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AB-1999-4 - Report of the Appellate Body

I. INTRODUCTION

1.
Canada appeals from certain issues of law and legal interpretations developed by the Panel in Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products (the "Panel Report").1 Following their requests for consultations, the United States2 and New Zealand3 requested that the Dispute Settlement Body (the "DSB") establish panels to examine certain alleged export subsidies that they contended Canada or its provinces had granted, through the Special Milk Classes Scheme, to support the export of dairy products and to examine a claim by the United States regarding imports into Canada of fluid milk and cream within the 64,500 tonnes tariff-rate quota committed in Canada's Schedule of Commitments under the Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement"). On 25 March 1998, the DSB agreed to establish two panels in accordance with these requests and further agreed that the two panels would be consolidated into a single panel pursuant to Article 9.1 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU") with standard terms of reference.
2.
The Panel considered claims made by the United States and New Zealand that Canada's measures are inconsistent with Articles II, X, XI and XIII of the General Agreement on Tariffs and Trade 1994 (the "GATT 1994"); Articles 3, 4, 8, 9, and 10 of the Agreement on Agriculture; Article 3 of the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement"); and Articles 1, 2 and 3 of the Agreement on Import Licensing Procedures. The Panel Report was circulated to Members of the World Trade Organization (the "WTO") on 17 May 1999. In paragraph 8.1 of its Report, the Panel concluded that Canada:

(a) through Special Milk Classes 5(d) and (e) - and this for all of the dairy products in dispute (butter, cheese and "other milk products") and for both marketing years at issue (1995/1996 and 1996/1997) - has acted inconsistently with its obligations under Article 3.3 and Article 8 of the Agreement on Agriculture by providing export subsidies as listed in Article 9.1(a) and Article 9.1(c) of that Agreement in excess of the quantity commitment levels specified in Canada's Schedule; and

(b) by restricting the access to the tariff-rate quota for fluid milk to (i) consumer packaged milk for personal use and (ii) entries valued at less than C$20, acts inconsistently with its obligations under Article II:1(b) of GATT 1994.

3.
In paragraph 8.3 of its Report, the Panel made the following recommendation:

We recommend that the Dispute Settlement Body requests Canada: (i) to bring its dairy products marketing regime into conformity with its obligations in respect of export subsidies under the Agreement on Agriculture; and (ii) to bring its tariff-rate quota for fluid milk into conformity with GATT 1994.

4.
On 15 July 1999, Canada notified the DSB of its intention to appeal certain issues of law covered in the Panel Report and legal interpretations developed by the Panel, pursuant to paragraph 4 of Article 16 of the DSU, and filed a Notice of Appeal with the Appellate Body, pursuant to Rule 20 of the Working Procedures for Appellate Review (the "Working Procedures"). On 19 July 1999, Canada filed its appellant's submission.4 On 6 August 1999, the United States and New Zealand filed their respective appellees' submissions.5
5.
The oral hearing in the appeal was held on 6 September 1999.6 The participants presented oral arguments and responded to questions put to them by the Members of the Appellate Body Division hearing the appeal.

II. BACKGROUND

A. THE CANADIAN DAIRY REGIME

1. Institutions

(a) CDC

(b) Provincial Milk Marketing Boards

(c) CMSMC

2. The Special Milk Classes Scheme

3. Price of Milk to the Processor

4. Returns to the Producer – Pooling

B. CANADA'S TARIFF-RATE QUOTA FOR FLUID MILK

17.
The factual aspects relating to Canada's tariff-rate quota for fluid milk are fully provided at paragraphs 7,142 and 7,143 of the Panel Report.

III. ARGUMENTS OF THE PARTICIPANTS

A. CLAIMS OF ERROR BY CANADA – APPELLANT

1. Article 9.1(a) of the Agreement on Agriculture

(a) "direct subsidies, including payments-in-kind"

18.
Canada contends that the interpretation of the term "export subsidies" in the Agreement on Agriculture must take into account the related provisions of the SCM Agreement. The Agreement on Agriculture and the SCM Agreement are both Multilateral Agreements on Trade in Goods and, in the language of Article II:2 of the WTO Agreement, are "integral parts" of the WTO Agreement. The two Agreements reflect the latest statement of WTO Members as to their rights and obligations concerning agricultural subsidies. The clear inference is that, if possible, there should be consistency of interpretation between the two Agreements, particularly with respect to the notions of "subsidies" and "export subsidies". In Canada's view, the Panel did not give proper consideration to this need for consistent interpretation.
19.
Canada submits that the interpretation of the expression "direct subsidies, including payments-in-kind", in Article 9.1(a) of the Agreement on Agriculture, should begin with the word "subsidies". That word, although not defined in the Agreement on Agriculture, is defined in Article 1.1 of the SCMAgreement. If the elements identified in Article 1.1 are present, Article 9.1(a) of the Agreement on Agriculture requires examination of whether the "subsidies" are "direct". The Panel erred by failing to do this. In Canada's view, a subsidy is "direct" if: it is funded directly from government funds; it is paid directly to the beneficiary by the government itself; and it does not involve the activities of non-governmental actors acting through a government-mandated scheme. In this case, since the alleged subsidy is not funded by government, it is not "direct".
20.
The Panel also erred by "equating 'payments-in-kind' with 'direct subsidies'".41 A subsidy may take the form of a "payment-in-kind", but a "payment-in-kind" is not necessarily a "subsidy". By collapsing these separate legal concepts, the Panel failed to address the two fundamental elements of Article 9.1(a): namely, the terms "direct" and "subsidies".
21.
Canada contends that the Panel also substituted for the ordinary meaning of "payments", in the term "payments-in-kind", a special meaning of "gratuitous act, a bounty or benefit".42 The end result is that the Panel equates "payments-in-kind" with "direct subsidies", and "payments", in "payments-in-kind", with "benefit". In so doing, the Panel has confused the form of a transaction ("payments-in-kind") with its economic consequences ("benefit").
22.
Moreover, by holding that the "provision of a good at a price lower than the normal price"43 was a "payment-in-kind", the Panel departed from the ordinary meaning of that term, which Canada sees as reflecting a requirement to show a "financial contribution". When goods are sold at less than the "normal" price, purchasers are not receiving payments-in-kind but are simply paying less for the goods they receive.
23.
Although the Panel correctly set out to establish the existence of a "benefit", it misconstrued and misapplied that concept. The Panel established two "benchmarks" to test whether a benefit was conferred.44 Canada submits that the Panel erred in relying on the domestic price of milk as the first benchmark since that price is influenced by lawful, bound tariffs. On the basis of the Panel's approach, the exportation of any product, subject to an import tariff, at the prevailing world market price is, effectively, an export subsidy. It is, however, normal commercial practice for domestic and export prices to be different. Indeed, several provisions of WTO law suggest that price differentiation on the basis of market realities is acceptable.
24.
Canada notes that the Panel's "benefit" test is based on whether processors obtain milk under Special Classes 5(d) and 5(e) at a price more advantageous than the prevailing world market price for competing products, whether or not processors choose to source the product from those markets. The Panel's approach overlooks the commercial reasons why certain access opportunities are not pursued. The Panel was also wrong to presume that there is a "world market" price for raw milk, since raw milk is rarely traded internationally.
25.
Canada states that the legal error committed in connection with the second benchmark was compounded: by a failure to take into account relevant factual considerations and by making unwarranted presumptions concerning the import of milk under the Import for Re-export Program; by engaging in unwarranted speculation about the commercial viability of importing fluid milk into Canada from the United States; and, by relying on evidence that was deemed to contain "certain inaccuracies"45, without providing a basic rationale under Article 12.7 of the DSU to justify placing reliance on such evidence.

