U.S. Agricultural Trade: Canadian Wheat Issues
Released: 1998-11-17T00:00:00

Letter

Introduction

State trading enterprises (STE) have existed for some time and have been considered legitimate trading entities by the General Agreement on Tariffs and Trade (GATT) since 1947. STEs have developed in various countries for various reasons at different points in history. The current Canadian Wheat Board (CWB) was formally established in 1935, after other cooperative-like organizations disbanded. It is one of the largest grain traders in the world, and the largest exporter of wheat and barley to the United States.

STEs Are Established for a Variety of Reasons

STEs have been formed for various reasons. For example, the Australian Wheat Board (AWB) was created in 1939 to help Australian farmers manage difficulties in marketing wheat during wartime conditions, while Cyprus’ Carrot and Beetroot Marketing Board was established in 1966 because competition among producers was depressing the domestic and export prices of carrots and beetroot. Generally, a goal of export-oriented STEs is to maximize financial returns through the regulation of commodity sales from a particular country or region. The level of government involvement and overall size of the STEs’ operations vary widely; thus, it is difficult to generalize about STE operations or motivations on a global basis.

Previous GAO Reports on STEs

We have already published a number of reports on state trading issues, including (1) a July 1995 report that provides a brief summary of trade remedy laws available to investigate and respond to activities of entities trading with the United States, including STEs; (2) an August 1995 report on the General Agreement on Tariffs and Trade/World Trade Organization (WTO) practices that apply to STEs and the effectiveness of those disciplines to date; and (3) a June 1996 report that focuses on the activities of three STEs, including the CWB, and their potential capabilities to distort trade in their respective commodity markets.

CWB History

In Canada, prairie provincial wheat pools were formed in 1924 but went into temporary receivership after the stock market crash of 1929. Following the financial hardship faced by farmers during the Depression, the Canadian government passed the Canadian Wheat Board Act of 1935, establishing the CWB. The CWB was also given control of marketing oats and barley, although oats were removed from the CWB’s purview in 1989.

The CWB is currently managed by three commissioners, who are appointed by the government of Canada. A producer advisory committee, composed of 11 farmer-elected representatives from the prairie provinces, provides the CWB with advice on operational matters. The CWB employs over 500 people and has annual revenues of over $4.4 billion.

CWB Is a Major Grain Trader in the World Market

Although Canada produced only 5 percent of the world’s wheat and 10 percent of the world’s barley in 1996, it held a 20-percent share of the world’s wheat export market and about 20 percent of the world’s barley export market in that year (see figs. 1.1 and 1.2.) In 1996, the United States ranked fourth in the world in both wheat and barley production, while Canada ranked fifth in wheat and third in barley production.

Share of market (percent) (Preliminary) (Preliminary)

The United States imports more red spring wheat, durum wheat, and barley from Canada than from any other country. These imports constitute a significant share of the U.S. market. In crop year 1996-97, about 14 percent of the durum wheat and 7 percent of the red spring wheat supply in the United States came from Canada. The United States imported this wheat in part because of problems with disease, adverse weather conditions, and a shortfall in domestic supply. Also, U.S. food use of durum has risen 125 percent over the past 2 decades; thus, as the demand for durum wheat has increased, so too have U.S. imports of this wheat from Canada. The vast majority of durum wheat, red spring wheat, and barley arrives in the United States from Canada by rail direct from Thunder Bay, Ontario, and the Canadian western prairie provinces of Manitoba, Saskatchewan, Alberta, and the Peace River district of British Columbia. In 1997, 70 percent of these Canadian grains were shipped by rail, 18 percent by vessel, and 13 percent by truck.

For some export sales, the CWB relies on “accredited exporters” (AE), who are national and multinational companies authorized to purchase grain from the CWB for resale to customers. Some of the AEs are subsidiaries of U.S.-based multinational firms; some of the transactions that the AEs facilitate involve selling grain to other subsidiaries of the same company. Although the majority of the CWB’s sales are made directly to an end user, CWB officials told us that AEs facilitate all wheat sales to buyers in the United States.

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

With the rise in U.S. imports of Canadian wheat beginning in the mid-1980s, U.S. wheat farmers became increasingly concerned about what they perceived as Canadian wheat export subsidies and unfair barriers to U.S. wheat exports. U.S. wheat farmers thought that Canadian transportation subsidies gave Canadian wheat farmers an unfair advantage in foreign markets. Canadian wheat and barley producers have historically received transportation subsidies that reduced shipping costs. U.S. wheat farmers’ market access concerns centered on Canadian import permits, or license requirements, which essentially prevented U.S. farmers from selling their grain to Canada without a permit. In addition, the U.S. government was concerned that the CWB might be selling its grain in an unfair manner.

Specific provisions of the U.S.-Canada Free Trade Agreement (CFTA), effective January 1, 1989, dealt with several of these aspects of U.S.-Canadian grain trade. For example, under the CFTA, Canada agreed to eliminate Canadian transportation subsidies for agricultural goods originating in Canada and shipped via West Coast ports for consumption in the United States. CFTA called for ending Canadian import permits for grain pending changes in the comparative level of U.S. and Canadian support for producers. CFTA also dealt with the pricing of agricultural products, including wheat, providing that neither the United States nor Canada could export agricultural goods to the other at a price below the acquisition price of the goods plus any storage, handling, and other costs. Differences in U.S. and Canadian interpretations of this provision eventually led the United States to invoke CFTA dispute settlement procedures in May 1992. The subsequent 1993 CFTA dispute panel decision called for an audit of CWB pricing. An audit was conducted and its findings were reported in December 1993 (see ch. 4 for a discussion of the CFTA dispute panel decision).

The Canada-United States Joint Commission on Grains, mandated by a 1994 U.S.-Canadian memorandum of understanding (MOU), released its final report in October 1995. Comprised of 10 nongovernment U.S. and Canadian officials with equal representation, it was formed to assist the two governments in reaching long-term solutions to existing problems in the grains sector. The report addressed policy coordination, cross-border trade, grain grading and regulatory issues, infrastructure, and domestic and export programs and institutions (see app. I for a chronology of U.S.-Canadian grain trade relations).

While some areas of debate have been resolved, recent events have shown that difficulties remain in U.S-Canadian relations regarding the grains trade. Neither CFTA nor the use of trade remedies has resolved U.S. producer concerns about U.S. access to the Canadian wheat market, CWB practices, and increasing Canadian wheat imports into the United States. Despite CFTA’s gradual elimination of all duties between Canada and the United States by January 1, 1998, and the removal of Canadian import license requirements in 1995, some barriers continue to impede trade. Canada still requires an end-use certificate and subsidizes grain transportation through its ownership of railcars, and reciprocal access to grain handling and transportation systems in the two countries is yet to be achieved. In addition, the U.S. Trade Representative (USTR) remains concerned that the CWB may be using its monopoly to undercut U.S. wheat prices and that U.S. farmers continue to be hurt by increased Canadian wheat imports.

Regarding market access, Canada removed its import license requirement in 1991 but still requires that U.S. wheat be accompanied by an end-use certificate to maintain Canada’s varietal controls and quality standards. The U.S. requirement that imports be accompanied by an end-use certificate is a direct response to Canada’s requirement and will remain in effect until Canada removes its end-use requirement. It also serves as a method to prevent imports from being used in U.S. foreign aid, export, and credit guarantee programs. The Canada-United States Joint Commission on Grains recommended that both countries remove these requirements.

Another long-standing issue involves U.S. wheat exporters’ access to Canada’s primary grain elevator system. Canadian access to U.S. elevators, on the other hand, is relatively less impeded. In addition, Canada provides its wheat farmers with government railcars to transport their wheat. The Canada-United States Joint Commission on Grains recommended that both countries pursue the long-term goal of providing reciprocal access to each other’s grain infrastructure. In January 1998, the United States and Canada announced plans to implement a pilot program to facilitate U.S. wheat exports to Canada that would enable the United States to ship its grain directly to Canadian grain elevators. The United States is negotiating with Canada over Canada’s current requirement that U.S. grain be accompanied by a phytosanitary certificate—an assurance that the grain is disease free. The United States is also concerned about the costs of the pilot program and how it will be applied to imports.

The United States continues to disagree with Canada’s interpretation of CFTA provisions defining the acquisition price of grains and the decision of the CFTA durum panel. In her May 1998 testimony before the Senate Agriculture Committee, the U.S. Trade Representative stated that there was a problem with CFTA in this regard and that the United States may try to revisit this issue in the upcoming 1999 WTO multilateral trade negotiations involving agriculture. In March 1998, the United States requested a new audit of the CWB’s grain pricing related to the acquisition price. Canada agreed to the new audit but disagreed with the United States on its terms. Canada wants to maintain the audit terms both countries agreed to after the 1993 CFTA dispute settlement panel decision. The United States wants to (1) deviate from the panel decision by applying a broader definition of “acquisition price”; (2) expand the audit to cover not only durum but also spring wheat and barley; and (3) include in the audit Canadian grain export prices to countries other than the United States.

