Document: WT/DS276/R Page A-1 ANNEX A RESPONSES TO QUESTIONS OF THE PANEL IN THE CONTEXT OF THE FIRST SUBSTANTIVE MEETING
Document codes: WT/DS276/R
Complainant: U.S.
Respondent: Canada
Third parties: Australia, Chile, China, Taiwan, EU, Japan, Mexico
Dispute stage: Appellate Body
Agreements cited: Art. XVII:1, III:4  GATT 1994Art. 2  Trade-Related Investment Measures (TRIMs)

ANNEX A

RESPONSES TO QUESTIONS OF THE PANEL
IN THE CONTEXT OF THE FIRST
SUBSTANTIVE MEETING

Contents Page
Annex A-1 Responses of the United States to questions posed in the context of
the first substantive meeting of the Panel
A-2
Annex A-2 Responses of Canada to questi ons posed in the context of the first
substantive meeting of the Panel
A-20
Annex A-3 Responses of Australia to questi ons posed in the context of the first
substantive meeting of the Panel
A-40
Annex A-4 Responses of China to questions posed in the context of the first
substantive meeting of the Panel
A-43
Annex A-5 Responses of the European Co mmunities to questions posed in the
context of the first substantive meeting of the Panel
A-48
Annex A-6 Responses of the Separate Customs Territory of Taiwan, Penghu,
Kinmen and Matsu to questions posed in the context of the first
substantive meeting of the Panel
A-52

ANNEX A-1

RESPONSES OF THE UNITED STATES TO QUESTIONS POSED
IN THE CONTEXT OF THE FIRST SUBSTANTIVE
MEETING OF THE PANEL

(24 September 2003)

Questions Posed to the United States

Q1. The United States claims that the "CWB Export Regime" is inconsistent with
Article XVII:1 of the GATT 1994 (US first written submission, para. 105). The term "CWB
Export Regime" is defined at para. 15 of the US first submission as comprising (i) the legal
framework of the CWB, (ii) Canada's provision to the CWB of exclusive and special privileges,
and (iii) the actions of Canada and the CWB with respect to the CWB's purchases and sales
involving wheat exports. In this regard, please provide further clarification as follows:

 (a) Is the United States claiming that the "legal framework of the CWB" as such
(per se) is inconsistent with Article XVII:1?

1. The US claim is that the CWB’s legal structure and its incentives to act in a non-commercial
manner necessarily result in the CWB making sales not in accordance with Article XVII standards.
This legal framework, when taken together w ith other aspects of the CWB export regime, is
inconsistent with Article XVII.

 (b) What is the United States' claim with respect to "the provision to the CWB of
exclusive and special privileges"? Para s. 3 and 50 of the US first written
submission appear to recognize that Members may provide exclusive or special
privileges to enterprises.

2. Article XVII is premised on the fact that Members can grant exclusive and special privileges
to STEs. However, in recognition of the fact that these benefits and privileges may enable STEs to
engage in trade-distorting practices to the detrimen t of other Members, Article XVII imposes specific
obligations on Members that establish STEs. The Un ited States alleges that the CWB export regime
as a whole, including the actions of the CWB resu lting from the unchecked exercise of its exclusive
and special privileges, violates Canada’s obliga tions by necessarily resulting in the CWB making
sales that are not in accordance with the standards set forth in Article XVII:1.

 (c) What "actions" of Canada with respect to the CWB's purchases and sales
involving wheat exports are inconsistent with Article XVII:1?

3. The “actions” of the Government of Canada th at affect the purchases and sales of wheat are:
(1) Canada’s failure to exercise its authority to oversee the CWB, (2) Canada’s approval of the
CWB’s borrowing plan and guarantees of all borrowi ngs as well as credit sales, and (3) Canada’s

approval and guarantee of the initial payment price. These actions, when taken together with other
aspects of the CWB export regime, are inconsistent with Article XVII.

 (d) What "actions" of the CWB with respect to the CWB's purchases and sales
involving wheat exports are inconsistent with Article XVII:1?

4. The “actions” of the CWB are the CWB’s purchases and sales of wheat on discriminatory and
non-commercial terms.

Q2. In connection with the US argument that Canada is required under Article XVII:1 to
"ensure" that the CWB meets the Article XVII:1 standards, please provide clarification as
follows:

 (a) Is the United States arguing that Cana da's legislation must require, or mandate,
the CWB to meet the Article XVII:1 standards? (US first written submission,
paras. 65-66)?

5. No, the United States is not arguing that statutory language requiring the CWB to meet
Article XVII:1 standards would be sufficient to meet Canada’s obligations under Article XVII. In any
case, it is undisputed that Canada has no such stat utory provision in place. We understand that, as a
general matter, Members may choose the mechanism that they wish to use to meet their WTO
obligations. In this case, because the CWB’s legal structure and incentives, absent any countervailing
supervision or incentives, necessarily results in the CWB making sales not in accordance with the
Article XVII standards, Canada is not meeting its WTO obligations.

 (b) Is the United States arguing that in addition to imposing a statutory requirement
on the CWB that it meet the Article XV II:1 standards, Canada would need to
supervise CWB operations? (US first written submission, para. 69 and
footnote 59) Or is the supervision re quirement an alternative to a statutory
requirement?

6. While this question sets forth possible means fo r Canada to bring itself into compliance with
Article XVII, it is undisputed that Canada is not now undertaking such supervision, in accordance
with a statute or otherwise. This absence of superv ision, taken together with the legal structure of the
CWB and the incentives created by the CWB export re gime, is not consistent with the Canada’s
obligations under Article XVII.

 (c) Regarding the supervision requirement, what level and what kind of government
supervision would be required to "ensu re" compliance with the Article XVII:1
standards?

7. It would not be appropriate for us to specula te as to whether any particular measures adopted
by Canada would bring the CWB export regime into compliance. Whether any particular,
hypothetical level of supervision by Canada would actually lead to a conclusion that Canada was in
compliance with its obligations under Article XVII would depend on all of the facts and
circumstances of the CWB export regime as a w hole. The fact that Canada is undertaking no such
supervision at present, in combination with other as pects of the CWB export regime, is sufficient to
conclude that the regime is inconsistent with Article XVII.

 (d) Is Article 18 of the CWB Act insuffici ent to meet the supervision requirement
argued for by the United States?

8. Yes. In this case, Canada has explaine d that while it could supervise the CWB under
Article 18, it chooses not to do so. That fact of non-supervision, in combination with the other
aspects of the CWB export regime established by Ca nada, means that Canada has failed to meet its
obligations under Article XVII.

 (e) Is the United States arguing that as long as an STE has the ability to engage in
conduct proscribed by Article XVII:1, th e Member maintaining or establishing
it is in breach of Article XVII:1, or is the United States arguing that as long as
an STE has this ability, the Member concerned is under an obligation to
supervise the STE's operations? (US first written submission, paras. 67, 77-78)

9. Neither one of these statements captures the US position. It is not the mere fact that the CWB
has the ability to engage in conduct proscribed by Article XVII:1 that results in a breach of
Article XVII. Rather, the CWB’s unique legal structure and incentives, and the lack of any
countervailing supervision or incentives, necess arily result in the CWB making sales not in
accordance with Article XVII standards. A lack of government supervision is but one element of the
CWB regime. If this element, or any other element, were to be modified, the WTO-consistency of the
CWB regime would need to be reevaluated.

 (f) With reference to para. 50 of the US first written submission, why cannot the
balance of rights and obligations be preserved by an interpretation of
Article XVII:1 according to which, under Article XVII:1, Members have the
right to establish and maintain trading enterprises with special or exclusive
privileges, but in exchange must do nothing more than a ssume responsibility
under international law for any conduct by such enterprises which has been
found not to be in accordance with certain prescribed standards?

10. It is not entirely clear to us what it would mean, in the context of the WTO Agreement, for
Canada to “assume responsibility under internati onal law” if Canada did not, as suggested in
paragraph 50 of the first US submission, “ensure that the STE acts in a manner consistent with the
general principles of non-discriminatory treatment, to make purchases or sales solely in accordance
with commercial considerations, and to allow th e enterprises of other Members an adequate
opportunity to compete.” As described before, in the absence of supervision by the Government of
Canada and given its unique structure, the CWB export regime necessarily results in the CWB making
sales not in accordance with Article XVII standards. The CWB regime is therefore inconsistent with
Article XVII. In these circumstances, Canada ca nnot be said to have assumed its responsibility under
the WTO Agreement.

Q3. Is the United States arguing that if the CWB used its privileges to make sales on terms
which could not or would not normally be offere d by privately-held marketing agencies, such
sales necessarily would not be in accordance with "commercial considerations"?

11. Yes. This is supported by the provision in Article XVII:1(b) concerning allowing enterprises
of other Members an adequate opportunity to compete.

Questions Posed to Both Parties

Q6. Do the "commercial considera tions" referred to in Article XVII:1(b) vary depending on
what type of entity (e.g., co-operatives, sha re-capital corporations, etc.) is conducting the
purchase or sales operations?

12. No. Commercial entities, whether cooperatives or share-capital corporations, make decisions
in an environment that is constrained by market forces. These market fo rces discipline commercial

entities regardless of their corporate structure. Th e CWB is not disciplined by market forces in the
same way that commercial enterprises are. For ex ample, a commercial cooperative enterprise has to
compete for farmer members, and farmers are free to leave a cooperative and sell their wheat
elsewhere if the commercial cooperative does not provide favourable returns. A share-capital
corporation must also compete in the marketplac e for sales of wheat and must balance commercial
risks when making a decision regarding how much the corporation can pay for wheat. Unlike any
commercial enterprise disciplined by market fo rces, the CWB has a guaranteed supply of wheat
because farmers have no viable alternative but to sell their wheat for domestic human consumption
and export to the CWB. This guaranteed supply of wheat gives the CWB a different risk and pricing
structure than a commercial actor.

Q7. Please indicate whether, in your view, the CWB is a "State enterprise" or an
"enterprise" which has been granted "exclusive or special privileges", as these terms are used
in Article XVII:1(a), and why.

13. We consider the CWB to be a state tradi ng enterprise, as Canada acknowledges in its STE
notification.
1

Questions Posed to the United States

Q8. Could the United States confirm that, in respect of receipt of foreign grain into
Canadian elevators, the United States' claim is that the provisions of section 57 of the Canada
Grain Act, as such, are inconsistent with Article III:4 of the GATT 1994?

14. Yes, section 57 of the Canada Grain Act, as such, is inconsistent with Article III:4.

Q9. Could the United States confirm that, in respect of the mixing of grain, the United States
claim is that the amended provisions of section 56(1) of the Canada Grain Regulations (Exhibit
CDA-23), as such, are inconsistent with Article III:4 of the GATT 1994?

15. Our first submission addresses the measure in effect at the establishment of the March Panel
and the July Panel, which is section 56(1) prior to amendment. This measure, as such, is inconsistent
with Article III:4. The amended provision, although not within the terms of reference of the Panel,
also appears to do exactly the same thing, since, as we understand, US grain cannot qualify as eastern
Canadian grain. Accordingly, the amended measure , as such, also appears to be inconsistent with
Article III:4.

Q10. Could the United States indicate whether, in respect of the revenue cap, the United
States claim is that the provisions of section 150(1) of the Canada Transportation Act, as such,
are inconsistent with Article III:4 of the GATT 1994?

16. The US claim is that section 150(1) and section 150(2) of the Canada Transportation Act, as
such, are inconsistent with Article III:4.
2

Q11. Could the United States confirm that, in resp ect of rail car allocation, the United States
claim is that the provisions of section 87 of the Canada Grain Act, as such, are inconsistent with
Article III:4 of the GATT 1994?

1 See Working Party on State Trading Enterprises, New and Full Notification [by Canada] Pursuant to
Article XVII:4(a) of the GATT and Paragraph 1 of th e Understanding on the Interpretation of Article XVII,
G/STR/N/4/CAN, 5 November 2002 (Exhibit US-1).
2 See First Written Submission of the United States, para. 45.

17. Section 87 of the Canada Grai n Act is inconsistent with Artic le III:4. Canada’s claim that
foreign producers may use producer rail cars under section 87 is a hollow one. Only Canadian
producers can take advantage of producer rail cars under section 87 because all producer car loading
stations are in Alberta, British Columbia, Manitoba, or Saskatchewan.

Questions Posed to Both Parties

Q20. Once a panel has determined that, in maki ng certain export sale(s), an STE did not act
in conformity with the standards set forth in Ar ticle XVII:1(b), can the panel find a violation of
Article XVII:1 on that basis alone, or is it necessary for the panel to make a separate and
additional determination whether, in making th e export sale(s) in question, the relevant STE
did not act in a manner consistent with the general principles of non-discriminatory treatment

18. Article XVII:1(b) states that the obligations under Article XVII:1(a) “shall be understood to
require
” that STEs make purchases and sales in accord ance with commercial considerations and
afford the enterprises of other Members adequa te opportunity to compete in accordance with
customary business practice. Thus, Article XVII:1(b) sets forth examples of conduct that
Article XVII:1(a) requires. To fail to engage in the required conduct under Article XVII:1(b)
constitutes a violation of XVII:1. As the Korea Beef panel found, “[a] conclusion that the principle of
non-discrimination was violated would suffice to pr ove a violation of Article XVII; similarly, a
conclusion that a decision to purchase or buy was not based on ‘commercial considerations,’ would
also suffice to show a violation of Article XVII.”
3

19. Moreover, on the facts of this case, a findi ng that the CWB makes sales not in accordance
with commercial considerations under Article XV II:1(b) necessarily leads to the conclusion the CWB
is not acting in accordance with the general prin ciples of non-discriminatory treatment. Under the
CWB’s statutory structure and incentives, it uses its pricing flexibility to make sales on non-
commercial terms in order to target particular ex port markets, resulting in a violation of general
principles of non-discriminatory treatment.

Q21. The second clause of Article XVII:1(b) re quires STEs to afford enterprises of other
Members adequate opportunity "to compete for participation in such purchases or sales".

 (a) Is the expression "such purchases or sales" a reference to a given STE's
"purchases or sales involving either imports or exports", i.e., the expression used
in Article XVII:1(a)? In other words, is "such purchases" a reference to a given
STE's purchases abroad (imports) and "such sales" a reference to a given STE's
sales abroad (exports)?

20. In the context of this case, the expression “such purchases or sales” in the second clause of
Article XVII:1(b) refers to the opportunity to par ticipate in the CWB’s sales of wheat. This is more
fully explained in the answer to question 21(b), below.

 (b) Taking the case of an export STE lik e the CWB, are the relevant "enterprises"
of other Members (i) the enterprises wh ich are interested in buying wheat from
the CWB (i.e., wheat buyers); (ii) those enterprises competing with the CWB for
sales to the same wheat buyers (i.e., wheat sellers) or (iii) other enterprises?

21. Under Article XVII, an STE has an obligatio n to afford all ente rprises an adequate
opportunity to compete for participation in its purchases or sales involving either imports or exports.

3 Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, (WT/DS161/RWT/DS169/R)

This, in addition to the first obligation under Artic le XVII:1(b) to act in accordance with commercial
considerations, obliges a Member to ensure that its STEs with special and exclusive benefits and
privileges act as commercial actors. Here, the enterp rises at issue would include any enterprise that is
competing for participation in CWB wheat sales, including enterprises competing to purchase wheat
from the CWB (i.e., wheat buyers), as well as those enterprises selling wheat in the same market as
the CWB (i.e., wheat sellers).

Q22. Assume a Member has an export STE whic h has the exclusive right to sell a particular
agricultural product for export and domestic co nsumption. Please indicate whether in the
following situations the STE would be making it s export sales in accordance with "commercial
considerations" within the meaning of Article XVII:1(b):

 (a) The STE charges a lower price in expo rt market 2 than in export market 1
because market 2 is contested by a supplier who benefits from an export
subsidy, while market 1 is not.

22. We assume for this question that the STE a nd the subsidized supplier are offering wheat for
sale on the same terms, with the exception of price. We also assume that to meet the subsidized price,
the STE would be offering wheat for sale at a price that is less than the replacement value for the
wheat. Although in the short run both a private supplier and an STE could sell below cost in this
manner to meet the subsidized price in export market 2, in the long run a private actor could not
sustain this behaviour. If an STE uses its special and exclusive privileges to engage in sustained, long-
run price discrimination between export market 2 and export market 1 in these circumstances, the
STE is not acting in accordance with commercial considerations.

23. A Member is not permitted to violate its obligations under Article XVII of the GATT 1994
merely because that Member’s STE sells in a ma rket where its competitor has received export
subsidies. No such exception exists under Article XVII. Price discrimination by an STE using its
exclusive and special privileges in a non-commerc ial, non-transparent manner is not permitted under
Article XVII.

 (b) The STE charges a lower price in expo rt market 2 than in export market 1
because market 2 is a priority market for the STE (e.g., due to expected growth
in import demand) and the lower price is intended to deter other exporters from
contesting export market 2. The price charged by the STE in export market 2
would not or could not have been charged in the absence of the special or
exclusive privileges enjoyed by the STE.

24. In this case, the STE would not be maki ng its sales in accordance with commercial
considerations because it could not price discriminate in export market 2 in the absence of its special
and exclusive privileges.

 (c) The STE charges a higher price in expo rt market 1 than in export market 2
because the price-elasticity of import demand is lower in export market 1 than in
export market 2.