(b) "governments or their agencies"

26.
Canada argues that the Panel erred by finding that the provincial milk marketing boards are government agencies "solely on the basis of one characteristic: the delegation of some governmental authority."46 The mere fact of delegation of authority from government is not sufficient to conclude that an entity is an agency of government.
27.
Canada notes that, in Article 9.1(a), marketing boards are identified as potential recipients of "direct subsidies". The implication is that a marketing board is distinct from "governments or their agencies". Moreover, if marketing boards are deemed to be "government agencies", the result would be that subsidies are being provided by a government to itself.
28.
According to Canada, the Panel was misguided in relying on Article XVII of the GATT 1994 to support its conclusion that marketing boards may be government agencies. That provision has no bearing on the status of the marketing boards at issue under Article 9.1(a). Similarly, the Panel's reference to Article XXIV:12 does not advance its reasoning. That provision states that "regional" or "local" authorities are subject to GATT obligations but does not define such authorities.
29.
Canada notes that Item (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement (the "Illustrative List"), distinguishes between the provision of subsidies by "government-mandated schemes" and by "governments or their agencies". "Government-mandated schemes" will usually entail the delegation of authority by government to a private entity. Yet, under Item (d), such an entity does not become a government agency as a result of that delegation of authority.
30.
Canada emphasizes that under Canadian domestic law, the provincial milk marketing boards are neither part of the executive branch of any Canadian government nor are they government "agencies". The Panel failed to address the high degree of independence, private accountability and discretion enjoyed by the boards. An entity, such as the provincial milk marketing boards, which act in the private interest of a specific group, cannot be said to be performing government functions, even if it enjoys powers delegated to it by government.
31.
Canada adds, finally, that the judgment in the Bari III case, referred to by the Panel, provides no support for the proposition that the provincial milk marketing boards should be deemed to be government agencies because they enjoy some delegated powers.

2. Article 9.1(c) of the Agreement on Agriculture

(a) "payments"

32.
Canada contends that the Panel erred by collapsing the distinction between the term "payments" in Article 9.1(c) and the term "payments-in-kind" in Article 9.1(a). These words have different meanings: where the drafters intended the word "payments" to include "payments-in-kind", this was indicated in the text, as in the case of Article 9.1(a) and of paragraph 5 of Annex 2. The absence of an express reference to "payments-in-kind" in other provisions of the Agreement on Agriculture indicates a different intention. Canada argues that its interpretation is supported by the French and Spanish texts of that Agreement.
33.
The Panel also erred by equating a "payment-in-kind" with the provision of a good at a discounted price or "revenue foregone". As regards "revenue foregone", the Panel erred in concluding that, because such revenue counts against a Member's budgetary outlay commitments, every type of subsidy listed in Article 9.1 covers "revenue foregone". In Canada's view, it is only if the specific sub-paragraph of Article 9.1 can be interpreted to include "revenue foregone" that such revenue is relevant to the subsidy concerned. The Panel also fails to differentiate between "payments-in-kind" and "revenue foregone". In effect, therefore, the Panel errs by collapsing the separate terms, "payments", "payments-in-kind" and "revenue foregone", into a single concept.

(b) "financed by virtue of governmental action"

34.
Canada argues that the Panel's finding under Article 9.1(c), that "payments" were "financed by virtue of governmental action", is based expressly on the Panel's findings under Article 9.1(a) regarding "governments and their agencies". The finding under Article 9.1(c) is, therefore, wrong for the same reasons Canada submitted under Article 9.1(a).
35.
Canada also points to what it considers to be significant differences between in-quota and over-quota milk as regards the degree of government involvement and contends that the Panel erred by dismissing these differences.47 Neither the boards nor the CDC determine how much over-quota milk will actually be produced. Canada also underlines the differences in the pooling of returns to producers as between in-quota and over-quota milk.

3. Article 10.1 of the Agreement on Agriculture

36.
Canada observes that Article 10.1 applies to "subsidies contingent upon export performance", other than those subsidies listed in Article 9.1. The Panel erred by suggesting that the scope of the measures covered by Article 10.1 is drawn from the items listed in Article 9.1. The Panel indicated that a measure, which is partially, but not completely, covered by Article 9.1, should, for that reason, be included under Article 10.1. Canada emphasizes that a practice not included in Article 9.1 can only be an "export subsidy" if it satisfies the definition of that term in Article 1(e) of the Agreement on Agriculture. Approximations will not suffice.
37.
In interpreting Article 10.1, the Panel sought guidance from the SCM Agreement. Although it mentioned both Article 1 and the Illustrative List, the Panel overlooks consideration of Article 1, moving directly to Item (d) of the Illustrative List. The Illustrative List cannot be applied in isolation, but must be considered together with Article 1 of the SCM Agreement. Moreover, the Panel also erred by finding that Special Classes 5(d) and 5(e) fulfil the substantive requirements of Item (d) of the Illustrative List.