Wheat imports from Canada into the United States have risen since 1990, as shown in figure 1.3. Since the early 1990s, durum and red spring wheat imports have increased. Between 1990 and 1997, Canadian red spring wheat imports grew by more than 2,106 percent to 1,449,600 tons, while Canadian durum wheat imports have risen by 57 percent to 427,600 tons.

Durum Red Spring Other

In our 1996 report on STEs, we developed an economic framework to assess the capabilities of three STEs, given their relationships to domestic producers, governments, and foreign buyers. In this report, at the request of Senator Byron Dorgan, we look more closely at one of those three STEs—the CWB—and review a number of issues regarding its exports to the United States. We reviewed the following: (1) CWB operations, government assistance to the CWB and the Canadian farmer, and ongoing changes to the environment in which the CWB operates; (2) the availability of data to ascertain CWB pricing practices, and efforts to increase the amount of data available; and (3) the nature of trade remedies available to address the operations of STEs, and the frequency with which these remedies have been applied to STEs. In addition, we are providing information on the CWB’s role in commodities and futures markets, a summary of studies on the CWB’s effect on the Canadian farmer, and the applicability of U.S. antitrust laws to the CWB.

To explore the operations of the CWB and the government assistance available to the CWB and Canadian farmers, and ongoing changes to the environment in which CWB operates, we reviewed background documents on the CWB and the North American grain trade provided by officials in the Canadian embassy in Washington, D.C., the CWB, the USDA’s Foreign Agricultural Service (FAS), the Department of Commerce, and USTR. We also traveled to Canada to gather documents and interview officials from various agencies within the Canadian government who are involved with the Canadian grain trade, including Agriculture Canada, the Department of Foreign Affairs and International Trade, the Canadian Grain Commission, Finance Canada, the Canadian International Grains Institute, and Transport Canada. In addition, we interviewed officials from the CWB, representatives from the Canadian railroad industry, and private sector representatives in the grain trade.

To learn about the CWB from the U.S. government perspective, we interviewed officials from FAS and USTR. We also travelled to North Dakota to speak with state government officials, local farmers’ groups, private grain traders, and academics about the impact of Canadian grain imports on the U.S. grain industry.

To learn about the availability of data on CWB pricing practices and determine the efforts to increase the amount of data available, we built upon the information we gathered by reviewing the data collected by the U.S. Customs Service, the U.S. Bureau of the Census, and USDA on Canadian wheat imports. Specifically, we obtained Customs’ detailed data base on all wheat and barley shipments from Canada entered from 1992 through 1996. From Census, we obtained aggregate import data for 1992 through 1997. We also obtained information collected and compiled by USDA on the end use of wheat imported from Canada for the most recent 3 marketing years. We then reviewed all of the data to determine what they revealed about Canadian wheat imports. We requested a variety of data from the CWB, including transactional data, but were denied access.

We also interviewed officials from Customs, Census, and USDA about their import data. Our discussions included what procedures they use for collecting and compiling the data and for ensuring quality control, how the data are used by government agencies and private industry, and what the strengths and limitations of the data are. We also reviewed the agencies’ written procedures and regulations governing the collection and compilation of the data as well as internal evaluations of their data programs. In addition, we relied on previous GAO evaluations of the systems and processes for measuring U.S. trade with other countries.

To identify efforts to increase the amount of data available we evaluated whether the WTO has made progress in increasing the amount of information available on the CWB and other STEs as well as WTO members’ compliance with STE reporting requirements. We reviewed the annual reports and minutes of formal meetings of the WTO Working Party on STEs, and WTO members’ STE reporting submissions for 1995-97, as well as USDA and USTR documents. We also interviewed WTO Secretariat officials, individual members of the Working Party on STEs, and USDA and USTR officials. In addition, we reviewed relevant documents, including the 1994 Understanding on the Interpretation of GATT article XVII, which deals with STEs.

To identify the nature of trade remedies available to address the operations of STEs, we reviewed relevant U.S. statutes and documents published by the International Trade Commission (ITC), the Congressional Research Service, and GAO. We also reviewed the dispute settlement mechanisms within the CFTA, the 1994 North American Free Trade Agreement (NAFTA), and the WTO. We reviewed appropriate provisions of international trade agreements.

To determine the frequency with which dispute settlement procedures have been used for matters involving the CWB and other STEs, we reviewed appropriate provisions of international trade agreements. We identified WTO member country STEs; the type of information available about STEs; and STEs’ compliance with the WTO’s article XVII, by reviewing article XVII STE notifications submitted to the WTO Secretariat from 1995 to 1997. We also reviewed past GAO work. We requested that USTR identify all disputes under international agreements that involved an STE that had been notified to the WTO.

To determine the frequency with which U.S. trade remedy laws have been applied to matters involving the CWB and other STEs, we reviewed those laws and spoke with officials at USTR, the ITC, the Department of Commerce, USDA, the Department of Justice, and the NAFTA Secretariat. We obtained a list of STEs that provided notifications to the WTO Secretariat. We then asked USTR, the ITC, and Commerce to search their trade remedy enforcement records for any actions involving those STEs, going back to 1980. We asked the agencies to provide us with a description of the actions and their outcomes. All of the agencies responded to our request by identifying trade remedy actions that, according to their records, had involved STEs. The agencies stated, however, that it was difficult to determine conclusively whether the cases the agencies had identified represented the entire universe of such matters involving STEs. The agencies provided several reasons for this difficulty: (1) the voluminous amount of documentation on some types of cases coupled with an absence of electronic records to facilitate searches; (2) the possibility that an STE’s foreign name translation in a case file would differ from the translation on our STE list; (3) the fact that under U.S. law, STEs as institutions would not be the primary subject of a trade remedy action; and (4) the fact that the trade remedy action may not be country or foreign exporter specific; that is, it may involve imports of a particular product from all sources. We also examined Federal Register notices and reports issued by the agencies on their findings.

To review CWB participation in U.S. futures and commodity markets/exchanges, we met with CWB officials and reviewed CWB documents concerning CWB objectives in participating in U.S. markets. We also discussed the participation of STEs in these markets with the U.S. Commodity Futures Trading Commission (CFTC) and officials representing the Minneapolis Grain Exchange (MGE), the Chicago Board of Trade (CBOT), and the Kansas City Board of Trade (KCBOT).

To gather information on the CWB’s impact on the Canadian farmer, we reviewed Canadian and U.S. studies that measured the economic impact of the CWB and spoke with some of the authors of those studies. We also spoke with private grain traders and Canadian farm groups that represented both general farmers’ interests and specific commodity interests.

To determine the applicability of U.S. antitrust law to the CWB, we interviewed officials at the Department of Justice’s Antitrust Division and the Federal Trade Commission and reviewed the Antitrust Enforcement Guidelines for International Operations, issued by those agencies in 1995. We also reviewed statutes and case law relevant to the extraterritorial applicability of U.S. antitrust law.

We conducted our review from September 1997 to June 1998 in accordance with generally accepted government auditing standards.

We requested comments on a draft of this report from the Secretary of Agriculture, the U.S. Trade Representative, the Secretary of Commerce, the Commissioner of Customs, the U.S. Attorney General, and the Chairman of the ITC. We received technical comments from all six agencies, and incorporated them into the report where appropriate. USDA, USTR, and Commerce found the report to be accurate, fair, and balanced.

We also discussed the factual content of the report as it related to the CWB and the Canadian government with embassy representatives from Canada and with representatives from the CWB. Canada and the CWB provided technical comments, which were incorporated into the report where appropriate.

CWB Operations and Government Support for the Grain Sector

As an STE, the CWB has certain marketing characteristics and government support. These include a monopoly over most sales of Canadian wheat and barley and pricing flexibility through guaranteed supply and delayed payments to farmers. It also enjoys government guarantees of its financial operations and favorable interest rates on loans. Through other programs, the Canadian government provides additional subsidies to wheat and barley producers. However, the CWB faces changes in its structure and operations due to recently completed legislative reforms. These alter its corporate governance and relations to the government. Additionally, other changes in the Canadian grain marketing system are underway, including potential changes in rail regulation, U.S. investment in the industry, and the decline of import STEs in other countries.

