Wheat Wars With Friends Like This... CBA Annual Meeting Winnipeg, Mb.August 17, 2004 J. E. McLandress General Counsel, Canadian Wheat Board
Introduction “All politics is local...” -- Lyndon B. Johnson … and so is all trade policy. -- John Jackson Q: What drives the U.S. fixation on the CWB? A: “Ignorance and xenophobia.” -- Former aide to Governor of Montana
Outline • CWB 101 • The global wheat market • Common myths debunked • Past Investigations • Current Investigations • The Doha Round • Implications • Questions, comments, outrage, indifference… it’s your choice.
CWB 101: The Basics • Farmer-controlled grain marketing agent with the corporate mission to: “… market and provide quality products and services in order to maximize value to our owners, western Canadian grain farmers.” • Est’d in 1935 - farmers’ choice. • Three “pillars” (single-desk, pooling& guarantees) est’d in 1947. • Major governance reform in 1999 to CBCA structure.
CWB 101: Operations • Approx. 430 employees. • Offices in: Winnipeg (H.O.),Vancouver,Tokyo & Beijing. Regional offices: Airdrie, Alberta & Saskatoon. • Scope of Operations: • Sales • Transportation • Market Development • Payments to farmers • Financing • Farmer relations
CWB 101: Operations • CWB markets wheat, durum & barley to over 70 countries world-wide. • Each year the CWB sells: • 12 - 14 MT of milling wheat • 3.5 - 4.5 MT of durum • 2.5 - 3.5 MT of barley Total = 18 - 22 million tonnes of grain.
CWB 101: Export routes Prince Rupert Churchill St. Lawrence Vancouver Thunder Bay
CWB 101: Major customers 2003-04 Thousand tonnes Wheat Durum Barley Italy 672 Saudi Arabia (f) 561 Canada 2 200 USA (m) 414 China 1 800 Morocco 459 Japan 1 029 Algeria 378 China (m) 369 Philippines 705 Venezuela 332 Canada (m) 360 Mexico 693 Canada 292 Japan (f) 259 f = feed barley; m = malting barley *In total 16. 3 million tonnes were sold to customers in 71 countries/regions.
CWB 101: Prairie farmers • Represents 85,000 western Canadian farmers. 500 22,000 49,500 13,000
CWB 101: Prairie farmers • The CWB -- an agricultural co-operative model... • Production is pooled to manage risk. • All proceeds from sales, less the marketing costs, are passed back to farmers. • … With a twist -- the legislated single desk. The single desk gives farmers: • The ability to capture market premiums for Canadian grain. • Marketing power.
CWB 101: Financial Guarantees • Three guarantees: • Initial Payment • Borrowing • Credit Sales
The Global Market: Major Exporters Durum wheat* (including semolina) Wheat* E.U. 7% Argentina9% Canada**14% U.S. 17% Australia14% E.U. 15% Canada51% Others25% Others22% U.S. 26% * five-year average from 1999-00 to 2003-04
The Global Market: The Competition • World wheat trade is controlled by a handful of very large players. Revenues for 2002-03: • Cargill -- $59.9b* • ADM -- $30.7b** • Bunge -- $22.2b** • Louis Dreyfus -- $20.0b* • ConAgra -- $19.8b** • CWB -- $2.2b* • AWB -- $2.04b*** * Gross sales in U.S. dollars ** Net sales in U.S. dollars *** 2001-02figures due to 02-03 drought Sources: Annual reports, company Web sites
Myth vs. Fact • The “monopoly” • Control over grain production • Transparency • Predatory pricing practices • CWB competition with U.S. farmers • CWB commercial behaviour
Past Investigations: Why are the Americans upset? • CWB marketing success in the U.S. • CWB does not operate according to the U.S. share-capital corporate structure. • American politics.
