page 67 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix I 

Chronology of U.S.-Canadian Grain Trade

1996—Western Grain

Marketing Panel

In 1995, the Canadian Minister of Agriculture and Agri-Food appointed the

Western Grain Marketing Panel to lead a comprehensive examination of

western Canadian grain marketing issues. The panel released its report in

July 1996 and concluded that (1) a growing number of farmers were asking

for more options and flexibility in marketing grains and (2) common

concerns about the CWB by farmers were the lack of accountability to

farmers for its performance and the inflexibility of its operating policies.

The panel proposed amending the 1935 Canadian Wheat Board Act to

allow changes in CWB governance and to increase the flexibility of its

operations and the services it provides to farmers (for a discussion of CWB

operations, see ch. 2).

1998—Plan for Pilot

Program to Facilitate

Wheat Exports

In January 1998, the United States and Canada announced plans to

implement a pilot program to facilitate U.S. wheat exports to Canada that

would enable the United States to ship its grain directly to Canadian grain

elevators.3

 The United States is negotiating with Canada over Canada’s

current requirement that U.S. grain be accompanied by a phytosanitary

certificate—an assurance that the grain is disease-free.4

 The United States

is also concerned about how the cost of the pilot program will be applied

to imports.

1998—United States

Requests New Audit

of CWB Wheat Pricing

In March 1998, the United States requested a new audit of the CWB’s grain

pricing related to the acquisition price. Canada agreed to the new audit but

disagreed on its terms. Canada wants to maintain the audit terms both

countries agreed to after the 1993 CFTA dispute settlement panel decision.

According to a USTR official, the United States wants to (1) deviate from

the panel decision by applying for a broader definition of “acquisition

price”; (2) expand the audit to cover not only durum but also spring wheat

and barley; and (3) include third country pricing, that is, Canadian grain

exports to countries other than the United States.

3

Currently U.S. wheat can only enter Canadian elevators on a case-by-case basis requiring approval

from the Canadian Grain Commission.

4

Sanitary and phytosanitary measures are those taken to protect human, animal, or plant life or health.

The Agreement on the Application of Sanitary and Phytosanitary Measures in the Uruguay Round of

GATT contains disciplines in their use. NAFTA contains similar disciplines.

Page 68 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix II 

CWB Usage of the U.S. Futures Markets and

Commodity Exchanges

The CWB is a participant in the U.S. futures exchanges for grain and for

currency. It enters into wheat futures and options contracts to price a

portion of anticipated sales. It also enters into foreign exchange forward

and option contracts in order to manage the foreign exchange risk of a

portion of anticipated sales. The CWB reported that it conducts its

operations in order to reduce risk. Under certain conditions, the CWB can

face restrictions in its participation in futures markets at the Chicago

Board of Trade (CBOT) and the Kansas City Board of Trade (KCBOT) that

prevent Canadian grain from being delivered against a futures contract.

Both exchanges allow the entity that takes physical delivery of wheat

against a futures contract to specify that the wheat be of U.S. origin.

According to officials at both exchanges, this option helps ensure that

wheat exported under a U.S. government export program is of U.S. origin.

Officials at the U.S. Commodity Futures Trading Commission (CFTC), the

Minneapolis Grain Exchange (MGE), the CBOT, and the KCBOT confirmed that

there are no specific restrictions placed on state trading enterprises such

as the CWB. Rather, these entities must face the same market rules that all

other traders face. As with all traders, those who want to take an

unusually large position in the cash or futures markets must file an

application with the relevant exchange and the CFTC (if applicable). In

addition, those traders must file periodic reports with the exchanges and

the CFTC (if applicable) detailing their cash positions.

Some markets allow U.S.-origin requirements for wheat, which officials at

those markets told us were implemented in order to ensure that delivered

wheat that was benefiting from any U.S. food aid, export promotion, or

credit guarantee programs was of U.S. origin only, as required by law.

Since the importance of U.S. export promotion programs has diminished

in recent years, some traders have relaxed their U.S-origin requirements.

For example, officials at the CBOT told us that Canadian wheat had been

delivered against futures contracts at their exchange.

We were not able to ascertain the level of involvement of the CWB in U.S.

commodity and futures trading due to the confidentiality accorded trading

activity. At the MGE, for example, trading in the cash market takes place on

a trading floor, and no records are kept by the exchanges recording

specific information about the identity of traders. Although the CFTC does

monitor the activities of traders in the futures market, confidentiality

restrictions contained in the Commodity Exchange Act1

 prohibit it from

revealing such data to the public.

1

7 U.S.C. 1.

Page 69 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix III 

Effect of the CWB on the Canadian Farmer

The costs and benefits of the CWB’s operations to Canadian farmers are

subject to considerable dispute among academics and farmers. Two

CWB-contracted economic studies suggest the single-desk selling status of

the CWB gives it market power in the world wheat and barley trade and

increases farmer revenue through price discrimination. Further, the

studies conclude that the CWB marketing system does not result in a more

costly grain system for the farmers. In contrast, a study financed by the

provincial government of Alberta concludes that the CWB lacks market

power and finds that the Canadian grain system is more costly than the

comparable U.S. system.

Canadian farmers are divided in their views of the CWB. Some believe that

the CWB provides farmers with countervailing power relative to

multinational grain companies. Other farmers believe that the CWB reduces

their freedom and limits their incomes. Some believe that the CWB is

withholding exports to the United States and thus reducing the potential

returns to Canadian wheat and barley producers. A recent livestock study

provides some evidence in support of this view.

CWB Price

Discrimination and

Producer Revenue

The CWB has contracted with academic authors for studies that investigate

whether the CWB delivers higher returns to wheat and barley producers

than would be the case in a multiple-seller environment.1

 Two studies

were completed, one in 1996 on CWB wheat operations and one in 1997 on

CWB barley operations. The CWB provided its authors with unique access to

each CWB contract over an extensive period of time.2

 This enabled the

authors to compare CWB sales of Canadian western spring wheat and

western Canadian feed and malting barley to customers in Canada, the

United States, and other nations. Additionally, Alberta Agriculture

sponsored an assessment of the CWB.

3

1

Daryl F. Kraft, W. Hartley Furtan, and Edward W. Tyrchniewicz, “Performance Evaluation of the

Canadian Wheat Board” (Winnipeg, Canada: Canadian Wheat Board, Jan. 1996) covers CWB sales of

Canadian hard red spring wheat. CWB sales of feed and malting barley are analyzed by Drs. Andrew

Schmitz, Richard Gray, Troy Schmitz, and Gary Storey in “The CWB and Barley Marketing: Price

Pooling and Single-Desk Selling” (Winnipeg, Canada: Canadian Wheat Board, Jan. 1997). The CWB has

contracted for, but not yet received, a study of its durum wheat market operations.

2

The CWB declined to grant us access to these same contract records. This included a GAO request

restricted to a 5 percent sample of contracts. CWB officials also reported that they would not make

their records available to non-CWB-affiliated scholars.

3

Colin A. Carter and R.M.A. Loyns, “The Economics of Single Desk Selling of Western Canadian Grain”

(Edmonton, Canada: Alberta Agriculture, Food and Rural Development, Mar. 1996).

Page 70 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix III 

Effect of the CWB on the Canadian Farmer

CWB Wheat Study The CWB-sponsored wheat study compared the prices of individual CWB

wheat contracts with a price purported to correspond to a multiseller

competitive price. This was accomplished by matching the export price of

a Canadian wheat sale of a specific grade, on a specific day, from a

specific Canadian port with the competitive price of a similar wheat from a

competitor nation’s port. For example, a contract for Canadian western

red spring wheat graded 1 or 2 with a 14.5-percent protein content

originating from a St. Lawrence or Atlantic port was compared to U.S.

dark northern spring wheat with 15-percent protein content originating

from U.S. Gulf of Mexico ports.

The study concluded that for 1981-94, the CWB on average increased wheat

revenues by $14.56 per ton, or $289 million per year when compared to

multiple sellers offering wheat in competition with each other.4

 These

premiums represented about 8 percent of the CWB wheat revenues for

those years. The export market on average accounted for 74 percent of

this price premium, while the remainder reflected higher prices faced by

Canadian consumers and by foreign aid wheat donors. For 1994, the last

year covered in the study, the CWB premium was $6.38 per ton, which

represented 5.4 percent of that year’s sales value of $117.72 per ton. The

study reported that European buyers offered the highest price for wheat,

while in certain years sales to the United States earned low or no

premiums. An important consideration of the study was how the

single-desk system performed when the United States was intervening in

the world market with its EEP. The study found that the CWB premium over

revenue generated by multiple sellers was highest during the years of U.S.

export subsidies. The additional premiums in the EEP period reflected the

higher prices the CWB realized from sales to nonsubsidized EEP markets in

comparison with multiple sellers that are assumed to receive

subsidy-reduced prices on all sales.

The reliability of the study’s conclusions is subject to serious

methodological constraints that make it difficult to interpret the estimated

premiums. First, the matching of a Canadian grain contract with a U.S. or

another nation’s competitive grain price was an incomplete match. While

grade and protein content were accounted for, in no comparisons were the

grain varieties identical, and other quality attributes, including moisture

level, cleanliness, water absorption, test weight, consistency, percentage

of hard vitreous kernels, and protein quality were not controlled for in the

comparisons. Observed price differences due to these other attributes or

4

Unless otherwise noted, all Canadian dollars have been converted to constant 1997 U.S. dollars using

a market exchange rate and the U.S. gross domestic product deflator.

Page 71 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix III 

Effect of the CWB on the Canadian Farmer

differences in trade servicing should not be attributed to the operations of

the CWB. In addition, CWB contract prices may reflect the provision of credit

and other payment terms so that they are not comparable to competitive

port prices. Second, for certain geographic markets, grain originating from

Canada can have an ocean freight cost advantage (or disadvantage) when

compared to U.S. export prices. Third, a significant problem with the study

is that its methodology cannot distinguish between premiums that arise

from CWB marketing operations and those that arise from regulatory

activities of the Canadian Grain Commission that establishes and

maintains standards for grain quality and regulates grain handling.

