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In 1995, Canada introduced a new pricing system for dairy exports, called the "Special Milk Classes" scheme. This scheme ensures that Canadian exporters have access to milk at considerably lower prices than otherwise available on Canada's domestic market. New Zealand and the United States shared the view that the scheme provides export subsidies for the purposes of the WTO Agreement on Agriculture, and as such these exports must be limited by Canada's export subsidy volume commitments for dairy products. New Zealand and the United States argued that because Canada’s exports under the “Special Milk Classes” scheme were running at around double Canada’s export subsidy commitment levels, Canada was therefore in breach of the Agriculture Agreement.
In November 1997, the Government agreed to New Zealand invoking the dispute settlement provisions of the WTO against Canada in respect of its "Special Milk Classes" regime. New Zealand requested consultations under the Dispute Settlement Understanding in December 1997. As the consultations did not resolve the dispute, New Zealand requested a WTO adjudicative panel in March 1998. The United States had also requested a panel in respect of the “Special Milk Classes” scheme. The Panel that was established heard both cases together.
The parties to the case (New Zealand, the United States and Canada) all made written and oral submissions to the Panel in the latter part of 1998. The Panel issued its report in May 1999. The Panel found that Canada's "Special Milk Classes" scheme did provide export subsidies, and that Canada had therefore exceeded its export subsidy commitment levels in breach of the WTO Agriculture Agreement.
Canada unsuccessfully appealed the Panel’s Report - in its Report in October 1999, the WTO Appellate Body upheld the Panel's key findings. The WTO Dispute Settlement Body (made up of all WTO Member countries) adopted these findings, and recommended that Canada bring its measures into conformity with the WTO rules.
New Zealand and the United States then reached an agreement with Canada in December 1999 on the time-frame for Canada's implementation of the outcome of the case. This agreement provided for a "phased" implementation over the 2000 calendar year. As part of its implementation, Canada would continue to make use of the "Special Milk Classes" scheme for dairy exports, but agreed to limit export volumes under the scheme to within its commitment levels.
However as part of its implementation, Canada introduced a number of new dairy export mechanisms on a province-by-province basis. Canada claimed that the new schemes did not provide export subsidies, and it would not therefore limit the volume of exports under them to within its export subsidy commitment levels. New Zealand and United States officials considered that the new schemes continued to provide export subsidies and that Canada had therefore failed to comply with the Dispute Settlement Body's recommendations.
In February 2001, New Zealand, the United States and Canada held consultations on this issue, but failed to resolve New Zealand's and the United State's concerns. Consequently, later in February, New Zealand and the United States formally requested that the WTO reconvene the original dispute settlement Panel to examine Canada's replacement schemes. The Panel received written and oral submissions from the parties in May 2001. The EU, Mexico and Australia also participated as third parties and made written and oral submissions to the Panel. The Panel issued its decision in July 2001. The Panel found that Canada's replacement schemes continued to provide export subsidies in breach of its WTO commitments.
Canada subsequently appealed this decision and in December 2001 the Appellate Body held that the Panel had applied the wrong legal test to determine whether export subsidies had been provided. The Appellate Body also determined that it was unable to make any determination as to whether the Canadian measures were export subsidies since further factual information was required before the correct legal test could be applied.
Following the December 2001 Appellate Body ruling, New Zealand and the United States requested, for a second time, the reconvening of the original dispute settlement Panel to examine Canada's replacement measures against the legal test outlined by the Appellate Body. The Panel received written and oral submissions from the parties in March and April 2002. The EU, Argentina and Australia also participated as third parties and made written and oral submissions to the Panel. The Panel issued its decision in July 2002. The Panel, once again, found that Canada's replacement schemes continued to provide export subsidies in breach of its WTO commitments.
On 23 September 2002, Canada notified its decision to appeal the Panel decision. Following receipt of written submissions of the parties, the Appellate Body heard the appeal in Geneva on 31 October 2002. In its report of 20 December 2002 [external link to WTO website] the Appellate Body upheld the Panel's finding that Canada was providing export subsidies in breach of its WTO commitments. The Appellate Body found that Canada's replacement scheme was contrary to Canada's obligations under Article 3.3 and Article 8 of the Agreement on Agriculture. The Appellate Body's decision was adopted by the Dispute Settlement Body on 17 January 2003.
At the same time as initiating the dispute settlement process to investigate Canada's compliance with the original panel's finding, NZ also lodged a request seeking authorisation from the Dispute Settlement Body to take retaliatory action against Canada by suspending tariff concessions up to the value of US$35 million a year, which is the damage calculated to be caused to New Zealand by Canada's illegal dairy export subsidy regime (the US also made a similar request to the Dispute Settlement Body). The requests of New Zealand and the US were referred to arbitration. A mutually agreed solution [external link to WTO website] between Canada and New Zealand (and separately between the United States and Canada) was notified to the WTO on 9 May 2003.
