Document: WT/DS276/R Page B-1 ANNEX B RESPONSES TO QUESTIONS OF THE PANEL IN THE CONTEXT OF THE SECOND 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 B

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

Contents Page
Annex B-1 Responses of Canada to ques tions posed in the context of the
second substantive meeting of the Panel
B-2
Annex B-2 Responses of the United States to questions posed in the context of
the second substantive meeting of the Panel
B-15
Annex B-3 Canada's comments on the answers of the United States to the
Panel's questions from the second substantive meeting
B-25
Annex B-4 United States' comments on the answers of Canada to the Panel's
questions from the second substantive meeting
B-34

ANNEX B-1

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

(29 October 2003)

For Canada:

69. With reference to the possibility to condition the receipt of foreign grain on it being kept
separate from Canadian grain in authorising such receipt under section 57(c) of the Canada
Grain Act (see, e.g., Canada's second written submi ssion, para. 95), does the power to impose
such a condition derive from section 57 itself or is there a provision elsewhere in the Act and/or
regulations that provides for this?

1. The legal authority to impose conditions on the en try of foreign grain into elevators is derived
from Section 57 of the Canada Grain Act (“CGA”). Section 57 of the CGA gives discretion to the
Canadian Grain Commission (“CGC”) to deny entry of foreign grain into elevators. In accordance
with Canadian principles of statutory interpretati on and administrative law, a discretionary authority
to deny entry of foreign grain into elevators includes the authority to permit with conditions the entry
of the foreign grain into elevators. There are no other provisions in the CGA or Canada Grain
Regulations (“Regulations”) that provide for imposition of conditions on entry of foreign grain into
elevators.

70. With reference to the separate keeping in elevators of domestic grain of different types,
grades, protein content and origin, as referred to at paras. 247 and 248 of Canada's first written
submission, is such segregation/separate keepin g a commercial practice by elevators or a legal
requirement? If the latter, please provide the rel evant legal text. Also, please indicate whether
there is a difference in this regard between different types of elevators (primary, etc.).

2. The legal restrictions on mixing of grain are found in Section 72 of the CGA and Section 56
of the Regulations and relate to grain in transfer and term inal elevators. Additional conditions on
mixing of foreign grain and Canadian grain may also be imposed in orders authorizing entry of
foreign grain made pursuant to Section 57 of the CGA, though there are no legal requirements that
such conditions are imposed.

3. Various segregations are also made in primary, transfer and terminal elevators as a result of
commercial imperatives to meet grading standards, customer demand or contractual obligations.

71. With reference to Canada's reply to Questio n 63 and also to sections 57 of the Canada
Grain Act and section 56 of the Canada Grain Regulations, have there been instances where no
requirement was imposed that foreign grain be kept separate from Canadian grain, or where
mixing of foreign grain with domestic grain was allowed without a requirement that it not be
designated as "Canadian grain"? Could Canada indicate/estimate in relative terms (percentage
terms) how common an occurrence this is? (For the written answer: Please provide supporting
evidence.)

4. Nothing in Canadian law or regulations mandat es segregation of foreign and Canadian grain.
Where elevators purchase foreign grain with an intention to mix it with Canadian grain, they generally
indicate this in their entry authorization request; in these circumstances, the CGC has agreed with the
mixing request and required that the mixed grain not be designated as Canadian grain.

5. In 2002-2003, for example, about 12% of entry requests received by the CGC also contained
a request to mix the foreign grain with Canadian grain. All these requests for entry and mixing were
granted.

6. As a matter of practice, if there is no request for mixing from the elevator, the entry
authorization requirement includes a condition that the foreign grain be kept separate.

72. What is the legal relationship between the Wheat Access Facilitation Programme and
section 57(c) of the Canada Grain Act ? In particular, has the Wheat Access Facilitation
Programme been established under the authority of section 57(c)? Please provide documentary
support.

7. An authorization order under Section 57 of the CGA may be provided either ad hoc on request
by the elevator, or in advance for multiple shipment s over a specified period. One of the examples of
such advance authorization under Section 57 of the CGA is the authorization given under the Wheat
Access Facilitation Programme (“WAFP”) for entry of US-origin wheat into certain participating
Canadian primary elevators.

8. Elevators may either avail themselves of the advance consent provided by the Canadian Grain
Commission under the WAFP, if they meet the requirements of the Programme, or use the normal
Section 57 entry authoriza tion process (either for one shipment or for multiple shipments of wheat).
Therefore, to the extent the US claim is that Sec tion 57 as such is inconsistent with Article III, the
WAFP is not relevant as it is non-mandatory and is only an example of how the authority under
Section 57 of the CGA has been implemented.

9. To the extent that the United States has c oncerns about the exercise by the CGC of its
discretion under Section 57 in specific instances - including pursuant to the WAFP - it should have
raised these matters in its request for the establishmen t of the Panel. It did not do so. In fact, it did
not even raise the WAFP as a measure until its second written submission. The US attempt at
expanding the scope of this dispute at a late stage of the proceedings should be resisted.

10. Finally, Canada recalls that the governments of Canada and the United States negotiated the
WAFP in response to concerns raised by the US Government. Indeed, the WAFP is annexed to a
Record of Understanding between the two governments.
1 Canada questions the extent to which, in the
light of the principle of good faith in international law as implied in the maxim Pacta Sunt Servanda,
the United States should be permitted to challenge the very agreement it has negotiated.

73. With reference to section 57(c) of the Canada Grain Act, once the receipt of foreign grain
has been authorised, does a CGC employee have to be physically present, in most or all cases, to
monitor the flow of the foreign grain into the el evator bins? If so, do CGC employees similarly
monitor the flow of Canadian-origin grain into elevator bins?

11. Canadian law does not require CGC inspectors to be present at either primary or transfer
elevators to monitor receipt of grain into the elevat or. And indeed, it is rare that CGC inspectors are
present at either of these elevators for that purpose. This is true both for fore ign and Canadian grain.

1 See paras. 229-230 of Canada’s First Written Submission for a description of the WAFP.

The CGA requires that CGC inspectors be present at term inal elevators to monitor the flow of grain
into elevators, for both Canadian and foreign grain.
2

74. With reference to Canada's reply to Question 13(d), how common is CGC monitoring of
receipt or discharge and who pays for this in cases where such a requirement is imposed?

12. Nothing in Canadian law or regulations requires CGC monitoring of receipt or discharge of
grain at elevators and indeed it is very rare that the CGC imposes this type of condition either for
Canadian grain or for foreign grain. In those ra re cases where an inspection condition is imposed, for
example in the case of Starlink maize, the elevator pays the cost of CGC monitoring.

75. With reference to Canada's reply to Question 14(c), at what stage and where do the type
of inspections referred to in section 32 of the Canada Grain Act occur?

13. Official inspections are always required for grai n going into and out of terminal elevators. At
transfer elevators, official inspections are genera lly required on discharge from the transfer elevator,
and on request, are conducted on receipt of the grain into the elevator. Official inspections may also
occur at primary elevators on request.

76. Canada indicates in its responses to Questions 16(b) and 59(a) that there is no
authorisation requirement for the mixing of different grades and classes of foreign
 grain. Could
Canada explain why section 72(2) of the Canada Grain Act does not apply in such cases?
Furthermore, if there is no requirement for the mixing of different grades and classes of foreign
grain, would Canada nevertheless impose a requi rement that such mixed foreign grain not be
designated as "Canadian" grain, etc. If so, what would be the legal basis for such a designation
requirement?

14. The prohibition in Section 72(1) does not apply to foreign grain.

15. Section 72(1) by its terms only applies to grai n of a certain “grade”. Foreign grain is not
graded under the CGA: Section 16(1) authorizes the CGC to establish grades for “western grain” and
for “eastern grain”. Eastern grain and Western grain are defined in Section 2 of the CGA respectively
as being grain grown in the Eastern part of Canada and grain grown in the Western part of Canada.
As a result, grades are not set for foreign grain under the CGA. Therefore, the prohibition under
Section 72(1) regarding mixing of grain of differe nt “grades” does not apply to foreign grain.
Because the prohibition in Section 72(1) does not apply to foreign grain, neither does the
authorization requirement in Section 72(2).

16. Nothing in Canadian law mandates the imposition of mixing restrictions; any such restrictions
result from conditions or limitations imposed upon entry of foreign grain into the system under
Section 57 of the CGA. In order to avoid misrepresentation, any entry authorization that allows
mixing of foreign grain would also contain a re quirement that the mixed foreign grain not be
designated as Canadian.

77. Does section 72(1) of the Canada Grain Act allow the mixing of foreign grain with
Canadian grain of the same
 grade?

17. As explained in answer to Question 76, th e prohibition in section 72(1) does not apply to
foreign grain. The CGC authorizes mixing of Canadi an grain with foreign grain regardless of the
foreign grain’s quality, as long as the mixed lot is not represented as being Canadian grain.

2 This is because CGC insp ectors are required by the CGA to conduct official inspections on all grain
received into terminal elevators.

78. With reference to section 151 of the Canada Transportation Act , please clarify element
"E". In particular:

 (a) Does element E mean that the number of tonnes to be moved per crop year are
fixed by the Canadian Transportation Agency?

18. Element E (tonnage) is not fixed by the Cana dian Transportation Agency (“CTA”). Rather,
the number of tonnes moved in a crop year depends on market factors such as grain production and
sales. After the crop year has ended, the railways report the number of tonnes moved in the crop year
to the CTA. The CTA reviews, audits and adjusts (if necessary) the number submitted by the railways
to make a determination as to the value of element E.

 (b) Is the maximum revenue entitlement determined in advance of the crop year or
ex post? How is this taken into acco unt by the relevant railroad companies in
setting rates for the current crop year?

19. The Maximum Revenue Entitlement for each railway is determined ex post , because the
Maximum Revenue Entitlement is dependent on the number of tonnes hauled and the average length
of haul incurred during the crop year in question. The Maximum Revenue Entitlement is also
dependent on the allowable inflation factor (as reflec ted by Element F in the formula). This factor is
determined by the CTA in advance of the crop year and is not adjusted ex post.

20. The Maximum Revenue Entitlement is not take n into account by railways in setting rates for
the current crop year. Railways set rates based on market factors as is apparent from the growing
difference between the Maximum Revenue Entitlement and the actual railway revenues – a difference
that is expected to continue into the future. The Maximum Re venue Entitlement does not constrain
the railway’s ability to set their railway rates.

79. According to para. 85 of Canada's second written submission, around 20 per cent of US
grain that passes through the Canada grain handling system is for re-export. With reference to
Article V of the GATT 1994, please indicate:

 (a) What processes and/or transformation, if any, does US grain undergo in Canada
before re-export?

21. The 20 per cent of US-origin grain referred to in Canada’s table is mostly grain transiting
through Canada and not grain “imported” into Canada for re-export as grain.

22. This grain does not undergo an y process or transformation.

 (b) Under Canadian law, what processes and transformation confer origin on the
types of grain covered by the Canada Grain Act?

23. Under the CGA, “Canadian grain” is grain grown in the Eastern or Western region of
Canada.
3 No process or transformation would confer Canadian origin to foreign grain.

 (c) Can grain be considered to be "in-transit" within the meaning of Article V of
the GATT 1994 where (i) it is temporarily sto red in elevators, (ii), in addition to
being stored, is also cleaned in elevators, and (iii) is mixed with other grain?

24. Article V of GATT 1994 applies to goods “in tr ansit across the territory of a Member when
the passage across such territory, with or without … warehousing … is only a portion of the complete

3 See Section 2 of the CGA (Exhibit US-7).

journey…”. [emphasis added] Grain temporarily st ored in an elevator is the equivalent of
warehousing. Accordingly, temporary storage does not remove the goods in transit from the
application of Article V.

25. US-origin grain that is “in-transit” is neither cleaned nor mixed. The grain can be stored for
any period of time but would remain “in-bond”.

 (d) With reference to footnote 38 of Canada's second written submission, is Canada
suggesting that, for instance, foreign grain that enters a Canadian primary
elevator which is then sent to a tran sfer elevator for re-export is always
accompanied by a long term storage form?

26. No. US-origin grain entering primary elevators is generally destined for the domestic market
or, on rare occasions, may be re-exported but it is no t “in-transit”. However, Canada notes that most
US-origin grain that enters Canada destined for a th ird country goes directly to a transfer elevator and
is “in bond”.

80. With respect to Canada's defence of section 57 of the Canada Grain Act and section 56(1)
of the Canada Grain Regulations under GATT Article XX(d), and with reference to the panel
report on European Economic Community - Regulatio ns on Imports of Parts and Components
(BISD 37S/132, paras. 5.14-5.18) which suggest s that Article XX(d) covers only measures
designed to prevent actions that would be illegal under the laws with which compliance is
sought to be secured, please identify for each of the laws referred to ( Canada Grain Act, etc.),
and provide the text of, the obligations with wh ich sections 57 and 56 seek to secure compliance.
In addition, please provide details of how sect ions 56 and 57 are necessary to secure compliance
with the relevant provisions of the laws in question.

27. As a threshold matter, Canada notes that in a case subsequent to EEC - Parts and
Components, the WTO panel in Korea - Beef recognized that a measure designed to “secure
compliance” need not have enforcement of the justifying law as its sole objective.
4 With this in mind,
Section 57 of the CGA and segregation requirements are necessary to secure compliance with the
following provisions:

 • Sections 32, 61 and 70 of the CGA5 and Schedule III of the Regulations:6 Section 32 of
the CGA provides that where a CGC inspector make s an official inspection it shall issue
an inspection certificate assigning a grade, where the grain is grown in Canada, and
stating the country of origin where the grain was grown outside Canada. Sections 61 and
70 of the CGA and Schedule III of the Regulations provide for grading of grain and
inspections. Section 57 of the CGA and segregation requirements ensure that Canadian
grades are not inadvertently and inappropriately given to non-Canadian grain (contrary to
the CGA) and result in misrepresentation as to origin and as to end-use characteristics of
the grain.

 • Sections 5, 7(1), 24, 32 and 45 of the Canadian Wheat Board Act (“CWB Act ”)
7 and
Section 16 of the Canadian Wheat Board Regulations (“CWB Regulations ”):8 These
provisions collectively set out the CWB’s sole authority to market all wheat and barley
produced in the “designated area” (the Provi nces of Manitoba, Saskatchewan, Alberta

4 Korea – Measures Affecting Imports of Fresh, Chilled, and Frozen Beef , Report of the Panel,
WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, paras. 656-658 and n. 363.
5 Exhibit US-7.
6 Exhibit CDA-22.
7 See Exhibit US-2.
8 Exhibit CDA-68.

and the Peace River area of the Province of British Columbia) that is sold either for
export of for domestic human consumption. In respect of wheat and barley, Section 57 of
the CGA and segregation requirements ensure that foreign grain maintains its identity so
as to ensure that the CWB’ s exclusive jurisdiction over the export of CWB grain is
neither eroded nor inadvertently extended contrary to the CWB Act . They do so by
enabling wheat and barley, with respect to which the CWB has no exclusive marketing
mandate, to be kept separate from the grain that the CWB has been established to market.