CWB Barley Study The CWB-sponsored barley study used a different methodological approach

to evaluate whether the CWB creates revenue benefits for barley producers

greater than they would receive from multiple sellers. The study

concluded that the CWB successfully discriminates in the prices it charges

consumers in different markets and estimated that the CWB extracts from

barley consumers greater revenues for producers than would occur in a

competitive market.

As a demonstration of the CWB’s market power to price discriminate, an

analysis was conducted of CWB feed barley export contracts from west

coast Canadian ports. Price differences between sales to the United States,

Japan, and the rest of the world were established on a monthly basis. For

those months between 1986 and 1995 where comparable sales to all three

destinations took place, CWB prices per ton for sales to Japan were $28.33

(Canadian dollars) higher than they were for the rest of the world, and CWB

U.S. sales were $4.47 (Canadian dollars) higher per ton than the rest of the

world.5

 Price discrimination not only existed between export destinations

but also between the Canadian domestic market and the U.S. market. For

example, the study estimates that in 1991/92, the CWB’s Canadian

customers paid 29.6 percent more than did U.S. customers for six-row

malting barley and 14.1 percent more for two-row malting barley.6

In order to estimate the differences between CWB operations and that of

multiple sellers, the study used an economic model to simulate the prices

and revenues that multiple sellers would generate and compare them with

those generated by the CWB. This exercise required that a series of

assumptions be made about market conditions, which were subjected to a

5

Due to the confidential nature of the data, the study’s authors were unwilling to share sufficient data

with us to allow its conversion to 1997 U.S. dollars.

6

The study did not show a price breakout between the domestic and U.S. market for any other year.

Page 72 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix III 

Effect of the CWB on the Canadian Farmer

sensitivity analysis. For 1986 to 1995, the study found that the CWB

increased producer barley revenues on average by $70.5 million per year

when compared to multiple sellers. These premiums represent about 15

percent of the CWB barley revenues for those years. However, in 1995, the

last year of the study, producer revenues would have been $5.3 million

greater without the CWB, or 1.4 percent of that year’s barley revenue. This

loss occurred because the CWB made its sales early in the crop year, while

a tightening feed barley market resulted in non-CWB feed barley prices

exceeding CWB prices late in the crop year. Consistent with the wheat

study, the benefits of the CWB were greater during years with heavy EEP

usage.

The economic model used in the analysis required numerous assumptions

to conduct the study, some of which may limit the reliability of its

conclusions. Even though the study breaks the barley market into three

components: feed barley, six-row malting barley varieties, and two-row

malting barley varieties, this degree of product differentiation may not be

sufficient for purposes of analysis. For example, there are significant

differences between the barley varieties demanded by U.S. brewers and

those in Canada and other nations.7

 Thus, price comparisons between CWB

sales to Canada, the United States, and the rest of the world may be

comparisons of unlike products. Additionally, malting barley contracts can

include terms beyond variety and grade specifications, including

plumpness, protein, germination, varietal purity, and credit terms, which

render comparisons difficult.

Alberta Agriculture Study The Alberta study did not have access to the actual contracts of the CWB

and thus used other, more indirect evidence to evaluate whether the CWB

has market power to earn premiums for Canadian farmers. This study

reviewed the destination of most CWB sales and found that about

80 percent of the sales were to price-sensitive markets where prices were

consistent with a competitive market. Only sales to Japan, the United

Kingdom, and the United States were deemed to be to markets that were

more sensitive to quality than to price. With respect to the United States,

the findings of an ITC investigation were cited that found no premiums

were paid for Canadian wheat by U.S. flour millers. The study concluded

that Japan is the only market where a single-desk premium may exist,

although it is difficult to disentangle it from payments for other

7

U.S. brewers primarily use malt produced from six-row white aleurone barley, while Canadian beers

use six-row blue aleurone and two-rowed barley. See Demcey Johnson and William W. Wilson, “North

American Malting Barley Trade: Impacts of Differences in Quality and Marketing Costs,” Canadian

Journal of Agricultural Economics (1995), pp. 335-53.

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Appendix III 

Effect of the CWB on the Canadian Farmer

characteristics such as cleanliness and uniformity. Based on Japan’s share

of CWB sales, the study concluded that the single-desk premium is small.

Further, a comparison of farmgate returns between the United States and

Canada fails to show any evidence of price premiums.

Marketing Costs of

the CWB

In order to reach a bottom-line conclusion with respect to the costs and

benefits of the CWB for Canadian producers, the two CWB-contracted

studies and the Alberta study reviewed whether operating costs are higher

or lower under the CWB than would be the case with multiple sellers. The

CWB studies found that costs are lower, in part due to the government’s

financial guarantee of CWB operations, while the Alberta study concluded

that the CWB imposes net costs on the grain sector, especially in restricting

its flexibility to adjust to changes in market conditions.

CWB Wheat Study The approach taken in this study was to compare the risk management

costs of wheat to that of two non-CWB-marketed Canadian grains: flax and

canola. The wheat study estimated the differences in private sector risk

management and that of the CWB from 1981 to 1994. Private operations

were shown to have a risk management cost of about $21.50 per ton for

canola and on average $18 per ton for flax. The study estimated that the

risk management cost of CWB wheat was on average $3.91 per ton,

including taxpayer subsidies to cover deficits in several marketing years.

This difference suggests a risk management cost advantage for the CWB.

For more recent years, however, the record is less decisive. For the canola

market, the study further refined its estimates of risk management costs. It

reported that from 1991 to 1994 the adjusted risk cost per ton was $7.70

per ton of canola which, when compared to the prior estimate for CWB risk

costs of $3.91 per ton (1981-94), reduces the CWB’s risk management

advantage to $3.79 per ton.

This final basis of comparison does not, however, rely on the same time

period. Comparing the performance of wheat, canola, and flax for the

most recent 4 years of the study (1991-94) shows the risk management

cost per ton of wheat as $8.94,8

 for canola as $7.70, and for flax as $14.

This suggests that CWB wheat operations are at a disadvantage in

comparison to canola but retain an advantage in comparison to flax.

8

This estimate is higher due to the large government deficit payment to the CWB made in 1991.

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Appendix III 

Effect of the CWB on the Canadian Farmer

The use of the canola and flax markets as a basis of comparison to CWB

wheat risk management operations may be misleading. First, flax and

canola represented a small proportion of total grain production in western

Canada. During the period covered by the wheat study, flax and canola

tonnage averaged only 10 percent of total western grain production.

Therefore, part of the cost advantage for wheat marketing could reflect

economy of scale rather than the operation advantage of the CWB. Second,

the financial risk should be expressed with respect to value and not with

respect to weight or volume. Canola and flax are more valuable per ton

than wheat. During 1983-94, farmgate prices per ton for canola in western

Canada were 96 percent greater than wheat prices, and flax prices were

76 percent greater. Therefore, the risk management cost per ton would be

expected to be greater than for wheat. Hence, part of the risk management

cost disadvantage for these crops can reflect higher crop values rather

than the absence of a government marketing board.

The study did note that taxpayer monies and guarantees available to the

CWB gave it an advantage over private sector firms. The study reported that

the government guarantee allowed the CWB to borrow at the government

borrowing rate, which lowered borrowing costs between $26 million and

$45 million for the 1995-96 crop year or between about $1 and $2 per ton.

Additionally, the CWB profited from being able to raise money at the

government borrowing rate and then lending to borrowers at

commercially competitive rates. From 1981 to 1994, the CWB showed net

interest earnings in 10 years. Not mentioned in the study are the tax

advantages the CWB has relative to private companies.

CWB Barley Study This study focused on cost issues specific to barley. The study found that

the pooling system created economic efficiency losses due to the inability

of barley export deliverers to adjust to differences between Canadian

domestic prices and U.S. prices. On average for 1989-96, the losses were

about $4 million per year, although the losses in 1996, the last year of the

study, were estimated to be about $15 million. In addition, the study

reported that direct taxpayer transfers to barley producers occurred three

times during 1986-95 and noted that rather than being costs, these

transfers are benefits to producers. The study did not estimate the subsidy

value of the government guarantees that allow the CWB to borrow at the

government borrowing rate and to earn interest during the marketing year.

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Appendix III 

Effect of the CWB on the Canadian Farmer

Alberta Study This study included in its estimation of CWB costs the costs of institutional

and regulatory factors that are part of the Canadian grain system but not

part of the CWB. It justified its approach by asserting that the CWB is

responsible for much of the lack of flexibility in the Canadian system and

the limited competition in the grain handling and transportation areas.

According to the study, the CWB does not have the economic or political

incentive to reduce system costs and functions instead as a follower, not a

leader. In computing these system costs, the study reported that for wheat

farmers, direct costs and revenue losses are between $16.94 and $22.18 per

ton, while taxpayer costs are another $4.10 per ton. For barley farmers,

direct costs and revenue losses are between $18.14 and $24.50 per ton, and

taxpayer costs are $6.70 per ton.

Many of the components of the estimated costs to farmers in this study are

probably independent of whether the CWB exists or not. For example, the

direct cost of CWB administration includes marketing and logistical

activities that would occur in the private sector. The relevant analysis

would require a demonstration that CWB costs are greater (or smaller) than

those of private sector grain companies. Similarly, storage costs attributed

to CWB operations would also occur in a multiseller environment. In

computing costs of the grain handling system, the study compared

shipping and handling costs with those of operations in the United States

without considering whether the geography and infrastructure are

comparable. In any event, for many of the identified costs to change,

changes in other government regulations would be required beyond the

elimination or reform of the CWB. There are, however, several examples in

the study of cases where the CWB has responded slowly to changes in

market conditions and to the needs of farmers. In addition, the report

showed clearly that Canadian farmers benefit from taxpayer support of the

CWB.