Operational Characteristics Offer CWB Unique Status

The CWB has the sole authority to market for export and for domestic human consumption wheat and barley grown in the western prairie provinces of Manitoba, Saskatchewan, Alberta, and the Peace River district of British Columbia. The CWB controls all exports of wheat and barley products through an export licensing process and directly markets most of its exports, including those made to import STEs. The operating costs of the CWB are deducted from payments made to producers. It enjoys pricing flexibility due to its assured supply of grain and ability to price discriminate. This assurance of supply is not absolute, however, as producers are free to plant non-CWB crops. In addition, the CFTA established that CWB sales into the United States could not fall below the acquisition price.

CWB Monopoly Status

The CWB reports that its monopoly status as a “single-desk seller” of western Canadian wheat allows it to extract more money from the world market on behalf of farmers than would be the case without this government-mandated status. This status allows the CWB to capture premiums through price differentiation, a practice in which the CWB sells grain at differing prices into different markets and to different customers. CWB-contracted economic studies have concluded that the single-desk status of the CWB gives it market power in the world wheat and barley trade and increases farmer revenue through price discrimination. One study found that for 1981-94, the CWB on average increased wheat revenues by $14.56 per ton, or $289 million per year when compared to a system of multiple sellers offering wheat in competition with each other.These premiums represent about 8 percent of CWB wheat revenues for those years. A second study found that the CWB increased barley producer revenues on average by $70.5 million per year (1986 to 1995) when compared to what they would have received in a system of multiple sellers. These premiums represent about 15 percent of the CWB barley revenues for those years.

In contrast, a study financed by the provincial government of Alberta concludes that the CWB lacks market power and finds that the Canadian grain system is more costly than the comparable U.S. system. The study concluded that Japan is the only market where a single-desk premium may exist, and that, based on Japan’s share of CWB sales, the single-desk seller premium is small.

As a single-desk seller, the CWB has market power and can price discriminate, according to officials at six grain companies located in the United States and in Canada. “Price discrimination” is the practice of charging a higher price to some buyers and a lower price to others in order to maximize profits. CWB contracts include a provision that stipulates that the grain is for shipment to and consumption in a specific country. Grain companies reported that this stipulation prevents the AEs from competing against each other on price. One grain company characterized this as being good for Canadian and foreign producers but bad for consumers.

As a single-desk seller, the CWB may also choose to sell quantities to a certain market that differ from what would be supplied by the private trade. Several grain industry officials representing grain companies, grain consumers, and industry organizations reported that they believe the CWB withholds grain sales to the United States, with some citing the sales’ political sensitivity. An implication of withheld sales is that exports to the United States would increase in the absence of the CWB. Representatives of wheat farmers in Canada and the United States, as well as Canadian government officials, also believe that grain exports to the United States would be greater if the CWB ceased to exist.

CWB Pricing Flexibility

As the sole buyer of most Canadian wheat, the CWB has pricing flexibility and can deal in long-term contracts. The CWB has an assured supply of grain that it does not compete for and, according to a Canadian government official, acquires the grain from farmers at about 70-75 percent of the expected final return. This provides the CWB with a large margin within which to set prices and absorb any risk from changes in market conditions. The Canadian government confirms that, within its mandate to maximize returns to producers, the CWB has a certain latitude in pricing grain to customers. In contrast, private grain companies compete to acquire farmer-held stocks of grains and then compete to market it to buyers. Their profits and operations are funded from this margin between the two, and they encounter considerable risk from changes in market conditions.

CWB officials note that the CWB engages in price discrimination to benefit from differing market conditions around the world. Certain customers may be willing to pay more for CWB grain than other customers, so the CWB could charge them a higher price. In turn, the CWB may be able to lower its price to certain importing countries without affecting its sales to premium customers. We were not able to analyze the conditions under which this occurred, since we did not have access to CWB transactions, which the CWB considers commercially sensitive.

CWB pricing flexibility into the U.S. market was restricted as part of the CFTA, which went into effect in 1989. According to the agreement, sales into the United States could not be for less than the acquisition price plus the cost of transportation and handling of the grain. The United States and Canada disagreed on what constituted the Canadian acquisition price. A CFTA dispute resolution panel determined that the acquisition price is the initial payment the CWB gives farmers when they deliver their grain (see ch. 4). The initial payment is set by the government of Canada in consultation with the CWB. However, changes in how the government establishes the initial payment since the CFTA went into effect may have increased CWB flexibility in pricing grain headed into the United States.

A USTR negotiator of the CFTA recalls that during the 1980s the initial payment was established close to 90 percent of the expected final payment to producers. During the early 1990s, the CWB initial payments were set at 80 percent while, according to an official of the government of Canada, the initial payment is now set at between 70 and 75 percent. We requested data on the expected final payment to producers from the government of Canada to confirm this trend, but the request was declined. According to a Canadian government official, the decisions on the amount of the initial payment are considered to be “Advice to Ministers” and thus confidential. A USTR official believes that the reduction in the initial payment gives Canada more latitude in lowering its prices to the U.S. market. This effectively lowers the pricing floor established by the CFTA. The government of Canada interprets these changes differently. According to government officials, while the events during the 1980s and early 1990s may well have influenced the subsequent judgments of those involved in making decisions concerning initial payment levels, to attribute any trend in government decision making in this area to the CFTA or the relationship to acquisition prices would be misleading.

Canadian Government Assistance to the CWB

The Canadian government provides important financial assistance to the CWB. The government has covered CWB wheat and barley pool deficits on seven occasions over the course of its 63 year history. The government of Canada guarantees certain export credit sales of the CWB and compensates the CWB in case of losses or defaults. As a crown corporation, the CWB’s financing activities are guaranteed by the government. Thus the CWB is able to show net profits on its financing activities.

Direct Canadian Government Support of the CWB

The Canadian government offers direct financial support to the CWB under certain conditions. The Canadian government guarantees CWB initial payments and adjustments to initial payments as paid to farmers. In any year that sales revenue is insufficient to cover the initial payments, including any adjustments to the initial payment, the government pays the shortfall. Since the first CWB deficit in 1969, the government has provided monies in 6 other years for deficits in the wheat and barley pools. The total value of these transfers for losses in wheat and/or barley marketing operations is $1.3 billion. See table 2.1 for more details on these deficit payments.

Indirect Canadian Government Support of the CWB

In addition to direct government support in cases of operational deficits, the government provides indirect support through guarantees of CWB borrowings. These guarantees allow the CWB to borrow in commercial markets at favorable interest rates. In parliamentary testimony, a CWB official estimated that in 1995, CWB borrowing costs were $30 million lower than if the CWB had borrowed at the rate faced by a large multinational grain company and $46 million lower when compared to the normal commercial business rate of borrowing. The effect of this difference varies over time. In order to update the estimated interest savings, we recomputed the savings based on data provided by the CWB on the interest difference between rates the CWB posts to investors on its commercial paper and market rates of commercial paper from highly rated, nongovernment-guaranteed issuers. As of December 1997, the annual interest savings on CWB borrowing were between $9.4 million and $14 million, substantially lower than the 1995 value.

The CWB is in a position to profit from the interest rate differential between government borrowing costs and commercial rates on behalf of producers. In addition to enjoying reduced borrowing costs, the CWB can also earn interest on funds held following a grain sale but before making final payment to the producers. During the interim, the CWB can invest the funds at market rates and earn interest. The CWB does not distinguish in its public reporting between its earnings related to the indirect government support of below market rates of interest and its earnings from the reinvestment of sales revenues on behalf of producers. The latter earnings do not represent a benefit of the CWB since individual producers could also have invested the revenues at market rates if the CWB paid them at the time of sale. In 1997, the net interest from both of these sources was reported by the CWB to be about $61 million, nearly double the CWB’s $34 million in administration costs.

In addition to the contributions of the government to the CWB’s operational borrowing, the government also provides guarantees for export credit sales. The government of Canada provides export credit guarantees for government buyers of CWB wheat through the Credit Grain Sales Program. As of March 1998, the CWB had outstanding loans to foreign countries of $4.7 billion. At the end of the 1997 marketing year, the CWB accounts receivable from foreign customers was $4.6 billion. Of those loans, only 3.6 percent were classified as current, with 83 percent rescheduled, 9.1 percent overdue, and 4.5 percent subject to a Paris Club rescheduling. In certain cases, the government of Canada negotiates debt relief agreements with nations as do other exporting countries under the Paris Club process. Where there has been a rescheduling, this occurred for reasons of national policy, including reasons related to humanitarian concerns. In cases where a country with outstanding CWB exposure under the Credit Grain Sales Program receives concessional (favorable) treatment, the government of Canada makes up the difference owed to the CWB by the debtor country. For the CWB, both the principal and the interest are guaranteed by the government. Over the last 6 years, the government has reimbursed the CWB $918 million for lost principal and interest under Paris Club debt relief.

