PRB 98-5E
DECISIONS
ON DAIRY BLENDS BY THE
CANADIAN INTERNATIONAL TRADE TRIBUNAL
Prepared by:
Jean-Denis Fréchette
Economics Division
October 1998
Revised 19 August 1999
Inquiry
into Imports of Dairy Blends outside the Coverage
of
Canadas Tariff Rate Quotas
The Canadian International
Trade Tribunal Act, assented to on 13 September 1988, contains general provisions
that allow the federal government or the Minister of Finance to request the CITT to
inquire into economic, trade or tariff matters. The Tribunal acts strictly as a consultant
with a mandate to conduct research, receive presentations, find facts and hold public
hearings. Upon completion of an inquiry, the Tribunal must report to the Governor in
Council or the Minister of Finance and, if so requested, make recommendations.
In the case of the "Inquiry into the
Importation of Dairy Product Blends outside the Coverage of Canadas Tariff-rate
Quotas" (http://www.citt.gc.ca), the
CITT was not given a mandate to make recommendations.
More specifically, the terms of
reference of the inquiry directed the tribunal:
(a) to inquire
into the matter of the importation of dairy product blends outside the coverage of
Canadas TRQs by:
(i) examining
the factors influencing the domestic market for such imports and the implications of these
imports for the Canadian dairy producing and processing industry and other segments of the
Canadian food processing industry, including production and revenue levels;
(ii) reviewing
the legal, technical, regulatory and commercial considerations relevant to the treatment
of imports of these products, as well as Canadas international trade rights and
obligations under the North American Free Trade Agreement (NAFTA) and the World
Trade Organization (WTO) Agreement;
(iii)
identifying options for addressing any problems raised by this issue in a manner
consistent with Canadas domestic and international rights and obligations; and
(b) to hold a
public hearing with respect to the inquiry and to report to the Governor in Council by
July 1, 1998.
In the course of its inquiry,
the CITT produced a number of documents on various aspects of butteroil/sugar blends, in
particular the Canadian and international legal framework, the impact of the imports on
milk production in Canada and the need for blends and their use in the manufacturing of
ice cream. Since the Tribunals mandate was not making recommendations, but rather
"identifying options," we sometimes have to "read between the lines"
of the documents it produced. For example, in its report to the Governor in Council on
3 July 1998, the Tribunal raised a number of interesting facts but without
completely resolving the issue of the importation of butteroil/sugar blend imports.
Ice cream
manufacturers contended that the dairy blends offered technical advantages and helped
stabilize stock, but the Tribunals hearings showed that the price advantage of the
fat component in the imported butteroil blends was the most important factor influencing
the demand for them in the domestic market.(1)
The CITT inquiry also
determined that the use of butteroil/sugar blends is not limited to the manufacture of ice
cream; a growing quantity of such blends is used in making processed cheese. It should be
noted, however, that in a typical processed cheese recipe, only 5% of the total volume
consists of milkfat or butterfat that can be "replaced." According to the data
compiled by the Tribunal, ice cream and processed cheese producers used 6.3 million
kilograms of butteroil blends in 1997, the equivalent of 3.1 million kilograms of milkfat.(2) Canadian requirements for fat used in
manufacturing ice cream and "replaceable" fat for processed cheese totalled
25.639 million kilograms in 1997. In other words, the 3.1 million kilograms of fat from
the 6.3 million kilograms of butteroil/sugar blends represented 12% of the fat requirement
for ice cream and replaceable fat for processed cheese.
While the Dairy Farmers of
Canada believe that the replacement of this fat with imported dairy blends resulted in
revenue losses totalling $50 million in 1997, the Tribunal put the losses at between
$12.8 million and $30.9 million depending on whether production had been maintained and
surpluses exported or whether milk production had decreased through the dairy year in
proportion to the fat equivalent in blend imports.