In summary, while the CWB economic studies provide evidence of

successful price discrimination and single-seller market power, there are

methodological issues that reduce the reliability of the measured revenue

benefits. Over the time period investigated (1981-94), the CWB studies’

estimated average contribution of the CWB to wheat and barley revenues

were about 8 percent and 15 percent of total revenue, respectively. With

respect to cost, there is agreement among the studies that the government

guarantee of wheat board operations and other financial benefits are a

significant subsidy to Canadian farmers. Otherwise, the evidence

presented on the costs of CWB operations is mixed.

Page 76 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix III 

Effect of the CWB on the Canadian Farmer

Grain Company and

Canadian Farmer

Views on the CWB

Grain companies located in the United States and in Canada have mixed

views concerning the operations and future of the CWB. With respect to

pricing practices, six grain companies reported that as a single-desk seller,

the CWB had market power and did price discriminate. CWB contracts

include a provision that stipulates that the grain is for shipment to and

consumption in a specified country. Grain companies reported that it is

through these contracts that the CWB controls the ultimate destination and

use of its exports. This prevents the accredited exporters (AE) from

competing against each other on price and arbitrating between the

markets of different countries. This restriction was characterized as being

good for grain producers but bad for grain consumers.

The Canadian National Farmers Union sees the CWB as part of its defense

against domination by foreign grain traders and the railroads. It believes

that the CWB provides farmers with market leverage when dealing with

corporations. The Western Canadian Wheat Growers Association, a

voluntary group representing some western grain farmers, wants to end

the mandatory nature of the CWB and allow farmers to participate in a dual

market where the group could market through the CWB or for themselves.

The Western Canadian Wheat Growers Association criticizes the secrecy

of the CWB and the association’s inability to examine the CWB’s financial

books. While the association recognizes that the government financial

support is valuable, it believes that the CWB fails to get the highest price for

farmers.

One issue of interest to Canadian farmers and their U.S. counterparts is

whether the CWB restricts or encourages grain sales to the United States.

The CWB wheat study concluded that a multiple-seller system would so

expand exports to the United States that the U.S. government would

restrict Canadian access to the U.S. market. The CWB barley study found

that Canadian prices were lower than U.S. prices in 5 of 8 years analyzed,

suggesting that multiple sellers would increase their shipments to the

United States. The Alberta study pointed to the dramatic increase in barley

exports to the United States when the CWB briefly lost its authority to

regulate sales to the United States for a 40-day period in 1993. Interviews

with Canadian grain industry participants support the notion that the CWB

withholds grain from the U.S. market. Some said the CWB did this in order

to reduce trade conflicts. Many industry participants believe Canadian

exports to the United States would increase in the absence of the CWB. For

example, the Western Canadian Wheat Growers Association notes that

exports of oats to the United States increased when the CWB lost control of

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Appendix III 

Effect of the CWB on the Canadian Farmer

that commodity, as did barley exports, during the brief time period in

which the CWB lost control of barley sales.

Withholding of Canadian grain from the U.S. market can have effects on

other agricultural industries, both in Canada and the United States.

Canadian livestock production in western Canada has increased since the

elimination of rail subsidies for grain exports. A recent Canadian

government-sponsored study found that western Canada was the

lowest-cost producer mainly due to the low cost of feed in the western

provinces.9

 U.S. feed costs were 41 percent greater than they were in the

Canadian prairies. The study concluded that the price difference was

incompatible with an “efficient market.” The CWB controls all barley

exports from Canada, including feed barley exports to the United States

and, according to one analysis, does not maximize farmer returns from

higher prices in the U.S. market.10 According to a director of the Canadian

Cattlemens’ Association, the CWB exercises a national feed grains policy

that ensures a minimum supply of barley is available for the domestic

livestock industry which, at times, has been detrimental to Canadian grain

farmers.11 Canadian government officials report that there is no federal

government or CWB policy to ensure that a minimum supply of barley is

available for the domestic livestock industry. However, Canada’s livestock

has expanded, and exports to the United States are increasing. Legislation

has been introduced in the U.S. Senate to establish a joint U.S.-Canada

Commission on Cattle and Beef.12

9

Dr. Larry Martin, Dr. Zana Kruja, and John Alexiou, “Prospects for Hog Production and Processing in

Canada” (Guelph, Ontario: George Morris Centre, Mar. 3, 1998).

10Submission to the Canada-United States Joint Commission on Grains by the Alberta Barley

Commission and Western Barley Growers Association, Final Report, Vol. II (Winnipeg, Canada, and

Washington D.C.: Oct. 1995).

11Testimony of John Prentice, Canadian Cattlemen’s Association, Before the Standing Committee of

the Canadian Senate on Agriculture and Forestry, Edmonton, Alberta (Apr. 1, 1998).

12S. 617 (105th Cong. [1998]).

Page 78 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

The U.S. government collects extensive data on imports of Canadian grain

and on how one of these grains, Canadian wheat, is eventually used in this

country. Grain import data, along with similar data for all U.S. imports, are

used by government and business for such purposes as monitoring trade

balances with other countries and developing government trade policies

and corporate marketing strategies. Import data are collected by the U.S.

Customs Service and compiled by the U.S. Census Bureau. In preparing

this summary of U.S. data on Canadian grain, we found that the accuracy

of data on Canadian grain imports may be affected by a relaxation of

Customs’ regulatory controls because of NAFTA. Data on the use of

Canadian wheat, known as “end-use data,” are collected and compiled by

USDA to prevent Canadian grain shipments from benefiting from U.S.

agricultural assistance programs.

Uses of Grain Import

and Wheat End-Use

Data

Grain imports from Canada are an important component of U.S. trade with

Canada. As noted in chapter 1, U.S. imports of grains, such as durum

wheat, red spring wheat, and barley from Canada, through the CWB, have

increased significantly in recent years. Therefore, data on U.S. grain

imports from Canada have several important uses. For example, USDA

monitors the data to determine the effect of these imports on the supply

and price of similar commodities in the United States because these

imports can affect U.S. farmers. U.S. Customs uses the data to administer

U.S. trade laws pertaining to Canadian grain imports. For example, the

data help Customs determine whether grain shipped from Canada is in

compliance with NAFTA. However, it should be noted that because

Canadian grain is duty and quota free under NAFTA, Customs does not need

to examine Canadian grain import data as closely as it does data for

imports not covered by NAFTA or other trade access programs.

Census and other U.S. statistical agencies, such as the Bureau of

Economic Analysis, also use Canadian grain import data in compiling the

overall accounting of U.S. trade with other countries. Canadian grain

imports are included in the U.S. merchandise trade data produced by

Census that account for all commodities imported by the United States or

exported to other nations. Merchandise trade data, in turn, are used by the

Bureau of Economic Analysis in compiling information on the overall

economic performance of the United States.

Unlike grain import data, which are collected for numerous administrative

and statistical purposes, data on the end use of Canadian wheat are

collected for the sole purpose of assuring that such wheat is not mingled

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Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

with U.S. wheat. As we discuss in the next section, the end-use certificate

was instituted by the Congress to prevent Canadian wheat from benefiting

from certain U.S. assistance programs, including EEP.

How Data on

Canadian Grain

Shipments Are

Produced

The production of data on Canadian grain shipments is a large

undertaking, involving staff from three federal agencies—Census,

Customs, and USDA—as well as the U.S. buyers of these shipments. The

strengths and limitations of data on Canadian grain imports and data on

the end use of Canadian wheat in determining CWB pricing practices are

related to how these data are collected and compiled.

Grain Import Data Are

Collected by Customs and

Compiled by Census

Producing U.S. data on merchandise imports involves both the U.S.

Customs Service and the U.S. Bureau of the Census. The production

process is essentially the same for all commodities entering the United

States. However, the following discussion focuses on the collection and

compilation of data on grain imports from Canada.

The process begins at the ports where goods enter the United States. Grain

imports from Canada mainly enter the country through the northern land

border ports, particularly those located in North Dakota, Montana, and

Minnesota. For grain and other merchandise to enter the country,

importers (or brokers representing them) are required to present

information on the nature, origin, value, and other aspects of the goods1

 on

a form known as an “entry summary.” This entry information is used by

Customs to determine the duties and fees owed and also whether the

goods are under quota or other import restrictions. However, under NAFTA,

most imports from Canada are not subject to duties, quotas, or other

import restrictions. According to Census and Customs officials, about

99 percent of the information is transmitted through an electronic data

exchange known as the Automated Broker Interface (ABI). ABI is part of

Customs’ overall computerized merchandise processing system, the

Automated Commercial System. If entry information is not transmitted

through ABI, it must be presented on paper at the port of entry.

The entry information submitted to Customs by importers forms the basis

for the nation’s data on merchandise imports. Each entry lists the country

of origin, the international Harmonized Tariff Schedule (HTS) number that

indicates the type of good being imported, the value of the merchandise,

1

Customs does not require formal documentation for nontextile import transactions valued at less than

$2,000 nor for textiles valued at less than $250.

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Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

the quantity, its weight, and several other items describing the shipment.

Customs’ ABI has built in statistical edits designed by Census that reject

entries that do not meet statistical parameters developed by Customs and

Census. For example, a shipment of durum wheat from Canada with an

unusually high price per metric ton would fail the edit program. Rejected

entries are transmitted back over ABI to be corrected by the filer. ABI

entries accepted by Customs are transmitted to Census headquarters in

Suitland, Maryland.

If Customs discovers an error in an entry after it is transmitted to Census,

it is supposed to send a corrected version to Census, usually through an

on-line system. Statistical errors sometimes are found by Customs import

specialists. These staff, at offices associated with ports of entry, review

selected entries to ensure that the proper amount of duties and fees are

paid on imported merchandise and to verify that imports comply with

various quotas, other restrictions, and statistical reporting requirements.

Since most Canadian shipments are exempt from duties and other import

restrictions, when Customs import specialists review Canadian shipments

such as wheat, they are mainly concerned with statistical accuracy and

verifying that the shipments originated in Canada. Import specialists do

not review all entries. Rather, a component of the Automated Commercial

System, the Entry Summary Selectivity System, selects entry summaries

for review based on risk criteria.