The Export Development Corporation, another Canadian crown corporation, provides export insurance and financing services for export sales; for example, providing insurance against the risk of nonpayment by a foreign bank in export transactions involving a letter of credit. The Export Development Corporation does not release information by commodity for reasons of commercial confidentiality; thus, we are unable to report on what share of its business involves CWB exports. Public reporting of government export finance subsidies is limited to the aggregate costs of the negotiated debt relief that is published in Canada’s Main Estimates. The structure of Canadian credit guarantees by commodity or by nation is not released by the government to the public or to GAO for reasons of commercial confidentiality.

The government’s support of the CWB is supplemented by the fact that the CWB is not taxed on its activities. The CWB is exempt from tax on its income and capital because it is a crown corporation. The returns paid to the farmers are taxed as regular income.

Canadian Government Assistance to the Wheat and Barley Producers

The Canadian government also provides other subsidies to the grain sector through income support policies, income and crop insurance, and provision of railroad hopper cars. While Canadian government support for wheat and barley is substantial, it has fallen significantly in the last several years.

Many nations, including Canada and the United States, support their agricultural producers through direct and indirect assistance and subsidies. The government of Canada provides an annual estimate of this support for wheat and barley. The reported Canadian subsidies include costs associated with insurance programs for farmers; one-time payments that compensate agricultural landowners for the removal of the long-standing subsidy of railroad shipments of western agricultural products; other federal government expenditures on research and development, marketing, and promotion; and subsidies provided by provincial governments. In 1996, the combined subsidies for wheat and barley amounted to $922 million, or 19 percent of production valued at $4.8 billion. (See table 2.2 for the breakout by category.) This reflects a substantial reduction from 1990, when the combined subsidies for wheat and barley amounted to $3.2 billion, or 68 percent of production valued at $4.7 billion.

Moreover, the payments to landowners for the end of Canada’s subsidy for the transport of western grain ended with the 1996 payments. Thus, according to a Canadian official, for 1997 Canada projects that the reported subsidies will be about half of the 1996 rate and will be 10 percent of the farmgate value of production.

The subsidy data provided by Canada are, however, incomplete, as several government subsidies are not included. These consist of the previously discussed lower interest loans of the CWB and government reimbursements for losses on credit sales, as well as government support of the Canadian International Grains Institute. In addition to these excluded CWB subsidies, Canadian government data also exclude the value of government-provided hopper railcars that are supplied to transport prairie grains.

The government of Canada acquired 13,120 hopper cars during the 1970s and early 1980s, with 12,780 now in service. According to a Transport Canada official, these cars are an indirect subsidy to western grain producers, because producers are not charged for their services. This subsidy applies to all prairie grains, including the CWB grains. In addition to the federal government-owned hopper cars, the government leases another 1,982 hopper cars, and two provincial governments contribute another 1,973 cars. In total, government-provided cars constitute about two-thirds of the 25,000 grain cars in Canada. The government of Canada does not have an estimate of the subsidy value of the government-owned and -leased cars that it provides to the western grain industry. We estimate that the government grain car fleet, if procured through private sector leases, would cost between $61 million and $68 million per year. This subsidy benefits all western grain producers, including barley and wheat producers. The proportion of this subsidy accruing to wheat and barley producers is about 64 percent, so the subsidy to wheat and barley producers is between $39 million and $44 million.

Canadian Grain System Is Undergoing Changes

Changes to the Canadian grain system are ongoing, and several events have the potential to alter the U.S.-Canadian grain trading environment. The Canadian government has recently enacted legislation that alters the operational structure of the CWB. Also, recent changes in government subsidies for the transportation system and proposed further deregulation may have an impact on grain flows to the United States. Meanwhile, increasing foreign investment and consolidation of the grain distribution and handling system in Canada, as well as privatization of grain import functions by many of the CWB’s customers, are changing the CWB’s operating environment.

Legislative Change to the CWB’s Mandate

A law to amend the Canadian Wheat Board Act of 1935 was passed by the Canadian parliament on June 11, 1998. This law, known as Bill C-4,provides for a number of changes to the CWB in the areas of corporate governance and operational flexibility (see table 2.3), although it is too early to speculate about the legislation’s effects on Canadian farmers and the Canadian grain system as a whole. Bill C-4 was first put before the Canadian House of Commons on September 25, 1997, after more than 2 years of consultation with farmers and the Canadian grain industry. The bill builds on the principle of increasing direct producer input into the priorities and operations of the CWB while retaining the reporting mechanisms that allow the Canadian government to provide the CWB with financial guarantees and monopoly exporter status.

A key provision in the new law replaces the CWB’s commissioner structure of management with a President and board of directors. Ten representatives on the 15-member board will be directly elected by producers; 5 board members, including the President, will be government appointees. Since the directors will not be elected until later this year, the new management structure of the CWB is unlikely to be in place in time to affect this year’s sales policy. Under Bill C-4, the board has numerous administrative powers, including the authority to designate its own chairperson; determine the salaries of the directors, chairperson, and President; and review the performance of the President. Furthermore, all directors will have full access to information about CWB operations, including audited financial statements; they will also be able to review the efficiency of the CWB with respect to grain sale prices, price premiums achieved, and operating costs.

Bill C-4 also grants the CWB the ability to buy grain and reimburse producers for grain on more flexible terms. The CWB can now offer new payment options for farmers and enhance producers’ cash flows. For instance, the CWB will be able to close pool accounts before January 1 and thereby make final payments to producers before the beginning of the calendar year. These actions will be at the discretion of the new board.

Changes in Canadian Transportation System

Canadian wheat and barley producers have historically received transportation subsidies that reduced shipping costs. The direct subsidies paid to the railroads under the 1983 Western Grain Transportation Act peaked at $925 million in 1986-87 and declined to $445 million in 1994-95, their last year. The subsidy, since the CFTA in 1989, did not apply to shipments to the United States from Canadian west coast ports, but to shipments traveling overseas and to the United States through Thunder Bay, Ontario. The cash subsidy ended in 1995 with its elimination due to internal budget constraints and Canada’s need to meet its obligations under the WTO agreements. With the removal of the subsidy in 1995, freight rates were capped until at least the year 2000. Owners of prairie land received a $1.2-billion payment paid out in 1995-96 to compensate them for the removal of the subsidy.

The CWB expects the end of the grain transportation subsidies to make the United States a more attractive export market. According to a CWB official, the shipping costs of moving grain to Canadian coastal ports more than doubled when the subsidy ended, while costs to ship to the United States were left unchanged. The observed impact of the removal of the subsidies has been obscured by concurrent factors that have influenced export volumes and destinations. The CWB official in charge of U.S. marketing explained that at the same time the end of the rail subsidies made the United States a more attractive market, the decline of U.S. usage of the USDA’s Export Enhancement Program was working in an offsetting fashion, making the United States a less attractive market. According to a Canadian transportation official, it is too soon after the changes in the rail subsidy to see the effect, but Transport Canada anticipates the changes will lead to greater shipments to the United States or increased Canadian grain processing.

During the same period in which the government rail subsidies ended, the CWB changed the way it computes the freight charges that it deducted from the payments it made to individual producers when they delivered their grain. This change in the pooling points for computing freight rate changes raised the shipping costs of grain for producers in the eastern prairies, making the United States a more attractive market. The impact of the subsidy elimination and of the CWB changes in freight charges is estimated to have a significant impact on the Canadian exports to the United States. The Producer Payment Panel, a Canadian government-appointed group representing industry, government, and academics, used an economic model of Canadian agriculture to estimate the impact. The panel estimated that the two changes would increase export shipments of wheat to the United States by 46 percent and barley by 44 percent. This assumed that commodity flows are allowed to respond to market signals and do not face U.S. border restrictions or diversion by the CWB.

The government of Canada gave notice in 1997 that by 2002, the fleet of government-owned rail hopper cars would be privatized. The privatization of these hoppers is expected to change the attractiveness of shipment to the U.S. market relative to shipments to Canadian ports in a way reminiscent of the impact of ending the direct transportation subsidies.

Currently, railcars are provided to the industry without cost for rail movements east, north, or west, but charges are levied if the cars are used for shipments to the United States. According to a Canadian rail manager, the application to rail shipments of full costs for the railcars will make it relatively cheaper to move grain to the United States than to port positions once privatization takes place.

Recently, the Canadian government began a review of the grain handling and transportation system, with completion scheduled by the end of 1998. The grain review secretariat describes its scope as comprehensive, covering all handling and transportation actions between the farm bin and the loading of vessels for export. The objectives of the review are to ensure that the Canadian system meets expectations of customers; maximizes system efficiency, competitiveness, and capacity utilization; provides cost-effectiveness; promotes necessary investment; and establishes roles, responsibilities, and accountability for each system participant. A Montana State University study reviewed changes underway in the Canadian grain handling and transportation system and concluded that any reduction in freight costs due to system improvements is unlikely to fully offset the large increase in shipping costs due to the end of the direct subsidies and change in pooling costs. This suggests that changes in the transportation system will provide increased economic incentives for Canada to ship to the U.S. market.