25. In this case, assuming that both the STE and a private seller without any special and exclusive
privileges could both sell at a higher price in expo rt market 1 due to the price-elasticity of import
demand, the STE would be acting in accordance with commercial considerations. However, if the
STE alone was able to engage in price discrimination in this manner due to its exercise of special and
exclusive privileges, the STE would not be acting in accordance with commercial considerations.

 (d) Same as (c), but the STE in addition extracts monopoly rents (price premiums)
in both markets, which it could not do but for its exclusive right to export the
product concerned (assume the STE's product is perceived as superior in quality
for instance, such that there is no significant competition from other products).

26. An STE that extracts monopoly rents in both mark ets, which it could not do but for its special
and exclusive benefits and privileges, is not acting according to commercial considerations. Although
a commercial actor may be able to extract some monopoly rents if it faces little competition in the
marketplace, the fact that an STE is able to use its special and exclusive benefits and privileges to
extract monopoly rents in markets regardless of th e price elasticity of demand means that the STE is
not acting in accordance with commercial considerations.

Q23. Is the "commercial considerations" re quirement in Article XVII:1(b) essentially
intended to make sure that STEs use their special or exclusive privileges in such a way that their
purchases or sales involving imports or ex ports are made on terms which are no more
advantageous for the STE than they would have been if the STE did not have any special or
exclusive privileges? Or is the "commercial considerations" requirement essentially intended to
make sure that STEs act like rational economic op erators, i.e., that, in their purchase or sale
decisions, they are guided only by the consideration of their own economic interest?

27. Article XVII:1(b) requires STEs to act commercially, not merely rationally. Therefore the
“commercial considerations” requirement in Article XVII:1(b) is intended to ensure that STEs do not
use their special privileges to th e disadvantage of commercial actors . A Member could not meet the
second obligation under Article XVII:1(b) – to a fford enterprises of other Members adequate
opportunity to compete – if an STE’s special privileg es could be used to gain special advantages in
the marketplace. Article XVII:1(b) must be read in its entirety, and th e first obligation under
XVII:1(b) cannot render moot the second obligation under Article XVII:1(b). These two obligations
must be read together. Therefore, the “commercia l considerations” requirement in Article XVII:1(b)
must be intended to ensure that commercial ente rprises without special and exclusive privileges are
able to adequately compete for participation in the STE’s purchases and sales involving imports and
exports.

Q24. Pursuant to Article XVII:1(a), each Member undertakes that its STEs "shall" act in a
specified manner. Please explain the meaning and usage of the term "shall" in
Article XVII:1(a). In particular, what, if any, difference in meaning would there be if
Article XVII:1(a) had said that each Member "undertakes" that its STEs "will" act in the
specified manner?

28. Here the term “shall” should be given its ordinary meaning. “Shall” implies an obligation.
According to the New Shorter Oxford Dictionary, in relation to statutes, regulations, etc., “shall” is
“equivalent to an imperative.”
4 Similarly, according to the Merri am-Webster Dictionary, “shall” is
“used in laws, regulations, or directives to express what is mandatory.”5 Simply put, the obligation of
each Member under Article XVII:1(a) is a mandatory requirement that STEs granted special or
exclusive privileges act according to the general principles of non-discriminatory treatment prescribed
in the GATT 1994.

29. The language of Article XVII, as with many articles in the GATT 1994, sets forth obligations
using the term “shall.” The United States ca nnot address how different language not found in
Article XVII might or might not change the nature of the obligations at issue in this case.

4 New Shorter Oxford English Dictionary (1993), at 2808.
5 Merriam-Webster’s Collegiate Dictionary: Tenth Edition (2001), at 1072.

Questions Posed to the United States

Q25. With reference to para. 58 of the US first written submission, please elaborate on how
the Note to Articles XI, XII, XIII, XIV and XVIII supports the view that Article XVII:1(a)
requires non-discrimination as between sales in the domestic market and sales in export
markets.

30. The scope of the obligation under Article XVII:1(a) to “act in a manner consistent with the
general principles of non-discriminatory treatment prescr ibed in this Agreement” is a broad one. It
does not refer to a specific article or specific obliga tion, but, rather, refers to the general principles of
non-discrimination reflected in the obligations of the GATT 1994. This broad reference to non-
discriminatory treatment would encompass discrimination between sales in the domestic market and
sales in export markets.

31. Previous panels have concluded that the purpose of the No te to Articles XI, XII, XIII, XIV
and XVIII of the GATT 1994 “is to extend to state- trading the rules of the General Agreement
governing private trade and to ensure that the cont racting parties cannot escape their obligations with
respect to private trade by establishing state-trading operations.”
6 Indeed, the Korea Beef panel found
that the Ad Note’s broad purpose – to ensure th at Members cannot escape their WTO obligations by
establishing state-trading enterprises – led to the conclusion that the “general principles of non-
discriminatory treatment” under Article XVII:1(a) must include national treatment, i.e., discrimination
between imported and domestic products.

32. The same logic can be extended to export r estrictions and the behaviour of a state export
monopoly. Article XI generally states that no prohib itions or restrictions may be placed on exports.
In other words, a Member may not withhold goods from export markets. The Ad Note makes clear
that a Member cannot circumvent its obligations u nder Article XI by acting through a state-trading
enterprise, thus establishing that the obligations of Article XVII:1(a) include non-discrimination
between sales in the domestic market and sales in the export market.

Q26. With reference to paras. 17 and 65 of the US first written submission, is there anything
in the CWB Act, or any other statute or reg ulation, which legally precludes the CWB from
making its sales involving wheat exports in accordance with Article XVII:1?

33. The CWB is required by law to promote the sal e of Canadian wheat in world markets. This
statutory mandate and the actions of Canada and the CWB with respect to purchases and sales of
wheat, along with the special and exclusive pr ivileges granted to the CWB through laws and
regulations, necessarily preclude the CWB from making sales in a non-discriminatory manner,
according to commercial considerations, and in a manner that provides enterprises from other
Members an adequate opportunity to compete. If th e CWB were to act otherwise, it would violate its
statutory mandate. Furthermore, Canada has not ta ken any steps to ensure that the CWB adheres to
the Article XVII requirements.

Q27. Could the United States comment on th e description of CWB export sale operations
provided by Canada at paras. 54-58 of Canada's first written submission?

34. Paragraphs 54 through 58 do not provide any evidence that the CWB is acting in a non-
discriminatory manner, is acting according to commerci al considerations, or is allowing enterprises of
other Members an opportunity to compete.

6 Korea Beef , para. 749 (quoting Japan - Restrictions on Certain Agricultural Products (L/6253-
35S/163) (2 February 1988), para. 5.2.2.2).

35. The CWB states that it forecasts “target return s” for each export market in order to maximize
overall return to the pool, but fails to explain what considerations are used when setting this target
return. Similarly, while Canada states that ma nagers are required to obtain a certain “acceptable
return” on each sale, Canada does not provide an y information on how this acceptable return is
calculated. The CWB has an incentive to use its special and exclusive privileges to discriminate
between foreign markets and make some sales in a non-commercial manner.

36. Finally, under paragr aph 58, Canada states that “most,” but not all, sales prices are linked to
US futures exchange prices and that the CWB “oft en,” but not always, looks to US exchanges to
guide pricing decisions. The CWB also implicitly acknowledges that while differences in prices are
“primarily” based on considerations such as grade and protein of grain and transportation costs, other,
presumably non-commercial factors also come into play.

37. Indeed, paragraph 58 only tells part of the story, by focusing on Hard Red Spring wheat.
Noticeably absent is any discussion of the Durum wheat market, even though the CWB accounts for
over fifty per cent of world Durum exports. There is no futures market for Durum wheat, and
commercial actors in the Durum wheat market ha ve no basis upon which to judge the CWB’s Durum
wheat prices.

Q28. With reference to para. 80 of the US first written submission, if the CWB tries to sell all
wheat it has bought and in doing so seeks out the best markets and tries to obtain the best
possible prices, are the sales made in this way in accordance with commercial considerations?

38. No. The CWB’s mandate under the CWB Act is to obtain “reasonable” prices, considering
the objective of promoting sales of wheat. Accord ingly, the CWB is driven to maximize sales
quantity. In contrast, a commercial actor is only able to take advantage of a “best” price in a given
market if that price covers the commercial actor’s replacement value for the wheat sold. The CWB’s
special and exclusive privileges, including a govern ment guarantee of all initial payments for wheat
(which translates into a fixed, guaranteed, and known acquisition cost), means that the CWB does not
need to obtain a price that covers its costs in every market. In addition, the CWB’s special and
exclusive privileges allow the CWB to sell wheat at lower prices than commercial actors could ever
offer.

Q29. With reference to section 7(1) of the CWB Act, is the "object of promoting the sales of
grain produced in Canada in world markets" an objective which is commercial in nature? (US
first written submission, para. 65)

39. Sales promotion is not per se inconsistent with commercia l objectives. However, the
objective of sales promotion is just one of many objectives a commercial enterprise would need to
balance when acting in accordance with the realiti es and disciplines of the commercial marketplace.
Canada has given the CWB special and exclusive priv ileges that can be used to promote sales without
regard for other commercial considerations. With the Government of Canada guaranteeing CWB’s
cost of acquisition of wheat (i.e., the initial paymen ts made to farmers), the CWB can promote sales
without being restrained by commercial consider ations, thereby violating the obligations under
Article XVII:1.

Q30. With reference to footnote 12 of the US first written submission, please provide support
for the assertion that the CWB sets the "buy-bac k" price sufficiently high so as to make the
"buy-back" programme commercially insignificant.

40. Under the CWB’s “buy-back” programme, wheat farmers who wish to export their wheat
independently must both buy back their wheat from the CWB at a premium and receive an export
license from the CWB to sell that wheat abroad. The premium price is set by the CWB and is the

price the CWB determines the wheat farmer would ge t if selling in the foreign market for which the
export license is issued. This means that the wheat farmer must pay the CWB not only for the cost of
the wheat, but also for the expected return that wheat will earn when sold in a foreign market. The
CWB sets this artificial price, and it is not based on any publicly available rate.

41. Section 46(d) of the CWB Act provides for the “buy-back” programme. That provision states,
in relevant part, that the “buy-back” programme requires:

recovery from the [farmer] by the [CWB] . . . of a sum that, in the opinion of the
[CWB], represents the pecuniary benefit e nuring to the [farmer] pursuant to the
granting of a licence, arising solely by reason of the prohibition of exports of wheat
and wheat products and then existing differe nces between prices of wheat and wheat
products inside and outside of Canada.
42. The only farmers who participate in the buy- back programme are those who think they can
sell their wheat for an artificial price above the price the CWB determines that farmers should earn
abroad. It is not surprising that few, if any farm ers, choose to accept this risk. Effectively, the CWB
has used its special and exclusive privileges to nega te any benefit a farmer might be able to receive
through the independent sale of his wheat in fore ign markets. A similar buy-back programme is
available for independent wheat sales to the domestic market for human consumption.

Q31. The United States asserts that on average the CWB's initial payment to farmers has
been between 65 and 75 per cent of the expected final value of the wheat sold (US first written
submission, para. 25). Does the United States argue that any marketing arrangement which
involves an initial payment plus a revenue-shari ng arrangement is necessarily inconsistent with
commercial behaviour? If not, please indica te what would be a "commercial" initial payment
(as a percentage of the expected final value of the wheat sold), taking account of the marketing
and other services provided under such a marketing arrangement.

43. Marketing arrangements that involve an in itial payment are not per se inconsistent with
commercial behaviour. However, the CWB is affo rded the special and exclusive privileges that
enable the CWB to use pooling in a manner that is inconsistent with commercial considerations. The
Government of Canada guarantees the CWB’s initia l payment price and effectively requires farmers
to sell their wheat to the CWB, giving the CWB greater pricing flexibility than a commercial actor
would have. The CWB’s decision to set its initia l payment price is not governed by commercial
considerations since the Governme nt of Canada’s guarantee of those payments ensures that any
potential pool deficits are covered and farmers can not opt out of the CWB regime without facing
significant costs. In other words, the CWB is not governed by the commercial reality of facing an
actual economic loss on sales or of losing its source of supply. No commercial actor can determine its
purchase price for wheat knowing that the purchase price will not affect the commercial entity’s
bottom line. The Government of Canada removes market risk from the CWB’s decision to procure
wheat.

Q32. With reference to para. 25 of the US first written submission, please explain further how
the fact that the initial price is set by the CWB and the Government of Canada, as distinct from
possible government guarantees of the initial payments, gives the CWB greater pricing
flexibility than other grain trading companies.

44. A commercial actor does not face a guaranteed supply of wheat at a known, fixed price of
acquisition throughout the marketing year. The only way for a commercial actor to obtain such a
price guarantee is to purchase futures or options to en sure against price fluctuations. Price certainty
gives the CWB greater pricing flexibility than other grain trading companies because the CWB faces a
completely different price risk structure that is not driven by commercial considerations. A private

grain company would have to pay a tangible cost to obtain the same certainty under commercial
conditions.

Q33. Please provide evidence supporting the existenc e of the two alleged pool deficits (US first
written submission, para. 26). Were these two deficits paid for by the Canadian government?

45. Exhibit US-16 includes relevant pages of CWB Annual Reports which document two pool
deficits.
7 These two pool deficits were paid for by the Government of Canada.8

Q34. The United States has stated that when the CWB makes a sale on credit, the credit is
extended at a commercial rate (US first written s ubmission, para. 36). At the same time, the
United States has stated that government guarantees of CWB borrowings allow the CWB to
provide more favourable credit terms than those provided by commercial grain traders (US
first written submission, para. 75). Please explain how these statements can be reconciled.

46. The CWB, benefiting from its special and excl usive privileges, has an opportunity to offer
credit terms that are far more favourable than t hose offered by commercial grain sellers who do not
benefit from guaranteed government borrowing at belo w-market rates. The CWB can take greater
risks in extending credit than a commercia l grain trader because the CWB is getting its financing at
below commercial rates. In paragraph 75, the Unite d States observes that all other terms being equal,
as a direct result of the CWB’s special and exclus ive borrowing privileges, the CWB will be able to
capture a sale by taking a greater credit risk than would be warranted if the CWB was acting under the
commercial considerations of a private grain trad er. When the CWB extends credit at commercial
interest rates, it can take additiona l credit risks, such as offering a l onger term for the loan than would
be offered by a commercial actor. This has the e ffect of denying enterprises of other Members an
adequate opportunity to compete, since a priv ate grain trader acting according to commercial
considerations and without the sp ecial and exclusive privileges of the CWB would not be able to
make the sale on the same terms.

47. It should be noted that the CWB also has an arbitrage opportunity as a direct result of its
government-guaranteed borrowing privileges. We do not mean to imply that the CWB never seizes
upon this opportunity. Indeed, if the CWB lends at commercial rates and borrows at below
commercial rates, it profits from interest rate ar bitrage in a way that a commercial enterprise of
another Member, acting according to customary business practice, could not.

Q35. The United States argues that because the CWB is required to sell all Western Canadian
wheat which is produced, it will tend to export larger quantities of wheat at a lower price than
would a competitive marketing structure. But if Canadian wheat production were to decrease
because the CWB returns a lower price to Ca nadian farmers than would a competitive
marketing structure, can the United States produce any evidence, in theory or otherwise, and in
addition to Exhibit US-15, that CWB export supplies over time would be higher with the
current marketing structure?

48. In accordance with its legislative mandate, the CWB attempts to maximize all sales of
Western Canadian wheat produced in a current mark eting year. Through its special privileges the
CWB has more pricing flexibility than a commercial entity and can reduce prices in order to export
larger quantities of wheat.

7 See Canada Wheat Board, Annual Report: 1985-86, pp. 46-47; Canada Wheat Board, Annual Report:
1990-91, Table A. (Exhibit US-16.)
8 Id.

49. Since farmers cannot, in practice, privately sell their wheat for domestic human consumption
or export without going through the CWB, the fact th at some may believe they could receive a higher
return through a more competitive marketing structur e does not factor heavily into the determination
to produce wheat. There is effectively no exit option, as demonstrated by the Western Canadian
wheat farmers that have gone to jail for attempting to market their wheat on their own, outside of the
costly buy-back programme that effectively pr ecludes farmers from operating outside of the CWB’s
marketing structure.

50. If some farmers did reduce their wheat produc tion, the CWB would still continue to have
access to practically all wheat produced in Western Canada because of the CWB’s monopsony
privilege and thus would always have a relatively stable supply of high quality wheat for sale. Indeed,
the CWB has paid farmers a premium for high qua lity wheat even when such a premium is not
justified by demand, giving Western Canadian fa rmers an incentive to over-produce high quality
wheat. A CWB and Manitoba Rural Adaptation Council Inc. study (Exhibit US-15) found that
during the base period (1992-1997), on average, the production of high quality Canadian Red Spring
Wheat exceeded the market demand that has been willing to pay a commercial price premium for
wheat of that quality. In particular, the analysis suggests that Canadian high-quality wheat production
exceeded demand by 32 per cent over 1992-1997. W estern Canadian wheat farmers respond to the
realities of the CWB-dominated wheat market and, w ith no alternative marketing structure available,
continue to produce and sell wheat to the CWB of a quality and in a quantity that is responsive to the
CWB rather than to market demand.

Questions Posed to Both Parties

Q42. As a supplement to Exhibit CDA-24, could the parties provide an estimate of the volume
and proportion of US grain imported into Cana da for domestic consumption as compared to
that imported for re-export?