After Customs transmits the entry information to Census, Census subjects

all the data to a further array of statistical edits. Like the edits done by

Customs’ ABI program, these edits check whether import entries fit within

established parameters for value, quantity, country of origin, classification,

and other data elements. Import entries that fail any of the edits are

examined by Census commodity specialists, who may then contact the

importer, broker, or U.S. Customs to obtain the information needed to

resolve the problem. After Census finishes processing the data, they are

summarized monthly and released to the public. The first monthly release

usually occurs about 45 days after the close of the month and contains the

overall import, export, and trade balance data. Soon thereafter, Census

releases more detailed reports by commodity and trading partner and

other breakouts.

Since 1988, the United States and Canada have been exchanging

administrative records on imports and in 1990 started using this

information to determine each country’s exports to the other. The United

States and Canada began this arrangement because of the large

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Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

discrepancies that Census and its Canadian counterpart, Statistics Canada,

had identified between U.S. export and Canadian import data. A 1986

reconciliation of U.S.-Canadian merchandise trade data indicated that

reported U.S. exports were 20 percent lower than Canada’s reported

imports from the United States. Census and Statistics Canada believe that

by exchanging their more accurate administrative records on imports, they

have significantly improved U.S. and Canadian export data. This

information exchange between the United States and Canada is unique.

Wheat End-Use Data Are

Collected and Compiled by

USDA

The 1994 North American Free Trade Agreement Implementation Act that

approved U.S. participation in NAFTA authorized the wheat end-use

certification program.2

 As noted in the previous section, this program,

which has been in place since April 1996, is intended to ensure that

Canadian wheat does not benefit from U.S. export programs such as EEP.

The Canadian government maintains a similar program for U.S. wheat

imported into Canada.

The wheat end-use certification program is administered by USDA’s Farm

Service Agency. Under the program, imported Canadian wheat must be

stored separately and may not be commingled or blended with wheat

produced in the United States until the Canadian wheat is delivered to an

end user or is loaded onto a conveyance, such as a train, for direct delivery

to an end user.

To assure compliance with the requirements of the program, the Farm

Service Agency requires that all importers and subsequent buyers of

Canadian wheat file information relating to their purchases. The importer

must file a certificate that notes the importer’s name, the class and

quantity of wheat imported, the storage location, and the mode of

transportation used to bring the wheat to the United States from Canada.

The importer and all subsequent purchasers of the wheat must also submit

a wheat consumption and resale report that specifies the quantity and

class of wheat received, the quantity resold, the identity of the buyers, and

the end use. The wheat consumption and resale report identifies seven

broad categories of end use, including milling for human consumption,

milling for animal feed, manufacturing, brewing or malting, distilling,

re-export to another country, and other.

According to statistics compiled by the Farm Service Agency, over

92 percent of imported Canadian wheat is used for milling for human

2

Public law 103-182, December 8, 1993, section 321(f), 19 U.S.C. 3391(f).

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Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

consumption. The wheat end-use certificate program does not require

more detailed information concerning the milling of Canadian wheat, such

as the food products (for example, bread or pasta) made from the milled

wheat. Figure IV.1 shows the end use of Canadian wheat for March 1995,

when the end-use certificate program began, to December 1997.

Figure IV.1: End Use of Canadian Wheat, March 1995-December 1997

95.2%

1.3%

3.5%

Durum

92.6%

5.3%

2.0%

Red spring

Human consumption Export (3rd country) Other

95.2%

3.5%

1.3%

92.6%

2.0%

5.3%

Note: “Other” includes animal feed and manufacturing.

Source: USDA.

Reliability Issues

Could Also Affect

Import Data’s

Usefulness in

Determining CWBs

Prices

In preparing this summary, we became aware of two potential problems

with the reliability of Customs data. The statistical edits employed by

Customs and Census in combination with the entry summary reviews

performed by Customs field personnel are extremely useful for

maintaining the quality of U.S. import data. However, in two instances,

these procedures failed to detect errors in the filings made by importers of

Canadian wheat. In the first instance, USDA end-use data revealed that a

significant number of shipments of Canadian wheat bound for other

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Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

countries were incorrectly entered as U.S. imports, thus inflating the

recorded amount of wheat entering the country from Canada. In the

second instance, an audit by Customs revealed that some importers had

overstated the value of the wheat on their Customs entry forms. These

problems are consistent with concerns raised by some U.S. officials in a

previous GAO report,3

 where they noted that the reduction in duties

brought about by NAFTA may cause the accuracy of U.S.-Canadian trade

data to decline. The degree to which these errors affect the accuracy of

data on Canadian wheat imports is unclear, and Customs and Census

report that they have taken some steps to improve their quality control

procedures.

Re-Exports of Canadian

Wheat Can Affect Import

Data Accuracy

For several years, Census officials have been concerned that statistical

edits and Customs entry reviews are unable to detect instances in which

exports from Canada are entered as U.S. imports even though they are to

be exported from the United States without ever entering the U.S. market.

Census officials noted that if such Canadian exports, referred to as

“in-transit shipments,” are often filed as U.S. imports, U.S. data on

Canadian imports are overstated. The officials said that the initial

purchasers of the re-exported good should have instead filed an in-transit

form with Customs, which indicates that the shipment will only be

traveling through the United States en route to another country. Customs

does not try to determine whether filers of Canadian import entries are

submitting the correct form, because Customs law permits purchasers of

foreign goods to file them as imports even if they are to be re-exported

from the country.

According to Census and Customs officials, some U.S. purchasers of

Canadian goods, such as wheat, find it easier to file an import entry than

an in-transit document. In-transit documents require detailed

transportation information that Customs needs to assure that goods bound

for another country are not illegally diverted into the U.S. market. Also,

because of NAFTA, there are most likely no duties associated with filing an

import entry for Canadian goods. However, buyers of Canadian goods

must pay brokers’ fees regardless of whether they file import entry or

in-transit documents.

Data collected by USDA on wheat end-use and consumption certificates

reveal that some Canadian wheat shipments transiting through the United

3

See Measuring U.S.-Canada Trade: Shifting Trade Winds May Threaten Recent Progress

(GAO/GGD-94-4, Jan. 19, 1994).

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Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

States on the way to other countries have been incorrectly entered with

Customs as U.S. imports. As noted earlier, these certificates must be filed

for all Canadian wheat imported into the United States. Filers of wheat

consumption certificates must indicate either that the wheat will be used

in the United States for such purposes as human consumption or that the

wheat will be re-exported from the United States. According to USDA

officials, wheat designated for re-export on the wheat consumption form

was probably incorrectly entered as an import with Customs.

Data from the wheat consumption and resale reports show that a

significant percentage of wheat shipments from Canada was designated by

purchasers as being for re-export. For the 1995-96 wheat marketing year

(June 1 through May 31), about 1.5 percent of Canadian wheat entering the

United States was designated for re-export. This figure rose dramatically

in the 1996-97 marketing year to almost 12 percent. USDA officials believe

that this large increase was attributable to severe weather in Canada,

which prohibited many wheat shippers from using Canadian ports. The

officials explained that the shippers decided to move their shipments

through available U.S. ports and felt it was more expeditious to enter the

wheat as a U.S. import than to file in-transit documents. In the 1997-98

marketing year, wheat re-exports represented about 2 percent of U.S.

imports of wheat from Canada.

Recent Customs Review

Revealed Errors in

Canadian Wheat Values

A recent review of a small sample of Canadian wheat entries by Customs

and the Department of Commerce revealed that Customs’ and Census’

quality control procedures failed to detect mistakes in the reported value

for some entries. Customs initiated the review in early 1998 in order to

assess the accuracy of value data it collects on Canadian wheat imports.

Customs was particularly concerned that the entered value accurately

reflected the transaction price between the CWB and the U.S. purchaser of

the wheat.

Customs staff at the ports of Pembina, North Dakota, and Duluth,

Minnesota, reviewed recent entries of wheat made under several large

contracts between the CWB-accredited exporters and buyers in the United

States. By comparing the entered values to information contained on

invoices and contracts, the staff determined that for all the entries they

reviewed, the entered value was based on the prices used in the

transaction between the CWB’s accredited exporter and the purchaser in

the United States. This determination was important because it indicated

that the values submitted by Canadian wheat importers represented actual

Page 85 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

transaction prices rather than estimated prices based on spot prices on the

MGE.

4

However, during the course of the review, the Customs staff found that in

some of the entries, some freight charges, which should have been

reported separately, were included in the entered value. By including these

freight charges, the importer inflated the value of the shipment. Customs

reported this finding to the Commerce Department’s International Trade

Administration, whose staff then reviewed a sample of Canadian wheat

entries. Of the 19 entries they examined, 6 included freight in the entered

value. Because of the small number of entries reviewed by Customs and

Commerce, the agencies were unable to determine the extent to which

such errors affected the accuracy of reported Canadian wheat import data.

However, Customs officials noted that none of the errors in value resulting

from the inclusion of freight charges exceeded $10,000. Census does not

require corrections to the import database for value errors lower than this

threshold because it believes that they will not significantly affect the

accuracy of the overall official import statistics.

Customs staff interviewed the Customs brokers that filed the entries in the

reviewed sample to determine why freight charges were included in some

of the entered values. The staff found that in some instances wheat

importers did not separate the freight charges from the transaction price

in the information they provided their broker because brokers charge

more to file entries with freight charges than entries with no such charges.

Importers that included freight charges in the entered value did not incur

any Customs fees for doing so because Canadian wheat imports are duty

free under NAFTA.

Although they only reviewed a small sample of Canadian wheat entries,

Customs officials believe that the inclusion of freight charges in the

entered value was a widespread problem on the northern border. They

note that most Canadian wheat enters the U.S. through a few Customs

ports, such as Pembina and Duluth, connected to U.S. rail lines. Most of

the wheat entries arriving at these ports are filed by the same few large

Customs brokers interviewed by Customs.

Since the entry review, Customs has informed brokers that file Canadian

wheat entries that they should not include freight charges in the entered

4

Customs did not compile the results of its entry reviews and was unable to tell us how many entries

were involved.

