PRB 98-5E
INQUIRY OF THE CANADIAN INTERNATIONAL
TRADE TRIBUNAL ON DAIRY BLENDS OUTSIDE
THE COVERAGE OF CANADA'S TARIFF-RATE QUOTAS
Prepared by:
Jean-Denis Fréchette
Economics Division
October 1998
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:
to inquire into the matter of the
importation of dairy product blends outside the coverage of Canada’s TRQs by:
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;
reviewing the legal, technical,
regulatory and commercial considerations relevant to the treatment of imports of these
products, as well as Canada’s international trade rights and obligations under the North
American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO)
Agreement;
identifying options for addressing any
problems raised by this issue in a manner consistent with Canada’s domestic and
international rights and obligations; and
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
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 an 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 Canada’s domestic and international rights and
obligations. Moreover, it would be consistent with Canada’s 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 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 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 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 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, which continues to be the DFC’s preferred
classification. Government decisionmakers 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 is not over.
(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. |