51. Attached as Exhibit US-17 is information on total US grain shipments to Canada. The United
States does not collect data on Canadian use of US grain and therefore is unable to provide an
estimate of the proportion of US grain imported for domestic consumption or re-export.

Q43. Are the findings at para. 11.169 of the panel report on Argentina - Hides and Leather

mutatis mutandis and at paras. 8.133-8.134 of the panel report on US - FSC (Article 21.5 - EC)
relevant to this Panel's assessment of whethe r the grain segregation and rail transportation
measures give rise to differential treatment as between "like" products within the meaning of
Article III:4 of the GATT 1994?

52. The reasoning in both reports is relevant. The panel in US – FSC (Article 21.5 - EC)
explicitly found that a good is not “unlike” merely because of its origin. The panel went on to find
that for measures of general application, “there is no need to demonstrate the existence of actually
traded like products in order to establish a violation of Article III:4.” US origin grain, even when of
the exact same type as domestic Canadian grain, is subject to differential treatment as “foreign grain”
under Canada’s grain segregation and transportation measures. Because origin alone cannot serve as
a basis for a determination that two commodities ar e not like products, Canada’s challenge that US
grain is not “like” Canada origin grain fails.

53. Regarding the reasoning in Argentina - Hides and Leather, that panel found that where the
structure and design of the measure at issue diffe rentiates among products based not on physical
characteristics or end-uses but, in stead, based on factors which are not relevant to the definition of
likeness, the evidence required for a party to discharge its burden of establishing that a measure
applies to products is minimal. And, as the FSC panel noted, product origin cannot serve as a basis
for a determination that two products are not “lik e.” Here, because Canada’s grain segregation and

rail transportation measures discriminate on the ba sis of origin – even when all other product
characteristics are exactly the same – one must reach the conclusion that the measure at issue applies
to like domestic and foreign products. Thus, the st ructure and design of the Canadian measures alone
make clear that like products are subject to the Canadian measures at issue.

Q44. Are all imported and domestic products fallin g within each of the categories of "grains"
as defined in section 5(1) of the Canada Grain Regulations "like products" for the purposes of
Article III:4 of the GATT 1994, or are there di fferent "like" products within each of the
categories of grain? Are all imported and do mestic products falling within each of the
categories of "grains" or "crops" as defined in section 147 of the Canada Transportation Act
"like products" for the purposes of Article III:4 of the GATT 1994, or are there different "like"
products within each of the grain or crop categories?

54. All imported and domestic pr oducts falling within each of th e categories of “grains” as
defined in section 5(1) of the Canada Grain Regulations are “like products” for the purposes of
Article III:4 (i.e. foreign durum wheat and Cana dian durum wheat, foreign canola and Canadian
canola, foreign barley and Canadian barley).

55. The same holds true for like products falli ng within each of the categories of “grains” or
“crops” as defined in section 147 of the Canada Transportation Act.

Q45. Could the parties respond to the EC's assertion in paragraph 43 of its third party
written submission that a bulk grain handling system, such as that covered by the Canada
Grain Act, "offers cost advantages compared to other ad hoc distribution possibilities."

56. The EC’s assertion that a bulk grain handling system, such as that covered by the Canada
Grain Act “offers cost advantages compared to other ad hoc distribution possibilities” must be viewed
in the context of the entire paragraph of the EC submission, paragraph 43, which states:

In contrast, the fact evoked by Canada that foreign producers are not obligated to use
Canadian grain elevators, and may for instance deliver directly to Canadian end users
does not remove the unfavourable effects of the entry into grain elevators. It must be
presumed that an efficient bulk grain handling system offers cost advantages
compared to other ad hoc distribution possibilities. Equally, the fact that an
exceptional authorization for using the elev ators is a “well known and used” process
does not remove the less favourable treatment of foreign grain.
57. We believe that the key phrase in this para graph is that the possibility of alternative
distribution channels or exceptional authorizations “does not remove the less favourable treatment of
foreign grain.” Canadian grain can move in and out of the bulk grain handling system subject to far
less burdensome regulatory requirements than fore ign grain. If foreign grain was treated as
favourably as like Canadian grain in the bulk handling system, foreign grain could be transported at
far less cost.

58. There is a reason that the vast majority of grain in Canada travels through the bulk grain
handling system – there is no efficient alternative fo r most grain producers. The majority of grain in
the market is sold to large-quantity purchasers w hose demands cannot be met by individual farmers
shipping small lots of grain directly to end users outside of the bulk grain handling system. The bulk
grain handling system allows numerous grain farmer s to consolidate smaller quantities of grain at
elevators into the large bulk shipments that purch asers demand. Farmers who cannot take advantage
of the bulk grain handling system face prohibitive handling and transportation costs. For example,
trucking rates are significantly higher than rail rates and are not a viable economic alternative for most

producers. It is difficult and costly to access the ra il system as an individual producer, rather than
through the bulk handling system.

Questions Posed to the United States

Q46. With reference to paras. 207, 217 and 279 of Canada's first written submission, is it
correct that Article III:4 of the GATT 1994 does no t apply to laws affecting the transportation
of goods in-transit?

59. There is no question that Article III applies to the measures at issue in this case. Canada’s
references to Article V of the GATT 1994 and in transit shipments are no relevant to this dispute. The
laws and regulations at issue in this case – the Ca nada Grain Act and the Canada Grain Regulations –
are measures affecting the internal transportation and distribution of grain. These measures affect all
foreign and domestic grain that arrives at a bulk handling facility. Any foreign grain or domestic
grain entering Canada’s bulk grain handling system is subject to Ca nada’s internal grain regulation
from the moment that grain arrives at an elevator in Canada, regardless of the final destination of the
product.

60. There is a limited scenario in which US grain is truly “in transit” through Canada and is not
subject to Canada’s internal regulatory process. US grain shipped from the US State of Montana by
rail on sealed rail cars that travel through Canada and do not stop until they reach their final
destination in the US State of Washington are not s ubject to Canada’s internal measures because that
grain never enters the Canadian grain handling syst em. Any Canadian regulations in connection with
such traffic in transit are not at issue in this case.

Q47. With reference to para. 91 of the US first written submission, please explain how
section 57 of the Canada Grain Act and section 56 of the Canada Grain Regulations affect the
"transportation" of grain.

61. Canada’s bulk grain handling system is the internal distribution and transport network for
grain in Canada. The Canada Grain Act and the Canada Grain Regulations comprise the regulatory
structure for the bulk grain handling system, including the receipt and treatment of grains by elevators
throughout Canada. Most grain transported interna lly in Canada will, at some point, be received
and/or stored in a Canadian grain elevator. The language in the two passages referenced in the
Canada Grain Act and Canada Grai n Regulations state that Canadian elevators must not receive
foreign grain, except as authorized, and must not mix foreign grain with Canadian grain. Since
elevators comprise the main transport and dist ribution network for grains, these regulations
necessarily affect both the transportation and distribution of grain.

Q48. What is the United States' reaction to the assertion by Canada in its first written
submission (para. 238) that "since the entry into force of the WTO Agreement, the CGC has
never refused entry of foreign grain into Canadian elevators"?

62. The issue in this dispute is not whether the CGC has refused entry of foreign grain into
Canadian grain elevators. The regulations administered by the CGC result in less favourable
treatment for foreign grain than for like domest ic grain. The CGC may grant licenses, but these
licenses are conditionally granted and require elevat ors to satisfy additional onerous regulatory
requirements that are not imposed on like domestic grain.

Q49. Could the United States submit a complete version of the Canada Transportation Act
(Exhibit US-9)?

63. A complete version is attached as Exhibit US-18.

Q50. Does the United States agree with Canada's assertion, at para. 282 of its first written
submission, that the only rail movements subject to the revenue cap which affect transportation
of imported grain for internal sale are the movements of imported grain to Thunder Bay or
Armstrong for domestic use in Canada?

64. The United States fundamentally disagrees with Canada’s assertion that the only relevant rail
movements are movements of US-origin grain to Thunder Bay or Armstrong for domestic use in
Canada. As stated in Canada’s own submission, the revenue cap applies to all grain movements that
“originate in Western Canada.”
9 Thus, the revenue cap applies to the internal transport of all grain
within Canada from points in Western Canada to other Canadian ports. All of these movements are
covered by Article III:4.

Q51. With reference to para. 100 of the US first written submission:

 (a) Could the United States explain how the revenue cap translates into a
competitive advantage for Western Canadian grain over imported grain in
respect of the internal transportation of grain?

65. Because railroads must pay a significant pena lty for exceeding the rail revenue cap, railroads
price transport for Western Canadian grain subject to the cap at rates below the level that could trigger
the railroad to exceed the cap. Rail rates charged fo r imported grain can be set at a level that exceeds
the rail rates charged for domestic grain because th e revenue cap does not apply to shipments of
foreign grain.

(b) Why does the revenue cap necessarily constrain the rate-setting of the
prescribed railways rather than the volume of grain shipped?

66. Revenue received per mile is likely far more predictable than volume hauled. Because of the
CWB’s secrecy, railroads are faced with a great d eal of uncertainty regarding the volume of
commodities to be moved, as well as the timing a nd demand for rail equipment during the marketing
year. We understand that the railroa ds have never denied transport of Board grain. As the railroads
have little control over volume, rates are set at a lo w enough level so that adjustments can be made if
concerns arise about annual revenues, and there is ample opportunity to raise rates without exceeding
the revenue cap.

 (c) Could the United States explain ho w a system which appears to mandate a
maximum average rate translates into a competitive advantage for Western
Canadian grain?

67. For an explanation of how the rail revenue cap translates into a competitive advantage for
Western Canadian grain, please see the US answer to question 51(a).

Q52. Could the United States comment on pa ras. 290 and 291 of Canada's first written
submission?

68. Paragraphs 290 and 291 discuss grain movements that contain a transportation segment that is
not subject to the revenue cap for domestic moveme nts of grain. However, Canada ignores cases
where the revenue cap applies for the full route, i.e. shipments westward for export or shipments
eastward that stop at Thunderbay. Whether the rail reve nue cap applies to part of the route or the full
route, railroads provide lower rates to Western Canadian grain shipments subject to the cap so that the

9 Canada First Submission, para. 269.

railroads do not pay the penalty for exceeding the cap. As a practical matter, therefore, the rail
revenue caps keep prices lower for the transport of Western Canadian grain. Shipments of Western
Canadian grain that are subject to the rail revenue cap pay lower transportation costs than those
shipments would pay without the revenue cap. These lower transportation costs accord domestic
grain more favourable treatment than like foreign grain.

69. Further, there is no support for Canada’s argu ment in paragraphs 290 and 291 of its written
submission that railroads can charge as high a ra te for a non-regulated transportation segment and a
low rate on the regulated transportation segment so that the average rate reflects a “market” rate.

Q53. Could the United States confirm that, in resp ect of rail car allocation, the United States
claim is that the provisions of section 87 of the Canada Grain Act, as such, are inconsistent with
Article III:4 of the GATT 1994?

70. Yes, the United States claims that section 87 of the Canada Grain Act is inconsistent with
Article III:4 of the GATT 1994.

Q54. With reference to para. 101 of its first written submission, could the United States
explain how "[m]aking government rail cars ava ilable for the transport of domestic grain
reduces transportation costs for any grain that receives this benefit."

71. The provision of railcars from the Government of Canada relieves the railroads of the costs of
ownership associated with these rail cars. Therefore, the railroads can charge lower rates than would
be the case if the railroads had to lease or purch ase the railcars themselves and factor these additional
costs into the freight rates. This cost savings is passed on to those transporting domestic grain under
the producer car programme.

Q55. Could the United States explain further a nd provide further evidence for its assertion in
paragraph 101 of its first written submission that the producer car programme "excludes all
imported grain."

72. Despite Canada’s statement to the contrary , foreign producers cannot take advantage of the
producer rail car programme, as all of the loading sites are in Canada.
10 In addition, the relevant
regulations do not state that foreign grain is eligible for the producer rail car programme.

Q56. With respect to the United States' clai ms under the TRIMs Agreement, what specifically
does the United States mean when it asserts in its first written submission (para. 103) that:

 (a) The grain segregation requirements require elevator operators to "use"
domestic Canadian grain; that the rail revenue cap requirements require
shippers to "use" domestic Canadian grain; and that the producer car
programme requirements require shippers to "use" domestic Canadian grain?

 (b) What precisely are the "requirements" the United States is challenging for each
of the measures being challenged?

10 See Canadian Pacific Railway, “CPR Producer Car Loading Sites,” available at
http://www8.cpr.ca/cms/English/Customers/New+Customers/What+We+Ship/Grain/Producer+Cars.htm (last
visited 23 Sept. 2003) (Exhibit US-19) ; see also CN, “Producer Car Loader Station List,” available at
http://www.cn.ca/productsservices/grain/Canadaorigin/en_KFGrainCNProducerCarLoaderStationList.shtml
(last visited 23 Sept. 2003) (Exhibit US-20).

 (c) What "advantage" is the United States asserting the foreign shippers are seeking
to obtain?

73. Answers to (a), (b) and (c) are discussed below for both elevator operators and shippers.

74. “Use” by elevator operators refers to handling of grain in the normal course of business, i.e.,
handling, storage and transport. The requirement s challenged are the Canada Grain Act’s prohibition
on the receipt of foreign grain into grain elevators under section 57 and the Canada Grain Regulations
prohibition on mixing foreign grains under section 56(1). Local content requirements can be
facilitated through a variety of regulatory mechanis ms, some of which are more transparent than
others. Canada’s prohibition on the receipt of foreign grain in elevators and prohibition on the mixing
of foreign grain are “mandatory” and “enforceable ” requirements within the meaning of the TRIMs
Agreement Illustrative List. Moreover, they also provide direct cost advantages to those elevator
operators that accept Canadian grain over foreign grain because the need for special authorization to
accept and/or mix foreign grain and the onerous conditions that are often placed on such
authorizations creates a regulatory regime that financially rewards those elevators that accept
domestic grain over foreign grain. These matters are described in more detail in paragraphs 100 of
the First Written Submission of the United States.

75. “Use” by shippers refers to the shipment of grain by rail. The requirements being challenged
here are the requirement that only Canadian grain can be shipped in order to qualify for the rail
revenue cap, and the requirement to ship Canadian grain in order to qualify for the producer car
programme. Both requirements provide cost advantag es in the form of lower rail transport rates to
those shippers that choose to ship Canadian grain ra ther than foreign grain. Again, these matters are
described in more detail in paragraph 101 of the First Written Submission of the United States.
Canada – Measures Relating to Exports of Wheat and Treatment of Imported Grain

LIST OF EXHIBITS

US - 16. Canada Wheat Board, Annual Report: 1985-86 , pp. 46-47; Canada Wheat Board,
Annual Report: 1990-91, Table A.

US - 17. USDA, Foreign Trade Statistics: Fo reign Agricultural Service Export Commodity
Aggregations for Canada: 1999-2003.

US - 18. Canada Transportation Act, R.S.C., ch. 10 (1996).

US - 19. Canadian Pacific Railway, “CPR Producer Car Loading Sites,” available at
http://www8.cpr.ca/cms/English/Customers/New+Customers/What+We+Ship/Grain/
Producer+Cars.htm.

US - 20. CN, “Producer Car Loader Station List,” available at
http://www.cn.ca/productsservices/grain/Canadaorigin/en_KFGrainCNProducerCarL
oaderStationList.shtml.

ANNEX A-2

RESPONSES OF CANADA TO QUESTIONS POSED IN THE
CONTEXT OF THE FIRST SUBSTANTIVE
MEETING OF THE PANEL

(24 September 2003)

"CWB" stands for "Canadian Wheat Board".

"STE" stands for "State Trading Enterprise" and is intended to cover the type of enterprises
covered by Article XVII.

Canada:

4. Canada appears to be saying that the CW B's sales should be compared to sales of a
privately-held cooperative marketing agency (C anada's first written submission, para. 85 read
together with para. 89). Privately-held enterpri ses do not normally enjoy privileges like those
enjoyed by the CWB, however. Is Canada arguin g that if the CWB used its privileges to make
sales on terms which could not or would not norm ally be offered by privately-held marketing
agencies, such sales would not be in accordance with "commercial considerations"?

1. “Exclusive or special privileges” by defi nition provide STEs with certain privileges (or
advantages) that are either not enjoyed by other enterprises, or have a special character. The right of
Members to grant such privileges implies necessarily a right on the part of the recipients of such
privileges to use such privileges, in cluding in their business activities. For example, if a Member has
the right to grant to an enterprise an import monopoly, the recipient of such a monopoly privilege
must also have the right to exercise and enjoy the advantage of having a monopoly in the market in
which it has such an exclusive privilege.

2. Accordingly, the inquiry into whether an STE is acting consistently with Article XVII in its
use of such privileges can only be undertaken by reference to a private sector entity with similar
attributes. Otherwise, it would be impossible to determine whether the complained of behaviour was
simply a reflection of the mere use of the privileges, which, in and of itself, is not prohibited, as
opposed to the impermissible discriminatory conduct of an STE when using those privileges, which is
prohibited.