Page 86 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix IV 

How U.S. Data on Canadian Grain Are

Collected

value. Customs is currently reviewing a sample of Canadian wheat entries

filed in early 1998 to verify that the entered value is correct.

Trade Liberalization May

Affect Data Quality

Both the reporting of Canadian wheat for re-export and the inclusion of

freight charges in the entered value for Canadian wheat shipments appear

to confirm concerns expressed by U.S. officials and others in our 1994

report on the processes for measuring trade between the United States

and Canada. In that report, we noted that Census officials and others in

the statistical community had concerns that the implementation of NAFTA,

including the elimination of duties, would diminish the accuracy of

Customs’ statistical information. We said that these officials believed that

Customs would not be inclined to scrutinize entry documents solely for

the purpose of detecting statistical errors or to reject entries for what it

might consider to be minor statistical inaccuracies.

Census officials told us that they are concerned about discrepancies in

Canadian wheat import data such as those uncovered in the two reviews.

However, they remain confident that the data are sufficiently accurate for

their intended uses such as determining U.S. trade balances. Commerce

officials, on the other hand, note that errors in the reported value of

Canadian wheat entries present a major impediment to using import data

to analyze trends in Canadian wheat prices.

Page 87 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix V 

STE Notifications to the WTO for 1995-97

Every 3 years all members of the WTO are required to submit information,

in the form of a “new and full notification,” on the nature and extent of

their country’s state trading enterprise activities. WTO members

traditionally have been required to list products covered by STEs, report

reasons for introducing and maintaining STEs, provide some description of

their STEs’ functions, and include statistics on the extent of trade

accounted for by STEs. Since 1995, all STE notifications have been reviewed

by the Working Party on STEs, which has allowed the WTO to better track

the activities of STEs. According to the WTO, 58 countries, or about half of

all WTO members, complied with the full notification requirement when last

due in 1995. However, compliance problems remain, including a lack of

understanding of what trading entities should be listed on the notification

and the timeliness of members’ notification submissions. Members’

notifications reveal a wide variety of products covered and reasons for

maintaining state trading enterprises.

STE Notification

Compliance Has

Increased, but Some

Problems Remain

In 1995, we reported on the compliance with STE reporting requirements

from 1980 to 1994 and found that compliance was generally poor.1

 The

lack of compliance with notification requirements was attributed to (1) the

problem of what constitutes an STE, (2) the lack of a systematic review of

notifications received, (3) the low priority some member countries

assigned to STE reporting, and (4) the overall burden of reporting. Since the

creation of the Working Party on STEs in 1995, compliance has improved.

Fifty percent of all WTO members submitted a new and full STE notification

for 1995, compared to the previous high of 21.2 percent of members in

1981, another full notification year. In addition, WTO members are required

to submit “updating notifications” in intervening years, and the response

rate for updating notifications in 1996 and 1997, though lower than that for

1995, represented an improvement over the response rates recorded for

updating notifications between 1980 and 1994. During that period, the

highest response rate was 15.3 percent of members, and the lowest was

6.7 percent of members; this compares to a low of 26 percent of members

responding in 1997, shown in table V.1.

1

See State Trading Enterprises: Compliance With the General Agreement on Tariffs and Trade

(GAO/GGD-95-208, Aug. 30, 1995).

Page 88 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix V 

STE Notifications to the WTO for 1995-97

Table V.1: STE Notifications, 1995-97

Notification type

Number of notificationsa

received

Response rate

(percent)b

New and full (1995) 58c 50

Updatingd (1996) 48 41

Updating (1997) 30 26

aThe number of notifications reflects the fact that the EC submits a single notification that covers

all 15 of its member states.

bThe response rate has been calculated on a base WTO membership of 117, which counts the

EC as a single member. The official total membership of the WTO (132) includes the EC’s 15

member states counted individually as well as the EC itself.

cAccording to WTO documents, 23 of the 58 new and full notifications were also counted as

updating notifications, due to their late submission (see discussion to follow).

dIn updating notifications, members are supposed to indicate if any changes to their state trading

regimes have taken place since their last notification.

Source: STE notifications to the WTO Secretariat.

WTO provisions allow countries to question the completeness of other

members’ STE notifications.2

 Through the Working Party on STEs, members

submit written questions regarding other countries’ notifications and

receive written responses.3

 According to the WTO Secretariat, this process

itself has brought greater transparency to the notification process. U.S.

officials told us that the Working Party provides a good forum to apply

pressure on members that are not in full compliance with the reporting

requirements, either for the lateness or the incompleteness of their

submissions. According to WTO Secretariat officials, in at least one case, a

member that originally notified that it did not have STEs amended its

notification and reported several STEs, following pressure from the United

States and other Working Party members.

Continuing Problems Despite progress in the Working Party, some problems remain, including a

lack of understanding of what trading entities fall under the WTO’s

definition for state trading enterprises and the timeliness of member

countries’ responses to STE questionnaires. WTO Secretariat officials we

2

Specifically, these provisions were included in the 1994 Understanding on the Interpretation of Article

XVII of the General Agreement on Tariffs and Trade, which is found in annex 1 of the WTO agreement.

3

If a WTO member is still not satisfied with another members’ notification after questioning and

discussion in the Working Party, the member can submit a “counternotification” to the WTO Council

for Trade in Goods raising its concerns. As of June 1998, no member has yet submitted a

counternotification against another member. Although the provision remains untested, U.S. officials

we spoke with believe the ability to do so remains important.

Page 89 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix V 

STE Notifications to the WTO for 1995-97

spoke with said that the STE definition under article XVII is “still very

vague.” Differing interpretations of what constitutes state trading

enterprises may have resulted in inconsistencies in members’

notifications. For example, three Central European countries submitted

notifications claiming that they had no STEs under article XVII, while three

other countries with similarly structured economies from the same region

claimed that they had them. (For more information on whether individual

countries reported maintaining state trading enterprises, see table V.2.)

Members’ timeliness in submitting STE notifications has been one of the

principal areas of concern among Working Party members. According to a

WTO Secretariat official, “virtually all countries” have missed the deadlines

for submitting notifications. For example, WTO documents indicate that 23

out of the 58 new and full notifications submitted for 1995 were so late

that the Secretariat considered them updating notifications as well.4

4

According to USDA officials, WTO members’ timely submission of notifications is a pervasive problem

in the WTO, affecting many other issues besides STE monitoring.

Page 90 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix V 

STE Notifications to the WTO for 1995-97

Table V.2: WTO State Trading Enterprise Notifications by Country, 1995-97

Country

New and full

notification (1995)

Updating notification

(1996)

Updating notification

(1997) State trading reporteda

Argentina X X X

Australia X X X X

Barbados X X

Botswana X X

Brazil X X X X

Bulgaria X X

Canada X X X X

Chile X X X X

Colombia X X X

Costa Rica X X

Côte d’Ivoire X X X

Cyprus X X

Czech Republic X X

El Salvador X X

EC X X X

Gambia X X X

Guinea, Republic X

Haiti X X X

Honduras X

Hong Kong, China X X X

Hungary X X X

Iceland X X X

India X X

Indonesia X X X

Israel X X X

Jamaica X X X X

Japan X X X X

Korea X X X

Liechtenstein X X X X

Macau X X X

Malaysia X X

Malta X X X

Mauritius X X X X

Mexico X X

Morocco X X

Namibia X X X

(continued)

Page 91 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix V 

STE Notifications to the WTO for 1995-97

Country

New and full

notification (1995)

Updating notification

(1996)

Updating notification

(1997) State trading reporteda

New Zealand X X X X

Nigeria X X X

Norway X X X X

Pakistan X X X

Peru X X X X

Philippines X X X

Poland X X

Qatar X X X

Romania X X X

Singapore X X X

Slovak Republic X X X

Slovenia X X X

South Africa X X X X

Switzerland X X X X

Thailand X X X X

Tunisia X X X

Turkey X X X X

United Arab Emirates X X

United States X X X X

Uruguay X X X X

Venezuela X X X X

Zambia X X X

Total 58 48 30 39

Note: The WTO Secretariat considered 23 of the “new and full” notifications as also updating

notifications due to the lateness of their submission.

aAs reported in the country’s latest notification.

Source: Article XVII notifications provided to the WTO Secretariat.

Notifications Show

Wide Range of

Products Covered and

Reasons for

Maintaining STEs

WTO notifications provided some insight into the activities of STEs in the 39

member countries that reported maintaining some STEs between 1995 and

1997. As required by the WTO, these member countries listed the products

or groups of products for which they maintain STEs in their notifications.

Figure V.1 shows which commodities were most frequently reported by

countries as being subject to state trading. While members maintained

STEs for a wide variety of products, the majority of STEs described in

members’ notifications operated in the agricultural sector. In addition to

Page 92 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix V 

STE Notifications to the WTO for 1995-97

the products listed in figure V.1, some member countries also reported

maintaining STEs for tea, pork, poultry and eggs, and wool, among other

products. A few member countries reported maintaining STEs in

nonagricultural products such as chemicals and minerals and ore.

Figure V.1: State Trading Notifications by Product Sector, 1995-97

0

5

10

15

20

25

22

15 15

12 12

9 9

8

6

5

Number of countries

Petroleum

G

and oil

rains and 

cereals

Fruits 

and 

vegetables

Alcohol

Dairy

Beef and 

veal

Sugar

Tobacco

Utilities

Edible oils 

and oilseeds

Products traded

Note: Data are for products for which at least five WTO members reported maintaining state

trading.

Source: GAO analysis of STE notifications.

Page 93 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix V 

STE Notifications to the WTO for 1995-97

WTO members also reported a number of reasons for introducing and

maintaining STEs in their notifications. For example, many WTO members

reported using STEs to regulate prices in their domestic market. Some

countries sought to maintain market stability by limiting excessive price

movements and by guaranteeing minimum or maximum prices for selected

products. Other members reported that government intervention through

STEs made staple foods available to the general population at an affordable

price or to consumers in the economically weaker sectors at the lowest

possible price. Numerous member countries also reported using STEs to

prevent disruptions in their domestic food supply. Additionally, some

member countries reported using STEs to provide producers with “the

opportunity to obtain a fair return for their labor and investment” or to

help “maximize the income” of farmers.