Past Investigations: Why are the Americans upset? • They don’t like NAFTA ... • “Before the passage of the U.S.-Canada Free Trade Agreement, the U.S. imported virtually no Canadian grain. None. Since the negotiation of the Canadian Free Trade Agreement, imports of Canadian durum have grown to 20 to 25 percent of the U.S. market.” • -- U.S. Senator Kent Conrad to U.S. ITC, Sept. 4, 2003 • “I was in the U.S. House when the U.S.-Canada Free Trade Agreement was passed. I think it was incompetently negotiated, and I think the interests of American farmers were largely sold out in that negotiation.” -- U.S. Senator Byron Dorgan to U.S. ITC, Sept. 4, 2003 • “North Dakota wheat farmers' problems with the Canadian Wheat Board date back to the negotiations for the Canada-U.S. Free Trade Agreement and later NAFTA.” --Jack Dalrymple, Lt.. Governor, N. Dakota to U.S. ITC, Sept. 4, 2003
Past Investigations: Summary • Thirteen separate U.S. trade investigations since ‘89: • Jun. 1990 -- ITC , s. 332 Tariff Act of 1930. • Jun. 1992 -- GAO. • Feb. 1993 -- CUSTA Bi-National Panel (Durum audit). • Jul. 1994 -- ITC, s. 22 Agricultural Adjustment Act of 1930. • Oct. 1995 -- Canada-U.S. Joint Commission on Grains. • Jun. 1996 -- GAO. • Nov. 1998 -- GAO. • Oct. 1999 -- DOC, Live Cattle CVD. • Nov. 2001 -- ITC, s. 332 (as part of USTR s. 301). • Feb. 2002 -- USTR, s. 301 Trade Act of 1934. • Aug. 2003 -- DOC Final AD/CVD margin rulings re 02/09/12 petition. • Oct. 2003 -- ITC, Injury ruling re 02/09/12 petition. • Apr. 2004 -- WTO, DS 276 Panel report.
Current Investigations: AD/CVD • Sept. 13, 2002 NDWC files AD/CVD petition re Hard Red Spring Wheat (“HRS”) and Durum. • October 2002, ITC Preliminary injury ruling, affirmative on both -- investigation proceeds. • May 2003 DOC Preliminary AD/CVD tariffs in place. • August 2003 DOC Final AD/CVD tariffs determined: • 14.16% on HRS (8.87% AD + 5.29% CVD) • 13.55% on Durum (8.26% AD + 5.29% CVD) • October 2003 ITC Final Injury ruling: • 4-0 negative on Durum -- tariffs lifted. • 2-2 affirmative on HRS -- tariffs remain in place.
Current Investigations: AD/CVD • Noteworthy aspects: • “Particular Market Situation” investigation -- CWB prices are not set arbitrarily. • COP case on HRS -- 27 farmers out of 50,000 were used to determine the COP on an agricultural commodity. • Injury ruling on HRS -- Application of traditional injury analysis to a globally traded & priced product of which the U.S. is the world’s largest trader.
Current Investigations: AD/CVD • Appeals: • CWB challenge of HRS Injury ruling to NAFTA Chap. 19 panel -- panel selected August 3, 2004. • GOC challenge of HRS Injury ruling to WTO -- 1st Request filed. • GOC, CWB, GOA, GOS challenge of CVD ruling to NAFTA Chap. 19 panel -- panel selected July 9, 2004. • NDWC appeal of Durum Injury ruling to U.S. CIT --dismissed on jurisdictional grounds July 29, 2004.
Current Investigations: DS 276, GATT Article XVII “Article XVII (1): State Trading Enterprises (a) Each contracting party undertakes that if it establishes or maintains a Stateenterprise, wherever located, or grants to any enterprise, formally or in effect, exclusive or special privileges,* such enterprise shall, in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders. (b) The provisions of sub-paragraph (a) of this paragraph shall be understood to require that such enterprises shall, having due regard to the other provisions of this Agreement, make any such purchases or sales solely in accordance with commercial considerations,* including price, quality, availability, marketability, transportation and other conditions of purchase or sale, and shall afford the enterprises of the other contracting parties adequate opportunity, in accordance with customary business practice, to compete for participation in such purchases or sales. (c) No contracting party shall prevent any enterprise (whether or not an enterprise described in sub-paragraph (a) of this paragraph) under its jurisdiction from acting in accordance with the principles of sub-paragraphs (a) and (b) of this paragraph.