3. The EC acknowledges this point at paragraph 13 of its Written Submission, where it states:

With regard to the obligations under subparagr aph (b), the EC considers that the fact
that a STE operates in its trade related activities on the basis of its special and
exclusive commercial advantages does not per se prevent it from acting “in
accordance with commercial considerations”. This notion has to be interpreted in

light of a normal (private) commercial behaviour. Yet, it is clear that any private
operator that benefits from special and exclusive rights would make use of them.
4. The question, therefore, would not be whether, in its purchases and sales, an STE acts
commercially relative to any other enterprise that does not enjoy a similar privilege. Rather, the
inquiry would concentrate on whether in making such purchases and sales, the STE acts as would a
private enterprise that has the same rights and privileg es. Because, after all, it is axiomatic that the
use of a “privilege” implies some sort of competitive advantage relative to those that do not have such
a privilege.

5. Finally, Canada notes that certain privatel y-held enterprises do enjoy privileges like those
enjoyed by the CWB. For example, Cargill, a privat ely held US wheat trader, enjoys the privilege of
utilizing US government export credit guarantee programmes (commonly known as GSM 102/103) to
maintain or increase sales. Would the United St ates suggest that Cargill acts “non-commercially”
every time it resorts to the lavish export credit guarantee programmes of the US government?

5. With reference to para. 29 of the US first written submission, what are the criteria for
the approval by the Minister of Finance of the CWB annual borrowing plan? Please explain the
approval process.

6. The CWB submits annually a borrowing plan for the Minister of Finance to approve as
required under Section 19 of the Canadian Wheat Board Act (the “CWB Act”). The plan contains the
details of the CWB’s proposed borrowing programmes for the upcoming crop year.

7. In evaluating the borrowing plan, the De partment of Finance officials examine:

 • the level of borrowing in the plan as compared to previous years;

 • the level of borrowing as compared to the CWB’s forecasted needs related to credit
receivables, grain purchases and spring and fall cash advances to producers under the
cash advance programmes that the CWB administers on behalf of the Government of
Canada;

 • whether there have been any changes in the CWB’s financing needs arising from the
corporation’s business activities; and

 • whether the CWB’s risk management framework is consistent with the Minister of
Finance’s Risk Management and Credit Policy Guidelines for Crown Corporations.

8. Once the borrowing plan is approved, the CWB must comply with the terms and conditions of
the borrowing approval letter.
1 The Department of Finance doe s not approve individual borrowing
transactions. The CWB must also comply with the Minister of Finance’s reporting requirements in
that it must report on its borrowing activity on a quarterly basis.

Both Parties:

6. Do the "commercial considerations" referred to in Article XVII:1(b) vary depending on
what type of entity (e.g., Cooperatives, sha re-capital corporations, etc.) is conducting the
purchase or sales operations?

1 See Exhibit CDA-46 [contains strictly conf idential information] for an example of a borrowing
approval letter.

9. Commercial enterprises generally take into account similar factors in carrying out purchases
or sales. These include the factors listed in Ar ticle XVII, namely “price, quality, availability,
marketability, transportation and other conditions of purchase or sale.”

10. However, the way that each enterprise responds to such factors depe nds on the circumstances
in which it operates. That is, the size of the enterp rise, the market in which it operates, the type of
organization that it is, its financial circumstances and any special or exclusive privileges that it may
have been granted. For example, a large enterp rise with significant assets may be willing to extend
supplier credits that a smaller enterprise would no t be able to extend because of the economic risks
involved. Similarly, two banks of comparable size may have different risk exposures in their
portfolios, thus encouraging one to lend to a mark et that the other would consider an inappropriate
client. In both circumstances, each enterprise would be acting consistently with commercial
considerations, even though the resulting conduct is opposite.

11. In this respect, Canada’s reference to th e nature of the CWB as a “cooperative marketing
agency” responded to unsupported US allegations cont ained in paragraphs 79-85 of its First Written
Submission. There, the United States made a distinction between “profit-maximising” conduct by
share-capital corporations and “revenue-maximising” conduct allegedly engaged in by the CWB. The
United States made no attempt to explain why revenue-maximising is no t “commercial conduct” –
and indeed, any such attempt would be in vain. Ev en so, the US reference to “profit-maximising” on
behalf of the corporation is, as Canada demonstr ated and the United States failed to controvert,
inapposite in respect of cooperatives and similar ma rketing agencies. As indeed the United States
Department of Agriculture has observed, revenue maximising for a cooperative marketing agency
translates into profit maximising for the farmer.

7. Please indicate whether, in your view, the CWB is a "State enterprise" or an
"enterprise" which has been granted "exclusive or special privileges", as these terms are used
in Article XVII:1(a), and why.

12. Article XVII does not provide a definition of a “state enterprise”. The Article covers “state
enterprises” where a Member “establishes or maintains” one.

13. The CWB was established by an Act of Parliament, the CWB Act , which also sets out its
corporate structure and powers. The CWB is a corporation without share capital and thus has no
controlling shareholder. Until the end of 1998, th e CWB was governed by a Board of Commissioners
appointed by the government. The CWB was also an “agent of Her Majesty” and clearly was a “state
enterprise” that had been granted exclusive or special privileges.

14. In 1998, the corporate structure of the CWB was altered so that its governance/is now vested
in a Board of Directors, the majority of which are el ected by farmers. As a result, the CWB is neither
a Crown corporation nor an agent of Her Majesty.

15. Therefore, even if the CWB were not technically considered to be a “state enterprise” that has
been granted exclusive or special privileges, Canada has no doubt that it would fall into the category
of “any enterprise” that has been granted special or exclusive privileges. As a result, Canada has no
doubt that it has responsibilities under Article XVII with respect to the CWB.

Canada:

12. Is the Panel correct in understanding that once a licensed elevator operator has been
authorized to receive foreign grain, such grain can be mixed with Canadian grain of the same
type and grade (and need not be identified as mixed grain), but that it cannot be mixed with

Canadian grain of a different type, or with Canadian grain of the same type but of a different
grade, unless such mixing is authorised pursuant to relevant rules and regulations? Please refer
to relevant legal provisions.

16. Canada is not concerned with the mixing of any given lot of grain with another lot of grain as
long as the combined lot is not represented as “C anadian grain”. Canada’s concern is with
uncontrolled mixing in the bulk grain handling system that would affect Canada’s ability to know the
quality of the grain in the system, and its abilit y as an exporter to guarantee the quality, end-use
characteristics and Canadian origin of the grain.

17. There is no legal provision that specifically regulates mixing of foreign grain with Canadian
grain. If an elevator receiving foreign grain want s to mix that foreign grain with Canadian grain, it
would make this request either together with the re quest for authorization to receive foreign grain, or
at a later stage (Sections 57 and 72(2) of the CGA). The Canadian Grain Commission (“CGC”) would
always authorize it, as long as the lot of mixed grai n is identified as such to ensure that it is not
misrepresented.
2

18. As a general rule, elevator operators themselves will have no re ason to mix different types of
grain.

13. (
1) With respect to the authorisation of receipt of foreign grain into elevators pursuant
to Section 57 of the Canada Grain Act:

 (a) What is the process by which such orders are made by the Commission? How is
the process initiated? How long do es the process generally take? Does the
process involve any documentary requirements, costs, etc.?

1Note: Regarding Questions 13, 14 and 16, please provide documentary support for your answer.

19. The elevator operator initiates the process to obtai n an authorization to receive foreign grain.
It usually does so orally, by placing a telephone call to the CGC, and follows up with a written
request. There is no form; the written request for aut horization can be made by fax, e-mail, or post.
The elevator operator informs the CGC of its intenti on to receive foreign grain and describes the type
of grain, quality of the grain, origin and des tination, and volume of the grain, as well as the
anticipated date of receipt. Within a working day or two of the request, the CGC issues an order to
the elevator authorizing the receipt of the grain. There are no costs involved. A request for
authorization could cover several shipments.

20. Exhibits CDA-47 to CDA-53 [all containing strictly confidential information] contain
examples of authorization requests by elevator operators, including requests covering several
shipments and periods of several months, and orders issued by the CGC in response to these requests.

21. The process to obtain an authorization to receive foreign grain is routine, to the point that
elevator operators may have already arranged the transport of the grain before making a request.

22. The elevator operators are very familiar with the process to obtain an authorization from the
CGC to receive foreign grain. Elevator opera tors are in constant, and in most cases daily,
communication with the CGC.

 (b) What criteria are used to determine whether foreign grain should be received
into elevators?

2 For example, see Exhibit CDA-47 [contains strictly confidential information].

23. The authorization is routinely granted. Th e CGC, however, retains the authority to monitor
and control shipments of foreign grain for certain problems, such as where the foreign grain contains a
genetically modified grain not approved in Canada or where there is an SPS co ncern. In such cases,
the authorization for entry of the foreign grain of concern may contain conditions to prevent it from
contaminating grain in the elevator or the elevator equipment. Authorization would be denied only in
very exceptional circumstances, where the imposition of these conditions would not be sufficient or
where the risk of contamination would be too high.

 (c) What would be the difference between the prescribed process and a notification
system that entails completing a standardized form?

24. The existing authorization acts essentially like a notification. This is not an onerous process.
A standardized form, especially one that would be required at the border, would complicate an
existing informal, simple and flexible process and, would result in additional administrative costs for
the importer in accordance with the provisions of GATT 1994 and the NAFTA. In addition, a simple
notification would not allow the CGC to take appropriate measures where it became aware of certain
SPS problems or other unforeseen problems such as the presence of genetically modified grain in the
foreign grain that may affect the quality of Canadian grain in the handling system.

 (d) Are there conditional requirements oth er than those referred to in footnote 118
of Canada's first written submission?

25. There may be a requirement that the foreign grain be identified on documents according to its
origin and that the CGC be notified in respect of fu rther movements of the foreign grain so that it can
be tracked. In certain specific ci rcumstances, certain conditions may be attached to an authorisation
for an elevator to receive foreign grain in order not to compromise the quality of the grain within the
bulk handling system. These may include the cleani ng of equipment before and after delivery (for
example if there were SPS concerns or in the case of shipments containing Starlink Corn) or CGC
monitoring of receipt or discharge.

14. With reference to para. 224 of Canada's first written submission, how does Canada:

 (a) keep track of domestically-produced grain entering the bulk handling system;

26. Elevators are required to report and account for all grain received and shipped (Sections 23-
27 of the Canada Grain Regulations and Sections 79 and 80 of the CGA).

 (b) ensure that domestically-produced grain is not "misrepresented"; and

27. Canada maintains the quality of Canadian gr ain in the system through the Canadian quality
assurance system, which starts with variety registra tion before the grain is produced and enters the
bulk handling system, and continues with various qua lity control mechanisms in the system such as
inspections and grading standards and procedures. These quality control mechanisms applied to
Canadian grain ensure that end-users get a consistent quality of grain from year-to-year and shipment-
to-shipment. Because of this quality assurance sy stem, the grades assigned to the grain serve to
identify the quality, origin and end-use characteristics of the grain. It is also for this reason that
Eastern grain and Western grain are handled separately in the system.

 (c) maintain the quality of Canadian grain in the bulk handling system whenever
domestically produced grain enters the bulk handling system?

28. Primary elevator operators grade Canadian grain on entry and when the grain moves to
transfer and terminal elevators it is officially in spected by the CGC and assigned an official grade.
The mixing restrictions that apply to Canadian grain under Section 72 of the CGA, are just one of
many provisions that also serve to maintain quality, (also see Sections 56, 59, 61 and 70 of the CGA).

15. Is there a mechanism equivalent to the s ection 57 authorisation mechanism that is
applied to domestically-produced grain entering the bulk grain handling system? If not, why is
such a mechanism necessary?

29. No authorization is necessary for entry of Cana dian grain in elevators. The CGC monitors
movement of Canadian grain in elevators based on the elevators’ reports and on inspections.

30. An authorization request is necessary for entr y of foreign grain into elevators and not for
entry of Canadian grain into elevators because Ca nadian grain is subject to the Canadian quality
assurance system, while foreign grain is not.

31. The Canadian quality assurance system starts even before the grain enters the bulk grain
handling system, with plant breeding and variety regist ration. For example, in order to be registered,
a wheat variety must be visually similar and ha ve the same end-use characteristics as other wheat
varieties in its class – this means it will be visu ally distinguishable from wheat in other classes that
have different end-use characteris tics. Wheat grown in other c ountries is not subject to this
requirement. Therefore a foreign variety of wheat may look like CWRS (Canada Western Red
Spring) wheat but have very different end-use character istics. There is, therefore, a risk that foreign
grain may be misrepresented when entering the bulk grain handling system and affect the quality of
Canadian grain exports.

32. Foreign grain may be suffering from certain plant diseases such as tilletia indica (Karnal
bunt) and tilletia contraversa kuhn (TCK or dwarf bunt), or contain certain weed seeds that are not
present in Canadian grain, or certain genetically m odified grains not authorized in Canada. The CGC
monitors shipments deemed to be at risk of cont amination and may impose certain conditions such as
cleaning of elevators after they have received such foreign grain, in order to ensure that other grain in
the system is not contaminated and that it does not affect the quality of Canadian grain exports.

33. Because foreign grain is not subject to the sa me restrictions and conditions as Canadian grain
with respect to production, the Section 57 authorisation mechanism is necessary.

16. With respect to section 72(2) of the Canada Grain Act:

 (a) What is the process by which orders issued under section 72(2) are made by the
Commission? How is the process initiated? How long does the process generally
take? Does the process involve any documentary requirements, costs, etc.?

34. The process is the same as the process for an entry authorization under Section 57 (see
description in response to question 13(a)).

 (b) Could the Canadian Grain Commission au thorise, by regulation, the mixing, in
transfer elevators, of all or some Canadi an grain with foreign grain of the same
type, and/or all or some foreign grain with foreign grain of the same type?

35. The CGC may authorize mixing either by regulation or by order. There is no authorisation
requirement for the mixing of different grades and classes of foreign grain. Authorizations to mix
foreign grain with Canadian grain in transfer elevators are given by order of the CGC upon request.

 (c) If so, could such a regulation make the mixing of relevant grain subject to
certain conditions, such as appropriate grading designed to ensure consistent
quality?

36. Currently, foreign or mixed grain does not have to meet Canadian grading standards. Foreign
grain can be, and almost always is, sold under the gr ading standard of its own country of origin. If
requested, the CGC provides letters of assurance to a ttest to the quality of foreign grain or of mixed
grain. This requires testing of the grain. Such a letter could also include a reference to a comparable
Canadian variety and/or grade, where possible.

37. Any advance mixing authorization given by re gulation would have to be conditioned upon the
identification of the mixed lot as non-Canadian or of mixed origin. In addition, if the CGC were
asked to ensure the consistent quality of the grai n, additional extensive t esting would be required
because the CGC has no control over the varieties re gistered and produced in other countries and
would not otherwise be in a position to ensure c onsistent quality. This wo uld result in additional
costs.

17. With reference to paras. 295-300 of Canada's first written submission, is it possible that
circumstances might arise where a revenue cap de termined by the Canadian Transportation
Agency for a particular crop year would constrai n the prescribed railways' rate-setting in the
course of that year?

38. The railways have been significantly below thei r revenue caps for the two crop years to date.
In total, both railways were $5,740,944 and $22,1 85,969 below their combined revenue caps in crop
years 2000/01 and 2001/02.

39. The United States’ own findings in the CVD investigation (Exhibit CDA-45) were that the
revenue cap provided no benefit. In other words, an y constraint on railway revenues is driven by the
market, not by the revenue cap.

40. It is expected that the gap between the ra ilways’ grain revenues and their revenue entitlement
will increase over time because the revenue cap provis ion includes an upward adjustment for inflation
but not a downward adjustment for productivity. This has been the experience to date.

41. Absent unforeseen developments, and in light of the experience of the first two years of the
revenue cap regime, we project that the revenue cap will not constrain the prescribed railways’ rate-
setting in the future.

18. With reference to para. 46 of the US first written submission, is it correct that the
railway cars to be allocated by the Canadi an Grain Commission under the authority of
section 87 of the Canada Grain Act are "government railcars"?

42. No. Any car in the railways’ common fleet of cars can be allocated as a producer car. The
railway’s common fleet of cars comprises cars owned or leased by the railways, cars owned or leased
by the Government of Canada and cars owned by the Government of Saskatchewan, by the
Government of Alberta and by the CWB. Whethe r any particular railcar will be assigned to an
allocation for a “producer car” is a decision of the railways. Thus, producer cars may or may not be
“government railcars”.

19. With reference to paras. 312-313 of Canada 's first written submission, is Canada
arguing that the term "producer" should be co nstrued to mean "Canadian or foreign producer
of grain"? If so, does this mean that a US pro ducer, based in the United States, could apply to
the Canadian Grain Commission for a railway car without any Canadian intermediary?

43. Yes. Section 87 of the CGA is not limited to Canadian producers. Both Canadian producers
and US producers can have access to producer cars. Neither the statute nor the regulations provide
otherwise. Both would be required to bring their grain to a producer car-loading site on the Canadian
railway system. No Canadian intermediary is necessary for a US producer to obtain a producer car.

Both parties:

20. Once a panel has determined that, in making certain export sale(s), an STE did not act
in conformity with the standards set forth in Ar ticle XVII:1(b), can the panel find a violation of
Article XVII:1 on that basis alone, or is it necessary for the panel to make a separate and
additional determination whether, in making th e export sale(s) in question, the relevant STE
did not act in a manner consistent with the general principles of non-discriminatory treatment?