The notifications also included a description of the operations of STEs in

WTO member countries. For example, many countries reported that their

STEs held exclusive rights to import and/or export covered products. In

addition, in some cases STEs acted as the sole agent in the processing,

marketing, distribution, and purchasing of controlled products. STEs in

some member countries were authorized to issue licenses or permits to

import or export products and to process controlled products.

Furthermore, some members reported that STEs were involved in ensuring

the quality of covered products and supporting research and development

in those product sectors.

Page 94 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VI 

Legal Remedies

Various trade remedies are available to the United States under

international agreements and U.S. law. These include dispute settlement

mechanisms for resolving government-to-government disputes, as well as

U.S. laws that authorize U.S. agencies to conduct investigations and,

where warranted, provide relief to U.S. industry. The following section

provides an overview of these remedies.

Dispute

Settlement—GATT/

WTO

The WTO dispute settlement rules are incorporated in the Uruguay Round’s

Understanding on Rules and Procedures Governing the Settlement of

Disputes (Dispute Settlement Understanding), which is annex 2 to the WTO

agreement. These rules apply to disputes under all the WTO agreements.

The dispute settlement mechanism is intended to be a central element in

providing security and predictability to the multilateral trading system.

The dispute settlement mechanism is available for

government-to-government disputes in which a WTO member believes that

another has failed to meet an obligation agreed to in the WTO agreements.

A panel report under the WTO Dispute Settlement Understanding must be

adopted by the Dispute Settlement Body, unless there is a consensus not

to adopt it. Prior to the establishment of the WTO in 1995, disputes were

settled by GATT panels, whose decisions could be blocked by any party,

including the country that did not prevail in the dispute.

Dispute

Settlement—CFTA/

NAFTA

Three separate dispute settlement provisions of NAFTA are set forth in

chapters 19, 20, and 11. They provide mechanisms for dealing with the

three primary areas in which disputes can arise; they include, respectively,

antidumping and countervailing duty matters, the interpretation and

application of NAFTA, and the protection of investor rights. Chapter 19 lays

out the system for the review of antidumping and countervailing duty final

determinations made by the domestic agency of the importing country in

the dispute. Chapter 19 contains a mechanism for replacing judicial review

of final antidumping and countervailing duty determinations involving

imports from Canada, Mexico, and the United States with review by

independent, five-member, binational panels of experts drawn from an

agreed roster developed by the signatories. Chapter 20 provides for

five-member panels of experts to render decisions and recommendations.

Chapter 20 establishes NAFTA’s procedures for settling disputes between

signatory governments regarding NAFTA’s interpretation and application.

NAFTA is unique among trade agreements because, under chapter 11, it

contains a comprehensive regime for settling disputes between foreign

investors and host governments.

Page 95 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VI 

Legal Remedies

Section 301

Investigations

Sections 301-309 of the Trade Act of 1974, as amended,1 commonly

referred to as “Section 301,” gives the President broad discretion to

enforce U.S. trade rights granted by trade agreements and to attempt to

eliminate acts, policies, or practices of a foreign government that violate a

trade agreement or are unjustifiable, discriminatory, or unreasonable and

burden or restrict U.S. commerce. Section 301 provides a domestic

procedure under which affected enterprises or individuals may petition

the U.S. Trade Representative to initiate actions to enforce U.S. rights

under bilateral and multilateral trade agreements. USTR also may initiate

Section 301 investigations at its own discretion.

Once an investigation is undertaken, USTR must consult with the foreign

country alleged to have engaged in the unfair trade practices. If a mutually

acceptable solution is not reached, and the complaint concerns a breach

of an international agreement that has a dispute settlement mechanism,

USTR is obligated to commence dispute settlement procedures as provided

for in that agreement.2

If the determination at the end of the investigation is affirmative and

involves a trade agreement or an alleged unjustifiable practice that

burdens or restricts U.S. commerce, USTR must take action. If the

determination is affirmative and involves an unreasonable or

discriminatory practice that burdens or restricts U.S. commerce, USTR may

decide which actions, if any, are appropriate. Section 301 permits USTR to

decide to forgo trade action if a dispute settlement panel finds no violation

of a trade agreement or that the offending action does not deny U.S. legal

rights or nullify benefits under an agreement.3

 Remedies available include

suspending trade agreement concessions; imposing duties, fees, or various

import restraints; and denying service licenses.4

U.S. Antidumping Law The antidumping law is set forth in title VII of the Tariff Act of 1930, as

amended.5

 The law allows U.S. industry, including agricultural goods

producers, to petition the government to impose additional duties on

imports that the government determines are dumped and where the

1

19 U.S.C. 2411.

2

19 U.S.C. 2413(a)(2).

3

19 U.S.C. 2411(a)(2).

4

19 U.S.C. 2411(c).

5

19 U.S.C. 1673 et seq.

Page 96 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VI 

Legal Remedies

government determines that there is material injury to a U.S. industry

producing a like product by reason of the dumped imports.

Dumping is generally defined as the sale of an exported product at a price

lower than that charged for the like product in the “home” market of the

exporters or at a price below cost. U.S. antidumping laws seek to redress

this practice as a form of unfair price discrimination if an industry in the

United States is materially injured or threatened with material injury by

reason of the dumped imports. The U.S. antidumping law is applied in the

context of internationally negotiated rules on antidumping proceedings

and measures under the WTO antidumping agreement.6

Under the law, private parties petition the Department of Commerce and

the ITC on behalf of a U.S. industry to determine whether a class or kind of

merchandise is being sold in the United States at dumped prices and

whether those imports are sufficiently injurious. Commerce is to

determine whether sales are at “less than fair value” by calculating the

difference between the normal value of the product (for example, the

price in the home market) and the export price (for example, the price in

the United States). In a parallel investigation, the ITC determines whether a

U.S. industry is materially injured or threatened with material injury or

whether the establishment of an industry in the United States is materially

retarded by reason of the imports determined by Commerce to have been

dumped, using criteria specified in the act.7

 If the agencies find that both

dumping and the requisite injury exist, Commerce then calculates the

amount of duties imposed on each importer to offset the price difference

between the U.S. price and the normal value of the imported merchandise.

The information that must be provided in an antidumping petition is set

forth in federal regulations.8

 The Commerce Department determines

whether the petition “alleges the elements necessary for the importation of

a duty,” based on “information reasonably available to the petitioner

supporting the allegation.”9

 The party alleged to be dumping must respond

to Department of Commerce questionnaires on sales volumes and prices

that the Department creates and later verifies through on-the-spot

6

Section 1317 of the Omnibus Trade and Competitiveness Act of 1988 (19 U.S.C. 1677k) estabishes

procedures for the U.S. Trade Representative to request a foreign government to take action against

third-country dumping that is injuring a U.S. industry.

7

19 U.S.C. 1677.

8

19 C.F.R. 353.12.

9

19 U.S.C. 1673a(c)(1).

Page 97 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VI 

Legal Remedies

investigations. A failure to respond to the questionnaire or to permit

verification may lead to a dumping determination supported by the “best

information available,” that is, most likely the petitioner’s or other

respondent’s written submissions.10 Because this result may be

undesirable to the party alleged to be dumping, the best information

available rule has the effect of a subpoena, and most respondents answer

the Commerce Department’s questionnaires. According to the Department

of Commerce, aggregate values entered on U.S. Customs forms have often

been used by domestic industries to establish U.S. sales prices in an

allegation of dumping when filing an antidumping petition. Commerce

officials further stated that although information regarding the prices,

terms, and physical characteristics of the merchandise entering the United

States is an important element of a dumping allegation in an antidumping

petition, such information has been compiled from a variety of alternative

sources.

U.S. Countervailing

Duty Law

Subsidies provided by a government or public body may confer benefits on

the recipient that provide an unfair advantage in international trade, such

as allowing a producer to sell its products at a lower price than that of the

competition. U.S. countervailing duty laws attempt to redress the adverse

effects to a U.S. industry that seeks such relief.

The Tariff Act of 1930, as amended, provides for the imposition of

countervailing duties whenever certain actionable subsidies are bestowed

by a foreign government or public entity within a foreign country upon the

manufacture, production, or export of any article that is subsequently

imported into the United States causing injury.11

The process for countervailing duty investigations is similar to that for

dumping. Commerce must determine whether a country is providing

certain actionable subsidies to its industry or group of industries, either

directly or indirectly. If Commerce finds that an actionable subsidy exists

and the ITC determines that a U.S. industry is materially injured or

threatened with material injury or that the establishment of an industry in

the United States is materially retarded by reason of imports of the

subsidized product, Commerce then calculates the amount of duties to be

imposed on each importer to offset the subsidies provided for the

manufacture, production, or export of that product. While governments

can take many actions that could be said to confer benefits on their

1019 U.S.C. 1677e(b).

1119 U.S.C. 1671 et seq.

Page 98 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VI 

Legal Remedies

producers, not all of these actions are viewed as countervailable subsidies.

Generally, the benefit must be limited to a specific group of firms or

industries, or to a firm’s export activities, in order to be covered under this

law.12

Section 332

Investigations of

Trade and Tariff

Matters

Under section 332 of the Tariff Act of 1930, as amended,13 the ITC conducts

investigations into trade and tariff matters upon request of the President,14

the Committee on Ways and Means of the House of Representatives, the

Committee on Finance of the Senate, either House of the Congress, or

upon the ITC’s own initiative. Unlike other investigations by the ITC, the

statute does not provide for initiating section 332 investigations by public

petition. The ITC does, however, seek written submissions and

participation in public hearings during most section 332 investigations.