Other Changes to the CWB’s Operating Environment

U.S. companies have been investing more heavily in the Canadian grain system, both in new infrastructure and the commercial operations of the system, in recent years. This shift in ownership reflects U.S. business’ interest in the Canadian grain system. For example, officials at ConAgra, Inc., told us that their company has invested in terminal operations in western Canada; and Archer-Daniels-Midland purchased a 43-percent share of a Canadian grain company, United Grain Growers. This change means the CWB interacts on more levels with U.S.-based companies within Canada.

Historically, the CWB completed a lot of business on a state-to-state basis, especially with nonmarket economies, such as China; this trade involved working with other STEs. The decline of import-oriented STEs in other countries has changed the way the CWB does business with these countries, however. While some countries, such as China, still conduct business with the CWB through an STE, the majority of the CWB’s sales involves private companies. According to CWB officials, sales to other STEs now only comprise 10 to 15 percent of their entire business; at one time, this figure was as high as 35 percent. A Canadian farmers’ organization noted that private entities tend to prefer trading with other private entities as opposed to STEs; so the CWB increasingly uses its AEs to facilitate transactions with these private companies.

Conclusions

As an STE, the CWB receives direct and indirect government support, and it has some flexibility in setting its export prices. Moreover, wheat and barley producers also enjoy other government subsidies. The CWB faces structural changes due to recently completed legislative reforms, and other changes in the Canadian grain marketing system are underway; however, it is unclear how these changes will affect the way that the CWB conducts its business.

Agency and Country Comments

We received technical comments from USDA, USTR, ITC, the government of Canada, and the CWB on a draft of this chapter. We incorporated their suggestions where appropriate.

CWB Export Prices Have Limited Transparency

The United States collects extensive information on imports of Canadian grain, including the value of each shipment entering the United States, but because this information lacks important details on such grain aspects as quality, it reveals little about the CWB’s prices. The CWB discloses only limited information about its prices for the wheat and barley that it sells to its trading partners. U.S. officials believe that the lack of transparency in the CWB’s prices may provide it with more flexibility than is found among private grain traders. The CWB states that it reveals as much about its prices as its competitors in the private sector. U.S. government officials and U.S. farmers believe that nontransparent CWB prices make it difficult to assess whether the CWB’s practices are consistent with its international obligations under trade agreements. Officials from USDA and Customs—agencies that gather import data—are discussing the possibility of collecting more details on Canadian grain prices; however, they acknowledge that much of the information necessary to determine pricing practices would be difficult for Customs to readily collect at the border. The United States is also working through the WTO to increase the amount of information STEs, such as the CWB, must report on pricing and other activities. Thus far, the United States’ and other countries’ efforts to expand STE reporting requirements on pricing have had limited success. For example, while the WTO has recently introduced a new format for STE reporting that requires more information on STE pricing practices, that format does not go as far as the United States would like in increasing the pricing transparency of STEs such as the CWB.

CWB Provides Limited Information on Its Export Prices

The United States and other grain trading nations, and members of the U.S. grain industry, are concerned that without greater transparency, the CWB may be able to price its grain exports unfairly. The CWB makes public some aspects of its pricing methods, such as its use of prices on U.S. grain markets as the basis for sales into the United States. However, the CWB declines to reveal other important information, such as the actual contract prices for its sales to foreign grain buyers. The nontransparency makes it difficult for farmers to review CWB operations or to identify contract prices for individual sales. These contract prices could be useful in determining whether the CWB is engaging in pricing practices for which a trade remedy would be available, either through dispute settlement procedures under international agreements or through U.S. trade law. The CWB has recently made its contract records available to economists performing reviews of the CWB’s marketing performance under contracts with the CWB.

The CWB and the government of Canada defend the lack of full price transparency by noting that the CWB behaves like other private sector grain companies that also do not reveal their sales prices. The CWB believes that it should not be held to higher pricing disclosure standards than its competitors in the private sector. The CWB reports that revealing transactional data violates its confidentiality agreement with its customers.

CWB Pricing

Some aspects of CWB pricing are better known than others. The CWB allocates sales between Canada, the United States, the Caribbean and Latin America, Europe, the Middle East, the former Soviet Union, and the Asia-Pacific area based on expected returns, using different pricing strategies in different markets. According to CWB officials, prices for sales into the Canadian and U.S. markets are based on the trading values of grain on the MGE, adjusted for commercial freight. During hours when the MGE is closed, the price is based on the prior day’s closing price. The CWB sends its daily mill closing price to all mill customers, and it is published in several publications. According to the CWB, the objective of this strategy is to assure that Canadian domestic millers have grain prices that are consistent with what the wheat price would be in an open market. A Canadian grain company confirmed that sales to Canadian consumers are based on the MGE prices. The CWB’s domestic sales practices have created substantial domestic price transparency, although quantity information is only provided on an aggregate annual basis.

The CWB established a program that provides daily price quotes based on the MGE’s futures and cash markets for Canadian farmers wishing to market directly to the United States. These prices are posted daily for CWB producers. Without access to CWB transactional data, we were not able to confirm that sales into the United States were at the published prices. Several U.S. companies we spoke with reported that the CWB appeared to use prices based on the MGE.

CWB sales to other markets are less transparent, with the CWB reporting that sales reflect conditions of supply and demand in the various export markets. The CWB publishes daily export prices for its grains that are available at various port locations along the St. Lawrence Seaway and in-store at Vancouver, British Columbia. According to CWB officials, these “card” prices represent the prices paid by the top-paying customers for top grain and represent 10-12 percent of CWB sales volume. Of the 1.7 million-1.9 million tons sold at “card” prices, about 1.4 million tons were sold to Japan. In other cases where grain purchases are done through public tender, similar transparency is achieved. Remaining CWB sales are nontransparent.

Views of Interested Parties on CWB Transparency

There are mixed views on CWB price transparency. Some U.S. government officials and U.S. farmers believe that nontransparent CWB prices make it difficult to assess whether the CWB’s practices are consistent with its international obligations under trade agreements. Representatives of the Western Canadian Wheat Growers Association reported that the lack of transparency hampers their ability to evaluate the performance of the CWB as their grain marketer. Moreover, critics of the CWB believe that it is erroneous to compare a government-sponsored monopoly with a private company. In parliamentary hearings, some farmers testified that they do not trust the CWB, which they believe lacks transparency and accountability, and advocate that the Auditor General of Canada be the auditor of the CWB.

Officials at USDA emphasize that U.S. export prices are more readily available than those of Canada and other exporters. As an example, they cite an analysis of reported sales and export prices published by the International Grains Council that they prepared for the Canada-United States Joint Commission on Grains. They found that for a study period during the early 1990s, there were over 1,000 entries for the United States, 220 for the European Union, 71 for Canada, 44 for Argentina, and 11 for Australia on reported sales of grain and products.

Several grain industry experts believe that differences in price transparency between the U.S. and Canadian systems may give the CWB strategic advantages when compared to private grain traders. Studies prepared for the Canada-United States Joint Commission on Grains highlighted differences in price transparency between the grain systems of the two countries. According to one analysis, private export and domestic grain pricing in the United States is done in a transparent manner, with government-subsidized export sales also open to public view, while in Canada the prices of export sales by the CWB are closely held, though the price of grain in the domestic Canadian market is transparent. This difference in transparency between the U.S. and Canadian pricing practices places U.S. firms at a strategic disadvantage when competing with the CWB. Another Commission analysis concluded that the single-desk seller, with more knowledge of pricing behavior by U.S. firms, can win more bids and can expect to earn a higher profit.

In comparing the CWB with private firms, the CWB is further benefited by its monopoly sourcing requirement. Because it does not compete in procuring grain, it has the ability to undertake longer contracts and has a larger margin between the price at which it acquires its product and the price it asks for its grain. This advantage in sourcing gives the CWB considerable flexibility and latitude in pricing in comparison with private firms. The CWB, however, disputes this and believes that it may have a competitive disadvantage in grain procurement since private traders know the CWB acquisition cost and can use this information as a competitive advantage over the CWB.