4. Article II:1(b) of the GATT 1994

38.
Canada argues that the Panel overlooked the scope and meaning of Canada's entry in its Schedule of Commitments. In effect, the Panel reduced the language contained in the entry to a nullity by failing to ascribe any limiting effect to it. Instead, the Panel found that the entry contained "terms" relating solely to the way in which the size of the quota was determined. The Panel thereby failed to interpret the word "term" according to its ordinary meaning, which is "limiting conditions". The Panel also erred by failing to set out the basic rationale behind its finding, as required by Article 12.7 of the DSU.
39.
The Panel did not take sufficient account of the language in Article II:1(b) of the GATT 1994 which means, in effect, that Canada's access commitments are subordinated to the "terms and conditions" set out in its Schedule of Commitments. By giving the notation no limiting effect on Canada's access obligations, the Panel ignored the words "subject to" in Article II:1(b).
40.
Canada acknowledges that the two specific requirements at issue are not expressly provided for in its notation. But the Panel should have recognized a strong presumption that the notation was intended to restrict access to the tariff-rate quota to "cross-border purchases imported by Canadian consumers".
41.
Canada submits that because the Panel failed to ascribe any substantive meaning to Canada's terms and conditions, the Panel also failed properly to interpret the meaning of the word "consumer" in the notation. As a result of its approach, the Panel failed to rule on the central issue, namely, whether Canada must permit commercial import shipments of fluid milk within the two tariff lines in question.
42.
In view of the doubts regarding the interpretation of the notation, the Panel should have clarified the meaning by considering the negotiating history pursuant to Article 32 of the Vienna Convention on the Law of Treaties (the "ViennaConvention").48 Canada asserts that it was clear from the record before the Panel that Canada proposed to maintain its existing access opportunities, unless the United States removed barriers to Canadian access to the United States' market. Those existing access opportunities did not extend to commercial imports.

B. ARGUMENTS OF NEW ZEALAND – APPELLEE

1. Article 9.1(a) of the Agreement on Agriculture

(a) "direct subsidies, including payments-in-kind"

43.
New Zealand disagrees with Canada's view that the export subsidy provisions of the Agreement on Agriculture and the SCM Agreement form a single, comprehensive statement and must, therefore, be interpreted consistently. Even though the WTO Agreement may constitute a single undertaking, that does not mean that the provisions of one part are to be governed by the provisions of another part. The various WTO agreements contain provisions that establish a hierarchy between them and this hierarchy must be respected. Furthermore, on Canada's argument, neither Agreement could be applied in isolation, since only by applying the Agreements together could consistency be ensured.
44.
Canada seems to argue that the Panel erred because it found that any "payment-in-kind" constitutes a "direct subsidy". New Zealand does not concur in this reading of the Panel Report. The Panel makes it clear that a "payment-in-kind" is capable of being a "direct subsidy", provided that it can be shown to confer a "benefit".
45.
New Zealand agrees with the Panel that provision of goods at a reduced price can constitute a "payment-in-kind". If processors were to purchase milk at a higher price and receive a rebate, the rebate would undoubtedly be a "payment". In the case of Special Classes 5(d) and 5(e), the rebate is in the form of the provision of milk instead of money.
46.
In New Zealand's view, a "benefit" is conferred if access to milk under Special Classes 5(d) and 5(e) results in processors obtaining milk for export at a price which is lower than the price of milk from alternative sources. As the Panel concluded, Special Classes 5(d) and 5(e) do provide a "benefit" because processors would have to pay significantly higher prices for alternative supplies of milk.
47.
New Zealand observes that the Panel employed the two benchmarks to assess whether the terms offered under Special Classes 5(d) and 5(e) were available elsewhere in the marketplace. Such an approach was endorsed by the Appellate Body in its Report in Canada – Measures Affecting the Export of Civilian Aircraft ("Canada – Aircraft").49
48.
Finally, New Zealand argues that Canada's interpretation of the word "direct" in Article 9.1(a) of the Agreement on Agriculture rewrites that provision. If "direct" means funded through government funds, the words "the provision by governments or their agencies" are redundant. Canada's interpretation would also mean that the word "provision" should be understood as being preceded by the word "direct". In New Zealand's opinion, a "direct subsidy" is one that affects trade directly rather than indirectly.

(b) "governments or their agencies"

49.
New Zealand notes that Canada challenges only the Panel's conclusion that the provincial milk marketing boards are governmental in character. New Zealand maintains that the provincial milk marketing boards fall within the definition of "governments or their agencies" under Article 9.1(a). It defends this position on the basis of the delegation of power by the government to the boards and on the nature of those powers, which would normally inure to the federal or provincial governments.
50.
New Zealand does not share Canada's view that the reference to "marketing boards" as potential recipients of subsidies under Article 9.1(a) means that they cannot be government agencies. There is no single definition of the term "marketing board" and the Panel properly evaluated the particular characteristics of the provincial milk marketing boards at issue here. New Zealand also contends that both the Ad note to Article XVII:1, and Article XXIV:12 of GATT 1994 indicate that marketing boards are capable of being agencies of government, although neither purports to provide a universal definition of government agency.
51.
New Zealand disagrees with Canada's argument on Item (d) of the Illustrative List. Item (d) says nothing about the "government" status of "government-mandated schemes" since Item (d) does not depend upon whether those schemes are governmental or non-governmental.
52.
Finally, New Zealand contends that Canada's argument that the status of the provincial milk marketing boards should be determined by Canadian domestic law is contrary to Article 3.2 of the DSU, which provides that the WTO Agreements are to be interpreted "in accordance with customary rules of interpretation of public international law."

2. Article 9.1(c) of the Agreement on Agriculture

(a) "payments"

53.
New Zealand maintains that the Panel properly applied the appropriate principles of treaty interpretation in its examination of the word "payments". A "payment-in-kind" is a form of payment. Canada has offered no substantive argument to show that this is wrong.
54.
According to New Zealand, Canada's argument regarding revenue foregone suggests that such revenue would be excluded from the assessment of budgetary outlay commitments made for "export subsidies" under Article 9.1, unless there is explicit reference to revenue foregone in a particular sub-paragraph of Article 9.1. Since none of the sub-paragraphs in Article 9.1 refers specifically to revenue foregone, the implication of the Canadian argument is that revenue foregone need not be included at all in the calculation of "budgetary outlay" commitments. This is a rewriting of Articles 1(c), 9.1 and 9.2(a) of the Agreement on Agriculture.

(b) "financed by virtue of governmental action"

55.
New Zealand submits that, for the reasons given in its arguments on the meaning of "governments or their agencies", the Panel's analysis under Article 9.1(c), insofar as it is based on its analysis under Article 9.1(a), is correct. Canada is attempting to reargue the facts of the case by focusing on differences between in-quota and over-quota milk that the Panel did not regard as significant. The important point is that "governmental action" is involved regardless of whether the milk is in-quota or over-quota.

