Parliamentary Research Branch |
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| PRB 98-5E DECISIONS
ON DAIRY BLENDS BY THE Prepared by: Inquiry
into Imports of Dairy Blends outside the Coverage 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 Canada’s 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:
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 Tribunal’s 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 Tribunal’s 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 Canada’s domestic or international rights and obligations or because they do not represent a viable option."(3) That group includes:
Another group of seven options was deemed by the Tribunal to have greater potential because they are consistent with Canada’s obligations. The fact remains that the vast majority of these options are not supported unanimously within the dairy industry. The group includes:
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:
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:
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 Canada’s 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.
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 Canada’s 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 Canada’s 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 Canada’s 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. |
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