Based on the different
scenarios it considered, the Tribunal felt that the penetration level of butteroil could
eventually rise to a maximum of 25% of the fat requirement for ice cream production and
replaceable fat for processed cheese. Applying that maximum penetration level to the 1997
fat requirement for these two dairy products suggests that 6.4 million kilograms of
milkfat were replaced by imported blends. While agreeing that the use of blends will
continue in the years ahead, the Tribunal does not anticipate a recurrence of the strong
growth of recent years.
Since it was not
given a mandate to make recommendations, the Tribunal proposed in its report a series of
solutions that stand as more or less viable options from which the government can choose.
An initial group of six options was considered but rejected by the Tribunal because the
options "are inconsistent with Canadas domestic or international rights and
obligations or because they do not represent a viable option."(3) That group includes:
reclassification by the
government;
imposition of an excise tax;
bilateral negotiations with
New Zealand;
removal of anti-dumping and
countervailing duties on refined sugar;
an increase in milk prices;
and
a change in labelling
requirements.
Another group of seven options
was deemed by the Tribunal to have greater potential because they are consistent with
Canadas obligations. The fact remains that the vast majority of these options are
not supported unanimously within the dairy industry. The group includes:
an appeal to the Tribunal by
the DFC of the classification of butteroil blends;
an inquiry into safety
measures by the Tribunal;
a special class price for
butterfat to be used in ice cream and processed cheese;
a special class price for
butterfat for domestic butteroil blends;
compensation for dairy
farmers; and
a new tariff item for
butteroil blends negotiated under Article XXVIII of GATT.
The Tribunal also clearly
stated with some emphasis that maintaining the status quo was a possible option.
In response to the CITT report, the DFC stated
that with the exception of an appeal to the Tribunal and an inquiry into safety measures,
it rejected all other options identified by the Tribunal, considering them to be not
viable.(4)
Finally, the following
statement in the CITT report clearly illustrates the almost insoluble problem politicians
are now facing:
It is clear to the Tribunal
that there is no option available that comes without a cost to one or more of the
stakeholders. The dilemma is that there are economic consequences for the dairy farmers
from imports of butteroil blends, and yet the international rules limit the types of
action now available.(5)
The Government of Canada
ultimately rejected all the options put forward in the CITT report and solved the dilemma
by taking a way out that will let it stall for a while. In its analysis, the CITT quietly
threw the government a lifeline:
[. . .] a reference to the
Tribunal by the Deputy Minister concerning that same question [the tariff classification
of butteroil blends] would be consistent with Canadas domestic and international
rights and obligations. Moreover, it would be consistent with Canadas domestic and
international rights and obligations for the Tribunal to issue a decision classifying
butteroil blends within the schedule to the Customs Tariff on the basis of the
General Rules, the applicable rules, the Explanatory Notes and the Classification
Opinions.(6)
On 10 August 1998, the
government announced that the national Deputy Minister of Revenue had asked the CITT to
review the current tariff classification of butteroil blends.(7) While such a review would meet their initial
demands, Dairy Farmers of Canada felt that the entire process of blocking blend imports
takes too long and would allow their financial losses to continue to mount. It should be
remembered that a reference to the Tribunal by the national Deputy Minister of Revenue is
provided for in section 70 of the Customs Act and could have been made as soon as
the imports became an issue, in 1996.
In its 3 July 1998
report on its inquiry into blend imports, the CITT had considered, but rejected, the
option of having the Deputy Minister explore the reclassifying of butteroil blends, going
so far as to say, "In light of the fact that Revenue Canada has already considered
the question of the classification of butteroil/sugar blends on four previous occasions,
the Tribunal considers that it would be fruitless for the Government to direct Revenue
Canada to look into that same question a fifth time." The CITT report
continued: "[. . .] the fact that, prior to and after the conclusion of the Uruguay
Round, Revenue Canada issued classification opinions regarding the blends, the Tribunal is
of the view that, if the Government of Canada were to reclassify the butteroil blends
under a tariff item subject to a TRQ, such action could frustrate the reasonable
expectations of Canadas trading partners and, as a result, be subject to the process
of negotiation under Article II:5 of GATT."(8)
Even if it is more
"appropriate" for the CITT, rather than the national Deputy Minister of Revenue,
to review the current tariff classification of butteroil blends, the CITT will have to
deal with the four analyses from Revenue Canada and, more important, the decision of
7 November 1997 by the World Customs Organization (WCO), which found that the blends
were not milk constituents and therefore could not be classified under tariff item 0404.