3. Article 10.1 of the Agreement on Agriculture

56.
New Zealand submits that Canada fails to take proper account of the purpose of Article 10.1, which is to prevent Members of the WTO circumventing reduction commitments made in respect of export subsidies listed in Article 9.1. When the Panel indicated that Article 10.1 covered subsidies that did not meet all of the definitional elements of Article 9.1, it was precisely this type of circumvention that the Panel was aiming at. The Panel did not find that it suffices that a measure approximates an "export subsidy" under Article 9.1. The Panel emphasized that the alleged subsidy must meet the requirements of Article 1(e) of the Agreement on Agriculture.
57.
As with Article 9.1(a) of the Agreement on Agriculture, New Zealand considers that the SCM Agreement is not the appropriate starting-point for interpretation of the Agreement on Agriculture. That Agreement must be interpreted according to its own terms. In any event, New Zealand agrees with the Panel that Special Classes 5(d) and 5(e) are "export subsidies" within the meaning of Item (d) of the Illustrative List.

C. ARGUMENTS OF THE UNITED STATES – APPELLEE

1. Article 9.1(a) of the Agreement on Agriculture

(a) "direct subsidies, including payments-in-kind"

58.
The United States submits that the Panel correctly concluded, first, that Special Classes 5(d) and 5(e) provide a "payment-in-kind" to dairy processors and, second, that the "payment-in-kind" is a "direct subsidy" provided by the Canadian federal and provincial governments, working through the provincial milk marketing boards.
59.
Canada argues that the provision of goods at a price lower than their value is not a "payment-in-kind", although the provision of goods free of charge is. However, this position would allow circumvention of Article 9.1(a) by the imposition of a minimal fee, regardless of how small, for the goods.
60.
The United States agrees with Canada that the SCM Agreement is relevant to the interpretation of the Agreement on Agriculture, but its provisions are not to be given more weight than those of the Agreement on Agriculture. A practice which falls within Article 9.1 of the Agreement on Agriculture is an "export subsidy" for the purposes of that Agreement, irrespective of whether the practice is also an "export subsidy" under the SCM Agreement.
61.
The United States does not consider that the Panel "equated" "payments-in-kind" with "subsidies". First, the Panel focused on the circumstances of this case by referring to the "instant matter".50 Furthermore, the Panel's finding under Article 9.1(a) is not dependent solely on the term "payments-in-kind", but was an application of the provision in its entirety. The Panel's analysis of whether the "payment-in-kind" conferred a "benefit" is part of the Panel's consideration of the subsidy issue under Article 9.1(a) as a whole.
62.
Canada's argument as to the meaning of "direct" is also flawed. The term "direct" reveals nothing about either the grantor of a subsidy or the source of the funds. Indeed, Canada's own Special Import Measures Act (SIMA) Handbook relies on a very different understanding of the word "direct". It states that "a direct... benefit is one which accrues directly to the person, firm, or industry which is the intended recipient". This is in contrast to "an indirect benefit... which does not accrue directly, but which alters the economic environment within which firms operate."
63.
The United States contends that Canada's argument on the first benchmark is superfluous to the appeal because the Panel relied on the second benchmark, and not the first, in making its finding. Under the second benchmark, the Panel established that there were no alternative supplies of milk, or competing products, that were available to processors on terms as favorable as those offered under Special Classes 5(d) and 5(e).

(b) "governments or their agencies"

64.
The United States notes that Canada does not challenge either the governmental status or the role of the CDC in the regulatory framework. Canada's appeal against the Panel's findings on this issue turns exclusively on the status of the provincial milk marketing boards.
65.
The Panel did not focus simply on the delegation of powers to the marketing boards. Instead, the Panel also considered the functions of the boards, as well as the extent to which the provincial and federal governments retain supervisory oversight over the boards.
66.
The ordinary meaning of the word "agency" is not restricted to a department or other section of the government itself but also embraces entities acting on an agency basis. This meaning clearly does not exclude private entities acting for the government.
67.
The United States disagrees with Canada that the reference in Article 9.1(a) to "marketing boards" as potential recipients of "direct subsidies" precludes "marketing boards" from being government agencies in appropriate circumstances. This interpretation is not justified by the text of Article 9.1.
68.
Finally, Canada's argument on Item (d) of the Illustrative List is based entirely on the assumption that "government-mandated schemes" always involve the delegation of governmental authority. The United States does not agree with this assumption.

2. Article 9.1(c) of the Agreement on Agriculture

(a) "payments"

(b) "financed by virtue of governmental action"

73.
The United States disputes Canada's suggestion that the Panel's findings under Article 9.1(c) do not stand independently from the Panel's conclusions under Article 9.1(a). Under Article 9.1(c), the Panel examined in exhaustive detail the involvement of government in the functioning and control of Special Classes 5(d) and 5(e) and Canada has not refuted the Panel's specific factual findings concerning the breadth of that involvement.
74.
The United States considers that, for all relevant purposes, the role of the Canadian governments and of the provincial milk marketing boards under Special Classes 5(d) and 5(e) is the same. It makes no difference from the perspective of the processors whether the milk they receive is in-quota or over-quota because the price to them is the same. The United States rejects Canada's argument that it is significant that producers decide themselves whether to produce over-quota milk. If mandating the production of milk were a prerequisite for a finding of a subsidy, the subsidies disciplines would be altogether eviscerated.

3. Article 10.1 of the Agreement on Agriculture

75.
Canada's arguments on Article 10.1 reflect a mistaken reading of the Panel Report. Contrary to Canada's argument, the Panel did not state that any measure which does not satisfy some of the elements of Article 9.1 would, without more, be an export subsidy under Article 10.1. The Panel found that even a measure which meets most of the criteria in Article 9.1 must still satisfy the requirements of Article 1(e) of the Agreementon Agriculture.
76.
By arguing that the Panel should have assessed Special Classes 5(d) and 5(e) in terms of Article 1.1 of the SCM Agreement, rather than just in light of Item (d) of the Illustrative List, Canada is implicitly suggesting that the export subsidies identified in the Illustrative List might not satisfy the criteria set forth in Article 1.1. This is not possible. As a matter of definition, Article 3.1 of the SCM Agreement mandates that all subsidies described in the Illustrative List are subsidies for purposes of Article 1 of the SCM Agreement.
77.
The United States argues, in any event, that Special Classes 5(d) and 5(e) involve "subsidies" within the meaning of Article 1.1 of the SCM Agreement and, moreover, that the Panel was correct to conclude that these Special Classes fall within Item (d) of the Illustrative List.