44. No. A finding that an STE did not act in conformity with the standards set out in
Article XVII:1(b) alone is not enough to find a viola tion of Article XVII:1. This is because the first
step in determining the existence of a violation under Article XVII:1 is a finding that the STE did not
act in a manner consistent with the general principles of non-discriminatory treatment.

45. Article XVII:1(a) sets out the substantive obligation under Article XVII:1: state trading
enterprises must act in a manner consistent with the general principles of non-discriminatory
treatment. The non-discriminatory treatment is then interpreted and amplified by Article XVII:1(b).
Article XVII:1(b) recognises that where it does so in accordance with commercial considerations, an
STE may discriminate in its purchases and sales. Support for the proposition that Article XVII:1(b)
does not contain an independent obligation ma y be found not only in the opening sentence of
Article XVII:1(b), which unambiguously ties that paragr aph to the preceding one, but also in the very
structure of Article XVII:1. The “undertaking” in Article XVII:1 is set out in paragraph (a) and is not
repeated in paragraph (b); without paragraph (a), paragraph (b) would not impose an obligation on
Members.

46. Therefore, the more appropriate view is that there can be no violation of Article XVII:1 where
the complainant does not demonstrate, and the panel does not find, conduct that is not in accordance
with the general principles of non-discriminatory treatment of GATT 1994.

21. The second clause of Article XVII:1(b) re quires STEs to afford enterprises of other
Members adequate opportunity "to compete for participation in such purchases or sales".

 (a) Is the expression "such purchases or sales" a reference to a given STE's
"purchases or sales involving either imports or exports", i.e., the expression used
in Article XVII:1(a)? In other words, is "such purchases" a reference to a given
STE's purchases abroad (imports) and "such sales" a reference to a given STE's
sales abroad (exports)?

47. Yes. The reference to “such purchases or sales” in Article XVII:1(b) is to “purchases or sales
involving either imports or exports” identified in Article XVII:1(a). Accord ingly, “such purchases”
refers to an STE’s purchases abroad (imports) a nd “such sales” refers to an STE’s sales abroad
(exports).

 (b) Taking the case of an export STE lik e the CWB, are the relevant "enterprises"
of other Members (i) the enterprises wh ich are interested in buying wheat from
the CWB (i.e., wheat buyers); (ii) those enterprises competing with the CWB for
sales to the same wheat buyers (i.e., wheat sellers) or (iii) other enterprises?

48. For an export STE, the relevant “ent erprises” referred to in the second clause of
Article XVII:1(b) are enterprises that are interest ed in buying wheat from the CWB (that is, wheat
buyers). This is clear from the use of the word “participation”. In every purchase and sale there are
two sides who participate in the transaction: th e seller and the purchaser. The CWB’s competitors do
not “participate” in its sales. However, wheat buyers participate
 in a sales transaction with wheat
sellers. Therefore, if the CWB were selling wheat to enterprises in a Member, it must afford
“adequate opportunity, in accordance with customary business practice, to compete for participation
in such… sales” to wheat purchasers in other Members.

22. Assume a Member has an export STE which has the exclusive right to sell a particular
agricultural product for export and domestic co nsumption. Please indicate whether in the
following situations the STE would be making it s export sales in accordance with "commercial
considerations" within the meaning of Article XVII:1(b):

 (a) The STE charges a lower price in expo rt market 2 than in export market 1
because market 2 is contested by a supplier who benefits from an export subsidy,
while market 1 is not.

49. Yes. In this situation, the STE would be making its export sales in accordance with
“commercial considerations” within the meaning of Article XVII:1(b). Commercial actors, generally,
do not give up on a market simply because their comp etitors are subsidised. If this were the case, the
mere grant of an export subsidy in respect of a market would result in an effective monopoly on the
part of the recipient of the subsidy.

50. Of course, in contesting the market with a supplier who benefits from an export subsidy, an
STE would charge the lower price only if it made commercial sense to do so.

51. In the hypothetical posed, the STE would be reacting to market conditions in a manner
envisaged in paragraph 1 of Ad Article XVII. The supplier who has benefited from the export subsidy
has altered the “conditions of suppl y and demand” in that market. And, as with any other private
enterprise, the STE, in charging a lower price in export market 2, would be responding to those
changed market conditions.

52. Accordingly, where a competitor sells at a lower price in one market as opposed to another
market, for whatever reason, including because it benefits from an export subsidy, for the STE to
compete effectively it too must sell at a similar pri ce in that market. The price at which competitors
sell in a market is a commercial consideration in determining the price at which the STE will sell on
that market.

 (b) The STE charges a lower price in expo rt market 2 than in export market 1
because market 2 is a priority market for the STE (e.g., due to expected growth
in import demand) and the lower price is intended to deter other exporters from
contesting export market 2. The price charged by the STE in export market 2
would not or could not have been charged in the absence of the special or
exclusive privileges enjoyed by the STE.

53. Yes, in certain circumstances.

54. Charging a lower price in export market 2 than in export market 1 because (a) market 2 is a
priority market (for example, because of expected growth in import demand), and (b) the lower price
is intended to deter other exporters from contesting export market 2, may be “commercial” behaviour
depending on the nature of the market and the other enterprises competing in the market.

55. To the extent that a market is a priority ma rket, it can be expected that a seller would adjust
its short-term prices to make long-term gains. Th is may be done, for example, to build customer
loyalty or to familiarize potential customers with the seller’s products. Determining the means by
which to develop long-term custom er relationships is inherently a commercial consideration and is
standard commercial practice for any supplier. If th e special or exclusive privileges granted to an
STE, allow the STE to charge a lower price, doing so is consistent with commercial considerations as
it is exactly what any other commercial actor in si milar circumstances would do. In fact, for any
enterprise to ignore its competitive advantage, however acquired, would be a non-commercial action.

56. In theory, any enterprise, whether an STE or a private trader, with some market power may
seek to maximize long-term returns by charging a lower price in a market in order to deter
competitors, if the enterprise believed that its comp etitors would, in fact, be deterred from competing
in that market. This would be done with the exp ectation that the enterprise will subsequently recover
in profits the cost associated with this strate gy by charging prices above competitive levels. In
markets with low barriers to entry or re-entry, ho wever, lowering prices to deter competitors would
not be a rational action. Canada notes, in this re gard, that markets for agricultural products generally,
and wheat in particular, are characterized by extremely low barriers to entry. As such, it would be
futile for participants in such markets to pursue the pricing strategy set out in this hypothetical.

57. There is a distinction between non-commercia l behaviour and anti-competitive behaviour.
Article XVII, or indeed the WTO Agreement, does not prohibit anti-competitive behaviour. If the
market structure permits (for example, if barriers to entry or re-entry into a market are high), then
selling at a price that is intended to deter other exporters from contesting a market may be commercial
behaviour, even if it is anti-competitive. Article XVII:1 is concerned with ensuring that Members do
not do through STEs that which they may not do di rectly. Accordingly, state enterprises may only
discriminate in their purchases and sales on the basis of commercial considerations. There being no
competition rules in the WTO Agreement, nothing in that Agreement prevents state enterprises from
engaging in activities that, though by some defi nitions may be anti-competitive, are perfectly
consistent with commercial behaviour. It is pr ecisely because commercial considerations may lead
enterprises to engage in anti-competitive behaviour that some Members have adopted laws prohibiting
such behaviour. GATT 1994 does not, however, re quire such laws, nor does it place disciplines on
such behaviour.

58. Finally, a WTO Member that believes it h as been disadvantaged by a commercial pricing
strategy of an STE as set out in the hypothetical (which a strategy that may not be challenged under
Article XVII) is not necessarily without a remedy in the WTO. For example, the WTO Member could
consider challenging the special or exclusive privile ges to which the STE's low prices are attributable
under other WTO disciplines, such as the Agreement on Subsidies and Countervailing Measures or
the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994.

 (c) The STE charges a higher price in expo rt market 1 than in export market 2
because the price-elasticity of import demand is lower in export market 1 than in
export market 2.

59. Yes. In this situation, the STE would be making its export sales in accordance with
“commercial considerations” within the meaning of Article XVII:1(b). If the economic conditions in
market 1 allow the STE to sell at a higher price, then doing so is in accordance with commercial
considerations. A private trader in similar circum stances as the STE would also charge a higher price
in market 1 to take advantage of the lower price-elasticity of import demand.

 (d) Same as (c), but the STE in addition extracts monopoly rents (price premiums)
in both markets, which it could not do but for its exclusive right to export the

product concerned (assume the STE's product is perceived as superior in quality
for instance, such that there is no significant competition from other products).

60. Yes. Extracting monopoly rents (price premiums) in export markets is commercial
behaviour. Indeed, such an action is, by defi nition, undertaken in accordance with “commercial
considerations”. In fact, exacting such rents is so tempting on the part of private sector enterprises
that some WTO Members have competition laws and authorities to regulate precisely such activities.

61. Of course, a state enterprise – or indeed any enterprise – may “exact” monopoly rents only in
markets in which it has a monopoly. In this sense, and especially in respect of export monopolies,
there is a fundamental distinction between, on the one hand, the exclusive right to export a product
and, on the other, a monopoly in an export market for that product. One does not necessarily flow
from the other. For one thing, an exclusive right to export a product is in the power of the Member
making such a grant. No Member, however, has the right to grant a monopoly in an export market for
its products. For another, the existence of a m onopoly in an export market depends entirely on the
structure of that other market, including demand elasticity and the ease of market entry by other
exporters. For example, while the CWB enjoys the exclusive right to export wheat from Western
Canada, it does not enjoy a monopoly, either legal or ma rket-based – in any of the markets in which it
competes.

62. An export monopolist may, therefore, exact “monopoly rents” in international markets, by
virtue of the export monopoly, only in the rare circ umstance where the exporting country is the sole
source of the commodity or product for the market in question. Otherwise, the export monopolist will
be just another commercial player in the international market.

63. An exporter that enjoys market power will exact rents appropriate to its power so as to
maximize returns. It will do so irrespective of whether its market power results from an exclusive
right granted by the State or whether its market power (the monopoly) has been gained on the market,
be it through superior quality, internal growth or through mergers and acquisitions.

64. In circumstances where an STE enjoys both an exclusive right to export and a monopoly in an
export market, to consider monopoly rent seeking by that STE as not being in accordance with
“commercial considerations” would be an attack agai nst the grant of the exclusive right to export.
That Members of the WTO are entitled to grant such an exclusive right is expressly authorized by
Article XVII. An interpretation that would negate this right would obviously be erroneous.

65. Canada notes that some WTO Members ha ve competition laws, pursuant to which the
extraction of monopoly rents by dominant suppliers may be prohibited under certain circumstances.
For the time being, however, the WTO, and more specifically Article XVII, contains no competition
rules.

23. Is the "commercial considerations" requirement in Article XVII:1(b) essentially
intended to make sure that STEs use their special or exclusive privileges in such a way that their
purchases or sales involving imports or ex ports are made on terms which are no more
advantageous for the STE than they would have been if the STE did not have any special or
exclusive privileges? Or is the "commercial considerations" requirement essentially intended to
make sure that STEs act like rational economic op erators, i.e., that, in their purchase or sale
decisions, they are guided only by the consideration of their own economic interest?

66. The “commercial considerations” requirement is intended to make sure that STEs act like
rational economic operators. If an STE discriminates in its purchases or sales decisions (for example,
sells to one purchaser but not another because of the country of origin of the purchaser) the

discrimination must be based on commercial consid erations, including price, quality, availability,
marketability, transportation and other conditions of purchase and sale.

67. This interpretation is sup ported by two considerations.

68. First, if the first proposition were to prevail, it would automatically turn any subsidy granted
to an STE that can be character ized as a “special and exclusive pr ivilege” and that provided the STE
with a commercial advantage into a prohibited subs idy. However, Article XVII is manifestly not a
subsidy-regulation provision under GATT 1994; and nothing in GATT 1994 or elsewhere in the WTO
Agreement suggests that Article XVII provides for a new category of prohibited subsidies.

69. Second, the commercial considerations require ment cannot properly be interpreted to mean
that an STE must use its special or exclusive priv ilege in such a way that the purchases or sales
involving imports or exports are made on terms that are no more advantageous for the STE than they
would have been if the STE did not have any sp ecial or exclusive privileges because that would
nullify Member’s rights under Article XVII. If the first interpretation were to prevail, a Member
could grant exclusive or special privileges to an STE, but if the STE utilized those exclusive or special
privileges, the Member would be in violation of its obligation under Article XVII.

24. Pursuant to Article XVII:1(a), each Member undertakes that its STEs "shall" act in a
specified manner. Please explain the meaning and usage of the term "shall" in
Article XVII:1(a). In particular, what, if any, difference in meaning would there be if
Article XVII:1(a) had said that each Member "undertakes" that its STEs "will" act in the
specified manner?

70. The word “undertakes” creates a positive obliga tion on the part of Members in respect of the
conduct of state trading enterprises. In this contex t, there is no difference between “shall” and “will”,
because either way, the Member is answerable in respect of the discriminatory conduct of the STE in
question.

Canada:

36. With reference to paras. 46 and 150 of Canada's first written submission, are all
Western Canadian wheat farmers automatically members of the CWB?

71. There is no membership in the CWB. Western Canadian producers who, (a) choose to
produce wheat and barley, and (b) wish to sell the wh eat and barley they produce for export or for
domestic human consumption must apply for a CW B permit book and market such grain through the
CWB. These same producers also vote for the Board of Directors of the CWB.

37. Is the CWB required to purchase all Western Ca nadian wheat that is offered to it? If
not, has the CWB made use of the possibility to refuse to purchase Western Canadian wheat,
for instance in a situation where there was an oversupply of wheat in international markets?

72. The CWB is not required to purchase all Western Canadian wheat that is offered to it. There
have been numerous instances in the past where th e CWB has not accepted all of the wheat offered to
it for delivery, particularly with respect to durum wheat.
3

38. Is the CWB required to sell all wheat purcha sed by it, or could the CWB decide not to
market all wheat purchased, for instance if doing so would maximise returns to farmers? If the

3 For example, see Exhibit CDA-54 for Contract Acceptance Levels for 1995-96 to 2001-02.

CWB is required to sell all wheat purchased, is the CWB required to market wheat within a
particular time-period after purchase, or is it free to determine when to sell?

73. The CWB is not required to sell all of the wh eat that it purchases, and it could decide not to
market all wheat purchased if doing so would maximize returns to farmers.

74. Any such decision would be driven by considera tions such as the cost of storing the grain in
the commercial handling system and the logistical implications of retaining those stocks. For
example, the CWB does not own grain storage facilities. And so, the benefit of retaining the stocks
would have to be weighed against the additional storage fees that the private grain handlers would
charge the CWB. Similarly, the capacity of the Canadian grain handling and transportation system is
relatively constrained such that it requires regular tu rnover to remain efficient and effective. Thus,
withholding stocks of certain products would lessen the system’s capacity to handle other products.
That in turn could result in foregone revenue fro m those other products. So again, the costs and
benefits of the decision would have to be weighed.

39. With reference to para. 31 of the US first written submission, is the income generated by
CWB short-term investments financed thro ugh government-guaranteed borrowing "pool
money" that is "returned" to farmers? If not, is this income at the disposal of the CWB such
that it could be used, for instance, to finance expo rt sales, which do not co ver the price, paid to
farmers less marketing expenses?

75. Income generated from investments is paid into the pool accounts. Income paid to pool
accounts is done in accordance with Section 8 of the CWB Act, which specifies that these earnings are
to be used to pay “expenses incurred by the Corporation in its operations”. Surpluses remaining in the
pool accounts must be paid out to producers.

40. Regarding the 1998 amendment to the CWB Act (US first written submission, para. 66),
why was it deemed necessary to insert a "NAFTA-clause", but not a "WTO-clause"?

76. The decision in 1998 was not one of includi ng a “NAFTA-clause” and/or a “WTO-clause”.
A NAFTA-clause already applied to the CWB as a Crown corporation under the Financial
Administration Act (the “FAA”) and the decision was to continue this requirement for the CWB once
it was no longer a Crown corporation.

77. Section 61.1 of the CWB Act (the “NAFTA-clause”) is an identical provision to that of
Section 154.1(1) of the FAA.
4 Section 154.1(1) of the FAA applies to all Crown corporations. On
31 December 1998, when the first elected CWB di rectors assumed office, the CWB ceased to be a
Crown corporation. Therefore, in order for this provision to continue to apply to the CWB, it was
incorporated into the CWB Act. The wording of the two provisions is identical except for changes that
were necessary to alter a general provision (i.e., applying to all Crown corporations) to a particular
one (i.e., applying to a particular corporation, the CWB).

78. A “NAFTA-clause” was inserted in the FAA and, subsequently, in the CWB Act, because of
the nature of the obligation in NAFTA. The re levant provisions are Article 1502(2) and 1503(2),
which both begin with the phrase “[e]ach Part y shall ensure, through regulatory control,
administrative supervision or the application of other measures…”. The wording of Articles 1502(2)
and 1503(2) of the NAFTA is significantly differe nt from that of Article XVII of GATT 1994.
Accordingly, Canada’s implementation of those obl igations through a “NAFTA clause” is of limited
relevance in determining the scope and nature of the obligation set out in Article XVII. The repeated
reference by the United States to the “NAFTA clause” in the CWB Act as proof that Canada is in

4 Exhibit CDA-55.

violation of its WTO obligations is nothing less than an impermissible attempt to import the language
of NAFTA into the WTO Agreement, an attempt that the Panel should resist.