 • Section 52 of the Competition Act:9 Section 52 of the Competition Act prohibits false or
misleading representations to the public with respect to a product. Section 57 of the CGA
and segregation requirements ensure that fore ign grain maintains its identity in the bulk
handling system so that there is no misrepresentation as to origin and misleading
representations with respect to end-use character istics of the grain contrary to Section 52
of the Competition Act.

28. Canada refers the Panel to paragraphs 114- 125 of Canada’s Second Written Submission for
further details as to the necessity of the measures at issue to ensure compliance with these provisions.

81. With reference to Canada's reply to Quest ion 63, is there any reason why Canada could
not secure compliance with the relevant laws and co uld not maintain the integrity of its grading
system if foreign grain could be received in to elevators without a need for prior CGC
authorisation, but subject to the general require ment that foreign grain be kept separate from
domestic grain, unless the CGC grants an exemption from this requirement on request?

29. The need for authorization prior to entry into an elevator is necessary to address situations
such as where there is an SPS con cern or a concern regarding an unapproved genetically modified
event in shipments of grain. This is particularly important as once the grain enters an elevator, it is
very difficult, if not impossible, to deal with th e consequences. Such an occurrence would have a
serious negative impact on both the level of c onsumer confidence in the Canadian quality assurance
system, and indeed the ability of Canada to ensure and guarantee the quality of grain it is exporting.

30. The importance of this was highlighted recently by the discovery in Canada of a single cow
with BSE, with significant and continuing negative consequences. As a result, many countries around
the world banned the importation of beef from Canada. In the case of grain, if certain products (for
example, even trace amounts of GMO grain) not appr oved in Canada or other countries were found in
shipments of Canadian grain, it would have a dele terious effect on Canadian exports. Millions of
tonnes of grain pass through the bulk grain handling sy stem and are transported in tens of thousands
of rail cars. Given that, Canada mu st be aware of grain entering the system that has not been subject
to the Canadian quality assurance system and have the capacity to address any problems in order to
assure the quality of its exports.

31. Accordingly, the entry of foreign grain into the bulk handling system that is used to move
Canadian grain for export can raise SPS concerns that are additional to any SPS concerns arising from
the importation of foreign grain into Canada.

For both parties:

82. Please elaborate on what is an investment measure related to trade in goods within the
meaning of Article 1 of the TRIMs Agreement.

32. There is no definition for an “investment me asure related to trade in goods” in the TRIMs
Agreement. Accordingly, this phrase must be inte rpreted in accordance with the principles of treaty

9 Exhibit CDA-69.

interpretation in customary international law. The ordinary meaning of the words indicates that this
requires: (1) an investment measure, that is, a m easure that has an investment objective such as
encouraging the development of local capacity; and (2 ) that this investment measure be related to
trade in goods and not, for example, trade in service s. This phrase, which defines the scope of the
TRIMs Agreement, can also be understood in light of the Illustrative List, which is part of its context
and provides examples of the type of investment measures related to trade in goods that are
contemplated as falling within the scope of the Agreement.

33. An example of a trade related investme nt measure is the measure at issue in Indonesia-
Autos.
10 In making the determination that there was an investment measure at issue, the panel noted
that the car programme was

aimed at encouraging the development of a local manufacturing capability for
finished motor vehicles and parts and components in Indonesia. Inherent to this
objective is that these measures necessarily have a significant impact on investment
in these sectors ... we emphasize that our characterization of the measures as
“investment measures” is based on an ex amination of the manner in which the
measures at issue in this case relate to investment.
11
34. In this case, the measures at issue deal with handling of grain in elevators and with
transportation of grain and are not aimed at “encouraging investment”.

35. Canada also refers the Panel to its Firs t Written Submission at paragraphs 316-321.

83. With reference to paras. 1 and 2 of the Illu strative list annexed to the TRIMs Agreement
which contain the word "local production", is the investment contemplated in these paras.
investment pertaining to local production of good s, or could investment pertaining to the local
supply of a service also qualify as "investment" within the meaning of the TRIMs Agreement?

36. Article I of the TRIMs Agreement limits the scope of the Agreement to investment measures
related to trade in goods . Items 1(a) and 2(a) of the Illustrative List of the TRIMs Agreement
contemplate requirements for “ use” of products, whether specified in terms of particular products, in
terms of volume of value of products, or in terms of a proportion of volume or value of its local
production. The term “its local production” refers to the production of the “products” being used, that
is, the goods, and both must be read together.

84. With respect to the rail revenue cap, it would appear that an advantage, if any, could
accrue to Western Canadian grain and its purch asers/sellers, but not to the railway companies
transporting it. Is such an advantage covered by the provisions of Item 1(a) of the Illustrative
List annexed to the TRIMS Agreement?

37. No. Given that the revenue cap is not an investment measure, it does not even come within
the scope of the TRIMs Agreement. In addition, the purpose of local content requirements is to
favour use of domestic products over imported produc ts in production processes and that is why they
are considered to be trade distorting. If the advantage does not accrue to the person “using” the
product there would be no encouragement to “use” the domestic product. In any event, Canada notes
that in the recently concluded countervailing duty i nvestigation of Canadian wheat exports to the
United States, the Department of Commerce found th at there was no advantage being given by the
revenue cap.
12 Even assuming that Canadian grain is more attractive to domestic purchasers/sellers

10 Indonesia – Certain Measures Affecting the Automobile Industry , Report of the Panel, WT/DS54/R,
WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted 23 July 1998 (“Indonesia-Autos”).
11 Indonesia – Autos, para. 14.80.
12 Exhibit CDA-45.

because of the rail revenue cap, Canada recalls the finding of the Indonesia-Autos panel that “[t]he
TRIMs Agreement is not concerned with subsid ies … as such but rather with local content
requirements, compliance with which may be required through providing any type of advantage.”13

85. How do the parties define the term "use" in Item 1(a) of the Illustrative List contained
in the Annex to the TRIMS Agreement?

38. The term “use” in Item 1(a) of the Illustrative List can be understood as consuming,
processing or transforming the product. Grain elev ators and railways do not “use” grain but rather
provide a service (handling, cleaning or transportation) in respect of grain. In contrast, a flourmill
would be “using” wheat to produce flour and an o il seed crushing facility would be “using” soybeans
to produce vegetable oil. The US interpretati on of the term “use” as including transportation and
handling is contrary to the ordinary meaning of the word: it cannot be said that the driver of a truck
transporting toothbrushes “uses” those toothbrushes.

For Canada:

96. What is the purpose of the second clause of Article XVII:1(b) ("afford … adequate
opportunity … to compete for participation in su ch purchases or sales")? What does the second
clause add to the first clause ("commercial considerations")?

39. Article XVII:1(a) sets out the primary obligation of the Members in respect of state trading
enterprises, while Article XVII:1(b) defines the scope of that obligation by setting out circumstances
in which discrimination that is otherwise caught by subparagraph (a) would not come within the scope
of Article XVII:1 at all.

40. The type of discrimination that would be ca ught by Article XVII:1(a) is that set out in
Article I of GATT 1994. This is where an advantag e, favour, privilege or immunity is extended to
one Member, but not to others. Where a product is purchased from a Member (in the case of an
import monopoly) or exported to a Member (in the case of an export monopoly), this “advantage”
may amount to discrimination in one of two ways:

 • first, other Members (and, perforce their enterp rises) could be denied this opportunity
outright; or

 • second, the terms and conditions of the tran sactions under which other Members are
given this opportunity could be less advantageous than those provided to the initial
purchasers or sellers.

41. Where such distinctions are established, and they are not in accordance with the provisions of
Article XVII:1(b), such advantages are inconsistent with Article XVII:1.

42. Admittedly, Article XVII:1(b) is not a model of clarity. However, the structure of
Article XVII:1(b) reflects the reality of the two ty pes of discrimination that may exist and, more
specifically, the object of each element.

43. We begin with the words of the first clause of subparagraph (b). It applies to situations where
a state trading enterprise “ makes […] purchases or sales…”. By defi nition, therefore, the first clause
of subparagraph (b) presupposes that the state trading enterprise h as already decided to enter into a
business relationship – whether of purchase or sale – and the question is the terms and conditions of
the resulting agreement. The clause thus places discip line on the considerations that the state trading

13 Indonesia-Autos, para. 14.73.

enterprise must take into account in imposi ng terms and conditions on the transaction they make:
these considerations must be commercial. If the terms and conditions for one sale are different from
those for another, the difference must be in acco rdance with commercial considerations, such as the
factors set out in the subparagraph.

44. This, however, leaves the other situation of potential discrimination: where a Member and its
enterprises are entirely excluded from even competing for purchases (from export monopolies) or
sales (to import monopolies). In these circumstances, the issue is not the terms and conditions of a
purchase or sales agreement (in which the factors mentioned in the first clause would be highly
relevant), but rather the very chance, the opportuni ty to compete for such transactions. The second
clause of subparagraph (b) addresses a situation where no purchase or sale has taken place because a
state trading enterprise refuses to consider even allowing a purchaser or seller the opportunity to
compete for participation in its purchases or sales. In this context, the factors set out in the first clause
– such as price and quality of the product at issue – are not immediately relevant. And so,
Article XVII:1(b) provides that for such an exclusion from consideration to be consistent with
Article XVII:1, it must be in accordance with cust omary business practice. Accordingly, refusal by a
state trading enterprise to consider even the opportunity for such purchases or sales by enterprises of a
Member not based on customary business practice would result in the violation of Article XVII:1.

97. With reference to para. 39 of Canada's second written submission, is Canada suggesting
that in respect of export sales by an STE, th e MFN principle set out in Article I would not
prohibit the selling at a lower
 price or under less stringent terms and conditions in one market
than when selling in another?

45. The most-favoured-nation principle under Ar ticle I provides that any “advantage, favour,
privilege or immunity granted by any contracting pa rty to any product originating in or destined for
any other country shall be accorded immediately a nd unconditionally to the like product originating
in, or destined for, the territories of all other contracting parties.”

46. Under Article XVII, the application of the most-favoured-nation principle in respect of
exports sales by a state trading enterprise would re quire that the state trad ing enterprise provide any
advantage, favour or privilege granted in respect of products destined for purchasers in one WTO
Member immediately and unconditionally to products destined to purchasers in other WTO Members.
In the context of this question, the “advantage, favour or privilege” is the lower price or less stringent
terms and conditions. In other words, the most-favoured-nation principle would prohibit the selling at
a higher price or under more stringent terms and conditions in one market than in another.

47. Left untempered by Article XVII:1(b), the a pplication of the most-favoured-nation principle
under Article XVII:1(a) would require the state tradi ng enterprise to charge the same lower price or
impose the same less stringent terms and conditions in all markets. Without Article XVII:1(b) a state
trading enterprise would be required to sell at the same price and under the same terms and conditions
in all markets regardless of varyin g market conditions. State trading enterprises would, therefore, be
placed at a disadvantage as compared to private traders. Such an outcome does not accord with
common sense.

48. Article XVII:1(b) interprets the obligation unde r Article XVII:1(a) to the effect that an export
state trading enterprise may discriminate in its sales, that is, charge different prices or impose different
terms and conditions in different markets, as long as it does so based on “commercial considerations”.
Only where an export state trading enterprise fails to offer the lower price or less stringent terms or
conditions to other Members because of non-commercial considerations would the export state
trading enterprise violate Article XVII.

49. Further, this interpre tation is supported by Note Ad Article XVII, which provides 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.
The Note makes clear that the charging of different prices in different markets is not discrimination
under Article XVII:1, as long as it is based on commercial reasons.

98. With reference to para. 95 of Canada's second written submission, does not, or might
not, a condition to keep foreign grain separate fr om domestic grain entail costs for an elevator
operator, including the costs of separate/additional bins, etc.?

50. The requirement to keep foreign grain sep arate from Canadian grain does not entail extra
costs for an elevator operator. Elevators in Cana da are constructed to be able to handle numerous
segregations of grain – for example, between different types of grain as well as different grades of a
type – and elevator operators are experienced in managing elevator capacity to handle a large number
of segregations. Being required to keep foreign gr ain separate from Canadian grain is simply one
segregation amongst many that occur in elevators.

99. Could Canada elaborate upon, including by providing the legislative basis for and the
practicalities associated with, the inspection and reporting requirements with respect to
Canadian grain referred to in response to Questions 14(c) a nd 15? Do these requirements
apply to foreign grain as well?

51. Official inspection and other grading require ments are found at Sections 61 of the CGA for
primary elevators and at Section 70 of the CGA for terminal and transfer el evators. With respect to
Section 70 of the CGA, official inspections at terminals are required both upon receipt of the grain
into the terminal and upon discharge from the termina l; for transfer elevators, official inspection is
only required upon discharge.

52. Foreign grain is not graded by the elevator on receipt into primary elevators, nor is it
officially inspected by the CGC at transfer and/or terminal elevators.

53. The reporting requirements are based on Sections 79-80 of the CGA and Sections 23-27 of the
Regulations. Details of reporting requirements, reporting forms a nd instructions can be found at
http://www.grainscanada.gc.ca/regulatory/licensees/forms-e.htm.

54. Reporting requirements also appl y to foreign grain. However, because foreign grain is not
subject to the same quality assurance system prior to its entry into Canadian elevators, relying on
reporting is not sufficient in the case of foreign grain to address potential concerns.

100. With reference to section 32 of the Canada Grain Act:

 (a) Does this section cover cases where grain has been mixed? If so, what types of
mixing are covered (i.e., mixing foreign grain with domestic grain, etc.)?

55. Section 32(1)(a) covers cases where Canadian grain has been mixed with other Canadian
grain. Section 32(1)(b) covers cases where Canadi an grain has been mixed with foreign grain or
foreign grain mixed with other foreign grain.

 (b) Are section 32 inspections undertaken only in case of grain destined for export?

56. No. Official inspections are conducted for e xport of grain but they are also conducted where
grain moves to domestic end-users through a term inal elevator. A significant volume of grain

destined from Western Canada to the domestic mark et in Eastern Canada moves via the terminal
elevators in Thunder Bay and is therefore inspected. Official inspections also occur on request for
grain not destined for export; for example, in order to meet customer demand.

101. With reference to section 56(1), are there any conditions that operators of transfer
elevators need to satisfy in order to benefit from the advance mixing authorisation other than
the fact that grain needs to be "eastern grain"?

