Canada: WTO To Rule On U.S. Farm Subsidies And Canadian Tax Relief On Beer And Wine

Last Updated: January 26 2007

Article by John Boscariol, Alastair McNish, Simon Potter, Orlando Silva and Brenda Swick

Canada is at the centre of two new disputes at the World Trade Organization (WTO) which threaten to impact a number of sectors of the Canadian economy, including alcoholic beverages, livestock, ethanol, snack foods, soft drinks, and other foods and beverages containing sweeteners.

Background: Canada and the WTO

As a WTO Member, Canada is subject to the obligations and remedies contained in the WTO agreements which restrict the use of measures that inhibit the flow of international trade and investment. These obligations apply to Canadian government policies, administrative and legislative measures, and even judicial action. They also apply to measures across a wide range of areas, including taxation, industrial subsidies, services, intellectual property, government procurement, and foreign direct investment.

Canada is an active participant in the WTO’s dispute settlement mechanism. To date, it has brought 28 cases against other WTO Member countries who have taken measures alleged to violate their trade obligations. Canada has been the target of 15 WTO complaints by other countries and, as a result, has had to terminate or amend offending measures in numerous sectors, including automotive products, magazine publishing, pharmaceuticals, dairy products and regional aircraft.

Canadian Taxation of Wine and Beer

On November 29, 2006, the European Union (EU) requested WTO consultations with Canada over its proposal to repeal excise taxes against beer brewed in Canada and wine made from domestically grown grapes while leaving the tax on imports in place. This legislation was first proposed in May 2006, and has been in effect on a provisional basis since July. The new rules are due to be formally adopted within weeks and will be applied retroactively back to July 1, 2006. The different tax treatment for domestic beer and wine is alleged to violate WTO rules which prohibit discrimination against foreign goods once they enter a domestic market. In 2005, Canada was the EU’s fourth largest wine export market, and its second largest beer export market, with exports of wine valued at over C$650 million and beer exports of over C$160 million.

The EU’s request for WTO consultations is followed by a 60 day negotiation period before it can ask the WTO Dispute Settlement Body to establish a panel to decide whether Canada’s new regime is WTO-compliant. A final ruling from the panel can take at least 18 months. If found to be in violation of WTO rules, Canada must remove the offending measures or face trade sanctions from the EU.

U.S. Subsidization of Corn and Other Agricultural Products

More recently, on January 8, 2007, Canada initiated consultations with the United States over U.S. farm support programs, estimated at US$9 billion per year, which are alleged to be causing significant declines in world corn prices, and as a result, economic harm to Canadian farmers. They have also attacked export credit guarantees that subsidize the export of certain U.S. agricultural products. In addition, Canada claims that U.S. levels of domestic support for agricultural products, including corn, wheat, soybeans and sugar, exceed U.S. commitments under the WTO Agreement on Agriculture.

Although the dispute is still in its early stages, many view it as a shot across the bow, aimed at the new U.S. Congress that will soon be drafting a new version of the U.S. Farm Bill which contains many of these domestic support programs. Following on the heels of Brazil’s successful WTO challenge of similar U.S. subsidies for upland cotton growers, this case promises to be a major challenge to the U.S. farm program. To date, 32 countries have joined the complaint in support of Canada, including the members of the European Union, Argentina, Australia, Brazil, Guatemala, Nicaragua, Thailand and Uruguay.

If during the current consultations Canada and the United States fail to agree on a resolution, Canada may seek the appointment of a WTO panel to determine whether these agricultural support measures are consistent with U.S. WTO obligations. If the measures are found to be WTO-inconsistent, the United States will be required to amend them or be subject to sanctions. Those Canadian sanctions could include the imposition of punitive surtaxes on U.S. imports, including corn.

On a separate front, Canadian corn grower organizations seeking to have significant anti-dumping and countervail duties imposed on U.S. corn have launched several trade remedy actions over the last three decades. In the most recent case, the Canadian International Trade Tribunal ruled in April of 2006 that corn imports from the United States, which the Canada Border Services Agency found to be dumped and subsidized, had not caused injury to or threatened corn production in Canada. Canadian growers have sought judicial review of this no-injury finding at the Federal Court of Appeal, which is expected to hear the matter later this year.

For further information on these and other trade and investment issues, please contact any of the following members of the International Trade and Investment Law Group:

Montreal – Simon Potter

Ottawa – Brenda Swick

Toronto – John Boscariol, Orlando Silva, and Alastair McNish

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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