79. In any event, to the extent that a “WTO clause” might be relevant to the performance of
Canada’s obligations under Article XVII, the Panel might wish to c onsider that Article 103(1) of the
NAFTA affirms the rights and obligations of th e Parties to each other under GATT 1994. This
includes Article XVII. A requirement to respect the NAFTA, in the context of a “NAFTA clause”,
also necessarily incorporates a requirement to respect the requirements of GATT 1994, including
those of Article XVII.

80. Therefore, not only is “WTO clause” not requi red by Article XVII, but it would be redundant
in the face of a “NAFTA clause”.

41. If a particular provision of the CWB Act were open to more than one interpreting and
one of these interpretations would result in an inconsistency with Article XVII, would a
Canadian judge need to construe the CWB Act so as to conform to Canada's obligations under
Article XVII?

81. Canada is a dualist parliamentary common law jurisdiction. Canada “receives” customary
international law through judicial interpretation and application of the common law. However, treaty
obligations require implementing legislation to be in force domestically and are not incorporated into
domestic law upon ratification.

82. In the past, having due regard to Canada’s parliamentary tradition, Canadian courts applied
the law laid down by statute even if inconsistent with a treaty binding on Canada. In such rare
circumstances, Canada would have been liable inte rnationally for any consequent breach of its treaty
obligations.

83. The situation has, however, evolved. In recognition of Canada’s extensive web of
international obligations, courts have been prepared to interpret domestic law so as to conform as far
as possible with international law. Recent examples of this include Baker v. Canada (Minister of
Citizenship and Immigration)
5 and 114957 Canada Ltee. (Spraytech , Societe d'arrosage) v. Hudson
(Town).6 In both cases, the Supreme Court of Canada endorsed the following statement 7 from a
prominent commentator on statutory construction:

[T]he legislature is presumed to respect the values and principles enshrined in
international law, both customary and conve ntional. These constitute a part of the
legal context in which legislation is enacted and read. In so far as possible, therefore,
interpretations that reflect these values and principles are preferred.8
84. Accordingly, where treaty obligations are not directly incorporated into Canadian law,
Canadian courts consider international treaty ob ligations as “relevant context” in interpreting
constitutional and statutory provisions.

5 [1999] 2 S.C.R. 817 (Exhibit CDA-56).
6 [2001] 2 S.C.R. 241 (Exhibit CDA-57).
7 Found at pp. 861 and 266 respectively [emphasis added by courts].
8 Ruth Sullivan, Driedger on the Construction of Statutes, 3rd ed. (Toronto: Butterworths, 1994), p. 330
(Exhibit CDA-58).

Both Parties:

42. As a supplement to Exhibit CDA-24, could the parties provide an estimate of the volume
and proportion of US-origin grain imported into Canada for domestic consumption as
compared to that imported for re-export?

VOLUME OF US-ORIGIN GRAIN IMPORTS (TONNES)9
Year Ended Domestic Consumption
(Proportion)
Re-export
(Proportion)
Total

31 July 2003 5,385,196 (79%) 1,474,092 (21%) 6,859,288
31 July 2002 5,138,744 (71%) 2,064,337 (29%) 7,203,081
31 July 2001 3,562,392 (66%) 1,854,785 (34%) 5,417,177

43. Are the findings at para. 11.169 of the panel report on Argentina - Hides and Leather 10
mutatis mutandis and at paras. 8.133-8.134 of the panel report on US - FSC (Article 21.5 - EC) 11
relevant to this Panel's assessment of whethe r the grain segregation and rail transportation
measures give rise to differential treatment as between "like" products within the meaning of
Article III:4 of GATT 1994?

85. The findings of the panel in Argentina - Hides and Leather and of the panel in US - FSC
(Article 21.5 – EC) are not applicable. Canada does not argue that no US-origin grain is like
Canadian-origin grain simply because of its origin . However, because Canadian and US-origin grain
are not subject to the same quality assurance system , different treatment of the Canadian and US-
origin grain does not amount to “treatment less favourable” under Article III:4.

44. Are all imported and domestic products falling within each of the categories of "grains"
as defined in section 5(1) of the Canada Grain Regulations "like products" for the purposes of
Article III:4 of GATT 1994, or are there different "like" products within each of the categories
of grain? Are all imported and domestic pro ducts falling within each of the categories of
"grains" or "crops" as defined in section 147 of the Canada Transportation Act "like products"
for the purposes of Article III:4 of GATT 1994, or are there different "like" products within
each of the grain or crop categories?

86. For the purposes of the CGA, not all grain types are like. For example canola is not like
wheat as they have different characteristics and end-u ses. In addition, within each type of grain there
are different “like” products. For example, the top quality of barley is used for malting whereas the
lower quality is used for feed purposes only. The sale prices as well as end-uses of these two products
are different. Elevators would therefore ensure that these two qualities of barley are kept separate
from one another. There are many different classes of wheat produced in Canada that have different
inherent characteristics and are grown for different uses, such as hard red spring wheat (for bread) as

9 Statistics Canada and Canadian Grain Commission data.
10 Panel Report, Argentina – Measures Affecting the Export of Bovine Hides and Import of Finished
Leather ("Argentina – Hides and Leather "), WT/DS155/R and Corr.1, adopted 16 February 2001.
11 Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse to
Article 21.5 of the DSU by the European Communitie s ("US – FSC (Article 21.5 – EC) "), WT/DS108/RW,
adopted 29 January 2002, as modified by the Appellate Body Report, WT/DS108/AB/RW.

opposed to soft white winter wheat (for cookies). So me varieties of sunflower seed are grown for oil
and others for food use.

87. For the purposes of the CTA, each type of grain is a different “like product”.

45. Could the parties respond to the EC's a ssertion in paragraph 43 of its third party
written submission that a bulk grain handling system, such as that covered by the Canada
Grain Act, "offers cost advantages compared to other ad hoc distribution possibilities."

88. We understand the EC to suggest that it is more cost efficient for a farmer to go through the
Canadian bulk grain handling system than to sell its grain directly to end-users. It is not clear on what
basis the EC makes such an assertion, as it provides no evidence in support.

89. The EC allegation is not correct and reflect s a misunderstanding of the economic realities of
the North American grain market.

90. Bulk grain handling facilities such as primar y elevators are efficient at accumulating grain
from many local grain producers (who deliver relatively small lots by truck) and loading it on railway
cars, which are then transported over long distan ces in multi-car blocks. Both Canada and the
United States have bulk handling systems. In the vast majority of cases, a US farmer is closer to a US
primary elevator than to a Canadian primary elev ator. It is therefore more efficient (and cost-
effective) for US-origin grain to be accumulated in US elevators and for US rail cars to deliver the
grain directly to rail car unloading facilities operated by end-users, than it is for a US farmer to truck
grain to a Canadian elevator. As well, using prim ary elevators is not cost free. Canadian primary
elevators charge a minimum of $10-$15/tonne (roughl y twice as much as US elevators). Storage,
drying and other services, if required, would result in additional costs. Therefore, given that in the
majority of cases US-origin grain has already been delivered through a primary elevator in the United
States, there would be no reason to incur a second ha ndling charge by delivering grain to a Canadian
primary elevator.

91. A US shipper would not normally want to incur extra charges if grain could be shipped
directly to an end-user.
 In fact, most grain destined for the Canadian market, whether of US or
Canadian origin, goes directly to end-users.

Canada:

57. Does Canada have a way of knowing whethe r imported grain, once it enters the bulk
grain handling system, is destined for domestic consumption/use, or for re-export?

92. In the case of a primary elevator, the destinati on of the grain is provided to the CGC with the
request for authorisation to receive foreign grain.

93. When imported grain is received into a terminal or transfer elevator it is registered on the
CGC’s electronic registration system. At this point the destination of the grain is unknown. Once the
grain leaves the elevator, the elevator is required to register the destination of the grain on the CGC’s
electronic registration system. The CGC would then know if the grain is destined to a domestic end-
user or is being re-exported. The same process applies to domestic grain.

58. With respect to section 56(1) of the Canada Grain Regulations, how is Eastern Canadian
grain which has been mixed graded? For instance, is it graded as "Eastern Canadian Soybeans
- Mixed" in a case where soybeans of different grades are mixed?

94. In the case of some types of grain, such as wheat or corn, there are grades established for
grain produced in Western Canada (western grain) and grain produced in Eastern Canada (eastern
grain), because these types of grain are produced in both regions, but are of different varieties and
quality or end-use characteristics. The “Eastern” or “Western” designation identifies the regional
origin of the grain. In the case of some other kinds of grain, like soybeans, which are only produced
in significant volumes in eastern Canada, the established grades do not specify eastern or western, but
simply identify the grain as Canada origin. Due to the differences in quality between eastern grain
and western grain, they are not mixed together in the handling system, unless specifically authorized
by CGC.

95. If different grades of a class of eastern grain, for example White Winter Wheat, have been
mixed together, the combined lot would be graded according to the specifications the lot meets. For
example, if #1 Canada Easter White Winter Wheat is mixed with #3 Canada Eastern White Winter
Wheat, the combined lot may meet the specifications for #2 Canada Eastern White Winter Wheat and
would be graded as such.

59. With respect to the section 72(2) orders by the Canadian Grain Commission that are
contained in Exhibits CDA-28, 29 and 30:

 (a) Have there been orders pursuant to which the mixing in transfer elevators of
Canadian and foreign grain or of foreign grain only was rejected?

96. No request for mixing of Canadian and foreign grain in transfer elevators has been denied.

97. No authorization is necessary for mixi ng of foreign grain with foreign grain.

 (b) have there been instances where domestic grain was granted mixing
authorisation under section 72(2) in situatio ns not covered by the authorisations
contained in section 56 of the Canada Grain Regulations?

98. Yes, requests to mix the top two grades of m illing wheat at terminal elevators are frequently
made by the CWB, and granted by the CGC.

60. Do any procedures apply for the mixing of Eastern Canadian grain pursuant to
section 56 of the Canada Grain Regulations? If so, what are they?

99. Subsequent to mixing, Eastern Canadian grain has to be inspected to determine the grade of
the mixed lot, subject to Section 50 of the Regulations.

61. In para. 228 of its first written submissi on, Canada states that there is a process
whereby the Canadian Grain Commission allows receipt of US-origin grain into transfer
elevators on an annual basis. Could Canada provide further information and evidence
regarding such orders? Is this process available to foreign grain other than US-origin grain?

100. At present, annual consent has been given fo r US-origin grain only. Annual consent was
given for all foreign grain until 2002, when Canada encountered some phyto-sanitary problems with
imports of Ukrainian-origin grain. Consent could be given for an elevator to handle several shipments
of foreign grain or a series of shipments over the course of a period of time, on request, and that
request would be granted if the CGC did not ha ve any phyto-sanitary concerns and was given
information regarding its destination. Two examples of such requests and authorizations are attached
as Exhibit CDA-59 [both contain strictly confidential information].

101. Advance consent orders are au tomatically issued to transfer elevators year after year, although
they are often adjusted on request.

62. With respect to the Wheat Access Facilitatio n Programme referred to at paras. 196 and
229 of Canada's first written submission, please answer the following questions:

 (a) Has the programme ever been used by US grain producers? (see Canada's first
written submission, para. 239)

102. US-origin grain producers have never availe d themselves of this Programme. Although about
thirty Canadian elevators registered in the progr amme to receive US-origin wheat, US producers did
not deliver any wheat to these elevators. Economic realities are the most likely explanation: for any
number of reasons, including the weakness of the Ca nadian dollar, wheat prices at elevators were
simply too low in Canada, or alternatively, ha ndling charges too high compared to US handling
charges. It has been more attractive for US farmers to deliver their wheat to US elevators.

103. Indeed, as part of a 6-month review of the Canada-US Record of Understanding , Agriculture
and Agri-Food Canada contacted Canadian primar y elevators to seek their views on the WAFP.
Canadian elevator operators noted that:

 • US producers had not used the programme because of the price spread between
Minneapolis and Canadian values;

 • they could not find customers wanting US wheat, or willing to pay the company’s
margins to get it; and

 • prices in Canada were not good enough to persuade a US farmer to participate.

 (b) Is this programme applicable to grain other than wheat?

104. No. The programme was implemented at the request of the US government in respect of
wheat.

 (c) Is this programme applicable only to Western Canadian primary elevators?
(Exhibit CDA-27, p.7)

105. Yes. The programme was designed at the requ est of the US government to facilitate access of
US-origin grain into Western Canadian primary elevators.

 (d) Is this programme applicable to foreign grain other than US-origin grain?

106. No. This programme was specifically designed to respond to a US government request.

 (e) How does the "advance consent" system work in practice? How do elevator
operators wishing to import US wheat proceed?

107. An explanation of how the programme work s is contained in the CGC Memorandum to the
Trade (Exhibit CDA-60).

63. With reference to para. 263 of Canada's first written submission, could Canada
elaborate on why the grain segregation me asures are "necessary" in order to "secure
compliance" with the grading provisions of th e Canada Grain Act, the Canada Wheat Board

Act and what Canada refers to as the misrepresen tations and consumer protection provisions of
Canada's competition laws?

108. Because foreign grain is not subject to the same quality assurance system as Canadian grain,
if US wheat, for example, were mixed with Cana dian wheat, the CGC would no longer be able to
visually grade Canadian wheat. Unlike Canadian-ori gin wheat, US-origin wheat is not subject to the
same requirement for visual distinguishability between varieties with different end-use characteristics.
Thus, the Canadian visual grading system cannot function properly and maintain segregation in the
system according to particular qualities desired by end-users if US-origin wheat is commingled with
Canadian-origin wheat.

109. In addition, most US wheat is grown from va rieties not registered in Canada. If mixing
occurred with no restrictions, the specific end-u se characteristics could no longer be ensured. In
Canada, if a variety does not perform well (tha t is, meet the acceptable criteria and end-use
characteristics for its class) it will not be registered. For example, at the end of two years of testing in
Canada, the Alsen wheat variety was refused regist ration because of poor qual ity performance. This
variety is grown extensively in the United States. Segregation requirements for foreign grain that is
not subject to the Canadian quality assurance system is necessary to maintain the integrity of the
Canadian grading system.

110. In addition, the measures are necessary to secure compliance with Canada’s unfair
competition and consumer protection because, in order to determine the origin of the grain in the grain
handling system, it is necessary to keep grain of di fferent origins separate from one another and to
identify them properly if they are mixed so as not to misrepresent them. This is particularly important
where the grain is exported as the importing country often requires a certification that the grain is
Canadian origin grain. If Canada were not able to determine the origin of the grain in its grain
handling system, it would not be able to provide this assurance to countries purchasing its grain and to
comply with section 32 of the CGA. No other measure is reasonably available that would ensure strict
compliance with the prohibition against misrepresentation of origin.

111. Finally, the measures are necessary to secure compliance with the provisions establishing the
CWB as a single desk exporting STE, as contained in the CWB Act , because the relevant CWB
privileges apply to the sale of Canadian wheat fo r export or for domestic human consumption; if
foreign wheat were not distinguished from Ca nadian wheat, the monopoly authority of the CWB
could not be enforced.

64. Could Canada please provide support for it s assertion at paras. 286 and 287 of its first
written submission that (i) the setting of rates is left entirely to the prescribed railways; and (ii)
that for all movements that include a non-reve nue cap portion, the railways have the discretion
to charge what the market will bear, regardless of what the rate may be for the revenue cap
portion of the movement?

112. (i) Railways charge differential rates, that is , what the market will bear, as referenced in
reports of the Canada Transportation Act Review Panel and the US Surface Transportation Board.
12
There are no provisions in the revenue cap section of the Canada Transportation Act (see Part III of
Exhibit US-9) or elsewhere that set rate limits on individual grain movements with the following
minor exceptions (which are not at issue in this case):

 (a) single car rates for revenue cap movements from branch lines cannot exceed single
car rates for substantially similar reve nue cap movements from mainline points by
more than 3 per cent;

12 See para. 289 of Canada’s First Written Submission and Exhibits CDA-34 and CDA-45.

 (b) the Canadian Transportation Agency (t he “Agency”) sets “interswitching” rates for
all traffic that originates within 30 kilome tres of a point where traffic can be inter-
changed between two railways; and

 (c) the Agency has a limited ability to set rates for all traffic that is inter-changed
between two railways outside the 30 kilometr e “interswitching” limit in the event the
two railways and/or shipper cannot agree on the rate.

113. (ii) Railways charge differential rates, i.e. wh at the market will bear, as referenced in reports
of the Canada Transportation Act Review Pa nel and the US Surface Transportation Board. 13 There
are no provisions in the CTA (see Part III of Exhibit US-9) that set rate limits on individual grain
movements that are not covered by the revenue ca p provisions, including the portion of movements
that originate or terminate outside the geographi c territory covered by the revenue cap, with the
following minor exceptions (which are not at issue in this case):

 (a) the Agency sets “interswitching” rates for all traffic that originates within 30
kilometres of a point where traffic can be inter-changed between two railways; and

 (b) the Agency has a limited ability to set rates for all traffic that is inter-changed
between two railways outside the 30 kilometr e “interswitching” limit in the event the
two railways and/or shipper cannot agree on the rate.

65. Could Canada please explain why the statem ent at page 36 of Exhibit CDA-34 that "the
cap was to allow flexibility in grain transportati on rates while simultaneously giving protection
to farmers by constraining the total revenues the railways could capture from moving grain"
does not suggest that foreign producers would be treated less favourably with respect to
movements covered by the cap?