57. No, but the mixed Eastern grain will be o fficially inspected upon discharge and will be
assigned the grade for which it qualifies.

102. With reference to Canada's replies to Qu estions 13(b), 13(c) and 15, how does Canada
control shipments of foreign grain for GMO a nd SPS problems where foreign grain is shipped
to the end-user directly rather than through the bulk grain handling system?

58. SPS problems are usually dealt with at the border. There is a requirement for an SPS
certificate both for grain going to end-users and for grain entering elevators. However, no country’s
border controls are infallible. Given the importance of maintaining the quality and reputation of
Canadian grain exports, there are greater concerns for grain entering the bulk grain handling system
(which is geared towards exports) than for grain, whether domestic or imported, shipped directly to an
end-user. The entry of foreign grain into the bulk grain handling system can raise SPS concerns that
are additional to any SPS concerns arising from the mere importation of foreign grain into Canada.

59. Similarly, as regards GMOs, Canada may not have concerns about certain GMOs going
directly to end-users. However, Canada may want to protect grain in the bulk grain handling system
from genetically modified events not approved in Cana da or in other countries, given that most of the
grain entering the system is destined for export, including to countries that do not accept GMOs and
that have a very low tolerance level for GMO “contamination”. Canadi an exports could be
compromised if even a trace of a genetically modified event not approved in Canada or in other
countries were introduced into the bulk grain handling system.

103. With reference to section 57(c) and para. 19 6 of Canada's first written submission, why
does the CGC not rely on section 57(d) with respect to foreign grain for which there is an SPS
concern?

60. Elevator operators in Canada are experienced in identifying problems with contaminations
and infestations and, as a result, such problems with in Canada are relatively rare. However, there are
disease, weed and insect pests in other countries th at do not exist in Canada and with which the
Canadian industry may be unfamiliar. Therefore, an elevator operator may not know or “have reason
to believe” that there are SPS concerns with resp ect to specific foreign grain. The CGC possesses
more knowledge about SPS concerns and is in a better position to dete rmine what level of protection
is necessary.

61. In addition, not all SPS or GMO issues would cause the grain to fall within the definition of
“contaminated” grain within the meaning of Section 2 of the CGA. For example, although a particular
shipment of US wheat may not be “cont aminated” (within the meaning of the CGA) with a fungal
disease such as karnal bunt, for SPS reasons, all wheat from an affected region in the United States
would need to be strictly scrutinized.

104. With reference to para. 161 of Canada's fi rst written submission, are there SPS controls
in respect of imports of foreign grain at the border as well, or are the controls in cases of foreign
grain entering the bulk grain handling system limited to those the CGC may undertake under
section 57?

62. Foreign grain is also subject to SPS controls at the border.

63. No importer or exporter of US grain to Canada has to apply for an import permit in respect of
plant health issues, unless the gr ain originates in the states of California, Arizona, New Mexico or
Texas. Therefore, while US grain shipments are a ccompanied by phytosanitary certificates indicating
freedom from certain diseases or pests, they are not subject to the same scrutiny as imports from most
other countries where import permits are required by CFIA.

105. Why are Alberta, British Columbia, Mani toba and Saskatchewan the only provinces
with loading sites eligible for the producer railcar programme?

64. Section 87 of the CGA does not limit “eligible loading sites” to these provinces but simply
limits producer cars to “producers”. There is no geogr aphical limitation in law, regulation, or in the
CGC Producer Car Allocation Orders.

106. With reference to Canada's Article XX defence, please provide your views on the
alternative measures referred to by the EC in its written third party submission at paras. 31 and
32.

65. Paragraphs 31 and 32 of the EC submi ssion seem to rely on a misunderstanding of
Sections 57 of the CGA and Section 56 of the Regulations. At paragraph 56, the EC notes that: “it is
not clear why an elevator which has previously received imported grain could not subsequently
receive Canadian, and vice versa”. This is not corre ct. Elevators that receive foreign grain can also
receive Canadian grain. Requiri ng cleaning of the bin after recei pt of foreign grain would be
imposing significant additional burdens that do not exist under the current system. Furthermore, it
would not achieve the objective of avoiding mi srepresentation regarding the origin and end-use
characteristics of the product. With respect to the reference to “spot checks”, it is unclear what the
EC is referring to and how this could achieve the same objective.

107. It appears that non-registered wheat varieties n eed not be visually distinguishable. If so,
how can elevator operators avoid improperly grading such wheat on receipt? ( see Canada's
second written submission, para. 119)

66. There are very minimal amounts of non-registered varieties of wheat grown in Canada
whereas most wheat grown in the United States is of varieties not registered in Canada. Non-
registered varieties of wheat grown in Canada cannot be graded as milling quality wheat (they are
only eligible for feed grades). As a result, production of non-registered varieties of wheat is
discouraged in Canada. Elevators would suffer m onetary penalties if a shipment of milling quality
wheat was found to contain a non-registered variet y (in excess of established tolerances). Elevator
operators are familiar with varieties grown on farms in the area and will be cautious in order to avoid
these monetary penalties. In addition, if an elev ator operator has concerns that a shipment may
contain unregistered varieties, it can submit a sample to the CGC for testing.

108. With reference to para. 125 of Canada's second written submission, how does Canada
secure compliance with the CWB Act vis-à-vis eastern Canadian grain?

67. Compliance with the CWB Act with respect to Eastern Canadi an wheat is secured through the
requirement in the CWB Act (Sections 45 and 46(c)) that exporters of wheat grown outside the CWB
designated area must obtain an export licence from the CWB.

68. Eastern wheat is fundamentally different from Western wheat -- Eastern wheat is
predominantly soft wheat and it fits in different wheat classes than Western wheat.

69. In any event, in order to mix Eastern grain and Western grain in transfer elevators (the only
location where there is both Eastern grain and W estern grain) an authorization from the CGC is
necessary pursuant to Section 72 of the CGA and Section 56 of the Regulations.

ADDITIONAL PANEL QUESTION POSED AFTER THE SECOND MEETING

For Canada:

109. With reference to Canada's defence under Article XX(d), could Canada please indicate
the level of compliance section 56 of the Canada Grain Act and section 57 of the Canada Grain
Regulations seek to secure with the various laws ref erred to in Question 80? Please provide
support for the level indicated.

70. Canada takes significant steps to protect the quality and reputation of Canadian grain exports.
Canada is also committed to protecting the CWB’s exclusive jurisdiction over the export and sale for
domestic consumption of Western Canadian wheat and barley. In addition, Canada prohibits
misrepresentation of products: it does not want to reduce the leve l of misrepresentation but to
eliminate all misrepresentation with respect to gr ain. In light of this, Section 57 of the CGA and the
segregation requirements are designed to secure a ve ry high level of compliance with the grading
provisions of the CGA, the CWB Act and the Competition Act.

ANNEX B-2

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

(29 October 2003)

Questions for the United States:

Question 66
: With reference to the US reply to Qu estion 9, could the United States please
confirm that it expects the Panel to rule only on section 56(1) of the Canada Grain Regulations as
it existed at the time the March and July 2003 panels were established, and not section 56(1) as
amended.

1. Under the Panel’s terms of reference, the Pane l is called to make findings on Section 56(1) of
the Canada Grain Regulations as it existed at th e time the March and July 2003 panels were
established. We note, however, that Section 56(1) as amended, which is not within the Panel’s terms
of reference, is essentially the same as Section 56(1) as it was drafted at the time of the panel request.
Prior to the amendment, Section 56(1) was written as an explicit prohibition on the mixing of foreign
grain. Section 56(1) as amended also prohibits the mixing of foreign grain by stating that only eastern
Canadian grain can be mixed. The result is the same, and only the form differs.

Question 67
: With reference to the US claim in respect of section 56(1) of the Canada Grain
Regulations, please clarify further why an inconsistency with Article III:4 is alleged to arise. In
particular, is the United States' argument th at if Canada intends to maintain the advance
mixing authorisation represented by section 56(1), it should also give advance authorisation for
the mixing of foreign grain that is like eastern gr ain, on the one hand, with eastern grain, on the
other hand?

2. Section 56(1) prohibits a transfer elevator from mixing foreign grain. At the same time,
Section 56(1) allows the mixi ng of eastern Canadian grain.
1 In order to be compliant with its
Article III:4 obligations, foreign grain should be treated as like eastern Canadian grain.

3. Section 56(1) does not refer to any advan ce mixing authorization requirement for eastern
Canadian grain. Eastern Canadian grain, a prod uct of national origin for Canada, is like certain
foreign grain. Therefore, no advance mixing aut horization requirement should be imposed on like
foreign grain. An elevator operator should be free to mix foreign grain with foreign grain, as well as
foreign grain with like eastern grain, without obtai ning prior authorization. Ultimately, it is up to
Canada to determine precisely how to comply with a panel finding that Section 56(1) is inconsistent
with Canada’s obligations under Article III:4.

1 This is true under Section 56(1) prior to ame ndment, as well as Section 56(1) as amended.
Section 56(1) prior to amendment states that mixing is allowed “if neither of the grains is western grain or
foreign grain.” Canada Grain Regulations Section 56(1). The only grain that can be mixed, then, is eastern
grain. As amended, Section 56(1) reaches the same re sult and affirmatively states that eastern grain may be
mixed. See Regulations amending the Canada Grain Regulations, Exhibit CDA-23.

Question 68
: With reference to the US reply to Quest ion 11 and para. 19 of the US second oral
statement, is the United States claiming that sectio n 87 is inconsistent with Article III:4 because
producers of foreign grain are legally precluded, pursuant to section 87, from having access to
producer cars, or because they are in fact deni ed such access in view of the fact that the
producer car loading sites are located in certain areas?

4. The United States is claiming that Section 87 is inconsistent with Article III:4 because foreign
grain is legally precluded from having access to prod ucer cars and is thereby accorded less favourable
treatment than like Canadian grain.

5. As evidence that foreign grain is legally pr ecluded from having access to producer cars and is
thereby accorded less favourable treatment than like Canadian grain, the United States has shown that
producer cars are only available to Canadian grain producers located in certain Canadian provinces.
The United States also has pointed out Canadian Gove rnment statements that the producer car benefit
is only available to producers of Canadian grain. 2 It can therefore be concluded from this evidence –
indeed, there is no other logical conclusion that can be drawn – that US grain is legally precluded
from receiving the producer car benefit, since Canadian grain producers do not produce US grain.

Questions for both Parties:

Question 82
: Please elaborate on what is an investment measure related to trade in goods
within the meaning of Article 1 of the TRIMs Agreement.

6. At the outset, we wish to note that it is not clear whether the TRIMs Agreement requires a
separate analysis of whether a measure is a trad e-related investment measure. The panel in Indonesia
– Autos expressly declined to reach this issue.3 Nevertheless, whether or not the TRIMs Agreement in
fact demands a separate analysis of this issue, th e measures in this dispute are investment measures
related to trade in goods within the meaning of Article 1 of the TRIMs Agreement. Because Canada’s
grain segregation and transportation measures require elevator operators, shippers and
sellers/purchasers of grain to use domestic grain in order to obtain cost advantages, these measures
necessarily have investment consequences for t hose enterprises and are investment measures for
purposes of the TRIMs Agreement. These grain segregation and transportation measures also are
clearly related to trade in goods, as they affect th e sale, purchase, transportation, distribution and/or
use of grain and favour use of domestic grain over foreign grain.

Question 83
: With reference to paras. 1 and 2 of the Illustrative list annexed to the TRIMs
Agreement which contain the word "local producti on", is the investment contemplated in these
paras. investment pertaining to local production of goods, or could investment pertaining to the
local supply of a service also qualify as "investment" within the meaning of the TRIMs
Agreement?

2 The United States has offered the web page of Agriculture and Agri-Food Canada as evidence that
Section 87 of the Canada Grain Act provides less favourable treatment for foreign grain, and Exhibit US-23
should remain before the Panel for consideration, notw ithstanding Canada’s attempts to suggest otherwise.
Canada repeatedly referred to government web sites du ring consultations as authoritative descriptions of
Canadian measures. Canada also has itself provided the Panel with numerous web pages as evidence ( see, e.g.,
Exhibits CDA-60, CDA-61, CDA-62, and CDA-66). At the second panel hearing, Canada attempted to blur the
distinction between measures on the one hand and evidence on the other by referring to Exhibit US-23 as a
“measure.” The measure at issue here is Canada Grain Act Section 87, and the web page provided by the
United States, Exhibit US-23, is evidence of the scope of that measure.
3 See Indonesia - Certain Measures Affecting the Automobile Industry , WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R (25 Sept. 1997), para. 14.71.

7. Only paragraph 1(a) of the Illustrative List is relevant to this dispute, and the phrase “local
production” is not applicable to the measures at issu e here. In this dispute, the grain segregation and
rail transportation measures require the purchase or use of domestic grain. These measures do not
state this requirement in terms of a proportion of the value of local production. The Panel need not
examine the term “local production” in order to conclude that Canada ’s grain segregation and
transportation measures fall under paragraph 1(a) of the Illustrative List and inconsistent with
Article 2 of the TRIMs Agreement.

Question 84
: With respect to the rail revenue cap, it would appear that an advantage, if any,
could accrue to Western Canadian grain and it s purchasers/sellers, but not to the railway
companies transporting it. Is such an advantage covered by the provisions of Item 1(a) of the
Illustrative List annexed to the TRIMS Agreement?

8. Canadian grain and its purchaser s/sellers who use the rail transport system to ship Canadian
grain obtain an advantage under the rail revenue cap in the form of lower rail transport rates for
Canadian grain. This advantage is only obtain ed when domestic rather than foreign grain is
transported, and it is an advantage that is cove red by paragraph 1(a) of the Illustrative List.
Compliance with the rail revenue cap measure is necessary in order for Canadian grain and its
purchasers/sellers to obtain this advantage. The fact that the railway companies must comply with the
measure in order for the advantage to be conferred does not place the rail revenue cap measure outside
the scope of paragraph 1(a) of the Illustrative List.

Question 85
: How do the parties define the term "use" in Item 1(a) of the Illustrative List
contained in the Annex to the TRIMS Agreement?

9. For purposes of this dispute, and as discussed in our response to the Panel’s first set of
questions, “use” refers to the handling of grain in the normal course of business, i.e., handling, storage
and transport.

Questions for the United States:

Question 86
: Could the United States elaborate on what it means when it says that the CWB
Export Regime "necessarily results" in CWB expo rt sales that are not in accordance with the
Article XVII standards? (see US second written submission, para. 3; US reply to Question 1(a))?
Is the United States arguing that non-confor ming CWB export sales are an inescapable
consequence of the CWB Export Regime, or is the United States arguing that it can be
presumed, in the light of the various aspects of the CWB Export Regime discussed by the
United States, that the CWB will make sales that are not in accordance with the Article XVII
standards (see US first written submission, para. 70)?