Efforts to Increase CWB Pricing Transparency

U.S. concerns that the CWB has an unfair pricing advantage have led to efforts to increase the transparency of CWB pricing practices. USDA and Customs officials are discussing the possibility of collecting more detailed price information on Canadian wheat imports. The data that Customs currently collects on Canadian grain, as well as on all other imports, lack the transactional detail necessary to be useful in determining whether the CWB engages in pricing practices for which a trade remedy may be available. For example, this information could be important to the United States in determining whether the CWB’s exports to the United States are priced below the acquisition price, and thus, not consistent with Canada’s obligations under CFTA and NAFTA. However, given the limited availability of detailed contract information, USDA officials acknowledge that expanded data collection at the Canadian border would be of only limited benefit in revealing CWB pricing practices, because much of the information necessary to determine these practices cannot be readily collected by Customs. The United States is also working through the WTO to increase the amount of pricing information the CWB and other STEs are required to submit in notifications to the WTO on their activities. So far, the United States has had limited success in achieving this objective. The WTO has changed its STE reporting format to include more information on pricing, but the United States does not believe that the changes are sufficient to determine if the CWB and other STEs are engaging in improper pricing.

Grain Import Data Are Insufficient to Determine CWB Pricing Practices

In general, the information on the value of imported merchandise collected by Customs on the entry forms submitted by importers is used to calculate duties as well as to compile U.S. trade statistics (see app. IV for a detailed discussion of processes for collecting and compiling import data). However, most imports from Canada, including wheat and barley, are duty free under NAFTA. Therefore, the value information collected by Customs on Canadian wheat and barley shipments is used only for statistical purposes. Census aggregates this value information to show the total value of wheat and barley entering the United States from Canada. Further aggregations allow Census to determine the U.S. trade balance with Canada as well as the overall U.S. trade balance.

While the value information collected by Customs is used for calculating duties and compiling trade data, there are several reasons why this information lacks the detail that would be useful to determine whether the CWB is engaging in pricing practices for which a remedy may be available, either through use of dispute settlement procedures or through U.S. law. The entered value data currently collected by Customs do not provide specific detail on all of the elements affecting the price of a shipment, for example, protein content and payment terms. According to the Department of Commerce, additional information regarding imports may be useful in assessing whether foreign exporters are engaging in unfair pricing practices. However, Commerce officials state that the lack of additional information should not prevent a domestic industry from seeking relief under U.S. trade laws since petitions filed under those laws, in most cases, need not provide specific price information. Commerce states that while pricing information is an important element of a dumping petition, such information has been compiled from a variety of alternative sources by the petitioning industry. Moveover, Customs’ aggregate data have often been used by domestic industries when filing an antidumping petition.

In addition, the value information collected by Customs is of only limited use in determining the competitiveness of the price of Canadian grain in the U.S. market. In order to make an accurate determination of the price of Canadian grain, detailed information about the nature of the grain is required. For example, wheat’s protein and moisture content as well the amount of foreign material it contains are important pricing determinants in the wheat market. The price of durum wheat, for instance, can vary significantly depending on its protein level. In the 1996-97 marketing year, the CWB paid Canadian farmers $198 for a metric ton of a particular grade of durum wheat at a 14-percent protein level as compared to $188 for a metric ton of the same grade of wheat at a 12.5-percent protein level. Customs’ import entry form does not require this level of detail. The form only requires that wheat be classified according to the Harmonized Tariff Schedule (HTS), which provides separate classifications for varieties of wheat such as durum and red spring. The HTS also divides some wheat varieties, such as red spring, into broad grade categories.

Customs’ entry information, therefore, can only be used to estimate the border price per metric ton of varieties of Canadian wheat, such as durum. Without the detailed quality information, Canadian wheat import prices are not comparable to U.S. market prices.

Customs’ entry information also does not reflect important information about the contract between the exporter and importer, which is necessary for determining the competitiveness of the price of Canadian grain entering the U.S. market. For example, the value of a shipment of durum wheat entering the United States from Canada in October could be based on a contract that was signed in February. The contract price is usually based on the current price of durum on the Minneapolis grain market. The market price of durum wheat can vary considerably from month to month. Therefore, a direct comparison of Canadian durum import prices and market prices on the date of importation is often inappropriate. Moreover, Customs’ entry form does not require information on payment terms, such as credit.

Customs and USDA Discussing Expanding Amount of Data Collected on Canadian Wheat Shipments

Customs and USDA recently began discussions on increasing the amount of information Customs collects on wheat shipments. USDA has asked Customs to consider the feasibility of collecting more detail on wheat protein levels on Customs’ entry forms. According to Customs, some invoices for wheat presented to Customs at entry contain quality and protein information. Customs can also obtain such information by sending a “request for information” (form CF28) to the importer, although the information is not part of Customs’ automated reporting system, and, thus, not publicly available.

USDA wants the HTS classifications for wheat to be expanded to take into account variations in protein levels. Customs told us that the HTS classifies durum and some other types of wheat merely by the name of the wheat, with no consideration of various quality levels being imported. Currently, the HTS only allows for reporting varying grades for red spring wheat. USDA hopes that expanding the HTS classification for wheat would allow it to better estimate the price of Canadian wheat entering the U.S. market. However, USDA acknowledges that even if such an expansion of the HTS occurs, estimates of Canadian wheat prices entering the United States would still be limited. USDA notes that these estimates would still lack important wheat pricing information such as moisture and foreign substance content, as well as contract details such as the prevailing market price at the time of the contract. In addition, USDA does not believe it is feasible for Customs to collect such detailed information on the automated import entry form. Customs officials expect opposition to such changes from some importers and Customs brokers who would consider the additional information requirements to be burdensome.

New STE Notification Questionnaire May Not Sufficiently Increase CWB Pricing Transparency

The issue of the potential trade-distorting practices and lack of transparency of STEs, such as the CWB, is being discussed multilaterally through the WTO. The WTO will soon implement a new questionnaire for collecting information on STE activities, including their pricing practices. In negotiations on the format of the new questionnaire, the United States argued strongly for adding questions that would help bring greater transparency to the pricing activities of STEs and therefore be of use in determining whether STEs such as the CWB are engaging in improper pricing. U.S. officials believe that the new questionnaire does not go far enough in increasing the pricing transparency of the CWB and other STEs. The United States plans to continue pursuing the issue of STE transparency in the WTO.

The WTO agreement provided for the creation of a Working Party on STEs tasked with ensuring and, in the long run, improving the transparency of STE activities. The agreement also established a formal STE definition. The Working Party has allowed the WTO to better track the activities of STEs but has had mixed success in increasing their transparency. One of the tasks of the Working Party has been to revise the WTO’s questionnaire on STEs.

After over 2 years of negotiation, in April 1998 the Working Party reached agreement on a revised questionnaire that will now be used as the basis for WTO members’ STE notifications (for more information on WTO members’ recent STE notifications, see app. V.) While the new questionnaire requests more descriptive information about the functioning of WTO members’ STEs and additional quantitative information on STE import and export activities, it may not increase the transparency of the CWB.

Obtaining detailed information on STE pricing activities has been a major U.S. objective for revising the questionnaire because U.S. officials think that such data may assist the United States in determining whether certain STEs use their special status to operate unfairly. To this end, the United States forwarded several proposals to the Working Party. One proposal requested that members be asked to provide transaction-level pricing data on an ad hoc basis; that is, at the request of another member. Another proposal asked that members provide, on a quarterly basis, information on average prices for STE imports and exports, broken down by country of origin or destination. However, while supported by some Working Party members, the United States faced significant opposition from other Working Party members, including Canada, to these proposals. Opposing WTO members were concerned about providing commercially confidential information and about the possible administrative burden this would impose on countries. Ultimately the Working Party could not agree that this more detailed pricing data should be provided; instead, the new questionnaire asks for information on STEs’ average annual prices for individual commodities.

U.S. government and WTO officials believe that the new questionnaire represents an improvement over the 1960 questionnaire. According to USDA and USTR officials, the new version provides greater “organizational clarity” for WTO members to make their notifications. Specifically, the new questionnaire sets forth detailed guidelines and a structure for presenting descriptive and statistical information on members’ STE practices. In addition, the questionnaire now asks members to submit information on their STEs’ domestic pricing practices, something that was not previously required. The new questionnaire may be particularly useful in obtaining more information on the STE practices of prospective WTO members with market transition economies. In these countries, such as China or Russia, public information on their STEs is not always readily available. According to a WTO Secretariat official, the new questionnaire asks for information on STE practices in a much clearer way; the more precise language in the new questionnaire will “discourage one-line answers” and may result in less variation in the level of detail members provide on their STEs. Other Working Party members we spoke with echoed this view.