Investigations Under

the Agricultural

Adjustment Act

Under the provisions of section 22 of the Agricultural Adjustment Act of

1933, as amended,15 the President can impose fees or quotas on imported

agricultural commodities that undermine any USDA domestic commodity

support program. The act directs the Secretary of Agriculture to advise the

President when the Secretary believes that an article is being imported in

such quantities as to interfere with or affect any USDA support program or

other agricultural program. If the President agrees, he or she must order

an investigation by the ITC. Based upon the ITC investigation, the President

can make an affirmative determination and impose import fees or import

quotas on the product in question.

These provisions are no longer applicable to products of countries or

entities that are WTO members. Title IV of the Uruguay Round

implementing legislation eliminates the use of quantitative restrictions on

agricultural goods under section 22 for products of WTO members.

1219 U.S.C. 1677(5A).

1319 U.S.C. 1332.

14The President has delegated authority to request investigations to the USTR.

157 U.S.C. 624.

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Appendix VI 

Legal Remedies

Safeguards—ITC

Investigations of

Serious Injury to U.S.

Industries From

Increased Imports

A safeguard is a temporary import control or other trade restriction a

country imposes to assist domestic industry seriously injured by increased

imports that are fairly traded. Generally they must be applied to

merchandise from all sources without discriminating against any

particular country. The safeguard clause in article XIX of GATT allows WTO

members to obtain emergency relief from increased imports.16 Sections

201-204 of the Trade Act of 1974, as amended,17 authorize the ITC to

conduct investigations concerning whether an article is being imported

into the United States in such increased quantities as to be a substantial

cause of serious injury, or the threat thereof, to the domestic industry

producing a like or directly competitive article.18

In making its determination, the ITC is required to take into account all

relevant economic factors.19 For example, in determining serious injury,

the ITC must consider whether (1) productive facilities in the industry have

been significantly idled, (2) a significant number of firms have been able to

operate at a reasonable level of profit, and (3) significant unemployment

or underemployment has occurred within the industry. In determining the

threat of serious injury, the ITC must consider, among other factors, a

decline in sales or market share; a higher and growing inventory; and a

downward trend in production, profits, wages, productivity, or

employment in the industry. The ITC is required to consider the condition

of the domestic industry over the relevant business cycle and examine

factors other than imports that may be the cause of serious injury, or

threat of serious injury, to the domestic industry.

If the ITC makes an affirmative injury determination, it is required to

recommend the action that would most effectively address the serious

injury or threat to the domestic industry.20 The ITC may recommend to the

President relief in the form of new or increased tariffs, quotas, trade

16Additionally, the WTO Agreement on Agriculture provides for the imposition of special agricultural

safeguards for designated agricultural products that have been subject to tariffication, such as beef,

cheese, and peanuts. There are two types of special safeguards, each of which allows for additional

duties to be imposed: a “volume-based” safeguard may be applied whenever imports exceed a certain

quantity, and a “price-based” safeguard may be applied to products whose price is below a price

threshold. These special agricultural safeguards, however, do not apply to products from Canada or

Mexico.

1719 U.S.C. 2251-54.

18The ITC may initiate an investigation on its own motion; at the request of the President, USTR, the

House Committee on Ways and Means, or the Senate Committee on Finance; or upon petition of an

entity representative of an industry.

1919 U.S.C. 2252(c).

2019 U.S.C. 2252(e).

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Appendix VI 

Legal Remedies

adjustment assistance to workers, or a combination of these measures.

The President may then take action consistent with the ITC

recommendation or other action deemed appropriate.21 The President

must report to the Congress on the action that he or she is taking. If he or

she takes action that differs from that recommended by the ITC or takes no

action at all, the Congress may, through a joint resolution, direct the

President to proclaim the relief recommended by the ITC.

22

Safeguard—Bilateral

Emergency Action

Safeguard Procedures

NAFTA provides for a separate bilateral safeguard action in a case of injury

due to the reduction or elimination of duties under NAFTA.

23 Under U.S.

NAFTA implementing legislation,24 the process for seeking relief is similar

procedurally to that for global safeguard investigations.25 If the ITC finds

that, as a result of the reduction or elimination of a duty provided for

under NAFTA, a product from Canada or Mexico is being imported in such

increased quantities and under such conditions that imports of the

product, alone, constitute a substantial cause of serious injury, or the

threat of serious injury, to the domestic industry producing a like or

directly comparable product, it makes a recommendation to the President.

The President is responsible for making the final decision on whether to

grant relief; available relief is limited to an increase in duty to the lesser of

the pre-NAFTA rate or the current most-favored-nation rate. Unlike the

general safeguard provision under GATT, NAFTA requires that a party taking

such action provide mutually agreed compensation in the form of

concessions having substantially equivalent trade effects or the equivalent

value of the additional duties expected to result from the relief action.26

Provisional relief is available under these bilateral emergency action

procedures.

21In addition to these recommendations, the ITC may also recommend that the President initiate

international negotiations to address the underlying cause of the increase in imports of the article or

otherwise to alleviate the injury or threat. The ITC may, in addition, recommend that the President

implement any other action authorized under law that is likely to facilitate positive adjustment to

import competition (19 U.S.C. 2252(e)(4)).

2219 U.S.C. 2253(c).

23As a general rule, these bilateral actions may be taken only during NAFTA’s transitional period (that

is, the 10- to 15-year period during which duties are being phased out).

2419 U.S.C. 3352.

25NAFTA countries retain their rights to use general safeguards, although NAFTA limits the ability of a

NAFTA country to apply a general safeguard to another NAFTA country. A NAFTA party wishing to

apply a general safeguard to another NAFTA country must find that imports from the NAFTA country

account for a substantial share of total imports and contribute importantly to the serious injury or

threat caused by the imports in question.

26NAFTA article 801.4.

Page 101 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VII 

Application of U.S. Antitrust Laws and the

CWB

It is well established through statute1 and case law that U.S. antitrust law

can reach beyond our borders to address foreign activity if that activity

has the required effect in the United States. Antitrust enforcement,

whether initiated (1) by the U.S. government through the Department of

Justice or the Federal Trade Commission,2

 (2) by private parties,3 or (3) by

state attorneys general,4

 is carried out through legal proceedings in U.S.

courts, or in the case of the Federal Trade Commission, through

administrative proceedings. When a court applies our antitrust laws,

whether domestically or internationally, it must determine whether

particular conduct constitutes a practice covered by a provision within

those laws. Analyzing the applicability of antitrust law to the CWB,

however, is further complicated by the nature of the CWB as a

quasi-governmental entity, certain acts of which could be covered by

sovereign immunity and related doctrines. Thus, any potential applicability

of U.S. antitrust law to the CWB will depend on the specific conduct or

activities of the CWB.

Department of Justice officials in the Antitrust Division told us that the

division has not, at least within the last 20 years, initiated any action

against the CWB, nor were they aware of any deliberations contemplating

such action. These officials, as well as an official at the Federal Trade

Commission, stated that they could not provide a definitive answer to the

question of the applicability of U.S. antitrust laws to the CWB, emphasizing

the fact-specific nature of such cases. A general principle that emerges

from a review of applicable case law and discussion with government

officials, however, is that courts would be more likely to apply U.S.

antitrust law to CWB activities where those activities are not compelled

under Canadian law and where the CWB is acting as a participant in the

wheat market and not as a regulator. On the other hand, courts are

unlikely to accept a challenge against CWB conduct that is required under

Canadian law governing the marketing and export of wheat even where

that conduct conflicts with U.S. antitrust law. Courts are also unlikely to

find jurisdiction over activities of the CWB that could be considered

sovereign activity of the Canadian government.

1

15 U.S.C. 6a.

2

The Department of Justice and the Federal Trade Commission share responsibility for enforcing the

antitrust laws at the federal level.

3

It is reported that private actions accounted for approximately 95 percent of all antitrust litigation in

the U.S. District Courts in 1997. See Judicial Business of the United States Courts, Table C-2

(Washington D.C.: Administrative Office of the U.S. Courts, 1998).

4

State Attorneys General enforce U.S. antitrust laws pursuant to section 4c of the Clayton Act of 1914,

as amended. 15 U.S.C. 15c. State Attorneys General also enforce state antitrust laws.

Page 102 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VII 

Application of U.S. Antitrust Laws and the

CWB

While other U.S. laws may possibly be relevant to potential antitrust

theories,5

 a broad prohibition on anticompetitive behavior is contained in

the Sherman Act of 1890.6

 Section 1 makes illegal “[e]very contract,

combination . . . or conspiracy, in restraint of commerce or trade among

the several States, or with foreign nations.”7

 Section 2 of the Sherman Act

prohibits monopolization of, attempts to monopolize, and conspiracies to

monopolize any part of trade or commerce among the several states or

with foreign nations. Under U.S. law, however, U.S. producers of

agricultural products are permitted to act together in, among other things,

processing and marketing their products and, thus, enjoy a qualified

immunity from antitrust laws.8

Extraterritorial Reach

of U.S. Antitrust Laws

A number of issues have an effect on the extraterritorial application of

U.S. antitrust laws. These issues include subject matter jurisdiction,

personal jurisdiction, international comity, the act of state doctrine, and

foreign sovereign compulsion.

Subject Matter Jurisdiction U.S. courts have held that the Sherman Act applies to foreign conduct that

was meant to produce and did in fact produce some substantial effect in

the United States.9

 Thus, for example, where foreign companies organize a

cartel for the purpose of raising the price of a product in the United States,

it will have met the intent element of the test. Whether the imports have a

substantial effect in the United States, of course, will depend on the

particular facts present.

Personal Jurisdiction In order to bring a suit in a U.S. court, the court must have personal

jurisdiction over the defendant. Courts have required that the defendant

have “minimum contacts” with the United States such that an exercise of

5

For example, the Clayton Act of 1914 (15 U.S.C. 12-27), prohibits a variety of business practices whose

effect may be to substantially lessen competition or tend to create a monopoly. According to the

“Antitrust Enforcement Guidelines for International Operations” (April 1995) (Antitrust Guidelines),

the Clayton Act expands on the general prohibitions of the Sherman Act of 1890 and addresses

anticompetitive problems in their incipiency.