10. Non-conforming CWB export sales are an inescapable consequence of the CWB Export
Regime. The CWB has a statutory mandate to ma ximize sales of Canadian wheat on the world
market. When the CWB fulfills this mandate throug h the use of its special and exclusive privileges
and in the absence of any constraints on the CWB’s non-commercial pricing and risk structure, what
results are CWB actions that are necessarily in consistent with Canada’s obligations under
Article XVII.

Question 87
: With reference to the word "commercia l" in Article XVII:1(b), please provide
answers to the following questions:

 (a) How should the word "commercial" be interpreted?

11. Canada has undertaken under Article XVII:1(b) that the CWB shall make its sales solely in
accordance with commercial
 considerations. The word “commercial” must be read not in isolation,

but in the context of Article XVII:1(b), which places specific constraints on the actions of the CWB.
Consistent with the customary rules of interpretati on of public international law, which are reflected
in Article 31 of the Vienna Convention,
4 the word “commercial” must be interpreted according to its
ordinary meaning, in context and in light of the object and purpose of the GATT 1994.

12. Article XVII:1(b) does not caveat or qualif y the word “commercial.” Nevertheless,
recognizing that the CWB does not in fact make sal es in accordance with comm ercial considerations,
Canada attempts to read an additional, qualif ying phrase into Article XVII:1(b), arguing that
“commercial considerations” really means the consid erations of a private grain trader in similar
circumstances to the CWB.
5 This interpretation frustrates the structure of Article XVII:1, which
limits the actions of STEs and sets forth the obligations of Members that chose to establish and
maintain STEs. In interpreting the word “commercia l” in Article XVII:1(b), one must therefore keep
this structure in mind. Furthermore, Canada’s interpretation of “commercial” would require the Panel
to read into the text words which simply are not there, in contravention of customary rules of treaty
interpretation.6

 (b) The US can be understood as arguing that it may be "rational" for an export
STE to use its special privileges to gain a competitive advantage in the
marketplace vis-à-vis its competitors, but that export sales made in this manner
would not be based on "commercial" cons iderations. In other words, the US
appears to argue that the "commercial considerations" criterion requires more
than rational competitive behaviour. ( see US reply to Question 23, US second
written submission, para. 19) If that is correct, could the United States explain
how the word "commercial" in Article XVII:1(b) supports this view?

13. The “commercial considerations” criterion unde r Article XVII:1(b) requires more than mere
rational competitive behaviour. As explained abov e, one must keep in mind the structure of
Article XVII. Article XVII states that Member s may establish and maintain STEs and grant them
exclusive privileges. However, if a Member chooses to establish such an STE, that Member
undertakes that the STE will act in accordance with certain standards of behaviour. Under
Article XVII:1(b)’s standards, STEs must ma ke sales solely in acco rdance with commercial
considerations. Nowhere does Article XVII:1(b) state or imply that an STE must merely make its
sales as a rational actor with special privileges.

14. Acting rationally and acting commercially are not the same thing, especially when the actor
has been afforded special and ex clusive privileges and a mandate to promote the sale of Canadian
grain in world markets at reasonable prices. Indeed, Merriam-Webster’s Collegiate Dictionary
confirms this view, listing “reasonable” as a synonym for “rational.”
7 Article XVII is clear – Canada
undertakes that the CWB will act acco rding to “commercial” considerations, not merely “rational” or
“reasonable” considerations. “Co mmercial” is defined by The New Shorter Oxford Dictionary as
“[i]nterested in financial return rather than artistry; likely to make a profit; regarded as a mere matter
of business.”8 As explained in our first submission 9, the CWB’s legal mandate to maximize sales of
Canadian wheat at “reasonable” prices10 leads the CWB to make sales in greater volumes and at lower
prices than a normal, profit-maximizing firm. The CWB is not focused on profit and “mere matter[s]
of business.” Canada has established the CWB and h as directed the CWB to act, not in accordance

4 Vienna Convention on the Law of Treaties, 23 May 1969, 1155 U.N.T.S. 331.
5 See, e.g., Canada’s Opening Statement at the Second Meeting of the Parties, para. 33.
6 See United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality
Line Pipe from Korea, WT/DS202/AB/R (15 Feb. 2002), para. 250.
7 Merriam-Webster’s Collegiate Dictionary: Tenth Edition (2001), p. 967.
8 The New Shorter Oxford English Dictionary (1993), p. 451.
9 See First Written Submission of the United States, paras. 85-86.
10 See Canadian Wheat Board Act (Exhibit US-2), sec. 7(1).

with commercial considerations, but, instead, to act consistently with the policy objectives set forth in
the Canadian Wheat Board Act. The CWB does in fact act according to this legal mandate. The
CWB’s rational behaviour under the Canadian Wh eat Board Act results in the CWB maximizing
sales, rather than profits, in furtherance of Ca nada’s policy objectives but not in accordance with
commercial considerations. This behaviour is in consistent with the obligations set forth in
Article XVII:1(b).

15. An STE may make full use of its special and exclusive privileges to gain market share in
particular markets, for example, by discounting prices to make sales – but that behaviour would not be
commercial. “Commercial considerations” in XVII:1(b) specifically references consideration of
price, quality, availability, etc. Commercial behavi our driven by these considerations would result in
actions that reflect market realities and are consiste nt across all actors in a given industry or market
sector. The special and exclusive privileges gran ted to the CWB permit it to operate without the
normal commercial constraints faced by a fully commercial actor – for example, the reduced risk
faced by the CWB because of the government-guara nteed initial payment to farmers and government-
guaranteed borrowings. Commercial entities face an entirely different risk structure and would
therefore have to act differently in commercial se ttings. The CWB may act rationally in light of its
special and exclusive privileges, but its acti ons would not be in accordance with commercial
considerations. The CWB makes decisions that are not driven by commercial considerations, but are
driven by the unique qualities of the CWB export regime, including the CWB’s special and exclusive
privileges and its policy mandate to maximize sales not profits.

16. Finally, private enterprises must make deci sions according to commercial considerations in
order to stay in business. For example, a priv ate enterprise cannot engage in long-run predatory
pricing or the enterprise will be unable to cover its costs. The CWB, with its special and exclusive
privileges and special mandate, however, does not face these commercial market constraints and
could therefore engage in sales that are rational (t hey increase the quantity of wheat sold) but are not
commercial in nature (the replacement value of the wheat sold is not recovered). Article XVII:1(b)
restores a balance and ensures that STEs like the CW B engage in sales not according to a rational set
of criteria, but solely in accordance with commercial considerations.

 (c) With reference to the US reply to Ques tion 22(d), would the United States accept
that a private monopolist that is able , due to barriers to entry, to extract
monopoly rents in its home market is acti ng on the basis of what is described as
"commercial considerations" in Article XVII:1(b)?

17. Assuming that the barriers to entry are beyond the monopolist’s control, we would agree that
a private monopolist may be able to extract rents in its home market and such behaviour would be
commercial. However, such pure or natural monopolies are rare, and do not exist in the industry of
concern here, i.e., bulk grains. A pure or natural monopoly, of course, differs considerably from a
government-granted right of monopsony.

Question 88
: What is the United States' reaction to the Canadian argument, set out at para. 63
of its second written submission, that under the US interpretation of Article XVII:1(b),
Members could grant special or exclusive privileg es, but STEs would not be able to use them
without violating Article XVII?

18. Canada’s argument is without merit. Article XVII expressly provides that Members may
establish and maintain enterprises with special and exclusive privileges. However, every Member that
chooses to establish or maintain su ch an enterprise undertakes that the enterprise will act according to
the standards set forth in Article XVII:1. For example, under Article XVII:1(b), the CWB must not
act in a way that denies the enterprises of other Members an adequate opportunity to compete for
participation in the CWB’s sales, and the CWB must make its sales solely in accordance with
commercial considerations.

19. Contrary to Canada’s assertions, Article XVII: 1(b) permits the use of special and exclusive
privileges within certain parameters. For exampl e, the CWB can exercise its government-granted
monopoly privilege related to the sale of western Canadian wheat for domestic human consumption
and export. Article XVII:1(b) does not require th e CWB to let other entities sell western Canadian
wheat, it merely requires the CWB to sell wester n Canadian wheat in accordance with commercial
considerations and in a manner that affords the en terprises of other members an adequate opportunity
to compete for participation in those sales.

20. Indeed, the Ad Note to Article XVII supports the US interpretation and provides an example
of an STE’s use of special and exclusive privileges that is consistent with Article XVII:1(b). The Ad
Note states that an STE with special and exclusive privileges is not precluded from price
discrimination between markets as long as “such diff erent prices are charged for commercial reasons,
to meet conditions of supply and demand in export markets.”
11

Question 89: Would the United States agree that expo rt STEs compete not only with private
enterprises that enjoy no government-conferred privileges and are constrained by market
forces, but possibly also with private enterprise s that may be dominant firms with market
power in their home markets, private enterpri ses that engage in sustained or repeated dumping
in third country markets within the meaning of Article VI of the GATT 1994 (but cause no
material injury or cause material injury in a country that has no anti-dumping legislation or
chooses not to counter such dumping), private ent erprises that export agricultural products the
exportation or production of which has been subsidized (and do so consistently with the
Agreement on Agriculture, for instance), etc.?

21. In theory, both an export STE and a priv ate corporation compete with the enterprises
described above. But the nature of the players in the market does not in any way caveat or alter the
obligation under Article XVII:1(b) to act in accord ance with commercial considerations. Just as a
private corporation would have no choice but to act according to commercial considerations
regardless of the players in the market, an STE also must act solely according to commercial
considerations. The Article XVII:1(b) standard re mains the same whether or not the enterprises listed
above compete in the market.

22. In practice, regarding private enterprises that are dominant firms with market power in their
home markets and private enterprises engaged in su stained and repeated dumping in third country
markets, the United States does not agree that the CWB is in fact co mpeting with such enterprises.
These two hypothetical scenarios are unlikely to exist in the world bulk grain sector. This is because
private enterprises selling grain on the world market do not have a guaranteed access to supply and
must compete with other entities in order to secure a supply of grain. In countries without monopoly
STE’s, all enterprises exporting grain must compete for supplies to sell. The grain export sector in
most major grain exporting countries includes major international grain companies, as well as small,
more specialized exporters who trade in only a fe w grain commodities and sell to selected markets.
Given the nature of the grain market, none of th ese private enterprises can be characterized as a
dominant firm with market power in its home market.

23. Concerning a private enterprise that engages in sustained or repeated dumping in third
country markets in the wheat sector, we would firs t note that Members have condemned dumping that
causes or threatens material injury under Article VI:1 of the GATT 1994. That condemnation exists
whether or not a particular importing Member ha s anti-dumping legislation or chooses to take
corrective action. Accordingly, the United States woul d hope that this would be a rare enterprise and
there would not be sustained or repeated dumping.

Question 90: With reference to footnote 15 of the US second written submission, please provide
a complete copy of CWB Marketing Panel Report (exhibit US-12). Also, please explain how the
passage quoted in footnote 15 supports the view th at No. 2 CWRS was actually sold at prices
below No. 3 CWRS. Finally, if it did do so, why did the CWB have sold No. 2 CWRS at prices
below No. 3 CWRS?

24. A complete copy of the CWB Marketing Panel Report is provided as Exhibit US-24.

25. In the passage quoted in footnote 15 of the US second written submission, the CWB describes
the “value” of CWB pooling for the Canadian wheat farmer. Canada explains that a farmer should
not assume that just because he delivered No. 2 CW RS to the CWB, his return is equal to the
weighted average of all CWB sales of No. 2 CWRS during a given year. The CWB explains that this
would be a false assumption because No. 2 CWRS (a higher quality wheat) might have been sold by
the CWB at lower prices than the prices at which all the No. 3 CWRS (a lower quality wheat) was
sold. Considered in context, one can infer that th e CWB does in fact engage in such pricing schemes.
The description is not posed merely as a hypothetical , but as an explanation of CWB activities. This
statement also corroborates other ev idence that the CWB gives away quality and protein in its sales.
Given the CWB’s secrecy surrounding its sales data, relying on such CWB statements is one means of
demonstrating that the CWB engages in sales that are inconsistent with Article XVII:1.

26. Regarding why the CWB would sell No. 2 CWRS at prices below No. 3 CWRS in a given
market, such behaviour precludes another competit or from competing in that market because the
competitor cannot sell comparable high-quality wheat at a low-quality wheat price without taking a
loss. The CWB engages in such behaviour to increase its sales and market share. It is able to do so
without concern for the losses faced by private comp etitors because the CWB’s special and exclusive
privileges provide the CWB with mech anisms to adjust its pools in a way a private enterprise cannot.
For example, the CWB adds its net interest earn ings to its pool accounts, using the net interest
earnings to inflate the pool revenue so that the CWB can increase returns to farmers irrespective of the
actual revenue earned from current grain sales.
12

Question 91: At para. 25 of the US first written submission, the Unites States asserts that, over
the past 15 years, the CWB's initial payments have been "well below full market value". On the
other hand, at paras. 12 and 13 of the US second written submission and in its reply to
Question 35, the United States asserts that the CWB during 1992-1997 paid premiums to
Western Canadian farmers for high-quality wheat, thus giving an incentive for farmers to over-
produce such wheat. Could the United Stat es explain how "below-full-market value" initial
prices have induced over-production of high-quality wheat?

27. These two CWB behaviours demonstrate how the CWB’s sales are inconsistent with
Article XVII:1 standards. Initially, the advantage gained by the CWB as a result of the initial price
payment mechanism should be analyzed separatel y from the CWB practice of encouraging excess
production of high-quality wheat. Under the initial price payment mechanism, the CWB can acquire
wheat for as little as two-thirds of the expected fu ll market value of the wheat. This provides the
CWB with maximum pricing flexibility in making sal es. The initial price payment mechanism means
that the CWB – for an entire marketing year – knows at exactly what price it can acquire wheat, and
its monopsony procurement right means the CWB knows approximately how much wheat is available
for purchase. This provides the CWB with significant pricing flexibility and decreased risk exposure.

28. To ensure there are sufficient quantities of high-quality wheat, the CWB’s pooling
mechanism, in combination with the varietal c ontrol system, encourages production of high quality
wheat (see response to question 90, above). “On average, the amount of high-quality wheat produced
in Western Canada has been larger than the demand that has been willing to pay a commercial

12 See US Second Written Submission, paras. 16-17.

premium for it.”
13 To the extent that such production exceeds world demand, the CWB engages in
price discounting to move the high-quality wheat into export markets.