4. Article II:1(b) of the GATT 1994

78.
Consistently with the rules of treaty interpretation, the Panel was aware of the context of the language in the notation in Canada's Schedule. Nevertheless, the Panel could not find, in that language, the specific access restrictions contended for by Canada.
79.
The United States disagrees with Canada that the most relevant meaning of the word "term" is "limiting conditions", as this meaning would render the word "conditions", in the phrase "terms and conditions", entirely superfluous. It is reasonable to assume that the words "other terms and conditions" contained in Canada's Schedule are intended to mirror the language used in ArticleII:1(b). The similar language in this provision has been interpreted as indicating not simply additional conditions.52 Accordingly, there is no reason for giving the entry a narrower interpretation than is justified by the ordinary meaning of its wording.
80.
According to the United States, the only operative word in Canada's notation is the word "represents". However, that word gives the notation no legally operative effect. It is not the same as saying "access is limited to", or "this quantity is available only for", language which Canada could have added, as it did with respect to yoghurt and ice cream.
81.
The United States agrees with the Panel's interpretation of the word "consumer".53 The Panel was not required to spell out that "consumer" also embraces entities such as processors that "consume" milk in manufacturing. The Panel did not ignore the core issue, but found that the notation did not support the two restrictions imposed by Canada.
82.
The requisite conditions for resorting to Article 32 of the Vienna Convention were not met and, thus, the Panel was not compelled to take into account the negotiating history. Moreover, even if Article32 were applicable, a panel is not required to look to the negotiating history. That is simply "permitted". In any event, the negotiating history does not establish the existence of a common understanding between Canada and the United States that confirms Canada's interpretation of the notation.

IV. ISSUES RAISED IN THIS APPEAL

83.
This appeal raises the following issues:

(a) whether the Panel erred in its interpretation and application of Article 9.1(a) of the Agreement on Agriculture, in particular, with respect to:

i) the expression "direct subsidies, including payments-in-kind", and

ii) the expression "governments or their agencies";

(b) whether the Panel erred in its interpretation and application of Article 9.1(c) of the Agreement on Agriculture, in particular, with respect to:

i) the term "payments", and

ii) the expression "financed by virtue of governmental action";

(c) whether the Panel erred in its interpretation and application of the term "export subsidies" in Article 10.1 of the Agreement on Agriculture; and

(d) whether the Panel erred in finding that Canada has acted inconsistently with its obligations under Article II:1(b) of the GATT 1994 by restricting access to the tariff-rate quota for fluid milk to consumer packaged milk for personal use, valued at less than C$20, imported under the authority of General Import Permit No. 1.

V. ARTICLE 9.1(A) OF THE AGREEMENT ON AGRICULTURE

A. "DIRECT SUBSIDIES, INCLUDING PAYMENTS-IN-KIND"

84.
The Panel stated that "'payments-in-kind' are a form of direct subsidy."54 For the Panel, it followed that "a determination in the instant matter that 'payments-in-kind ' exist would also be a determination of the existence of a direct subsidy."55 (emphasis added) The Panel next proceeded to consider the meaning of the term "payments-in-kind". It concluded that the ordinary meaning of the word "payments", in the term "payments-in-kind", "connotes a gratuitous act, a bounty or benefit provided, for example, in pursuit of a policy objective".56 According to the Panel, this meaning is "mandated by the general context of this provision which includes Article 1 of the SCM Agreement."57 On the basis of this interpretive framework, the Panel examined whether Special Classes 5(d) and 5(e) provide a "benefit". It reached the conclusion that a "benefit" was conferred and that there was, therefore, a "payment-in-kind".58 On the grounds that this "payment-in-kind" was provided by Canada's "governments or their agencies", the Panel found that "the making available of milk under Classes 5(d) and (e) constitutes an export subsidy within the meaning of Article 9.1(a)."59
85.
Canada submits that the Panel's interpretive approach is flawed. It believes that the Panel has equated "payments-in-kind" with "direct subsidies", and "payments", as used in "payments-in-kind", with "benefit". Thus, in Canada's view, the Panel, in essence, equated "direct subsidies" with "benefit".
86.
On our reading of the Panel Report, the Panel took the view that if "payments-in-kind" were provided by "governments or their agencies", "direct subsidies" were also provided. In other words, the Panel found that a "payment-in-kind" is necessarily a "direct subsidy". This is clear from the Panel's statement that "a determination … that 'payments-in-kind' exist would also be a determination of the existence of a direct subsidy."60 Moreover, this understanding of the Panel's reasoning is borne out by the Panel's subsequent analysis. At no point did the Panel examine whether the "payments-in-kind" that it found to exist were "subsidies", let alone "direct subsidies". To the contrary, the Panel's finding under Article 9.1(a) resulted from its conclusion that the provision of reduced priced milk to processors for export under Special Classes 5(d) and (e) constitutes "payments-in-kind" provided by Canada's "governments or their agencies".61 In making this finding, the Panel did not make any reference to the measures being "direct subsidies". It assumed that because the measures were "payments-in-kind" they were, therefore, also "direct subsidies".
88.
We, therefore, conclude that the Panel erred in finding that "a determination in the instant matter that 'payments-in-kind' exist would also be a determination of the existence of a direct subsidy."63 The Panel should have considered whether the particular "payment-in-kind" that it found existed was a "direct subsidy". Instead, because the Panel assumed that a "payment-in-kind" is necessarily a "direct subsidy", it did not address specifically either the meaning of the term "direct subsidies" or the question whether the provision of milk to processors for export under Special Classes 5(d) and 5(e) constitutes "direct subsidies".
89.
We have just found that the term "payments-in-kind" describes a transfer of economic resources, in a form other than money, but that the term gives no indication as to the economic value of that transfer or as to whether there is a subsidy.64 The Panel, however, interpreted the word "payments", in the term "payments-in-kind", as connoting "a gratuitous act, a bounty or benefit".65 (emphasis added) To us, each of these meanings describes the economic value of a transfer, both from the perspective of the grantor and of the recipient. These meanings all infer that the economic resources transferred by way of the payment were given in exchange for less than full value and, in the case of a "gratuitous" payment, without any exchange of value at all. While we acknowledge that a "payment" may be made "gratuitously", the ordinary meaning of the word also encompasses a transfer of economic resources made for full or partial consideration. We, therefore, find that the Panel erred in holding that the word "payments", in the term "payments-in-kind", necessarily "connotes a gratuitous act, a bounty or benefit".66
90.
We also note that the Panel's reliance on the SCM Agreement in interpreting Article 9.1(a) of the Agreement on Agriculture was not consistent. The concept of "benefit" is an integral part of the definition of "subsidy" in Article 1.1 of the SCM Agreement. Yet, on the one hand, the Panel used this term, not to assist in defining the term "direct subsidies" in Article 9.1(a) of the Agreement on Agriculture, but to define the word "payment". However, on the other hand, the Panel failed entirely to make any mention of the other integral aspect of a "subsidy" under Article 1.1 of the SCM Agreement, namely the need for a "financial contribution". The Panel did not explain why one aspect of the definition of a "subsidy" in the SCM Agreement is relevant in interpreting Article 9.1(a) of the Agreement on Agriculture, while the other is not.
91.
Thus, on our reading of the Panel Report, the Panel equated a "payment-in-kind" with a "direct subsidy", and then equated a "payment-in-kind" with a "benefit". For the Panel, it followed logically from the existence of a "benefit" that a "direct subsidy" also existed. If the "benefit" was provided by "governments or their agencies", it followed, furthermore, that there was an export subsidy as listed in Article 9.1(a) of the Agreement on Agriculture. It was on the basis of this flawed interpretive approach that the Panel found, in paragraph 7.87 of its Report, that export subsidies as listed in Article 9.1(a) are granted through Special Classes 5(d) and 5(e). Since we have held that the interpretive approach which underlies the finding in paragraph 7.87 of the Panel Report is wrong, it follows that that finding is itself tainted by the same errors of law. The conferral of a "benefit" does not necessarily constitute a "payment-in-kind", and a "payment-in-kind" is not necessarily a "direct subsidy".67 Thus, the Panel's assessment that a "benefit", and hence a "payment-in-kind", are provided by "governments or their agencies" does not, in our view, warrant the conclusion that export subsidies are conferred.
92.
We, therefore, reverse the Panel's interpretive approach, in paragraphs 7.43 and 7.44 of its Report, regarding the terms "direct subsidies" and "payments-in-kind". Since the Panel's finding in paragraph 7.87 of its Report that Special Classes 5(d) and 5(e) involve export subsidies under Article 9.1(a) of the SCM Agreement is based, in part, on the Panel's flawed interpretive approach, which we hereby reverse, we also reverse the finding of the Panel in paragraph 7.87. However, in view of our findings below on Article 9.1(c) of the Agreement on Agriculture, we do not find it necessary to examine in this Report whether export subsidies, as listed in Article 9.1(a), are conferred through Special Classes 5(d) and 5(e) and we, therefore, reserve our judgment on this question.