According to USDA officials, whether the new questionnaire is able to bring greater transparency specifically to the CWB’s activities will largely depend on how Canada responds to the questionnaire. USDA officials told us that if Canada acts in the spirit of the new questionnaire, Canada could use its new notification to provide new information on the CWB’s activities. However, one USDA official also told us that the new questionnaire may provide virtually no new information about CWB pricing. This official told us that the CWB has provided much more information and transparency on domestic prices in recent years; Canada now publishes prices daily in various publications, and these data are essentially the same kind of price data that are available in the United States for U.S. grain prices. Therefore, according to this official, the new questionnaire does not necessarily provide for new information on Canada’s domestic grain prices. In addition, this official could not identify any sections of the new questionnaire that would definitely constitute new information that is not in the public domain with respect to the CWB. Canadian officials did not respond to our request to identify areas where the new questionnaire will require them to provide additional information on the CWB.

In addition to the questionnaire, the Working Party has been developing an illustrative list of state trading activities. This list will be used in conjunction with the new questionnaire to help WTO members identify what entities in their trading regimes should be reported in the notification questionnaire.

Working Party members have agreed to continue work defining possible further information needed to enhance the transparency of STEs. According to one WTO member we spoke with, it may be appropriate for the Working Party to review the adequacy of the new questionnaire and the list after a few years, because countries may initially “report the bare minimum” in the first trial run of the questionnaire. However, the working party has only met twice since the questionnaire was approved and, according to the WTO Secretariat, the Working Party has not begun discussing any future work program beyond continuing the review of notifications and finalizing the illustrative list. USDA and USTR officials told us they intend to pursue obtaining greater transparency of STEs through the Working Party, but they have not yet outlined their strategy for doing so. These officials stated that the United States is beginning to “think beyond transparency” about the need to develop disciplines on STEs in agriculture; they anticipate that STEs will be a significant focus in the WTO negotiations on agriculture set to begin at the end of 1999 or shortly thereafter.

Conclusions

While the United States collects extensive Canadian grain import data, it has been unable to shed light on the CWB’s grain export prices. Although the existing grain import data are insufficient to determine CWB export prices, expanding the amount of data collected on Canadian wheat import shipments would be difficult and may not provide the desired pricing information. The United States has worked closely with the STE Working Party at the WTO but has had limited success in increasing STE pricing transparency in that forum, as well.

Agency and Country Comments

In comments on our draft report, USDA emphasized that, in its view, the CWB, as the sole buyer of Canadian wheat for domestic human consumption and for export, is able to engage in trade-distorting actions. USDA also said that we did not sufficiently emphasize the CWB’s pricing flexibility that comes from its practice of making initial payments to its farmers of only 70-75 percent of the expected value of their grain. We believe that point was sufficiently established in the draft. However, we did not attempt to quantify the impact of CWB activities on grain trade.

The CWB did not agree with GAO’s assertion that the CWB has flexibility in pricing compared to private firms because it does not compete to procure grain. Rather, the CWB believes that it has a competitive disadvantage in obtaining grain because private grain traders know the CWB’s acquisition cost. GAO included the CWB’s statement in its discussion of this issue.

Trade Remedy Enforcement Affecting STEs

The CWB and other STEs are allowable under the WTO Agreements and NAFTA. They operate throughout the world in various forms and for various purposes. Trade remedies have not been fashioned specifically to deal with imports from STEs. However, products imported into the United States that are manufactured, produced, or marketed by STEs are subject to the same laws regulating imports as any other product, including laws that restrict imports or provide remedies to U.S. industry competing with unfairly traded goods. We asked the U.S. government entities charged with enforcing international trade agreements and U.S. trade laws, including USTR, Commerce, and the ITC, to search their records from 1980 to the present to determine how trade laws have been applied to STEs. We found a total of 15 trade remedy actions involving an STE, the most recent taken in 1995. Some of the trade remedy actions resulted in increased duties, while others prompted the country in which the import STE was operating to remove import restrictions that limited U.S. exports.

Trade Remedies Under U.S. Law and International Trade Agreements

Trade remedies under U.S. law allow government and private parties to seek redress for disruptive, trade-distorting, or unfair trade practices. The United States has various trade remedy laws at its disposal to deal with trade issues, dumping, actionable subsidies, or increased imports causing domestic injury. Dispute settlement provisions under international trade agreements, including the WTO and NAFTA, provide a means of seeking relief from measures or actions taken by other governments, which could include actions by STEs. The following is a brief summary of the relevant U.S. laws (for a more detailed description of each trade remedy, see app. VI).

Title VII of the Tariff Act of 1930, as amended, provides the most common means of dealing with antidumping issues. Under title VII, private parties can petition the Department of Commerce and the ITC on behalf of a U.S. industry to determine whether a class or kind of merchandise is being sold in the United States at “dumped” prices and whether a U.S. industry is materially injured or threatened with material injury by reason of such dumped imports. If the agencies find that both dumping and injury or threat of injury exist, Commerce then calculates the amount of duties imposed on each importer to offset the price difference between the U.S. price and the normal value of the imported merchandise.

Title VII of the Tariff Act of 1930, as amended, also provides for the imposition of countervailing (or equalizing) duties whenever a government or public entity provides certain subsidies for the manufacture, production, or export of articles subsequently imported into the United States and a U.S. industry is materially injured or threatened with material injury by reason of such subsidized imports. As in the case of antidumping law, petitions are filed with Commerce and the ITC, and countervailing duties are imposed if Commerce finds a subsidy and the ITC finds that a U.S. industry is materially injured or threatened with material injury by reason of imports of such subsidized imports.

Under section 332 of the Tariff Act of 1930, as amended, the ITC has broad authority to investigate matters pertaining to U.S. customs laws, foreign competition with domestic industry, and international trade relations. Most ITC investigations under section 332 are conducted at the request of USTR or the House Committee on Ways and Means or the Senate Committee on Finance.

Section 22 of the Agricultural Adjustment Act of 1933, as amended,authorizes the President to impose fees or quotas on imported products that undermine any USDA domestic commodity support or stabilization program. Since 1995, such actions may be applied only against imports from non-WTO countries.

Sections 201 to 204 of the Trade Act of 1974, as amended, authorize the ITC to conduct investigations concerning whether an article is being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing a like or directly competitive article. If the ITC makes an affirmative determination, it recommends a remedy to the President, who makes the final decision as to whether to impose a remedy and, if so, in what form and amount. Remedies generally take the form of increased tariffs and import quotas.

Sections 301-309 of the Trade Act of 1974, as amended, commonly referred to as “Section 301,” give the President broad discretion to enforce U.S. trade rights granted by trade agreements and to attempt to eliminate acts, policies, or practices of a foreign government that violate a trade agreement or are unjustifiable, discriminatory, or unreasonable and burdensome or restrict U.S. commerce.

CWB and Other STE Involvement in Trade Remedy Actions

The CWB and other STEs have been involved in investigations under U.S. trade law, and their activities have been the subject of formal disputes under international trade agreements. As shown in table 4.1, the CWB has been involved in three different trade remedy actions since 1980. The ITC conducted two investigations involving U.S. imports of Canadian grain, and USTR reported one CFTA dispute settlement action about CWB export pricing. As for other STEs, the Department of Commerce found that five STEs had been involved in antidumping or countervailing duty investigations or reviews. The ITC reported no actions involving STEs under sections 201 to 204. USTR identified three Section 301 investigations involving STEs, which led to three GATT dispute settlement procedures. USTR found one additional dispute settlement procedure involving an STE, not preceded by a Section 301 investigation. USTR found no WTO or NAFTA disputes involving STEs. All of the GATT dispute settlement cases involved restrictive practices of import STEs, whose actions impeded U.S. exporters’ access to foreign markets.

Use of Trade Remedies Involving the CWB

The CWB was involved in three trade remedy actions, including two ITC investigations and one CFTA formal dispute. The ITC investigations both involved Canadian wheat imports into the United States—one looking at the competitiveness of the two markets, and the other examining the effect of those imports on U.S. farm sector support programs. The CFTA dispute involved the interpretation of provisions in the agreement on export prices of agricultural goods.

ITC Investigations of U.S. Grain Imports

The increase in imports of Canadian grain to the United States prompted two ITC investigations. In 1990, the ITC began a section 332 investigation on the conditions of competition between the U.S. and Canadian durum wheat industries. The ITC found that it was not apparent that prices paid by U.S. processors during 1986-89 for Canadian durum wheat were significantly different than prices paid for similar quality U.S. durum.

At the President’s request, the ITC launched an investigation in January 1994 under section 22 of the Agricultural Adjustment Act to determine whether wheat, wheat flour, and semolina were being imported into the United States under such conditions and such quantities as to “render or tend to render ineffective, or materially interfere with, the price support, payment and production adjustment program conducted by. . .” USDA for wheat. Canada was the principal source of wheat imports into the United States, Canadian production and U.S. production being the two most important sources of supply.