29. It is only through the combination of special and exclusive privileges that this seemingly
anomalous situation occurs. The CWB pays less th an full value to acquire wheat from producers, and
depending on its selling practices and supply and demand conditions in a particular marketing year,
the CWB will return to the farmer a higher price than the CWB sold the wheat for in an export
market. The CWB has a large supply of high quality wheat that it can “price to move,” depending on
world market conditions. The CWB continues to encourage the excess production of high-quality
wheat by rewarding farmers through price premiums, even if those price premiums are not warranted
by market conditions.

30. For example, the CWB states that it bases it s pricing on the Minneapolis Grain Exchange
(MGE). Therefore one can assume that the premiums for high-protein wheats offered by the CWB
should be similar to the premiums posted at the MGE. However, this is not the case. For marketing
years 1995/96, 1996/97 and 1997/98, the protein premium spreads in Canada for No. 1 Canadian
Western Red Spring were over 20 per cent greater than the similar protein premium spreads offered
for No. 1 Dark Northern Spring in the United States. This pattern continued in the 2002/03 marketing
year when the spread between low and high protein wheat in Canada was over three times that which
existed in the US market.
14 Thus, the higher premiums offered by the CWB are not merely reflective
of market conditions and market prices. The CWB therefore has incredible pricing flexibility.

Question 92: What is the significance under Canadian law of the reference on the Agriculture
and Agri-Food Canada website (contained in exhi bit US-23) to the fact that Canadian grain
producers may apply to the Commission fo r producer railway cars and the absence of a
reference to foreign grain producers on that site?

31 As mentioned in our answer to question 68, the United States submitted the Agriculture and
Agri-Food Canada website as evidence that foreign gr ain is denied the producer car benefit afforded
to like Canadian grain. As Exhibit US-23 demonstr ates, as of March 13, 2003, it is the position of
Agriculture and Agri-Food Canada that only “Canadian grain producer s with an adequate quantity of
lawfully deliverable grain” are eligible for the producer car programme.

Question 93
: With reference to the US reply to Quest ion 54, is there evidence that the railway
companies are in fact charging lower rates for government rail cars than for other types of rail
cars?

32 Yes. The provision of government rail cars re sults in lower freight rates, and, according to
the CWB, these rates will increa se if the government-owned rail cars are privati zed and sold to the
railway companies. When the sale of the federa l producer car fleet was c ontemplated in 2002, the
CWB made the following statement in opposition to the sale of the government rail cars:

The CWB is concerned that selling the hopper car fleet will result in added costs for
farmers. Regardless of who purchases the cars from the federal government, there
will be new costs in the transportation system that will eventually have to be picked
up by farmers. . . . [R]egardless of whether the railways incur leasing costs on the

13 Canadian Wheat Board, “The Role of the Canadian Wheat Board in the Western Grain Marketing
System (23 Feb. 1996) (Exhibit US-24), p. ix.
14 Comparison based on CWB final payment statistics available on the CWB website and publicly
available MGE pricing data.

cars or ownership costs like depreciation and interest, farmers will ultimately bear
these costs through higher rates.”15 (Emphasis added.)
Question 94: With reference to the US reply to Quest ion 51(b), para. 36 of the US second oral
statement ("shippers have an incentive to charge lower fees") and para. 135 of Canada's second
submission, please provide further support for your assertion that prescribed railway
companies have an incentive to respond to the revenue cap by adjusting their rates?

33 The purpose of the rail revenue cap is to m ove away from government-regulated freight rates
to a system that, by design, gives the railways the ability to make adjustments in freight rates. The
Government of Canada’s announcement of the new rail revenue cap programme made perfectly clear
that the purpose of the rail revenue cap was to re duce rail rates below the rates that would prevail
without the cap. The press release issued by Transp ort Canada directly ties the revenue cap to lower
rates, announcing “the establishment of a reve nue cap that provides for an annual estimated
$178 million reduction in railway revenues, which re presents an estimated 18 per cent reduction in
grain freight rates from 2000-2001 levels[.]”16

34 In Canadian Pacific Railway’s Second Quarte r Report for 2001, it notes that “revenue growth
for the quarter more than offset the combined negative impacts of the revenue cap on Canadian
grain[.]”17 With the revenue cap having a negative impact on revenue growth, railway companies
have an incentive to adjust rates on shipments th at are not subject to the cap in order to boost
revenues.

Question 95: Could the United States please comment on exhibit CDA-67?

35 At the second panel hearing, Canada chose to selectively read from Exhibit CDA-67, noting
that, in general, very small amounts of protein over-d elivery are standard industry practice. However,
the excerpt from the USITC report goes on to state that “ a higher frequency of protein over-delivery
in the higher ranges was found for the CWRS wheats .” (Emphasis added.) Indeed, the exhibit
submitted by Canada itself makes clear that protein over-delivery occurs with a higher frequency for
Canadian versus US wheat.

36 It is important to note that US references to the CWB’s quality giveaway practices are not
confined to over-delivery of protein. A quality giveaway can be in many different forms. For
example, as referenced in our response to question 90, a quality giveaway can involve grade as well,
offering a high-grade wheat for a lower-grade price.

15 Canadian Wheat Board, “Grain Matters: Sale of the Federal Hopper Car Fleet,” (July-Aug. 2002)
(Exhibit US-25).
16 Transport Canada, Press Release No. H034/00, “Government of Canada Announces Measures to
Improve Western Grain Handling and Transportation System,” (10 May 2000) (Exhibit US-26).
17 Canadian Pacific Railway, “CPR Reports Incr eased Second Quarter Operating Income of
$206 Million,” (19 July 2001) (Exhibit US-27).

LIST OF EXHIBITS

US-24 Canadian Wheat Board, “The Role of the Canadian Wheat Board in the Western
Grain Marketing System (23 Feb. 1996).

US-25 Canadian Wheat Board, “Grain Matters: Sale of the Federal Hopper Car Fleet,” (July-
Aug. 2002).

US-26 Transport Canada, Press Release No. H034/00, “Government of Canada Announces
Measures to Improve Western Grain Handling and Transportation System,”
(10 May 2000).

US-27 Canadian Pacific Railway, “CPR Re ports Increased Second Quarter Operating
Income of $206 Million,” (19 July 2001).

ANNEX B-3

CANADA'S COMMENTS ON THE ANSWERS OF THE
UNITED STATES TO THE PANEL'S QUESTIONS
FROM THE SECOND SUBSTANTIVE MEETING

(4 November 2003)

 The answers provided by the United States in r esponse to the Written Questions of the Panel
in Connection with the Second Panel Meeting (“US Answers”) do not clarify or provide further
support for the US claims. However, for greater cer tainty as to Canada’s position, and to avoid any
misunderstanding, Canada makes the following brie f remarks on the US Answ ers. The fact that
Canada does not provide comments on all the US An swers does not indicate that Canada agrees with
those answers. Equally, the fact that Canada does not specifically deny, refute or correct US factual
assertions or mischaracterizations of Canadian pos itions does not indicate that Canada agrees with
those assertions or mischaracterizations.

For the United States:

66. With reference to the US reply to Questio n 9, could the United States please confirm
that it expects the Panel to rule only on section 56(1) of the Canada Grain Regulations as it
existed at the time the March and July 2003 pa nels were established, and not section 56(1) as
amended.

67. With reference to the US claim in respect of section 56(1) of the Canada Grain
Regulations, please clarify further why an inconsistency with Article III:4 is alleged to arise. In
particular, is the United States' argument th at if Canada intends to maintain the advance
mixing authorisation represented by section 56(1), it should also give advance authorisation for
the mixing of foreign grain that is like eastern gr ain, on the one hand, with eastern grain, on the
other hand?

1. Section 56 of the Canada Grain Regulations (“Regulations”) as it existed at the time the
March and July panels were established incorrectly referred to foreign grain. The prohibition against
mixing in Section 72 of the Canada Grain Act (“CGA”), to which Section 56 of the Regulations is an
exception, does not apply to foreign grain. Accordingly, the reference to “foreign grain” in Section 56
of the Regulations was a drafting error of no practical significance. Section 56 of the Regulations has
now been amended to reflect the original intent , which was to allow mixing of eastern grain with
other eastern grain in transfer elevators.

68. With reference to the US reply to Quest ion 11 and para. 19 of the US second oral
statement, is the United States claiming that sectio n 87 is inconsistent with Article III:4 because
producers of foreign grain are legally precluded, pursuant to section 87, from having access to
producer cars, or because they are in fact deni ed such access in view of the fact that the
producer car loading sites are located in certain areas?

2. The United States continues to assert that fo reign grain is “legally” precluded from having
access to producer cars. However, the United Stat es does not point to a singl e provision of Canadian

law that prohibits or restricts access to producer cars for either foreign grain or foreign grain
producers. In advancing its case, the United States pr ovides an interpretation of Canadian law that is
not based on any accepted principle of statutory inte rpretation. Rather, it relies exclusively on an
Agriculture and Agri-Food Canada website as ev idence for its interpretation of Section 87 the CGA.
As a preliminary matter, information materials on a website cannot and do not limit the scope of
Canadian legislation. In addition, Agriculture and Agri-Food Canada is not responsible for the
producer car programme and so any information on its website is of limited relevance to the
administration of the programme. Finally, the in formation contained on the website has now been
removed because it was incorrect.
1

3. Canada notes that the US argument has evolve d in the course of these proceedings. It now
claims that Canada is in violation of Article III:4 because Canadian producer cars are not available in
the United States to goods not imported into Canada. There are at least three problems with this line
of argumentation. First, nothing in the WTO Agreement provides that a Member may be found in
violation of its obligations because its measures do not apply extra-territorially. Second, Canada
recalls the findings of the panel in Canada – FIRA in respect of the scope of coverage of Article III:

[T]he General Agreement distinguishes between measures affecting the “importation”
of products, which are regulated in Artic le XI:1, and those affecting “imported
products”, which are dealt with in Article III.
2
4. The fact that producer cars are not available for the transport of grain of whatever origin that
has not yet been imported into Canada is simply i rrelevant under Article III. Third, the location of
producer car loading sites is determined by the ra ilways – that is, private commercial operators, and
not the Government of Canada – taking into account requests by producers.

5. The US case has no merit and should be dismissed.

Questions for both parties:

82. Please elaborate on what is an investment measure related to trade in goods within the
meaning of Article 1 of the TRIMs Agreement.

6. Canada is puzzled by the US argument th at a panel may apply the TRIMs Agreement to a
measure without first determining whether the measure is an “investment measure.” The
United States does so even as it repeatedly asserts , without support, that the measures at issue
“necessarily” are “investment measures”.

7. The United States has the burden of establishing not only the facts of the case, but also that
the facts as established result in a violation of an applicable treaty provision, as interpreted in
accordance with the principles of treaty interpretation in customary international law. In the case of a
claim under the TRIMs Agreement, Article 1 (“cove rage”) sets out the scope of coverage of the
Agreement: it “applies to investment measures related to trade in goods only”. Therefore, for a claim
of violation under the TRIMs Agreement to succeed, the United States must first establish, and the
Panel find, that a measure is an “investment measure” and subject to the provisions of the TRIMs
Agreement. It is axiomatic that before a trea ty provision may be applied, it must be properly
interpreted, and the term “investment measure” is no exception to this overriding principle. Contrary

1 With respect to continuing reference to consultations by the United States, Canada recalls that the
content of discussions during consultations is not relevant to the Panel process. That being said, and given the
US insistence on raising the issue, Canada notes that the web page of Agriculture and Agri-Food Canada on
producer cars was never referred to during consultations.
2 30S/140, at para. 5.14.

to the US assertion, therefore, the Panel should interpret the term “investment measure” before it
proceeds to apply the Agreement.

8. The United States is, of course, well aware of this logical sequence, even as it invites the
Panel to ignore its responsibilities by failing to properl y interpret the terms of a “coverage” provision.
While it exhorts the Panel not to interpret the term “investment measure” in accordance with
principles of treaty interpretation, it proffers a defin ition of its own. According to the United States,
an “investment measure” is any measure with “i nvestment consequences”. The United States does
not tell the Panel how it arrives at this interpretation. In addition to being unsupported assertion, the
US interpretation is overbroad and unreasonable: Canada cannot conceive of a domestic or export
measure that does not have an “investment consequence” in some way. The US interpretation would
thus expand the coverage of the TRIMs Agreement to include almost any measure. Such an outcome
could not possibly have been intended by the Members.

9. Canada refers the Panel to its answ ers to Question 82 and to the discussion in Indonesia-
Autos of what constitutes an investment measure.
3 The measures at issue in this case are not
investment measures.

83. With reference to paras. 1 and 2 of the Illu strative list annexed to the TRIMs Agreement
which contain the word "local production", is the investment contemplated in these paras.
investment pertaining to local production of good s, or could investment pertaining to the local
supply of a service also qualify as "investment" within the meaning of the TRIMs Agreement?

10. The United States still does not explain or demonstrate how the measures at issue “require the
purchase or use” of domestic grain, even though this is the basis for its claim that the measures fall
within the Illustrative List. Th e United States has also declined to explain how measures regulating
the provision of services could be brought under the TRIMs Agreement, which covers investment
measures related to trade in goods only.

11. The revenue cap and the grain handling pr ovisions at issue do not fall under paragraph (1)(a)
of the Illustrative List.

84. With respect to the rail revenue cap, it would appear that an advantage, if any, could
accrue to Western Canadian grain and its purch asers/sellers, but not to the railway companies
transporting it. Is such an advantage covered by the provisions of Item 1(a) of the Illustrative
List annexed to the TRIMS Agreement?

12. The United States essentially argues that the phr ase “compliance with which is mandatory to
obtain an advantage” means “compliance by one enterprise is necessary for another enterprise to
obtain an advantage”. The Panel should reject th is proposed US interpretation as unsupported by the
principles of treaty interpretation and by common sense. Any US argument based on this proposition
should, therefore, fail.

85. How do the parties define the term "use" in Item 1(a) of the Illustrative List contained
in the Annex to the TRIMS Agreement?

13. The United States persists in pursuing a defin ition for the word “use” that is contrary to the
ordinary meaning of the word and defies logic. An airline company that transports passengers does
not “use” them or their luggage. A truck that carries milk “uses” the diesel oil in its tank but not the

3 Indonesia – Certain Measures Affecting the Automobile Industry , Report of the Panel, WT/DS54/R,
WT/DS55/R, WT/DS59/R, WTDS264/R, adopted 23 July 1998, para. 14.80 (“Indonesia-Autos”).

milk in the tanker. A moving and storage company that stores furniture and personal goods of the
people it moves does not “use” their beds, dining tables, linen and cutlery.
4

For the United States:

86. Could the United States elaborate on what it means when it says that the CWB Export
Regime "necessarily results" in CWB export sales that are not in accordance with the
Article XVII standards? (see US second written submission, para. 3; US reply to Question 1(a))?
Is the United States arguing that non-confor ming CWB export sales are an inescapable
consequence of the CWB Export Regime, or is the United States arguing that it can be
presumed, in the light of the various aspects of the CWB Export Regime discussed by the
United States, that the CWB will make sales that are not in accordance with the Article XVII
standards (see US first written submission, para. 70)?