114. The purpose of the revenue cap when it was established was indeed to give protection to
farmers while providing flexibility in setting rates in order to encourage competition and efficiencies.
The revenue cap was only one element of governme nt policy reforms that were aimed making the
system more commercial, competitive and accountable.

115. The Agency’s analysis, which was accepted by the United States in the CVD case, is evidence
that the Canadian government’s policy reforms have achieved this objective and that any constraint on
railway revenues is now driven by the market, not by the revenue cap.

116. Because the revenue cap does not constrain railway revenues, it does not result in less
favourable treatment for foreign producers.

13 Ibid.

ANNEX A-3

RESPONSES OF AUSTRALIA TO QUESTIONS POSED
IN THE CONTEXT OF THE FIRST SUBSTANTIVE
MEETING OF THE PANEL

(24 September 2003)

Question 1

1. As noted in the submission of Australia to the Panel, Australia considers that
subparagraph XVII:1(b) is to be viewed as a component of the obligation defined in
subparagraph XVII:1(a). The elemen ts of subparagraph XVII:1(b) are to be applied to assist a Panel
in determining whether the standard of behaviour la id down in subparagraph XVII:1(a) has been met.
Subparagraph XVII:1(b)is not a separate standard for STE behaviour and does not found a separate
obligation on Members.

2. The first task of any Panel therefore is to determine whether the MFN and National Treatment
principles are applicable to the act in question with in the factual context of the dispute. In then
applying these principles to the facts, the Panel is to utilise, as appropriate to the principle being
applied, the definitional assistance provided in subparagraph XVII:1(b).

Questions 2 and 3

3. Both questions 2 and 3 appear to consider the meaning and application to various hypothetical
situations of the elements of s ubparagraph XVII:1(b) in isolation from the general principles of non-
discriminatory treatment which they further define an d elaborate. As noted above, Australia does not
consider this to be appropriate. Further, application of Article XVII:1 should be undertaken on a case
by case basis, having regard to the actual facts at issue. However Australia does wish to make the
following points concerning interpretation and appli cation of Article XVII:1(a) and (b) which would
be applicable to such questions.

4. Australia submits that in examining any act complained of under Article XVII it is first
necessary to consider which non-discriminatory principl e/s are applicable to the particular purchasing
or selling situation. They are not both necessarily applicable to every situation. When this is
determined, it must be considered which of the el ements of subparagraph XVII: 1(b) are applicable to
the behaviour subject to complaint, including their a ppropriate relationship to each general principle.
They may then be applied, having regard to all the facts of the case, as part of examining whether the
STE has acted in a manner consistent with the applicable general principles.

5. A particular purchase or sale by an STE for import or export to which the principle of MFN
or the principle of National Treatment is not applicable cannot be separately tested for its
‘commerciality’ or whether adequate opportunity has been provided to other Member’s enterprises to
compete in that purchase or sale.

6. As an STE’s exporting behaviour has not before been considered under Article XVII, and the
issue of export behaviour has hardly been consider ed in terms of the application of MFN or National
Treatment under GATT 1994, the appropriate application of either principle has not been examined in
regard to a similar factual situation as this dispute.

7. With regard to the application of the MFN pr inciple to sales for expor t, Australia notes that
pursuant to the Interpretive Ad Note to Article XV II, price discrimination between export markets for
commercial reasons will not fall foul of this princi ple. Moreover it does not appear consistent with
how MFN has been applied and interpreted unde r GATT 1994 for an exporting Member’s (or its
STE’s) MFN obligation to be consid ered to include a concurrent ob ligation to all other Members to
afford them adequate opportunities to compete fo r participation in the market for which that
Member’s exports are destined.

8. Australia would also note that the way in wh ich special or exclusive privileges have been
considered in the hypotheticals does not properly distinguish the key issue - that it is not what
privileges or monopoly rights (which are permissible under GATT 1994) may enable an STE to do,
but whether what it actually does (in terms of purchases or sales involving either imports or exports)
is consistent with the general principles of non-discriminatory treatment of GATT 1994.

9. Application of Article XVII to any STE purchase or sale must be undertaken on a case by
case basis, having full regard to the particular commercial circumstances of the case. The
hypothetical scenarios do not capture the complex inte raction between the many factors that influence
world market prices for agricultural products, includ ing factors such as the market structure, the
impact of government policies, variations in product quality, and other changes in variables
influencing demand/supply for a particular product in a particular market.

Questions 4 and 5

10. As with the response to questions 2 and 3, Australia does not consider that the content and
meaning of ‘the commercial considerations’ require ment can be considered in isolation from the
applicable general principle of non-discrimination that it is used to further define.

11. Article XVII is not intended to place STEs w ith such privileges on the same footing as non-
privileged enterprises. Each form of enterprise is equally consistent with GATT 1994. Australia
considers the purpose of Article XVII:1 was simply to require that all STEs, whether exercising such
privileges or not, act in a way that is not inconsistent with the general principles of non-discriminatory
treatment governing international trade under GA TT 1994 – including by acting consistently with
commercial considerations.

12. Australia considers that the particular factual situation of the case at issue is of relevance in
considering the action complained of in terms of ‘commercial considerations’. This would include
consideration of the type of STE undertaking such purchases or sales for import or export as well as
the particular commercial context in which that STE operates and the nature of the actions subject to
complaint.

Question 6

13. The current text is unambiguous. The word ‘s hall’ signifies the treaty- level obligation that
Members are here undertaking concerning the acts of their STEs. It is used for all substantive
obligations of Members under GATT 1994. There is little relevance in considering whether the use of
the word ‘will’ would make a difference in meaning to Article XVII.

Question 7

14. As was stated in the Australian submission to the Panel, the undertaking of Members in
Article XVII:1(a) concerning the behaviour of th eir STEs does not impose any direct obligation on a
Member beyond an obligation of result. It cannot be interpreted to imply further obligations
concerning how an individual Member should meet this undertaking.

Question 8

15. Australia does not see how the National Treatment principle can be considered to prohibit
discrimination by an STE in terms of sale between its export market and its domestic market - that is
discrimination between internal and external mark ets. The essence of National Treatment is the
prevention of discrimination within the internal marketplace. The nexus to what happens in the
external marketplace would not seem relevant to an inquiry into such discrimination.

16. Australia would also note that domestic a nd export markets are driven by different and
particular conditions of supply and demand which will impact on the price that can be realised in each
market. Different behaviour, including as regards pric ing, by an STE in its domestic and in its export
markets does not per se equate to or signify some form of ‘discrimination’.

ANNEX A-4

RESPONSES OF CHINA TO QUESTIONS POSED
IN THE CONTEXT OF THE FIRST SUBSTANTIVE
MEETING OF THE PANEL

(24 September 2003)

MEASURES RELATING TO EXPORTS OF WHEAT

1. Once a panel has determined that, in making certain export sale(s), a STE did not act in
conformity with the standards set forth in Article XVII:1 (b), can the panel find a violation of
Article XVII:1 on that basis alone, or is it necessary for the panel to make a separate and
additional determination whether, in making th e export sale(s) in question, the relevant STE
did not act in a manner consistent with the general principles of non-discriminatory treatment.

Answer

 On this point we agree with the Panel on Korea – Beef that took the view that “…the terms
‘general principle of non-discrimination treatment prescribed in this Agreement’ (Art. XVII:1(a))
should be equated with ‘make any such purchases or sales solely in accordance with commercial
consideration’ (Art. XVII:1(b)). A conclusion that the principle of non-discrimination was violated
would suffice to prove a violation of Article XVII; similarly, a conclusion that a decision to purchase
or buy was not based on ‘commercial considerati ons’, would also suffice to show a violation of
Article XVII.”
1

 We think that the Panel on Korea – Beef case gave the proper interpretation of the relation
between Article XVII:1(a) and Article XVII:1(b).

2. The second Clause of Article XVII:1(b) re quires STEs to afford enterprises of other
Members adequate opportunity to “to compete for participation in such purchases or sales ”

 (a) Is the expression “such purchases or sales ” a reference to a given STE’s
“purchases or sales involving either imports or exports”, i.e., the expression used
in Article XVII:1(a)? In other words, is “such purchases” a reference to a given
STE’s purchases abroad (imports) and “such sales” a reference to a given STE’s
sales abroad (exports)?

Answer

 Under Article XVII: 1 (a), WTO Members undertake that if they establish or maintain a state
enterprise, or grant exclusive or special privileges to any enterprise, such enterprise shall , in its
purchases or sales involving either imports or exports , act in a manner consistent with the general

1 Panel report on Korea – Various Measures on Beef, para. 757.

principles of non-discriminatory treatment, wh ich is further required by explanation in
Article XVII:1(b) to mean that such enterprises sh all make any such purchases and sales solely on the
basis of commercial considerations and shall affo rd the enterprises of the other Members adequate
opportunity, in accordance with customary business prac tices, to compete for participation in such
purchases or sales.

 Therefore, the expression “such purchases or sales ” is a reference to a given STE’s
“purchases or sales involving either imports or exports”, i.e., the expression used in Article XVII:1(a).

 (b) Taking the case of an export STE lik e the CWB, are the relevant “enterprises”
of other Members (i) the enterprises, which are interested in buying wheat from
the CWB (i.e., wheat buyers); (ii) those enterprises competing with the CWB for
sales to the same wheat buyers (i.e., wheat sellers) or (iii) other enterprises?

Answer

 Our position is that the relevant “enterprises” are (i) buyers of Canadian wheat, and (iii) other
enterprises— e.g., wheat suppliers to CWB. Artic le XVII:1(b) states that “such enterprises shall …
afford the enterprises of the other contracting pa rties adequate opportunity … in such purchases or
sales.” In the case of CWB, “purchases” mean th e purchases of CWB from its suppliers and “sales”
mean the exports made by CWB. To comply with Article XVII:1(b), CWB must give adequate
competing opportunity to buyers in its sales( i.e. exports), and suppliers in its purchases. With respect
to (ii) competitors, CWB has no such obligation, because it is not in a superior position than its
competitors for sales to the same wheat buyers. They are on the same line competing with each other.

3. Assume a Member has an export STE whic h has the exclusive right to sell a particular
agricultural product for export and domestic co nsumption. Please indicate whether in the
following situations the STE would be making it s export sales in acco rdance with “commercial
considerations” within the meaning of Article XVII:1(b).

 (a) The STE charges a lower price in expo rt market 2 than in export market 1
because market 2 is contested by a supplier who benefits from an export subsidy,
while market 1 is not.

Answer

 Yes, this is in compliance with commercial c onsideration requirement within the context of
Article XVII:1(b). The Ad Article XVII paragraph 1 states:

“The charging by a state enterprise of different prices for its sales of a product in
different markets is not precluded by the provisions of this Article, provided that such
different prices are charged for commercial reasons, to meet conditions of supply and
demand in export markets.”
If a subsidized supplier charges a low price, it will be certain that the original equilibrium of demand
and supply in this market will be broken and will be forced to shift to a new market situation
favourable to the subsidized suppliers, which m eans that the situation of demand and supply will
change. To meet this new situation of demand and supply, i.e., the new market competition situation,
a STE has to quote and charge a competing price. Th is situation falls just within the scope of the
above Ad note.

 (b) The STE charges a lower price in expo rt market 2 than in export market 1
because market 2 is a priority market for the STE (e.g., due to expected growth

in import demand) and the lower price is intended to deter other exporters from
contesting export market 2. The price charged by the STE in export market 2
would not or would not have been charged in the absence of the special or
exclusive privileges enjoyed by the STE.

Answer

 To charge a competing price, which might be lo wer than that charged in market 1, to deter
other exporters from contesting export market 2 for ma intaining a priority market or its prior market
share is a normal practice based on the commercial considerations according to the market
competition situation even if the price would not be charged in the absence of the special or exclusive
privileges. If maintaining a priority market by deterring competitors is solely based on commercial
considerations, the special privile ges underlying them cannot alter the nature of it. If the exclusive
rights or special privileges are not in violation of Article XVII in themselves, the using of them by a
STE in accordance with commercial considerations is not a violation, either. If a privilege or a right
cannot be used, it will not be a privilege or right at all.

 (c) The STE charges a higher price in expo rt market 1 than in export market 2
because the price-elasticity of import demand is lower in export market 1 than in
export market 2.

Answer

 Yes, this is a commercial consideration. If the price-elasticity of import demand is lower in
export 1, a STE could increase the price without runni ng the risk of reducing demand. This is in
conformity with the economic rational, and certainly the “commercial considerations” requirement.

 (d) Same as (c), but the STE in addition extracts monopoly rents (price premiums)
in both markers, which it could not do but for its exclusive right to export the
product concerned (assume the STE’s product is perceived as superior in quality
for instance such that there is no significant competition from other products).

Answer

 Yes, this is a commercial consideration. To pursue monopoly profit is a commercial
consideration. To go a step further, to pursue monopoly rents by the using of the exclusive rights or
special privileges is also a commercial consideration. If this line of reasoning was defied, the natural
result would be that the granting of exclusive rights or special privileges is a violation of Article XVII
in itself and Members would be deprived of the right to establish STEs.

4. Is the “commercial considerations” re quirement in Article XVII:1(b) essentially
intended to make sure that STEs use their special or exclusive privileges in such a way that their
purchases of sales involving import or expo rts are made on terms which are no more
advantageous for the STE than they would have been if the STE did not have any special or
exclusive privileges? Or is th e “economic considerations” requi rement essentially intended to
make sure that STEs act like rational economic op erators, i.e., that in their purchase or sale
decisions, they are guided only by the consideration of their own economic interest?

Answer to the first question

 No. If this was the intention of Contracti ng Parties of GATT or Members of WTO, they
would have made a clear and express statement in this regard in Article XVII. As to the meaning of
the phrase “commercial considerations”, the interpre tative notes and the drafting history indicate that

Article XVII:1 (b) would not preclude the charging by a state trading enterprise of different prices in
different export markets;
2 nor consideration of the advantages of receiving a “tied loan” in connection
with a purchase.3 Moreover, it was understood that the phr ase “customary business practice” as used
in Article XVII:1 (b) was intended to cover busin ess practices customary in the respective line of
trade.4

Answer to the second question

 Yes. This illustrates the proper interp retation of “commercial considerations”.

5. Do the “commercial considerations” re quirement in Article XVII:1 (b) vary depending
on what type of entity (e.g., co-operatives, sh are-capital corporations, etc.) is conducting the
purchase or sales operations?

Answer

 First, we think that it is clear that no matter what type of entity a STE is, it should make
purchases and sales in accordance w ith commercial consideration. Second, the elements of
“commercial considerations” or the weight of each elem ent to be given to may vary with the type of
entities conducting the purchase or sales operation. Article XVII:1(b) provides that a STE shall
“…make any such purchases or sales solely in accord ance with commercial considerations, including
price, quality, availability, marketability, transpor tation and other conditions of purchase or sale…”
This provision lists some elements of commercial c onsiderations and allows a STE to consider “other
conditions of purchase or sale”. Different type of commercial entities may take different elements
into account in their operation or give different wei ght to each of the element listed. The standard
should be that a STE shall take the same consid erations into account as what a private-sector
enterprise of the same type of entity should do. If in private sector a cooperative and a share holding
company have different considerations in the ordina ry course of their business, then STEs in form of
cooperative or in form of share holding company may do the same thing, which is not against the
“commercial considerations” requirement provided in Article XVII:1.

6. Pursuant to Article XVII:1(a), each Memb er undertakes that its STEs “shall” act in a
specified manner. Please explain the mean ing and usage of the term “shall” in
Article XVII:1(a). In particular, what if any, difference in meaning would there be if
Article XVII:1(a) had said that each Member “undertakes” that as STEs “will” act in the
specified manner?

Answer

 According to Black’s Law Dictionary, “shall” ,whe n used in statutes, contracts or the like, is
“generally imperative or Mandatory”, “and in comm on or ordinary parlance, and in its ordinary
signification, the term “shall” is a word of comma nd, and one which has always or which must be
given a compulsory meaning; as denoting obligation” , but “it may be construed as merely permissive
or directory (as equivalent to ‘may’), to carry out the legislative intention and in case where no right
or benefit to any one depends on its being taken in the imperative sense, and where no public or
private right is impaired by its interpretation in the other sense.”
5 In the same dictionary, “will” is “an
auxiliary verb commonly having the mandatory sense of “shall” or “must.” 6 We can see that in legal

2 Interpretative note to Article XVII:1.
3 Interpretative note to Article XVII:1(b).
4 Analytical index, op. cit., 477.
5 Black’s Law Dictionary (1979), at 1233.
6 Id, at 1433.

uses, these two words carry almost the same meani ng. In the context of Article XVII:1, with the
preceding word “undertake”, these two words will not make any significant differences. Members
undertake that a STE “shall” act in a specified manner or “will” act in this kind of manner both means
that Members shall assume responsibilities if a STE th ey established fails to act in this specified
manner.

7. Do the third parties agree with the Unit ed States’ view that Article XVII:1(a) imposes
an obligation on Members to take affirmative me asures to ensure that their STEs comply with
the Article XVII:1(a) standards? [US first written submission, paras.50-52,67-69]

Answer

 No. We agree to Canada’s view that the obligation of Members under this provision is an
“obligation of result”. We think that GAT T Article XVII does not impose an obligation on
governments to involve in STE’s everyday operati on. If a government were imposed such an
obligation, it would be too burdens ome and not practical. Moreover, such an obligation runs afoul of
the objective of GATT Article XVII.