B. "GOVERNMENTS OR THEIR AGENCIES"

93.
The Panel identified the CDC, the provincial milk marketing boards and the CMSMC as playing "a direct decision-making role" in administering Special Classes 5(d) and 5(e).68 Canada does not appeal the Panel's conclusion that the CDC, a federal Crown corporation, is an "agency" of government within the meaning of Article 9.1(a), nor does Canada specifically appeal the Panel's finding regarding the CMSMC. As regards the provincial milk marketing boards, the Panel found that they were:

… established and operate within a legal framework set up by federal and provincial legislation. These boards exercise powers in respect of inter-provincial and external trade delegated to them by the federal government through the CDC, as well as powers delegated to them by provincial authorities. Three of these boards (Alberta, Nova Scotia and Saskatchewan) are, according to Canada, agencies of the provincial government. Orders or regulations issued by the provincial marketing boards can be enforced before the Canadian courts. In most provinces, individual decisions by the boards are subject to appeal to a provincial supervisory board or commission (of which Canada recognizes the governmental nature).69 (emphasis added)

94.
It was against this factual background that the Panel concluded that:

It is precisely because the boards receive the authority from the governments to regulate certain areas themselves that their actions become governmental. What is important though is that Canadian governments maintain the ultimate control and supervision of most, if not all, of the boards' activities. These governments define, and approve changes to, the boards' mandates and functions.70 (underlining added)

95.
Since the Panel found that all of the bodies that play a decision-making role in the CMSMC are "government agencies", the Panel found that the actions of the CMSMC were the actions of a "government agency".71
96.
Canada's appeal focuses on the Panel's findings that the provincial milk marketing boards are "government agencies". Canada takes the view that the Panel erred in law in deciding that these boards are "government agencies" "solely on the basis of one characteristic: the delegation of some governmental authority."72 (emphasis added)
98.
In the present case, the Panel seems to us to have applied precisely these concepts in concluding that the provincial milk marketing boards are "government agencies". Contrary to Canada's assertions, the Panel's conclusion is not based on the sole fact that the provincial milk marketing boards enjoy authority delegated to them by governments. To the contrary, the Panel examined both the source of the provincial boards' powers and the functions performed by those boards in the exercise of their powers. We note, furthermore, that as regards three of the provincial boards, Canada acknowledged that they were "agencies" of certain provincial governments of Canada.76
99.
As regards the source of the provincial milk marketing boards' powers, it is clear that, in the words of the Panel, they "operate within a legal framework set up by federal and provincial legislation."77 Furthermore, the provincial boards' powers and functions may only be modified by "governments".78 In these circumstances, it is clear, as the Panel said, that "these boards act under the explicit authority delegated to them by either the federal or a provincial government."79 (emphasis added) Indeed, we are of the view that Canada accepts that the provincial milk marketing boards act on the basis of delegated powers vested in them by federal and provincial "governments". On appeal, Canada does not argue that there is no delegation of powers by its "governments" to these boards, but, rather, that the delegation of powers is not a sufficient basis, on its own, for a finding that such entities are "government agencies".80
100.
The Panel did not, however, rely solely on the fact of the delegation of powers. The Panel also examined the functions of the provincial milk marketing boards and concluded that their powers enable them, again in the words of the Panel, to "regulate" a particular sector of the economy, namely the dairy sector.81 The "governmental" character of the boards' functions, as well as the extent of their regulatory control, is underlined by the fact that their orders and regulations are enforceable in courts of law.82 Thus, the powers of the provincial boards are augmented by the machinery of the State itself, and the boards have at their disposal the public force to ensure that their regulatory functions and decisions are carried out. Although the provincial boards enjoy a high degree of discretion in the exercise of their powers, governments retain "ultimate control" over them.83 The Panel was, therefore, correct to conclude that the provincial milk marketing boards are "government agencies".
102.
In light of the foregoing, we uphold the Panel's finding in paragraph 7.80 of the Panel Report, that the provincial milk marketing boards are "agencies" of Canada's governments.