14. The United States asserts that the CWB h as a statutory mandate to “maximize sales of
Canadian wheat on the world market”. Th e United States does not cite where in the Canadian Wheat
Board Act (“CWB Act”) or any other Canadian statute such a mandate is set out.

15. The US assertion is factually incorrect. Section 5 of the CWB Act provides that the CWB is
incorporated with “the object of marketing in an orderly manner, in interprovincial and export trade,
grain grown in Canada.” Section 7(1) of the CWB Act provides that the CWB “shall sell and dispose
of grain acquired by it pursuant to its operations under this Act for such prices as it considers
reasonable with the object of promoting the sale of grain produced in Canada in world markets.”
Under no rule of statutory interpretation may e ither provision be read as requiring the CWB to
maximize sales at all costs. Accordingly, the US argument that in fulfilling its mandate, the CWB’s
use of its special and exclusive privileges necessaril y results in a violation of Article XVII has no
factual foundation.

16. As well, the “necessarily results” assertion of the United States has no basis in logic. The
United States repeatedly undermines its own argumen ts in this respect by alleging an element of
voluntariness in respect of the actions of the CWB. After all, if the CWB has the discretion to do
something that would result in a breach of the requi rements of Article XVII, it also has the discretion
to do something that would not result in such a br each. Accordingly, even in accordance with US
assertions, the CWB’s actions cannot “necessarily result” in one thing rather than another.

17. The latest example of this is contained in pa ragraph 16 of the US Answers. There the United
States alleges that:

[t]he CWB, with its special and exclusiv e privileges and special mandates, however,
does not face these commercial market constraints and could therefore engage in
sales that are rational (they increase th e quantity of wheat sold) but are not
commercial in nature (the replacement valu e of the wheat sold is not recovered).
[emphasis added]
18. The United States expressly affirms that the CWB has discretion. The United States thus
implicitly concedes that the CWB is under no mandate to act not in accordance with the standards set
out in XVII. Without such a mandate, there can be no “as such” violation of Article XVII.

87. With reference to the word "commercial" in Article XVII:1(b), please provide answers
to the following questions:

4 Canada refers the Panel to its answer to Question 85 and to its Second Written Submission, para. 20.

 (a) How should the word "commercial" be interpreted?

 (b) The US can be understood as arguing that it may be "rational" for an export
STE to use its special privileges to gain a competitive advantage in the
marketplace vis-à-vis its competitors, but that export sales made in this manner
would not be based on "commercial" cons iderations. In other words, the US
appears to argue that the "commercial considerations" criterion requires more
than rational competitive behaviour. ( see US reply to Question 23, US second
written submission, para. 19) If that is correct, could the United States explain
how the word "commercial" in Article XVII:1(b) supports this view?

 (c) With reference to the US reply to Qu estion 22(d), would the United States accept
that a private monopolist that is able , due to barriers to entry, to extract
monopoly rents in its home market is acti ng on the basis of what is described as
"commercial considerations" in Article XVII:1(b)?

19. Article XVII:1(b) provides that a state trad ing enterprise that engages in discriminatory
practices not in accordance with Article XVII:1(a), is nevertheless acting consistently with
Article XVII if it acts in accordance with commercial considerations. The United States has not at
any point given a proper interpretation of what constitutes “commercial considerations”. It has
repeatedly stated that a state tr ading enterprise that does not have the same commercial constraints of
certain private traders necessarily does not act in accordance with commercial considerations. It has
also asserted that “revenue maximising” and “maximising sales” are not “commercial considerations”,
and in support it has adduced a study that has not ed that “revenue maximising” conduct potentially
results in higher production than “profit maxi mising conduct”. The United States has not adduced
evidence or argument why the report in question, even if correct, is in any way support for the
proposition that revenue maximising conduct is not acting in accordance with commercial
considerations. Finally, although the United States re peatedly refers to what private traders can or
cannot do, it has not once adduced any evidence of su ch conduct. Indeed, when faced with evidence
that its own multinationals in the same sector use programmes that are substantially similar to the
measures at issue, the United States has adopted an attitude of stony silence.

20. From the outset, the position of Canada, amply supported by the language of the treaty and by
common sense, has been that Article XVII:1(b) does not set out a standard of specific behaviour (for
example, profit maximising or revenue maximising). The conduct of a private tr ader in the market is
dictated by any number of short-term and long-te rm considerations based on market conditions, as
well as its structure and objectives – the total ensemb le of these considerations is referred to as
“commercial considerations.” A state trading ente rprise is no different. “Revenue maximization”
may be perfectly commercial conduct for one private trader, but ruinous to another; a trader in
possession of a highly perishable commodity at the end of its life has every incentive to “maximise
sales” for reasons that a coal dealer would not have to deal with. Finally, as any business model based
on “rational” conduct sets out, to seek short-term profit maximisation at the cost of long-term
consumer loyalty could be disastrous to a private trader. Thus, a trader – whether private or a state
trading enterprise – that does not act rationally but rather “commercially” in the very narrow US sense
of “profit maximization” may well find itself out of business soon after the profits are realised.

21. What Article XVII:1(b) requires, then, is si mply that state trading enterprises take into
account certain factors (“commercial consideration s”) in making purchases or sales, and not others
(non-commercial considerations – for example, po litical ones). That is, they should base their
decisions on the same sort of factors that priv ate traders take into account in making purchases or
sales. These factors include, but are not limited to, “price, quality, availability, marketability,
transportation and other conditions of purchase or sale.” In the same vein, the manner in which a state
trading enterprise, or any enterprise for that manner, responds to such factors depends on the

environment and circumstances in which it operates. For a state trading enterprise, its environment
and circumstances necessarily include the exclusive or special privileges that it enjoys.

22. The United States asserts that the CWB does not act in accordance with commercial
considerations because it is “not focussed on profit ”. Canada has already demonstrated that the
assertion has no legal basis and, by opposing “co mmercial conduct” to “rational conduct”, is
manifestly absurd and unreasonable. The assertion is also outright false and irrelevant. For one thing,
the CWB operates as a cooperative marketing agency for Western Canadian farmers. Its objective is
to make money for those farmers and, unlike Cargill or ADM, not to make a profit for itself.
Accordingly, in one sense the CWB is very much “f ocussed on profit”: “profit” for the farmers. In
any event, the object of a cooperative marketing system is not to make profits for itself, and so in this
sense, the US assertion is entirely irrelevant.

23. Further, Canada does not consider the US di stinction between “rational” and “commercial” to
be viable. In particular, “to act in accordance with commercial considerations” is not at all the same
as “to face commercial market constraints”: any subs idized firm by definition does not face the full
force of the market. And yet applying for a subsidy, accepting it, and using it to gain market
advantage is so commercial that since 1896 the United States has had an increasingly complicated
regime for combating it.

24. Finally, the United States states that “o f course” a “pure or natural monopoly” differs
considerably from a “government-granted monopsony”.
5 The US assertion is problematic for three
reasons. First, it is not at all clear under what standard non-governmental monopolies are “purer”
than governmental ones. The offhand “of course” should not mask the absence of any analysis of this
unsupported, and indeed unsupportable, assertion. A nd the distinction is all the more curious as it is
advanced before the Panel by a country that has one of the most developed anti-trust regimes in the
world and whose courts have br oken up such “pure or natural m onopolies” as AT&T and Standard
Oil and even pondered the break-up of Microsoft. Second, to the extent that the United States
proposes to use the term “government-granted” as an opprobrium in contradistinction to “pure or
natural”, it suffices to state that whether “impur e” or “unnatural”, government-granted exclusive
privileges are expressly permitted by the WTO Agre ement – and the United States has repeatedly
protested that it is not challenging the right to grant such privileges. The degree of “purity” or of
“naturalness” of a monopoly is, then, irrelevant to the legal question before the Panel. Third, aside
from the question of characterisation, the very asser tion of a distinction betw een “pure or natural”
monopolies and government-granted ones – unfounded a nd undeveloped as it is – is simply incorrect
under Article XVII. For the purpose of determin ing whether or not a monopolist state trading
enterprise is acting in accordance with “commercia l” considerations, the only logical comparison in
the market is to a “pure or natural” monopoly. Otherwi se, as Canada has demonstrated, at question
would no longer be the conduct of the state trading enterprise, but rather the initial grant of the
exclusive or special privileges.

90. With reference to footnote 15 of the US second written submission, please provide a
complete copy of CWB Marketing Panel Report (exhibit US-12). Also, please explain how the
passage quoted in footnote 15 supports the view th at No. 2 CWRS was actually sold at prices
below No. 3 CWRS. Finally, if it did do so, why did the CWB have sold No. 2 CWRS at prices
below No. 3 CWRS?

25. Canada regrets that yet again, it must correct a manifest mischaracterization of the evidence
before the Panel. As with its earlier outright mis quotation of Canada’s Article 6.2 submission or the
quotation out of context of “primarily”, in its response to Question 90 and in footnote 15 of its Second

5 US Answers, para. 17.

Written Submission, the United States again wilfully misrepresents the statement at page 15 of the
CWB Marketing Panel Report.6

26. By creatively dropping certain words, the Un ited States completely changes the meaning of
the text. Read in its entirety, the meanin g is clear: the CWB’s statement corrects a hypothetical
misunderstanding that pooling is the weighted averaging of CWB sales prices for a given type, class,
and grade of grain over a given year. The CWB explains that if pooling were indeed (and it is not) the
weighted averaging of CWB sales, then:

… somebody who had delivered No. 2 CWRS 13.5 per cent protein wheat during
1994-95 would have ended up receiving the wei ghted average of all sales of No. 2
CWRS 13.5 per cent protein wheat during that year. The problem with that type of
system would be that all or most of the No. 2 CWRS 13.5 might have been sold at
lower prices than the prices at which all th e No. 3 CWRS wheat was sold. The result
of this would be that the average return for No. 3 CWRS wheat would be higher than
that for No. 2 CWRS 13.5 wheat, even though No. 2 CWRS 13.5 was worth more in
the market than No. 3 CWRS at all times throughout that year. That would obviously
not be a proper market relationship between these two grades of wheat.
The averaging of prices is not what happens in the CWB pooling system.
 Instead, as
the CWB sells wheat and barley throughout the crop year, the revenue from those
sales is deposited into four pool accounts: the wheat account or “pool”, the durum
wheat pool, the designated barley pool (bar ley sold for human consumption purposes,
primarily malting barley), and the feed barley pool. Revenues from the sales of each
of these four commodities are pooled separately in the appropriate account.
Pooling is a mechanism both for collecting and – more to the point – for distributing
to farmers who delivered to the CWB in the course of the year the results of sales the
CWB made on their behalf. All farmers in the wheat pool, for instance, will end up
sharing in the results of all wheat sales made throughout the crop year. The actual
pool return that is established for any particular class, grade, or protein level of wheat,
on the other hand, will be determined by the price relationships for the various wheats
that existed in the world markets over the course of that year. The CWB keeps track
of these price relationships in the market as it makes sales throughout the year to
ensure that when the crop year is over and everything is paid out of the pool accounts,
it will have reflected to farmers the proper market relationships between the various
classes and grades.
7
27. The United States asserts that its selective quotation of this statement “corroborates other
evidence that the CWB gives away quality and protein in its sales.”8

28. The United States has once again undermined its own arguments. The Marketing Report
proves the opposite of what the US claims: the CWB does not give aw ay quality and protein in its
sales. Rather, the CWB maintains the proper market relationship between different grades of wheat in
its pooling system and returns to farmers reflect th e price relationship in the market between various
classes and grades of wheat.

92. What is the significance under Canadian law of the reference on the Agriculture and
Agri-Food Canada website (contained in exhibi t US-23) to the fact that Canadian grain

6 Exhibit US-24.
7 Exhibit US-24, pp. 15-16 [italics in original; underline added for emphasis].
8 US Answers, para. 25.

producers may apply to the Commission fo r producer railway cars and the absence of a
reference to foreign grain producers on that site?

29. Under Canadian law, web site information is i rrelevant to the interpretation of a law. While
governments use web sites to provide information to the public, these web sites are of no relevance to
the interpretation of the law and cannot modify or restrict the terms of the law.

93. With reference to the US reply to Qu estion 54, is there evidence that the railway
companies are in fact charging lower rates for government rail cars than for other types of rail
cars?

30. The US Panel Request did not include a challenge to the provision of government railcars but
only the provision of producer cars . In fact, the second bullet of Claim 2 of the request refers
specifically to Section 87 of the CGA, which deals with producer cars not with government railcars.

31. Producer cars may or may not be government railcars.
9 Moreover, the fact that a government
railcar is used in a given instance as a “producer car” will not affect the railway’s rates.

32. Accordingly, the US answer to the Panel’s question is irrelevant to the claim before the Panel.

94. With reference to the US reply to Question 51(b), para. 36 of the US second oral
statement ("shippers have an incentive to charge lower fees") and para. 135 of Canada's second
submission, please provide further support for your assertion that prescribed railway
companies have an incentive to respond to the revenue cap by adjusting their rates?

33. 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 government policy reforms that were aimed at making the
system more commercial, competitive and accountable.

34. The Canadian Transportation Agency’s analys is, which was accepted by the US Department
of Commerce in the countervailing duty case,
10 is evidence that the Canadian government’s policy
reforms have achieved this objective and that an y constraint on railway revenues from revenue cap
movements is now driven by the market, not by the revenue cap.

35. Rail rates for both revenue cap and non-revenue cap movements are established based on
market conditions and the railways charge differential prices, i.e. what the market will bear.

95. Could the United States please comment on exhibit CDA-67?

36. As with its demonstrated misrepresentation of Canadian statements and other evidence before
it, the United States persists in reading exhibit CDA- 67 selectively. This is particularly evident when
examining the underlying portions of the study that are then summarized in CDA-67.