Current Investigations: DS 276 • U.S. Request for Consultations -- December 17, 2002. • Panel formed -- March 31, 2003. • Core allegations respecting CWB: • Article XVII (re STE’s) -- Given its structure and privileges, the CWB is genetically incapable of acting commercially and therefore must, per se, act non-commercially and violate Art. XVII of the GATT. • Allegations unrelated to CWB: • Article III & TRIMs (re Nat’l Treatment) -- Certain of Canada’s regulations re (1) segregation and mixing of U.S. & Canadian grains and (2) U.S. access to certain Canadian railcars, amount to discriminatory and less favourable treatment.
Current Investigations: DS 276 • Panel Report (public version rel’d April 6, 2004) conclusions: • Article XVII -- U.S. claim dismissed. • “In view of the CWB’s current governance structure, which gives Western Canadian producers control over the CWB … the CWB has an incentive to maximize returns to the producers whose products it markets.” • “…we are not persuaded that the CWB’s legal structure and mandate, together with the privileges enjoyed by the CWB, create an incentive for the CWB to make sales which are not solely in accordance with commercial considerations. The factual evidence adduced by the United States regarding actual CWB sales behaviour does not prove otherwise.” • Article III --U.S. claim dismissed re rail cars but allowed re grain segregation and mixing.
Current Investigations: DS 276 • Appeals: Article XVII • U.S. appealed its loss to the Appellate Body of the WTO. • Canada cross-appealed on technical grounds. • Hearing in Geneva before AB held on July 12, 2004. • Decision will be released on August 30, 2004. Article III (and TRIMs) • Neither Canada nor the U.S. appealed.
The Doha Round • Feb. 15, 2002 USTR Robert Zoellick announces a four-point plan to “seek relief from the trading practices of the CWB...” • Examine launching a possible DSU case at the WTO. • Work with the NDWC and the U.S. wheat industry regarding a possible AD/CVD challenge. • Work with the U.S. industry to identify impediments to U.S. wheat entering Canada. • “Vigorously pursue comprehensive and meaningful reform of monopoly State Trading Enterprises in the WTO agricultural negotiations…”
The Doha Round • Nov. 2001 -- Doha Round officially launched. • Structural reform of STE’s governed by GATT Art. XVII did not form part of the mandate for negotiators. • July 31, 2004 -- framework agreement for continued agricultural negotiations reached by WTO Member states, including Canada. It provides, inter alia: “18. The following will be eliminated by the end date to be agreed: … Trade distorting practices with respect to exporting STEs including eliminating export subsidies provided to or by them, government financing, and the underwriting of losses. The issue of the future use of monopoly powers will be subject to further negotiation.”
The Doha Round • The Government of Canada had previously committed that it would not relinquish the guarantees without knowing that Canada was getting something in return, and that the single desk would not be on the table. • In an Aug. 4, 2004 letter to Sen. Tom Daschle (S. Dak.), Amb. Zoellick reassured the Senator that subsidies to U.S. farmers would not be affected by the WTO Framework Agreement on Agriculture.
The Doha Round • Next steps in the negotiations: • Dec. 2005, Hong Kong Ministerial -- target date for “modalities” agreement. • 2006-07-08 - ?? -- continued negotiations. • Implementation period -- +/- 6 years??
Implications: So what does it all amount to? • CWB legal and consulting expenses for these challenges -- $17m and counting ($12m for current investigations) + innumerable staff hours. • The fact that there has been no credible finding or study that shows the CWB violates international trade rules, distorts trade or injures U.S. producers is utterly meaningless. • The U.S. government is pandering to local North Dakota politics by continuing to press the issue. • The Canadian government has bowed to U.S. and E.U. bullying to allow the issue to get this far.
Last Words • “Unlike most traditional conquerors, [Americans] are not content merely to subdue others. We insist that they be like us. And, of course, for their own good.” The Lexus and the Olive Tree -- Thomas Friedman • “In [America] there is little tolerance for subtlety, nuance or shades of grey… Canadians, however, have found themselves throughout their history to be in an interdependent world… ... Our founding ideas, our institutions, and the experience of building our two nations [Canada & the U.S.] have been very different; one by conquest, the other by compromise.” Fire and Ice -- Michael Adams