6

15 U.S.C. 1-7.

7

15 U.S.C. 1.

8

Capper-Volstead Act, 7 U.S.C. 291.

9

Hartford Fire Insurance Co. v. California, 509 U.S. 764 (1993).

Page 103 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VII 

Application of U.S. Antitrust Laws and the

CWB

jurisdiction comports with “fair play and substantial justice.”10 The

antitrust guidelines state that the Department of Justice and the Federal

Trade Commission interpret the concept of transacting business

pragmatically. For example, jurisdiction over a foreign entity may be

established through a related company in the United States acting as its

agent or alter ego.

The 1976 Foreign Sovereign Immunities Act provides immunity from suit

in U.S. courts for the sovereign acts of foreign states and agencies or

instrumentalities owned by a foreign state.11 Under the act, a key question

for establishing personal jurisdiction over the CWB would be whether the

alleged anticompetitive activities are sovereign or commercial as defined

in the act. A foreign government is not immune from suit in any case “in

which the action is based upon a commercial activity carried on in the

United States by the foreign state; or upon an act performed in the United

States in connection with a commercial activity of the foreign state

elsewhere; or upon an act outside the territory of the United States in

connection with a commercial activity of the foreign state elsewhere and

that act causes a direct effect in the United States.”12

The antitrust guidelines state that in attempting to distinguish commercial

from sovereign activity, courts have considered whether the conduct being

challenged is customarily performed for profit and whether the conduct is

of a type only a sovereign can perform. The guidelines conclude that most

activities of government-owned corporations operating in the commercial

marketplace will be subject to U.S. antitrust laws to the same extent as the

activities of foreign, privately owned firms.

International Comity Where two governments prescribe inconsistent conduct of the same

person, the U.S. courts have held that they must “consider, in good faith,

moderating the exercise of [their] enforcement jurisdiction.”13 Potential or

actual conflicts among national legal systems are often avoided or

moderated by deference shown by one nation’s courts to the courts and

laws of another state, a deference referred to as “comity.” Although the

application of comity is discretionary, courts have enumerated specific

10International Shoe Co. v. Washington, 326 U.S. 310 (1945).

1128 U.S.C. 1602, 1603(a),(b).

1228 U.S.C. 1605(a)(2).

13Timberlane Lumber Co. v. Bank of America, 549 F.2d 597 (9th Cir. 1976).

Page 104 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VII 

Application of U.S. Antitrust Laws and the

CWB

factors to be considered, including the degree of conflict with foreign law

or policy.

In 1993, the Supreme Court had an opportunity to clarify the law

concerning the degree of conflict factor for purposes of comity analysis.14

In that case, 19 states and numerous private plaintiffs had brought cases

against domestic insurers and domestic and foreign reinsurers of general

commercial liability. The plaintiffs alleged that the insurance companies

had conspired to restrict the terms of coverage of commercial general

liability insurance available in the United States. The district court

dismissed the case on the grounds of comity, finding that a “significant”

conflict with English law and policy would result from application of U.S.

antitrust law to the British reinsurers’ conduct and operations in the

United Kingdom and that the interference and harm caused by the conflict

was not outweighed by other factors. The Court of Appeals for the Ninth

Circuit reweighed the factors that figured in the comity balance and

reversed the decision.

The Supreme Court held that comity did not justify dismissal. The Court

found that subject matter jurisdiction existed since there had been foreign

conduct that “was meant to produce and did in fact produce some

substantial effect in the United States.” The Court rejected the claim that

conflict with foreign law existed, holding that no conflict exists for

purposes of an international comity analysis if the person subject to the

regulation by two states can comply with both. The Court determined that

conflict did not exist because the defendants could have complied with the

law of both nations at the same time. Thus, in a proceeding against the

CWB, in considering whether comity would weigh against review, one

factor a court might look to would be whether the activities that form the

basis of the alleged antitrust violation were required by Canadian

legislation governing the CWB’s activities.

The Act of State Doctrine According to Department of Justice and Federal Trade Commission

officials, a key defense the CWB may raise against the application of U.S.

antitrust law to activities of the CWB is the act of state doctrine. As

described in the antitrust guidelines, the act of state doctrine is a

judge-made rule of federal common law.15 It applies only if the specific

conduct complained of is a public act of the foreign sovereign within its

territorial jurisdiction on matters pertaining to its governmental

14Hartford Fire Insurance Co. v. California, 509 U.S. 764 (1993).

15Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964).

Page 105 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VII 

Application of U.S. Antitrust Laws and the

CWB

sovereignty. The guidelines explain further that while the act of state

doctrine does not compel dismissal as a matter of course, judicial

abstention is appropriate in a case where the court must “declare invalid,

and thus ineffective as a rule of decision in the U.S. courts . . . the official

act of a foreign sovereign.”16

The act of state doctrine, however, has been held to be inapplicable to the

commercial activities of a foreign state.17 In this regard, the antitrust

guidelines state that the U.S. government would not challenge foreign acts

of state if the fact and circumstances indicate that (1) the specific conduct

complained of is a public act of the sovereign; (2) the act was taken within

the territorial jurisdiction of the sovereign; and (3) the matter is

governmental, rather than commercial. Determining whether a particular

action is a commercial activity rather than an act of state is a fact-specific

question. According to an Federal Trade Commission official, if the CWB

were viewed as a regulator of wheat rather than a participant in the wheat

market, that is, if the CWB were considered by a U.S. court as a regulating

arm of government, then its activity could be immune from the reach of

U.S. antitrust law.18 On the other hand, if a court considered the CWB to be,

in effect, a government-chartered entity engaged in a commercial

endeavor, the act of state doctrine may not provide immunity to the CWB.

Foreign Sovereign

Compulsion

Under circumstances where the foreign sovereign has compelled the very

conduct that the U.S. antitrust law prohibits, the Department of Justice

and the Federal Trade Commission will recognize a foreign sovereign

compulsion defense.19 The scope of this defense is considered limited,20

and the Department of Justice and the Federal Trade Commission will

refrain from enforcement actions on the grounds of foreign sovereign

compulsion only when three criteria are satisfied: (1) the foreign

government must have compelled the anticompetitive conduct under

circumstances in which a refusal to comply with the foreign government’s

command would give rise to the imposition of penal or severe sanctions;

(2) the compelled conduct can be accomplished entirely within its own

16W.S. Kirkpatrick & Co. v. Environmental Tectonics Corp., 493 U.S. 400 (1990).

17Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682 (1976).

18See International Assoc’n of Machinists and Aerospace Workers v. OPEC, 477 F. Supp. 553 (1979),

aff’d. 649 F.2d 1354 (1981), cert. denied 454 U.S. 1163 (1982).

19See Antitrust Guidelines; Interamerican Refining Corp. v. Texaco Maracaibo, Inc., 307 F. Supp. 1291

(1970) (antitrust immunity if illegal acts were compelled by foreign sovereign).

20See In re Japanese Electronic Products Antitrust Litigation, 723 F.2d 238 (1983).

Page 106 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VII 

Application of U.S. Antitrust Laws and the

CWB

territory; and (3) the order must come from the foreign government acting

in its governmental capacity.

The foreign sovereign compulsion defense, as well as the act of state and

comity doctrines, were invoked to dismiss a recent antitrust challenge to

an STE. In that case in which a private plaintiff alleged that the New

Zealand Dairy Board violated the Sherman Act, the District Court

dismissed the action, finding that there was an actual and material conflict

between U.S. antitrust law and New Zealand law regarding the export of

dairy products.21 The court looked to the underlying statutory scheme

empowering the Board and essentially determined that the Board’s

conduct was required by its statute. The court declined jurisdiction on the

grounds of foreign sovereign compulsion, act of state, and international

comity. While not specifically explained in the decision, to the extent the

Board is a participant in the market engaging in activities compelled by

New Zealand law, the foreign sovereign compulsion doctrine would

appear to apply. According to the Department of Justice and Federal

Trade Commission officials, however, the foreign sovereign compulsion

doctrine is usually limited to private parties. The decision of the court

demonstrates the interrelationship of these doctrines, each of which could

be significant in analyzing the potential applicability of U.S. antitrust law

to a quasi-governmental entity like the CWB.

21Trugman-Nash, Inc. v. New Zealand Dairy Board, 954 F. Supp. 733 (1997).

Page 107 GAO/NSIAD-99-21 U.S. Agricultural Trade
Appendix VIII 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Phillip Thomas

Kimberly Gianopoulos

Emil Friberg

Nina Pfeiffer

Carolyn Black-Bagdoyan

Rona Mendelsohn

Office of the General

Counsel, Washington,

D.C.

Richard Burkard

Herbert Dunn

Office of the Chief

Economist,

Washington, D.C.

Loren Yager

Daniel Coates

Los Angeles Field

Office

Edward Laughlin

Larry Thomas

Page 108 GAO/NSIAD-99-21 U.S. Agricultural Trade
Page 109 GAO/NSIAD-99-21 U.S. Agricultural Trade
Related GAO Products

Agriculture Trade Agreements: Selected Implementation Issues

(GAO/T-NSIAD-98-106, Feb. 12, 1998).

U.S. Agricultural Exports: Strong Growth Likely But U.S. Export

Assistance Programs’ Contribution Uncertain (GAO/NSIAD-97-260, Sept. 30,

1997).

Canada, Australia, and New Zealand: Potential Ability of Agricultural State

Trading Enterprises to Distort Trade (GAO/NSIAD-96-94, June 24, 1996).

State Trading Enterprises: Compliance With the General Agreement on

Tariffs and Trade (GAO/GGD-95-208, Aug. 30, 1995).

Summary of Trade Remedy Laws Available to Investigate State Trading

Enterprises and Encourage Behavior Consistent with Fair Trade

(GAO/OGC-95-24, July 28, 1995).

International Trade: Canada and Australia Rely Heavily on Wheat Boards

to Market Grain (GAO/NSIAD-92-129, June 10, 1992).

(711335) Page 110 GAO/NSIAD-99-21 U.S. Agricultural Trade
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