37. That study examined the selling practices of the CWB and US wheat merchants in the United
States market, and sales by US exporters of Canadi an and US wheat in eight separate third-country
markets. The excerpt cited in CDA-67 addressed th e findings of the International Trade Commission
(ITC) in respect of non-US export markets only, fo r which it had limited data. Those data, as the
excerpt in CDA-67 states, demonstrated that ove r-delivery of protein tended to be “small” and
“occurred in both US and Canadian contracts.” Th e reference to “higher frequency of protein over-
delivery in the higher ranges” for Canadian CWRS wheat was based on a very small sample of

9 See Canada’s Answer to Question 18 and Canada’s First Written Submission, paras. 301-307.
10 See Exhibit CDA-45, p. 34.

contracts that was skewed because it included contracts for two classes of Canadian wheat, but only
one class of US wheat.11

38. In any event, over-delivery of protein amount s to a “giveaway” as the United States alleges
only if the final contract price is not adjusted upwards to reflect the additional protein delivered. The
United States adduces no evidence to support such a conclusion, which would, in any event, be
incorrect. Indeed, the ITC study showed that for the export markets examined, the contract price was
adjusted upwards in 47 per cent (43 of 92) of contracts involving Canadian wheat, but only 13 per
cent (15 of 117) of contracts involving US wheat.
12 To the extent, therefore, that the data in this study
permit any conclusions about protein “giveaways” in the eight export markets, the practice was more
common in contracts for US wheat than Canadian wheat.

39. In addition, with respect to the US market , for which the underlying data were much more
robust, the results of the study unambiguously refu te the US allegation that the CWB consistently
over-delivers protein. The data demonstrated a lower percentage of over-delivery for Canadian
wheat, as the following passage attests:

To assess the extent of over-delivery of pr otein content in domestic wheat purchases,
the Commission analyzed differences in c ontracted and delivered protein in 615
Durum, HRS, and CWRS wheat contracts reporting both sets of data. For all but # 1
CWRS wheat, most contracted purchases we re shown to have a tendency toward
over-delivery of protein content. However, all contracts for all comparable wheat
grades and classes tended to meet or exceed the contracted protein specification for
final delivery of the product. Out of 510 reported US shipments of HRS and US
Durum wheat, 65 per cent reported protein over-delivery, while 54 per cent of 105
reported CWRS and Canadian Durum contr acts reported over-delivery of protein.
Most of these differences were found to be within a 1.0 percentage points range
above the contracted protein specification, a nd nearly all were within 1.5 percentage
points, for both US and Canadian wheat.
13

11 See Exhibit CDA-70, Table 5-9.
12 See Exhibit CDA-70, Table 5-7.
13 See Exhibit CDA-71.

ANNEX B-4

UNITED STATE'S COMMENTS ON THE ANSWERS OF
CANADA TO THE PANEL'S QUESTIONS FROM THE
SECOND SUBSTANTIVE MEETING

(4 November 2003)

Questions for Canada:

Question 69
: With reference to the possibility to condi tion the receipt of foreign grain on it
being kept separate from Canadian grain in au thorising such receipt under section 57(c) of the
Canada Grain Act (see, e.g., Canada's second written submission, para. 95), does the power to
impose such a condition derive from section 57 itself or is there a provision elsewhere in the Act
and/or regulations that provides for this?

1. The United States wishes to emphasize, as mentioned in paragraph 26 of our second written
submission, that Section 57(c) of the Canada Grain Act (“CGA”), on its face, prohibits the entry of all
foreign grain into Canadian grain elevators. If an elevator operator wishes to receive foreign grain,
Section 57 provides for an exception to this general prohibition. The elevator operator must apply to
the Canadian Grain Commission (“CGC”) and request a special entry authorization for the foreign
grain. This special authorization is a regulatory hurdle not required for like domestic grain.

Question 70
: With reference to the separate keeping in elevators of domestic grain of different
types, grades, protein content and origin, as ref erred to at paras. 247 and 248 of Canada's first
written submission, is such segregation/separate keeping a commercial practice by elevators or
a legal requirement? If the latter, please provide the relevant legal text. Also, please indicate
whether there is a difference in this regard between different types of elevators (primary, etc.).

2. Section 56(1) of the Canada Grain Regulati ons (“CGR”), on its face, prohibits transfer
elevators from mixing foreign grain. This prohibiti on is a legal requirement and is based solely on
origin. As for the segregation requirements in Sec tion 72 of the CGA, these are based on grade only.
Neither Section 56(1) of the CGR or Section 72 of th e CGA refer to type, class or protein content as
referred to at paras. 247 and 248 of Canada’s first written submission.

Question 71
: With reference to Canada's reply to Question 63 and al so to sections 57 of the
Canada Grain Act and section 56 of the Canada Grain Regulations, have there been instances
where no requirement was imposed that foreign grain be kept separate from Canadian grain, or
where mixing of foreign grain with domestic grain was allowed without a requirement that it
not be designated as "Canadian grain"? Coul d Canada indicate/estimate in relative terms
(percentage terms) how common an occurrence this is? (For the written answer: Please
provide supporting evidence.)

3. The United States does not understand how Cana da can state that “[n]othing in Canadian law
or regulations mandates segregation of foreign and Canadian grain,” since Section 57 of the CGA and
Section 56(1) of the CGR provide clear and explicit prohibitions on entry of foreign grain into grain

elevators and the mixing of foreign grain. An y special authorization required to overcome these de
jure prohibitions is an additional burden placed on foreign grain that is not placed on Canadian grain.

4. It is not surprising that, as Canada states, “i f there is no request for mixing from the elevator,
the entry authorization requirement includes a conditi on that the foreign grain be kept separate,” since
under Section 56(1) there is a legal prohibition on th e mixing of foreign grain. The United States
disagrees with Canada’s characterization that this prohibition occurs “as a matter of practice.”
Section 56(1) clearly sets forth a legal requirement that mixing may only take place if neither of the
grains to be mixed is foreign grain.

5. As for Canada’s assertion that 12 per cent of en try authorization requests include a request to
mix foreign grain with Canadian grain, Canada provides no evidentiary support for this figure.

Question 72
: What is the legal relationship betwee n the Wheat Access Fa cilitation Programme
and section 57(c) of the Canada Grain Act ? In particular, has the Wheat Access Facilitation
Programme been established under the authority of section 57(c)? Please provide documentary
support.

6. Canada’s answer to the Panel’s question mis- characterizes the United States’ reference to the
Wheat Access Facilitation Programme. We have not referred to the WAFP as a separate challenged
measure, but, rather, we refer to it to provide a concrete example of the CGC’s onerous regulatory
requirements. This does not expand the scope of the proceedings.

7. The CGC characterizes the WAFP not as a separate authorization, but as a document that
“clarifies
 the Canadian Grain Commission’s (CGC) requirements for Canadian licensed primary
elevators handling wheat from the United States (US).” 1 (Emphasis added.) The WAFP also states
that primary elevators may receive US wheat “subject to participation in the Wheat Access
Facilitation Programme and adherence to the requirements set out in this Memorandum.”2 (Emphasis
added.) Moreover, not adhering to the WAFP requirements has serious consequences for the primary
elevator. The Memorandum states that “[f]ailure to comply with the requirements in this
Memorandum could result in revocation of license, prosecution, or the CGC refusing to give further
permission to facilities to receive US wheat.”
3 (Emphasis added.) Finally, the Importer’s Declaration
form, a form required under the WAFP, specifically refers to Section 57(c) of the CGA, indicating
that Section 57(c) is indeed the legal authority under which the WAFP operates.4

8. In short, the CGA violates GATT Article III:4, and the WAFP is but one clear example of
this. This is true regardless of the origin of th e WAFP, which is irrelevant to the dispute and does not
excuse Canada from maintaining an otherwise WTO-inconsistent measure.

Question 73
: With reference to section 57(c) of the Canada Grain Act , once the receipt of
foreign grain has been authorised, does a CGC em ployee have to be physically present, in most
or all cases, to monitor the flow of the foreign grain into the elevator bins? If so, do CGC
employees similarly monitor the flow of Canadian-origin grain into elevator bins?

9. Canada provides no evidence for its assertion th at it is “rare” that CGC inspectors are present
to monitor receipt of grain into primary and transfer elevators. Indeed, Canada’s response is contrary
to the requirements of the CGC as clarified by the WAFP, which states that the CGC will not

1 Canadian Grain Commission, “Memorandum to th e Trade: Canadian Licen sed Primary Elevators
Handling United States Wheat,” (22 Feb. 2001), available at
www.grainscanada.gc.ca/Views/Tradenotices/uswheat99-e.htm (Exhibit CDA-60).
2 Id.
3 Id.
4 See id.

authorize the entry of US wheat unless there is a CGC employee on site to monitor the flow of US
wheat into bins.

Question 76
: Canada indicates in its responses to Qu estions 16(b) and 59(a) that there is no
authorisation requirement for the mixing of different grades and classes of foreign grain. Could
Canada explain why section 72(2) of the Canada Grain Act does not apply in such cases?
Furthermore, if there is no requirement for the mixing of different grades and classes of foreign
grain, would Canada nevertheless impose a requi rement that such mixed foreign grain not be
designated as "Canadian" grain, etc. If so, what would be the legal basis for such a designation
requirement?

10. Despite statements to the contrary in paragr aph 16 of Canada’s answer, Section 56(1) of the
CGR does explicitly mandate the imposition of mixing restrictions with respect to foreign grain.

Question 78
: With reference to section 151 of the Canada Transportation Act , please clarify
element "E". In particular:

 (a) Does element E mean that the number of tonnes to be moved per crop year are
fixed by the Canadian Transportation Agency?

11. As Canada notes in its second written submission, “ the railways are in contact with the major
shippers, including the Canadian Wheat Board (“CW B”), before and during each crop year and are
sophisticated at predicting volumes of movement in order to plan for and optimize the use of railway
resources.”
5 Thus, while element “E” is not fixed by the CTA, it is nevertheless an element that can
be estimated by the railways.

 (b) Is the maximum revenue entitlement determined in advance of the crop year or
ex post? How is this taken into acco unt by the relevant railroad companies in
setting rates for the current crop year?

12. Contrary to Canada’s st atements, railroad companies do take into account the maximum
revenue entitlement when setting rates for the current crop year. Because of the way the rail revenue
cap is set and implemented, with penalties for ex ceeding the revenue cap, railroad companies have a
strong incentive not to exceed the revenue cap. Th e main way to do this is to adjust rail rates
throughout the crop year.

13. Under the revenue cap formula, element C (a verage length of haul), E (number of tonnes
hauled), and F (price index) are adjusted each year, w ith other factors referring to the base year. Data
regarding elements C and E are in the hands of the railroad companies. As stated in Canada’s answer,
element F is determined by the CTA before the be ginning of the crop year, so the railroad companies
know how element F will affect the rail cap. This leaves one element – the freight rate – that the
railroad companies adjust in order to ensure that they do not exceed the revenue cap. For example, if
tonnage during the crop year (element E) was to exceed earlier projections (for example, because of
an unanticipated increase in Canadian Wheat Board sales), the railroad company, in order to avoid
paying a penalty, would have to lower freight rates to avoid exceeding the revenue cap.

14. Indeed, for the 2000-01 crop year, the first year the rail revenue cap was in effect, rail
revenues were only 0.7 per cent below the revenue cap.
6 Contrary to Canada’s unsupported assertions

5 Second Written Submission of Canada, para. 135.
6 See Adrian Ewins, “Railways Below Revenue Cap, But Slightly,” The Western Producer
(2 Jan. 2003) (hereinafter “The Western Producer”), available at
www.producer.com/articles/20030102/news/20030102news06.html (Exhibit US-28).

that railway companies do not take the revenue cap into account, railroad company executives have
stated that they see it as their obligation to stay below the rail revenue cap.7

Question 80 : With respect to Canada's defence of section 57 of the Canada Grain Act and
section 56(1) of the Canada Grain Regulations under GATT Article XX(d), and with reference to
the panel report on European Economic Community - Regu lations on Imports of Parts and
Components (BISD 37S/132, paras. 5.14-5.18) which suggests that Article XX(d) covers only
measures designed to prevent actions that would be illegal under the laws with which
compliance is sought to be secured, please id entify for each of the laws referred to ( Canada
Grain Act, etc.), and provide the text of, the obliga tions with which sections 57 and 56 seek to
secure compliance. In addition, please provide details of how sections 56 and 57 are necessary
to secure compliance with the relevant provisions of the laws in question.

15. Canada has not met its burden with respect to its Article XX(d) defence. Section 57 and
Section 56(1), which are wholesale prohibitions on the entry into grain elevators and mixing of
foreign grain, are not necessary to secure compliance with the grading provisions of the CGA and
CGR. Canada has not adequately explained how the per se prohibition on the entry of foreign grain
into grain elevators under Section 57 and the per se prohibition on the mixing of foreign grain under
Section 56(1) prevent actions that would be illega l or are otherwise designed to secure compliance
with Sections 32 (inspection certificates), 61 (gra ding and inspection proce dures on receipt of grain
for primary elevators) and 70 (grading and inspectio n procedures on receipt of grain for transfer and
terminal elevators). Canada appears to argue that Sections 57 and 56(1) ensure that inspectors do not
make mistakes and assign Canadian-specific grades to foreign grain. Yet Canada provides no
evidence that Section 57 and 56(1) are designed to eliminate such errors.

16. Even if Canada had demonstrated that Sections 57 and 56(1) were designed to secure
compliance with Sections 32, 61, and 70, the per se prohibitions under Sections 57 and 56(1) are not
necessary
 to secure compliance with Sections 32, 61, and 70. The grading provisions of the CGA and
CGR themselves, described in Canada’s own s ubmissions, along with the enforcement provisions
under the CGA and CGR, are adequate to ensure that “that Canadian grades are not inadvertently and
inappropriately given to non-Canadian grain.”8 Indeed, as Canada itself points out, Section 32 already
distinguishes between grain grown in Canada a nd grain grown outside Canada. Canada has not
shown that proper inspection and grading cannot be accomplished in the absence of Sections 57 and
56(1).

17. Regarding compliance with the CWB Act and the CWB Regulations, Canada has other
measures in place to ensure that the CWB only mark ets western Canadian wheat and barley. There is
no reason to establish a prohibition on the entry of all types of foreign grain into all grain elevators
throughout Canada under Section 57 in order to secure compliance with the CWB Act and the CWB
Regulations. The grading requirements under the CGA are adequate to ensure that foreign wheat and
barley are not mistaken for western Canadian wheat and barley and marketed by the CWB. In these
proceedings Canada has portrayed the CWB as a sophi sticated entity, and it is difficult to see – and
Canada does not adequately explain – why a per se prohibition on the entry of all foreign grain into all
grain elevators is needed in order to secure comp liance with the CWB Act and the CWB Regulations.
Indeed, Canada has no such per se prohibition in place with respect to the entry into grain elevators of
eastern
 Canadian wheat and barley, grains which are also outside of the CWB’s mandate under the
CWB Act and the CWB Regulations. The CWB can ensu re that it is only supplied western Canadian
wheat and barley by writing that requirement into its contracts with grain elevator operators, or using
the measures that are in place for east ern Canadian wheat and barley. The per se mixing prohibition
for foreign grain under Section 56(1) also is not necessary to secure compliance with the CWB Act

7 See id.
8 Canada’s Responses to the Panel’s Questions fro m the Second Substantive Meeting, Response to
Question 80, para. 27.

and CWB Regulations. Section 56(1) already in cludes a prohibition on mixing western Canadian
grain, and this prohibition alone is sufficient to secure compliance with the CWB Act and CWB
Regulations.