8. With references to Para 55 of the US first written submission, do the third parties agree
that Article XVII:1(a) prohibits the CWB from “making use of its exclusive privileges to
discriminate in its terms of sale between export markets and the Canadian domestic market”?

Answer

 No. Our position is that no support could be fo und for the US allegation in this regard neither
in Article XVII:1(a) nor in the whole context of Article XVII.

MEASURES RELATING TO TREATMENT OF IMPORTED GRAIN

9. With reference to paras 207, 217 and 279 of Canada’s first written submission, is it
correct that Article III:4 of the GATT 1994 does no t apply to laws affecting the transportation
of goods in-transit?

Answer

 It is correct that Article III:4 does not apply to laws affecting goods in-transit. The text of
Article III:4 is that:

The products of the territory of any contracting party imported into the territory of
any other contracting party shall be accord ed treatment no less favourable than that
accorded to like products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use……(emphasis added)
Therefore, Article III:4 applies only to laws affecting the imported goods.

 Moreover, Article V of GATT 1994 provides for the freedom of transit of goods, and also
vessels and other means of transport. There is no poi nt of stretching Article III:4 to cover the transit
goods.

ANNEX A-5

RESPONSES OF THE EUROPEAN COMMUNITIES TO
QUESTIONS POSED IN THE CONTEXT OF THE FIRST
SUBSTANTIVE MEETING OF THE PANEL

(24 September 2003)

I. MEASURES RELATING TO EXPORTS OF WHEAT

For all Third Parties

1. Once a panel has determined that, in making certain export sale(s), an STE did not act
in conformity with the standards set forth in Ar ticle XVII:1(b), can the panel find a violation of
Article XVII:1 on that basis alone, or is it necessary for the panel to make a separate and
additional determination whether, in making th e export sale(s) in question, the relevant STE
did not act in a manner consistent with the general principles of non-discriminatory treatment.

 According to the wording of Article XVII:1(b) , the provisions of subpa ragraph (a) "shall be
understood" to require that STEs make any purchases or sales solely in accordance with commercial
considerations. In the view of the EC, a finding th at the standard of subparagraph (b) has not been
met automatically entails the finding that subparagra ph (a) has been violated. This means that if a
panel establishes that an STE has not acted in acc ordance with commercial considerations in its
purchases or sales, it may make a finding of a violation on that basis alone.

 The EC would like to add that, as it has set out previously
1, it considers that subparagraphs (a)
and (b) of Article XVII:1, even though interrelated, are not identical in scope. This means that
inversely, if a Panel does not find a violation of the standard of Article XVII:1(b), it should still
examine whether the STE has also complied with the standards of Article XVII:1(a).

2. The second clause of Article XVII:1(b) re quires STEs to afford enterprises of other
Members adequate opportunity "to compete for participation in such purchases or sales".

 (a) Is the expression "such purchases or sales" a reference to a given STE's
"purchases or sales involving either imports or exports", i.e., the expression used
in Article XVII:1(a)? In other words, is "such purchases" a reference to a given
STE's purchases abroad (imports) and "such sales" a reference to a given STE's
sales abroad (exports)?

 The EC considers that the term "such purch ases or sales" in subparagraph (b) is to be
considered as a reference to the term "purchases or sales involving either imports or exports" in
subparagraph (a). However, the EC would like to specify that in its view, sales may also be said to
involve "imports" if the product sold has previ ously been imported, and purchases may be said to
involve "exports" if the products purchased are sub sequently exported. In this way, the term

"purchases or sales involving either imports or expor ts" encompasses the entire trading activity of an
STE.

 (b) Taking the case of an export STE lik e the CWB, are the relevant "enterprises"
of other Members (i) the enterprises wh ich are interested in buying wheat from
the CWB (i.e., wheat buyers); (ii) those enterp rises competing with the CWB for
sales to the same wheat buyers (i.e., wheat sellers) or (iii) other enterprises?

 Article XVII:1(b) does not further define the "enterprises" of the other contracting parties to
which "adequate opportunities" must be afforded. For this reason, the EC considers that the relevant
enterprises can be (i) the enterprises which are interested in buying wheat from the CWB ( i.e., wheat
buyers); (ii) those enterprises competing with the CWB for sales to the same wheat buyers (i.e., wheat
sellers), or also (iii) other enterprises which offer wheat to the CWB for sales abroad.

3. Assume a Member has an export STE which has the exclusive right to sell a particular
agricultural product for export and domestic co nsumption. Please indicate whether in the
following situations the STE would be making it s export sales in accordance with "commercial
considerations" within the meaning of Article XVII:1(b):

(a) The STE charges a lower price in expo rt market 2 than in export market 1
because market 2 is contested by a supplier who benefits from an export subsidy,
while market 1 is not.

 The export subsidy would constitute a factor in fluencing supply which is outside the control
of the STE, and which will tend to lower market price in market 2. By charging a lower price in
market 2, the STE would therefore be acting in accordance with commercial considerations.

(b) The STE charges a lower price in expo rt market 2 than in export market 1
because market 2 is a priority market for the STE (e.g., due to expected growth
in import demand) and the lower price is intended to deter other exporters from
contesting export market 2. The price charged by the STE in export market 2
would not or could not have been charged in the absence of the special or
exclusive privileges enjoyed by the STE.

 The term "commercial considerations" should be defined in the light of normal commercial
behaviour. Normal commercial behaviour involves th e setting of prices on the basis of the conditions
of supply and demand, which are taken as given c onstraints. Setting prices below normal market
levels in order to exclude competitors and thereby influencing the constraints on the market cannot be
regarded as normal commercial behaviour. This is independent of whether the prices could have been
charged in the absence of the special and exclusive privileges of the STE.

 (c) The STE charges a higher price in expo rt market 1 than in export market 2
because the price-elasticity of import demand is lower in export market 1 than in
export market 2.

 The price elasticity of import demand constitutes an external factor outside control of the
STE. By charging a higher price in export market 1 than in export market 2, the STE would therefore
act in accordance with commercial considerations.

 (d) Same as (c), but the STE in addition extracts monopoly rents (price premiums)
in both markets, which it could not do but for its exclusive right to export the
product concerned (assume the STE's product is perceived as superior in quality
for instance, such that there is no significant competition from other products).

 The EC considers that it must be distinguished whether the STE is able to charge premium
prices because its product is perceived as superior in quality to other products, or merely because of
its exclusive rights. If the price premiums are due to superior quality of the product, then the STE acts
in accordance with normal considerations in charging a higher price. In contrast, if the STE charges
premium prices in the absence of an objective justifica tion, such as superior quality, it no longer acts
as a participant subject to the constraints of the market, and does not act in accordance with
commercial considerations.

4. Is the "commercial considerations" requi rement in Article XVII:1(b) essentially
intended to make sure that STEs use their special or exclusive privileges in such a way that their
purchases or sales involving imports or ex ports are made on terms which are no more
advantageous for the STE than they would have been if the STE did not have any special or
exclusive privileges? Or is the "commercial considerations" requirement essentially intended to
make sure that STEs act like rational economic operators, i.e., that, in their purchase or sale
decisions, they are guided only by the consideration of their own economic interest?

 Article XVII does not affect the right of WTO Members to establish STEs and to endow them
with special and exclusive rights. Therefore, the mere use of such special rights does not constitute a
violation of Article XVII:1(b). However, the EC also considers that "commercial considerations"
cannot be regarded as purely requiring economic ra tionality. Rather, "commercial considerations"
should be defined in terms of normal commercial behaviour of economic actors subject to market
constraints.

5. Is the term "commercial considerations" a co ncept which is neutral in its application?
Or do the "commercial considerations" vary dependi ng on what type of entity is conducting the
purchase or sales operations?

 In the view of the EC, the term "commercial considerations" is a concept which refers to
normal commercial behaviour of a market participant subject to the constraints of the market.

6. Pursuant to Article XVII:1(a), each Member undertakes that its STEs "shall" act in a
specified manner. Please explain the meaning and usage of the term "shall" in
Article XVII:1(a). In particular, what, if any, difference in meaning would there be if
Article XVII:1(a) had said that each Member "undertakes" that its STEs "will" act in the
specified manner?

 In the view of the EC, Article XVII:1(a) estab lishes, for the Member concerned, an obligation
of result with respect to the behaviour of the STE it has established. This means that if the STE acts
in a manner not in accordance with Article XVII, the Member will be in violation of
Article XVII:1(a), regardless of whether and how th e Member involved has influenced the behaviour
of its STE.

 In the view of the EC, the terms "shall" or "will" both express a firm commitment. There
would therefore not be any difference in meaning if Article XVII:1(a) used the term "will" instead of
"shall".

7. Do the third parties agree with the United States' view that Article XVII:1(a) imposes an
obligation on Members to take affirmative measu res to ensure that their STEs comply with the
Article XVII:1 standards? (US first written submission, paras. 50-52, 67-69)

 In the view of the EC, Article XVII:1(a) establis hes an obligation of result with respect to the
behaviour of STEs. In contrast, Article XVII:1(a) does not specify specific measures which the WTO

Member. However, if the WTO Member fails to take the necessary measures, and the STE acts in
violation of Article XVII:1, it will be responsible for this violation.

8. With reference to para. 55 of the US first written submission, do the third parties agree
that Article XVII:1(a) prohibits the CWB from "making use of its exclusive privileges to
discriminate in its terms of sale between export markets and the Canadian domestic market"?

 The EC considers that if the CWB discriminates in its terms of sale between exports markets,
and such discrimination is not justified by co mmercial considerations, it acts in violation of
Article XVII:1(b). This is explicitly confirme d by the last paragraph of the Ad Note to
Article XVII:1. In the view of the EC, it is not decisive whether the discrimination is made possible
by the exclusive privileges of the CWB or not.

II. MEASURES RELATING TO TR EATMENT OF IMPORTED GRAIN

For all Third Parties

9. With reference to paras. 207, 217 and 279 of Canada's first written submission, is it
correct that Article III:4 of the GATT 1994 does no t apply to laws affecting the transportation
of goods in-transit?

 The EC notes that Article III:4 establishes an obligation of national treatment in respect of
laws, regulations and requirements affecting th e "internal sale, offering for sale, purchase,
transportation, distribution or use". In contrast, th e transit of goods across the territory of a party is
governed by the disciplines of Article V GATT. Th e EC therefore agrees th at Article III:4 does not
affect the transportation of goods in transit.

For the EC

10. With reference to footnote 11 of the EC's written submission, please indicate what types
of trade-distorting conduct would not be covered by Article XVII.

 The EC meant to recall that Article XVII does not affect the right of WTO Members to
establish STEs. Accordingly, trade distortions wh ich result directly from the establishment of the
STE, but are not attributable to any specific trade- related conduct of the STE, are not contrary to
Article XVII:1.

12. Could the EC please elaborate on its arguments in paragraph 37 of its third party
submission relating to claims made under GATT Article III:4. In particular, why does the EC
state that "some US wheat may not be like Canadian wheat, for instance if it is of a different
variety, grade, and quality" while at the same time arguing that domestic and imported wheat
must be "like" because such wheat "but for the difference in origin, is otherwise identical."

 The EC intended to clarify that wheat of a certain variety, grade, or quality, is not "like"
wheat which is of a different variety, grade, or quality. The EC therefore discussed the Canadian
segregation measures only to the extent that they concern wheat of identical variety, grade, and
quality. Under this hypothesis, however, the EC co nsiders that Canadian and foreign wheat must be
considered as like products, regardless of origin.

ANNEX A-6

RESPONSES OF THE SEPARATE CUSTOMS TERRITORY OF
TAIWAN, PENGHU, KINMEN AND MATSU TO QUESTIONS
POSED IN THE CONTEXT OF THE FIRST SUBSTANTIVE
MEETING OF THE PANEL

(24 September 2003)

Question 1

1. Article XVII:1(b) of GATT 1994 provides in part that “[t]he provisions of subparagraph (a)
of this paragraph sha ll be understood to require that such enterprises shall, having due regard to the
other provisions of this Agreement, make an y such purchases or sales solely in accordance with
commercial considerations...” A literal reading of th is provision suggests that the provision is not
intended as a separate independent obligation on Memb ers. Instead, it serves as a further elaboration
of the obligation under 1(a). By examining the sc ope established under 1(b), a determination can then
be made whether a violation of the obligation under 1(a) has occurred. In other words, if an STE does
not make its purchases or sales in accordance with commercial considerations, the Member in
question would be in violation of 1(a), as interpreted by 1(b).

2. Previous Panel rulings support our reading. In Korea-Measures Affecting the Import of Fresh,
Chilled and Frozen Beef , the Panel clarified the relations hip between non-discrimination under
subparagraph (a) and commercial considerations under subparagraph (b). It stated that,

[t]he list of variables that can be used to assess whether a state-trading action is based
on commercial consideration (prices, availability etc.) are to be used to facilitate the
assessment whether the state-trading enterp rise has acted in respect of the general
principles of non-discrimination. A conclusion that the principle of non-
discrimination was violated would suffice to prove a violation of Article XVII;
similarly, a conclusion that a decision to purchase or buy was not based on
‘commercial considerations’, would also suffice to show a violation of Article XVII.
(Korea Beef, para. 757.)
In Canada-Administration of the Foreign Investment Review Act of 1984, the panel also confirmed
that Article XVII:1(b) is not to establish an independe nt obligation. Instead, it is to interpret the scope
of the non-discrimination principle under Article XVII:1(a). The panel report of this case states that,

[t]he fact that sub-paragraph (b) does not establish a separate general obligation to
allow enterprises to act in accordance with commercial considerations, but merely
defines the obligations set out in the preced ing sub-paragraph, is made clear through
the introductory words ‘The provisions of sub-paragraph (a) of the paragraph shall be
understood to require...’ (L/5504, adopted on 7 February 1984, 30S/140, 163,
para. 5.16.)

The panel should be in a position to find a violat ion of Article XVII:1 by the said Member on the
basis of non-conformity with “commercial consideration” alone.

Question 2

3. Article XVII:1(a) of the GATT regulates purchases or sales involving either imports or
exports of STEs. If an STE’s activities do not have anything to do with import or export, it should not
be within the scope of the provision of Article XV II of the GATT. Since subparagraph (b) is a further
elaboration of subparagraph (a), the phrase “such purchases or sales” refers to purchases or sales
involving exports or imports, as indicated in subparagraph (a).

4. Given above interpretation, the CWB itself as an STE would have to provide enterprises of
other Members opportunities with regard to its pur chases or sales, taking into account customary
business practice. The enterprises of other Members in clude the buyers of wheat and the sellers of
wheat in so far as they seek participation in the purchases and sales involving the STE in question.

Question 3

5. There is no definition of the phrase “commercial considerations” either in Article XVII or in
other GATT provisions. The question of whether an STE is making decisions on purchases and sales
based on commercial consideration must be assessed on a case by case basis. In particular, the
structure of the markets, competitions, and other situ ations particular to th e market would determine
whether the STE is acting in accordance with commercial considerations.

6. Furthermore, considerations on pricing policy by any enterprise is closely related to the
dynamics of competition within a relevant mark et. How an enterprise determines its behaviour vis-à-
vis its pricing involves complex considerations such as, inter alia, market structure, the intensity of
price competition, supply and demand, the value pr ovided to the enterprise in matching/undercutting
the prices of competitors, etc. Is an STE selling its excessive stock at a substantial discount in order to
minimize losses acting in accordance with commercial considerations? The answer could be in the
affirmative. Therefore, the question of whether an STE acts in a manner solely in accordance with
commercial considerations can only be answered by reviewing the circumstances surrounding the
action in question.

7. With respect to the factors of supply and demand, Ad Article XVII states that,

[t]he charging by a state enterprise of different prices for its sales of a product in
different markets is not precluded by the provisions of this Article, provided that such
different prices are charged for commercial reasons, to meet conditions of supply and
demand in export markets.
Thus the condition of supply and demand is another one of the factors to consider when deciding
whether commercial considerations have been followed.

8. In any event, it is for the complaining Member to prove that the “inconsistent act” complained
of lacks the requisite commercial considerations. We do not consider it appropriate to base an analysis
of the term “commercial considerations” purely on hypothetical scenarios which seem to focus solely
on the pricing policy of an STE.

9. Nevertheless, it may still be useful to apply the above explanations to see whether the given
factors are the possible bases of charging different prices. With regard to the first hypothetical
question, the competitive structure of the two market s are different. This “could” be a valid basis for
the STE to apply different prices in each market. In other words, the different prices do not

automatically mean that the STE did not act in accordance with commercial considerations. For the
second through fourth hypothetical questions, we recognize that the STE mi ght abuse its market
position in deciding the sale prices. However, since differential pricing could be a legitimate way of
generating of profits, we might not be able to determine whether the STE is setting its prices in
accordance with commercial considerations purely by fact that the STE uses different prices to
compete in the relevant markets.

Question 5

10. We do not consider the type of entity c onducting the sale and purchase to be relevant. The
Panel should make its determination on a case-by-case basis, taking into account the particular
circumstances of the markets in question.

Question 7

11. As stated in our Third Party Submission, Artic le XVII: 1(a) poses only an obligation of result
the means of which is the prerogative of the Member concerned.