VI. ARTICLE 9.1(C) OF THE AGREEMENT ON AGRICULTURE

A. "PAYMENTS"

103.
In determining whether Special Classes 5(d) and 5(e) involve "payments" under Article 9.1(c), the Panel recalled that it had already found that "the provision of milk at a discounted price under Classes 5(d) and (e) involves 'payments-in-kind' in the sense of Article 9.1(a)".84 It followed that, if the word "payments" in Article 9.1(c) embraced "payments-in-kind", Special Classes 5(d) and 5(e) would involve "payments".85
104.
Based on the Oxford English Dictionary definition of the word "payment", the Panel took the view that:

… the ordinary meaning of the word "payment" includes both the act of remunerating a person with money and the act of remunerating a person with its equivalent in kind, a so-called "payment in kind".86

105.
The Panel found that this meaning was confirmed by the context of the word, which in the Panel's view, included: the words "a charge" and "financed" in Article 9.1(c) itself; the concept of "revenue foregone", that is included in the term "budgetary outlays", mentioned in Article 9.2(a) and defined in Article 1(c); as well as the other "export subsidies" listed in Article 9.1 of the Agreement on Agriculture. On this basis, the Panel found that Special Classes 5(d) and 5(e) involved "payments" within the meaning of Article 9.1(c).87
106.
Canada argues that the Panel erred by collapsing the distinction between "payments" in Article 9.1(c) and "payments-in-kind" in Article 9.1(a). Canada maintains that the concept of "payments-in-kind" is only included in those provisions of the Agreement on Agriculture that make express mention of the concept, which Article 9.1(c) does not. Moreover, Canada asserts that the Panel erred by relying on "revenue foregone" under Article 9.1(c). "Revenue foregone" is not relevant to all the sub-paragraphs of Article 9.1, but only to those which can be interpreted as including "revenue foregone". Article 9.1(c) is not such a sub-paragraph. Finally, even if Article 9.1(c) were to apply to "payments-in-kind", Canada disagrees with the Panel that Special Classes 5(d) and 5(e) involve "payments-in-kind".

B. "FINANCED BY VIRTUE OF GOVERNMENTAL ACTION"

115.
The Panel noted at the outset of its analysis on this issue that the parties did not contest that:

… payments-in-kind made under Classes 5(d) and (e) do not directly involve a charge on the public account. The cost of selling milk at a reduced price for export is not borne by the government. It is borne by the milk producers92 (underlining added)

116.
The Panel observed that such "producer-financed payments" can nonetheless be covered by Article 9.1(c), provided they are "financed by virtue of governmental action".93 The Panel found that the "payments" made under Special Classes 5(d) and 5(e) were financed in this way.94 In reaching this conclusion, the Panel relied on a number of factors. These included the facts that: the supply of milk under Special Classes 5(d) and 5(e) is managed by "agencies" of the Canadian federal or provincial governments, within the meaning of Article 9.1(a); these "agencies" determine when and what quantity of milk may be processed for export under those Special Classes; they negotiate the sale price of the milk with the processor or exporter; they enable the processor or exporter to take delivery of the milk; they collect the price paid for the milk by the processors or exporters; they determine the rules for the pooling of returns to producers for in-quota milk, as well as the rules for the more limited pooling of returns for over-quota milk; in the implementation of these rules, they determine the effective selling price of milk for the producers; they pay out those returns to producers; and, they monitor and supervise the operation of Special Classes 5(d) and 5(e).95
117.
In arguing that the Panel erred in finding that "payments" made under Special Classes 5(d) and 5(e) are "financed by virtue of governmental action", Canada maintains, first, that this finding is based on the Panel's earlier finding that the provincial milk marketing boards are "government agencies" under Article 9.1(a). Since Canada believes that the Panel's finding under Article 9.1(a) is erroneous, Canada also believes that the finding under Article 9.1(c) is flawed. Canada contends, moreover, that the "payments" are not "financed by virtue of governmental action" because the provincial milk marketing boards are composed, at least in part, of milk producers and act in the interest of those producers. Finally, Canada considers that the Panel failed to take sufficient account of important differences between the treatment of in-quota and over-quota milk, in particular, as regards the pooling of returns to producers.
122.
For these reasons, we, therefore, agree with the Panel's findings100 that the "payments" made under Special Classes 5(d) and 5(e) are "financed by virtue of governmental action" within the meaning of Article 9.1(c) of the Agreement on Agriculture.
123.
In light of all of the foregoing, we believe and so hold that the Panel was correct in finding, in paragraph 7,113 of the Panel Report, "that the making available of milk under Classes 5(d) and (e) constitutes an export subsidy within the meaning of Article 9.1(c)."

VII. ARTICLE 10.1 OF THE AGREEMENT ON AGRICULTURE

VIII. ARTICLE II:1(B) OF THE GATT 1994

125.
We approach this last issue by recalling the factual background to this aspect of the dispute. The Panel stated that:

In Part I of Canada's Schedule to GATT 1994, Canada established a tariff-rate quota for fluid milk (HS 0401.10.10 and 0401.20.10) of 64,500 tonnes. In-quota imports are subject, initially, to a maximum duty of 17.5 per cent (a rate to be decreased to 7.5 per cent in 2001). Fluid milk imports outside of the 64,500 tonnes tariff-rate quota bear an initial rate of duty equal to 283.8 per cent, declining to 241.3 per cent in 2001. In its Schedule, Canada specified under 'Other terms and conditions' that '[t]his quantity [64,500 tonnes] represents the estimated annual cross-border purchases imported by Canadian consumers'.102

126.
Canada asserts the right, on the basis of these "Other Terms and Conditions", to restrict access to the tariff-rate quota to imports authorized and actually allowed under the relevant practice followed by Canada at the time of the conclusion of the Uruguay Round. In 1970, Canada issued General Import Permit No. 1. The amended version of this Permit provides that "any person may, under the authority of this General Import Permit, import into Canada … any dairy products for the personal use of the importer and his household not exceeding $20 in value for each importation."103 Nevertheless, for such imports, no individual permits and no customs entries are required and no customs duties are imposed and collected, even in the case of imports within the in-quota quantity.104 Indeed, Canada does not monitor imports made under the authority of General Import Permit No. 1.105 Commercial shipments of milk are not, however, allowed by Canada within the tariff-rate quota.106 The United States claims that the restrictions that Canada places on access to its market for fluid milk are inconsistent with its obligations under Article II:1(b) of the GATT 1994.
127.
The Panel found, inter alia, that:

The words "[t]his quantityrepresents the estimated annual …" are, in our view, introducing "terms" related to the quantity of the quota – i.e., describing the way the size of the quota was determined – rather than setting out "conditions" as to the kind of imports qualified to enter Canada under this quota. In particular, the ordinary meaning of the word "represent" in this context does not, in our view, call to mind the setting out of specific restrictions or conditions.107 (emphasis in original)

128.
The Panel went on to state:

Even if the phrase could be said to include restrictions on access to the tariff-rate quota, we do not see how the two conditions at issue in this dispute could be read into this phrase. First, the restriction that only entries valued at less than C$20 qualify for the tariff-rate quota can nowhere be found in Canada's Schedule. Nowhere is any reference made to a maximum value per entry. … [I]n our view, the ordinary meaning of the words "cross-border purchases" by "consumers" in this context does not warrant the conclusion that only consumer packaged milk for personal use can enter under the tariff-rate quota. An imported good, by definition, crosses a border. Also, the dictionary meaning of "consumer" is not restricted to a person buying for personal use in small retail packages. All dictionary definitions of "consumer" referred to by the parties include wider definitions without these restrictions.108 (emphasis in original)

129.
The Panel held that the meaning of the terms in Canada's Schedule could be gleaned from an examination of the "ordinary meaning [of those terms] in their context and in the light of the object and purpose of GATT 1994."109 The Panel saw "no need to also examine the historical background against which these terms were negotiated."110 It noted, furthermore, that the "drafting history … is inconclusive, possibly supporting both the view of Canada and that of the United States."111 Finally, the Panel concluded that:

… Canada, by restricting the access to the tariff-rate quota for fluid milk to (i) consumer packaged milk for personal use and (ii) entries valued at less than C$20, acts inconsistently with its obligations under Article II:1(b) of GATT 1994.112

130.
On appeal, Canada argues, in essence, that the Panel erred by failing to ascribe any meaning, in the sense of "limiting effect", to the language in the notation in its Schedule.113 In Canada's view, the Panel ought to have established the meaning and content of the language in the Schedule, before considering whether the specific restrictions imposed under General Import Permit No. 1 were justified by that language.
132.
These rules call, in the first place, for the treaty interpreter to attempt to ascertain the ordinary meaning of the terms of the treaty in their context and in the light of the object and purpose of the treaty, in accordance with Article 31(1) of the Vienna Convention. However, as we also said in European Communities – Computer Equipment:

… if after applying Article 31 the meaning of the term remains ambiguous or obscure, or leads to a result which is manifestly absurd or unreasonable, Article 32 allows a treaty interpreter to have recourse to:

... supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion.

With regard to "the circumstances of [the] conclusion" of a treaty, this permits, in appropriate cases, the examination of the historical background against which the treaty was negotiated.115

136.
We note that the Panel also adopted an overly literal and narrow view of the words "cross-border purchases imported by Canadian consumers" in the notation at issue. Moreover, the Panel erred in failing to give meaning to all of the words in that notation. On the basis of its ordinary meaning, the Panel stated that the language in the notation could not refer only to "consumer packaged milk for personal use."119 (emphasis in original) We do not agree that the ordinary meaning of that phrase in the notation is so unequivocal. We do not see anything in the text of the notation which necessarily precludes such an interpretation. The notation refers to "cross-border purchases imported by Canadian consumers". It seems, to us, that this language may well be taken to refer to imports of fluid milk made by Canadian consumers for personal use in the course of cross-border shopping.
137.
Moreover, we do not share the Panel's view as to the significance of the object and purpose of Article II of the GATT 1994 for the interpretive question at issue. It is true, as the Panel said, that the object and purpose of Article II is "to preserve the value of tariff concessions…".120 However, the issue facing the Panel was what was the scope and content of the concession? The Panel's reference to the object and purpose of Article II appears to us to beg the very question that the Panel should have addressed: namely, what is the meaning of that notation? That is, what is the shape and tenor of the concession that Canada had set forth in its Schedule of Commitments?
140.
The next issue we must address is whether the measure promulgated by Canada in the form of General Import Permit No. 1 is consistent with the commitment for fluid milk in Canada's Schedule, as we read it. General Import Permit No. 1 authorizes:

Any person … [to] import into Canada from any country … any dairy products for the personal use of the importer and his household not exceeding $20 in value for each importation. (emphasis added)

141.
The first condition of General Import Permit No. 1 is that the dairy products, including fluid milk, imported into Canada must be for "the personal use of the importer and his household". This condition appears to us to be reflected in the following phrase in the notation in Canada's Schedule: "cross-border purchases imported by Canadian consumers". General Import Permit No. 1 allows, in the words of the notation, "Canadian consumers" to "import into Canada" fluid milk and other dairy products that they purchase in the United States. These are, therefore, "cross-border purchases" for the "personal use" of Canadian importers. Thus, we see the first condition of General Import Permit No. 1 as consistent with the notation at issue in Canada's Schedule.
142.
The second condition of General Import Permit No. 1 is that the value of "each importation" of any "dairy products" not exceed "$20 in value". In this connection, we note that General Import Permit No. 1 applies to "dairy products" generally, not just to fluid milk. The tariff-rate quota commitment and the accompanying notation in Canada's Schedule, however, apply only to "fluid milk". Moreover, the notation at issue in Canada's Schedule does not place any limit on the value of each importation. To the extent that the second condition of General Import Permit No. 1 is not reflected in the notation at issue, the Canadian measure is not consistent with Canada's commitment on fluid milk set forth in its Schedule.
143.
In light of the foregoing, we do not agree with the Panel's interpretation of the notation at issue relating to the tariff-rate quota commitment on fluid milk in Canada's Schedule. Nor do we agree with the Panel's finding that by restricting access to the tariff-rate for fluid milk to "consumer packaged milk for personal use", Canada acts inconsistently with its obligations under Article II:1(b) of the GATT 1994. However, we do agree with the Panel's finding that by restricting access to the tariff-rate quota for fluid milk to "entries valued at less than C$20", Canada acts inconsistently with its obligations under Article II:1(b) of the GATT 1994.

IX. FINDINGS AND CONCLUSIONS

145.
The Appellate Body recommends that the DSB request that Canada bring its measures found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with its obligations under the Agreement on Agriculture and the GATT 1994 into conformity with those agreements.

Signed in the original at Geneva this 23rd day of September 1999 by:

Mitsuo Matsushita

Presiding Member

Florentino Feliciano Julio Lacarte-Muró

Member Member

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