18. Finally, regarding compliance with Secti on 52 of the Competition Act, Canada fails to
demonstrate how Sections 57 and 56(1) are necessary to secure compliance with a general
misrepresentation statute, especially in light of the f act that there are specific inspection provisions of
the CGA that “ensure that foreign grain mainta ins its identity in the bulk handling system.”
9
Furthermore, Canada fails to explain why Canada does not find it necessary to segregate all products
according to origin in order to secure compliance with the general prohibitions on misrepresentation
contained in Section 52 of the Competition Act.

Question 81: With reference to Canada's reply to Question 63, is there any reason why Canada
could not secure compliance with the relevant laws and could not maintain the integrity of its
grading system if foreign grain could be receive d into elevators without a need for prior CGC
authorisation, but subject to the general require ment that foreign grain be kept separate from
domestic grain, unless the CGC grants an exemption from this requirement on request?

19. Canada’s implication that the provisions of th e CGA and CGR at issue in this dispute are SPS
measures is patently false. Section 57 of the C GA and Section 56(1) of the CGR are not designed to
address SPS concerns.

20. Canada already has SPS measures that address its SPS concerns in place. As referenced by
the United States at the second panel hearing, Canada ’s plant and animal health service, the Canadian
Food Inspection Agency (“CFIA”), not the CGC, is responsible for SPS measu res and enforcement.
When the CFIA deems it necessary based on an a ppropriate risk assessment, grain cannot enter
Canada without being accompanied by separate SPS documentation administered by the CFIA. These
phytosanitary certificates required by the CFIA ensu re that all SPS concerns related to grains are
addressed prior to that grain crossing the US-Canadian border. The CFIA requires this documentation
whether US grain is destined for the domestic Ca nadian market or a third-country market. The
examples Canada provides in its answer to the Pane l’s question are irrelevant. Canada provides the
Panel with no explanation for why prior authorization for entry of foreign grain into grain elevators or
the prohibition on mixing foreign grain is necessary to comply with any relevant law.

Questions for both Parties:

Question 82
: Please elaborate on what is an investment measure related to trade in goods
within the meaning of Article 1 of the TRIMs Agreement.

21. As Canada admits in its answer and as th e United States explains in its own answer to
question 82, the TRIMs Agreement does not include a definition of “investment measure.” Canada’s
reference to measures with investment “objectiv es” finds no support in the text of the TRIMs
Agreement. While Indonesia - Autos provides one example of a trade-related investment measure, the
panel in that dispute does not suggest that the TRIMs Agreement covers only the types of measures
that were at issue in the Indonesia - Autos dispute. As stated in our answer to question 82, the
measures in this dispute have investment conseque nces for those enterprises that must comply with
them, and these measures therefore are trade-related investment measures under the TRIMs
Agreement.

Question 84
: With respect to the rail revenue cap, it would appear that an advantage, if any,
could accrue to Western Canadian grain and it s purchasers/sellers, but not to the railway

9 Id.

companies transporting it. Is such an advantage covered by the provisions of Item 1(a) of the
Illustrative List annexed to the TRIMS Agreement?

22. Regarding Canada’s reference to the US Department of Commerce countervailing duty
investigation, as noted in paragraph 38 of our second written submission, the US Department of
Commerce analysis is not relevant to this proceeding.

Question 85 : How do the parties define the term "use" in Item 1(a) of the Illustrative List
contained in the Annex to the TRIMS Agreement?

23. Canada conveniently refers to only one, narro w concept of the word “use” in its answer.
However, the word “use” is not limited to consum ption, processing and transformation. Indeed, the
word use has a much broader meaning, including “to put into action or service” or to “employ.”
10
This broader definition of “use” clearly encompass es the handling, storage and transport of grain
referred to in the US answer to question 85.

Questions for Canada:

Question 96 : What is the purpose of the second clause of Article XVII:1(b) ("afford …
adequate opportunity … to compete for participation in such purchases or sales")? What does
the second clause add to the first clause ("commercial considerations")?

24. As set forth in our written submissions, 11 the United States fundamentally disagrees with
Canada’s interpretation of the second clause of Artic le XVII:1(b). Contrary to Canada’s assertions,
the second clause of Article XVII:1(b) sets forth a sp ecific obligation that requires Canada to ensure
that the CWB provides both buyers and sellers an adequate opportunity to compete for participation in
CWB sales. This means that when the CWB engag es in sales in export markets, the enterprises of
other Members, including both wheat buyers and sellers, should be able to compete in those sales in
accordance with customary business practice. Canada ’s interpretation - that this second clause of
Article XVII:1(b) would apply only to situations in which the CWB fails to enter into a transaction
altogether - is not supported by the text of Artic le XVII:1(b). Canada ignores the word “compete” in
the second clause of Article XVII:1(b). Article XVII: 1(b) does not require Members to ensure that
their STEs to engage in certain transactions. Ra ther, the second clause of Article XVII:1(b) provides
that Members must ensure that when their STEs do engage in transactions, the enterprises of other
members have an adequate opportunity to compet e in those sales in accordance with customary
business practice. As set forth in our written submissions, Canada has failed to meet this obligation.

Question 97
: With reference to para. 39 of Canada 's second written submission, is Canada
suggesting that in respect of export sales by an STE, the MFN principle set out in Article I
would not prohibit the selling at a lower price or under less stringent terms and conditions in
one market than when selling in another?

25. The MFN principle set out in Article I would
 prohibit the selling at a lower price or under less
stringent terms and conditions in one market than when selling in another.

26. As we have stated in our writte n submissions and as supported by the Korea Beef panel
report, Article XVII:1(a) and Article XVII:1(b) cont ain distinct obligations. Nevertheless, in this
particular dispute, the CWB’s sales that are not in accordance wi th commercial considerations under
Article XVII;1(b) also lead to the type of discrimination that violates the MFN principle under
Article XVII:1(a).

10 Merriam-Webster’s Collegiate Dictionary: Tenth Edition (2001), p. 1297.
11 See, e.g., US Answers to First Set of Panel Questions , paras. 20-21; Second Written Submission of
the United States, paras. 4, 19.

Question 98
: With reference to para. 95 of Canada's second written submission, does not, or
might not, a condition to keep foreign grain sep arate from domestic grain entail costs for an
elevator operator, including the costs of separate/additional bins, etc.?

27. Contrary to Canada’s asser tions, Canada’s grain segregation requirements do in fact entail
costs for elevator operators. Keeping foreign grain separate regardless of commercial demand for
such segregation leads to inefficien cies in the grain handling system. For example, it would be more
efficient for an elevator operator to store US corn and like Canadian corn in the same bin, since the
end user who purchases the corn ( e.g., a feed lot) does not care if it is mixed. Instead, an elevator
operator may have a bin half full of US corn and be unable to utilize the excess capacity because he
only has Canadian corn that needs storage.

28. The grain segregation requirements extend to rail car and truck shipments, which leads to
additional inefficiencies. Because US grain and Ca nadian like products must be kept separate, an
elevator operator may find that he has to ship a partially full rail car of US corn, since he is not
permitted to add like Canadian corn to the rail car in order to fill it. This results in additional costs for
the elevator operator. With cost s for handling foreign grain higher than the costs of handling like
Canadian grain, foreign grain faces less competitive conditions than like Canadi an grain, as elevator
operators will be more likely to accept like Canadian grain over foreign grain in order to avoid the
additional handling costs associated with foreign grain.

Question 99
: Could Canada elaborate upon, including by providing the legislative basis for and
the practicalities associated with, the inspectio n and reporting requirements with respect to
Canadian grain referred to in response to Questions 14(c) a nd 15? Do these requirements
apply to foreign grain as well?

29. If, as Canada states, foreign grain is not officially inspected at terminal elevators,
12 it is
difficult to understand why CGC inspectors must be present to monitor the flow of foreign grain into
terminal elevators. 13 This contradiction highlights the fact that throughout its submissions Canada
makes misleading statements about its grain segrega tion system in an attempt to obscure the legal
requirements under the CGA and make it difficult to assess whether Canada’s measures are consistent
with its WTO obligations.

30. Canada maintains a highly comprehensive re porting system that, as Canada admits, also
extends to foreign grain. Canada’s statement that “relying on reporting is not sufficient in the case of
foreign grain to address potential concerns,” is a baseless assertion and is not supported by the
extensive documentation listed at www.grainscanada.gc.ca/regulatory/licensees/forms-e.htm.

Question 102
: With reference to Canada's replies to Questions 13(b), 13(c) and 15, how does
Canada control shipments of foreign grain fo r GMO and SPS problems where foreign grain is
shipped to the end-user directly rather than through the bulk grain handling system?

31. Again, as with Canada’s answer to Ques tion 81, Canada misleadingly implies that the
provisions of the CGA and CGR at issue in this disput e are SPS measures. This is patently false. As
we discuss in our comments on Question 81, phyto sanitary issues with respect to grain imports are
handled by the Canadian Food Inspection Agency (CFIA). For example, CFIA Directive “Barley,
Oat, Rye, Triticale and Wheat -- Phytosanitary Re quirements on Import, Transshipped, In-Transit and
Domestic Movement,” effective November 2000, specifies the plant protection requirements for

12 See Canada’s Responses to the Panel’s Questions from the Second Substantive Meeting, Response to
Question 99, para. 52.
13 See id., Response to Question 73, para. 11, note 2.

imported, transshipped, in-transit and domestic movements of barley, oats, rye, triticale, and wheat
into and through Canada.14

Question 103 : With reference to section 57(c) and para. 196 of Canada's first written
submission, why does the CGC not rely on section 57(d) with respect to foreign grain for which
there is an SPS concern?

32. Please see US comments on Questions 81 and 102. Section 57 of the CGA and Section 56(1)
of the CGR are not SPS measures. To the extent th at Canada wishes to “strictly scrutinize” foreign
grain due to SPS concerns, such a function is outside the purview of the CGA and the CGC.

Question 104: With reference to para. 161 of Canada's first written submission, are there SPS
controls in respect of imports of foreign grain at the border as well, or are the controls in cases
of foreign grain entering the bulk grain ha ndling system limited to those the CGC may
undertake under section 57?

33. Here, Canada admits that the CFIA, not th e CGC, has responsibility for SPS controls related
to foreign grain imports. As stated by Canada , the CFIA, not the CGC, implements SPS measures
that may, depending on the CFIA’s assessment, include requirements for import permits and/or
phytosanitary certificates.

Question 105
: Why are Alberta, British Columbia, Manitoba and Saskatchewan the only
provinces with loading sites eligible for the producer railcar programme?

34. As demonstrated by Exhibits US-19 and US-20, the railways only offer producer cars at sites
located in certain provinces.

Question 106
: With reference to Canada's Article XX defence, please provide your views on the
alternative measures referred to by the EC in its written third party submission at paras. 31 and
32.

35. Canada fails to address the point made at paragraph 32 of the EC’s submission. Under
paragraph 32, the EC suggests that labelling or grading provisions could accomplish the same goals as
Canada’s prohibition on mixing all foreign grain. Indeed, as noted in our comments on Question 80,
Canada already has inspection and grading provisio ns in place which make the origin of the wheat
known to the purchaser, and this accomplishes Canada’s objectives with respect to misrepresentation.
Therefore, the prohibition on mixing generally is not necessary to secure compliance with the grading
requirements of the CGA, the Competition Act, or an y other law or regulation identified by Canada in
its submissions.

Question 107
: It appears that non-registered wh eat varieties need not be visually
distinguishable. If so, how can elevator operators avoid improperly grading such wheat on
receipt? (see Canada's second written submission, para. 119).

36. Canada’s statement that “most wheat grown in the United States is of varieties not registered
in Canada” is misleading in the context of its answ er to Question 107. Furthermore, Canada provides
no citations or evidence in support of this assertion. In US states that are adjacent to the Canadian
border (and whose farms are often nearer to a Canadian grain elevator than a US grain elevator),
registered Canadian varieties are quite commonplace. In the US state of Montana, for example,

14 See Canadian Food Inspection Agency, “Barley, Oa t, Rye, Triticale and Wheat – Phytosanitary
Requirements on Import, Transshipped, In-Transit and Domestic Movement, D-99-01 (1 Nov. 2000) available
at http://www.inspection.gc.ca/english/plaveg/protect/dir/d-99-01e.pdf (Exhibit US-29).

fifty per cent of durum wheat planted in the spring of 2000 was of a Canadian variety.
15 Even so, this
wheat is treated as “foreign” and is given less favourable treatment than like Canadian wheat.

Question 109: With reference to Canada's defence under Article XX(d), could Canada please
indicate the level of compliance section 56 of the Canada Grain Act and section 57 of the Canada
Grain Regulations seek to secure with the various laws referred to in Question 80? Please
provide support for the level indicated.

37. Canada’s answer to Question 109 does not satis fy Canada’s burden regarding its affirmative
defence under Article XX(d). As set forth in our written submissions,
16 Canada must prove that
Section 57 of the CGA and Section 56(1) of the CGR are necessary in order to secure compliance
with the laws set forth by Canada in its answer to Question 80. Securing a “very high level” of
compliance in no way proves that the measures at issu e in this dispute are necessary in order to secure
compliance with the grading provisions of the CGA, the Canadian Wheat Board Act and
accompanying regulations, or the Competition Act. Canada also fails to demonstrate how these
discriminatory measures are justifiable under the Article XX chapeau. Making foreign grain alone
subject to additional discriminatory requirements when Canada’s stated concerns ( e.g.,
misrepresentation, grading) apply equally to Cana dian grain and foreign grain constitutes arbitrary
and unjustifiable discrimination.

15 Montana Agricultural Statistics Service, Montana Wheat Varieties 2003 (18 July 2003) (Exhibit US-
30).
16 See, e.g., Second Written Submission of the United States, paras. 40-42; see also US comments to
Question 80, above.

LIST OF EXHIBITS

US-28 Adrian Ewins, “Railways Below Revenue Cap, But Slightly,” The Western Producer

(2 Jan. 2003), available at
 www.producer.com/articles/ 20030102/news/20030102news06.html.

US-29 Canadian Food Inspection Agency, “Barley, Oat, Rye, Triticale and Wheat –
Phytosanitary Requirements on Import, Tr ansshipped, In-Transit and Domestic
Movement, D-99-01 (1 Nov. 2000), available at
 http://www.inspection.gc.ca/english/plaveg/protect/dir/d-99-01e.pdf.

US-30 Montana Agricultural Statistics Service, Montana Wheat Varieties 2003

(18 July 2003).