Government decision-makers are often the architects of their own dilemmas, and a second
initiative in under six months by the CITT on the issue of butteroil/sugar blends suggests
that the debate has become a dead end.
Inquiry
into the Tariff Classification of Certain Butteroil Blends
Revenue
Canada classifies butteroil/sugar blends under tariff item 2106.90.95, deeming them not to
be butter substitutes. That opinion is challenged by the DFC, which argues that, since
they are used to make ice cream, these blends are indeed butter substitutes and would
therefore be better classified as dairy blends under tariff item 2106.90.33 (butter
substitutes) or, better yet, tariff item 0404.90, the tariff classification initially
created to limit imports of dairy blends.
On
10 August 1998, the Deputy Minister of Revenue requested that the CITT "review the
current tariff classification of butteroil blends." The CITT handed down the
following decision on 26 March 1999.
Butteroil
blends comprising less than 50 percent butteroil and more than 50 percent sugar (sucrose)
are classifiable under tariff item No. 2106.90.95. Blends comprising less than 50 percent
butteroil and more than 50 percent glucose are also classifiable under tariff item No.
22106.90.95.
This CITT decision,
which supports Revenue Canada by maintaining that butteroil/sugar blends are not butter
substitutes, is hardly surprising; it reflects the four previous Revenue Canada analyses
and upholds the WCO decision of November 1997. What is surprising, however, is that,
contrary to Revenue Canadas expectations, the CITT handed down "a decision, as
opposed to a non-binding opinion."(9)
The CITT handed
down a binding decision even though the Deputy Minister of Revenue had expected only an
"opinion" and Revenue Canada counsel had also argued for that option.(10) According to the CITT, a reference to it under
section 70 of the Customs Act, as was made by the Deputy Minister of Revenue, is,
once initiated, in the nature of an appeal under section 67 of the Customs
Act and [. . .] its disposition in such proceedings is a decision, as
opposed to a non-binding opinion."
One
of the three CITT members wrote a minority dissenting opinion favouring the DFC, however,
arguing that the blends under consideration can be used as butter substitutes and should
therefore be classified under tariff item 2106.90.33 if they are imported within the
market access limits, and under tariff item 2106.90.34 if they exceed those limits. In the
latter case, the applicable tariff for the year 2000 is 212%.
The CITT decision
merely intensified the claims by the DFC, which decided on 24 June 1999 to appeal the CITT
decision to the Federal Court.
(1) Canadian International Trade Tribunal, Report, An
Inquiry into the Importation of Dairy Product Blends outside the Coverage of Canadas
Tariff-Rate Quotas, 3 July 1998, p. 15.
(2) The milkfat (MF) content of butteroil/sugar blends
is calculated using the following formula: (quantity of blend x 49%) (99.3%) = quantity of
milkfat.
(3) CITT report (1998), p. 51.
(4) Dairy Farmers of Canada, "Press Release on the
Lingering Problem of the Tariff Classification of Butteroil Blends," Lethbridge,
Alberta, 8 July 1998.
(5) CITT report (1998), p. vi.
(6) Ibid., p. 67.
(7) Government of Canadas reaction to the Canadian
International Trade Tribunal Report, Press Release, Ottawa, 10 August 1998.
(8) CITT report (1998), p. 53.
(9) CITT, Unofficial Summary, decision on the tariff
classification of certain butteroil blends, Ottawa, 26 March 1999, p. 1.
(10) CITT, p. 3. |