The ITC completed its section 22 review in July 1994. The six commissioners rendered a split decision: three commissioners found that wheat was not being imported under such conditions and in such quantities as to materially interfere with USDA wheat programs; three Commissioners found that wheat was being imported under such conditions and in such quantities as to materially interfere with USDA wheat programs. The commissioners had differing recommendations. Previous negotiations and the ITC investigation resulted in a 1-year MOU between the two countries (see app. I).

CFTA Dispute Panel Ruling on Canadian Durum Wheat Exports

In May 1992, the United States requested that a binational dispute panel under CFTA consider pricing policies for Canadian durum wheat exports. The United States believed that Canada was acting contrary to the CFTA requirement that neither country export agricultural goods to the other country at a price below the acquisition price. Among other things, the panel was asked to determine whether the acquisition price included solely the initial payments made to farmers by the CWB—the Canadian position—or all payments made to farmers with respect to a durum wheat crop (initial plus interim and final payments, if any)—the U.S. position. The United States was concerned that the Canadians’ more narrow definition would allow Canada to undercut U.S. grain prices and still meet the terms of CFTA.

The panel’s final report supported Canada’s definition of the term but stated that it was not possible or desirable for the panel to determine whether the CWB had violated the CFTA provision. However, the panel recommended that a bilateral working group should be established for the general purpose of overseeing an audit of the CWB. An initial audit was conducted, which found that out of the 105 contracts or durum wheat sales to the United States CWB signed and completed from January 1, 1989, to July 31, 1992, 3 contracts were not in compliance with the CFTA prohibition against selling below acquisition price. By volume, the 3 contracts represented 13,985 metric tons in durum wheat sales, or 1.34 percent of the 1.04 million metric tons in total sales for the 105 contracts.

Use of Trade Remedies Under U.S. Law

STEs have been involved in trade remedy actions under U.S. law. These actions included products exported to the United States through STEs, and actions addressing STEs’ alleged unfair trade practices restricting U.S. exporters’ access to foreign markets.

Antidumping and Countervailing Duty Investigations

Commerce reported that it had conducted one antidumping investigation and four countervailing duty investigations involving STEs (see table 4.2). The 1990-91 antidumping investigation was prompted by a petition from the Ad Hoc Committee for Fair Trade of the California Kiwifruit Commission. Commerce found that fresh kiwifruit was being dumped at less than fair value by a New Zealand STE, the New Zealand Kiwifruit Marketing Board, through which all New Zealand kiwifruit for export must pass, except for such exports to Australia. The ITC then found that U.S. industry was injured/threatened by the imports. As a result, the United States imposed a dumping duty of 98.6 percent on those imports, effective November 1991. In two out of the four countervailing duty investigations, Commerce concluded that the STEs in the case, the New Zealand Meat Producers Board in one case and the Turkish Grain Board in the other case, were providing actionable subsidies. Commerce subsequently required Customs to levy a countervailing duty on imports from these two STEs. In the two remaining countervailing duty investigations, the petitioners terminated one, and the ITC found no injury on the other, and therefore no countervailing duties were levied.

A Commerce official reiterated that Commerce does not make a determination regarding STE status and that STEs are not accorded special treatment or recognition under U.S. antidumping and countervailing duty law. However, Commerce said that to the extent that an STE sells goods into the United States that are dumped or unfairly subsidized, U.S. antidumping and countervailing duty laws could provide a potential remedy. The official cautioned that it was difficult to determine conclusively which STEs had been the subject of antidumping or countervailing duty investigations or reviews, due to the length and complexity of the cases, the possible involvement of an STE in a case in an indirect or insubstantial way, and potential difficulties in translating foreign STE names.

Section 301 Cases Leading to a GATT Dispute Settlement

Canada - Restrictions on Beer Imports

USTR initiated a Section 301 investigation in June 1990 related to alleged discriminatory distribution and pricing practices of the provincial liquor boards of Ontario, including an STE, the Ontario Liquor Control Board. The USTR investigation was prompted by petitions filed by two U.S. brewing companies. These practices included listing requirements, discriminatory mark-ups, and restrictions upon distribution. After negotiations between Canada and the United States failed to resolve the issue, USTR requested that a GATT dispute settlement panel examine Canadian practices. In October 1991, the GATT panel reported that many of the Canadian practices were inconsistent with GATT prohibitions on quantitative restrictions and recommended they be removed. Because Canada did not discontinue the practices, in December of that year USTR determined that, consistent with the GATT panel finding, duties should be increased on beer and malt beverages from Canada. After resuming negotiations with Canada and again failing to reach agreement, the United States did increase duties by 50 percent ad valorem. Canada responded in kind by raising duties on beer imports from the two U.S. brewing companies that had originally submitted the Section 301 petitions. USTR initiated new negotiations with Canada in 1993, and the two countries ultimately signed an MOU in August of 1993. The MOU, among other things, increased U.S. brewers’ access to Canadian stores and reduced the Ontario Liquor Board’s fees for handling U.S. beer and removed the duties imposed earlier.

Thailand - Restrictions on Cigarette Imports

The U.S. Cigarette Export Association filed a Section 301 petition in 1989 alleging that the Royal Thai Government and its state-controlled import monopoly and STE, the Thailand Tobacco Monopoly, engaged in taxing and licensing practices that effectively prohibited the importation and sale of cigarettes into Thailand. USTR initiated a Section 301 investigation and, on February 5, 1990, requested that a GATT panel be formed to consider the issue. The GATT panel issued a report in September 1990 concluding that Thai cigarette import restrictions violated GATT prohibitions on quantitative restrictions. The panel recommended that Thailand bring its practices into conformity with its obligations under GATT. In October 1990, the Thai government said that it would remove its import restrictions and, in response, USTR terminated the Section 301 investigation.

Korea - Restrictions on Beef Imports

The United States challenged quantitative import restrictions imposed by Korea’s STE, the Livestock Products Marketing Organization, arguing that they violated GATT prohibitions against quantitative restrictions. The United States also argued that the very existence of an import monopoly controlled by domestic producers constituted a prohibited import restriction. The GATT panel concluded that the existence of a producer-controlled monopoly was not a GATT violation but found that the Livestock Products Marketing Organization import restrictions did violate GATT prohibitions against import restrictions. In 1989, a GATT panel report was adopted recommending that the two countries consult and that Korea conform to GATT. Pursuant to the panel recommendation, the United States and Korea signed a bilateral agreement. Two subsequent agreements, one in 1993 and one under the Uruguay Round, were entered into force to achieve free market conditions for the importation and distribution of U.S. beef in Korea. Each year, both countries meet quarterly to ensure full implementation of the beef agreement provisions.

Use of GATT Dispute Settlement Provisions Under International Agreements

Japan - Restrictions on Certain Agricultural Products

In 1988, a GATT dispute settlement panel’s report was adopted on a GATT dispute case. The United States alleged that a variety of quantitative restrictions maintained by Japan on 11 agricultural categories were inconsistent with Japan’s GATT obligations. Some of these restrictions were imposed by an STE - the Livestock Industry Promotion Corporation. The Livestock Industry Promotion Corporation is an import monopoly that regulates imports of beef and certain dairy products, including condensed skim milk, whole milk powder, skimmed milk powder, whey powder, and buttermilk powder, into Japan. Japan acknowledged that the Livestock Industry Promotion Corporation maintained import restrictions but argued that the GATT prohibition on quantitative restrictions did not apply to state-trading monopolies. The dispute settlement panel concluded that GATT provisions, including those prohibiting quantitative restrictions, apply to all import restrictions, whether or not they are instituted through quotas or by STEs. The panel further ruled that while GATT permits measures such as those limiting private imports necessary to enforce the exclusive trading rights of import monopolies, it does not permit quantitative restrictions otherwise inconsistent with GATT obligations.

On August 2, 1988, the United States and Japan signed an agreement to resolve the GATT dispute. Japan partially lifted its quotas and provided increased access as compensation. Japan eliminated quotas on 7 of the 11 product categories by April 1, 1990.

Conclusions

While relatively few trade remedy actions have been taken involving STEs—15 since 1980— some of these actions have resulted in increased duties on imports found to be injurious to U.S. industry. In addition, the United States prevailed in all of the GATT dispute settlement cases involving STEs. In every case, the GATT dispute panel found that the import STE’s restrictions that limited U.S. exports had violated GATT rules. A wide range of trade remedies can be applied to STEs, such as those seeking redress for dumping, actionable subsidies, and sufficiently injurious imports, and those seeking relief, through dispute settlement, from actions taken by other governments as well as by STEs.

Agency Comments

We received technical comments from USDA, USTR, the U.S. Department of Commerce, the U.S. Department of Justice, and the ITC on a draft of this chapter. We incorporated their suggestions, where appropriate.