During the last 20 years the annual production of butter in Canada has very nearly equalled annual consumption. Generally, it has been necessary to import only marginal quantities to bridge the gap between the time when the previous year's stocks of Canadian butter have been depleted and the beginning of new production in the Spring. The object of Canadian butter policy has been to seek an arrangement whereby butter is imported only when Canadian supply is depleted and to prevent such butter from entering the Canadian market and depressing prices when Canadian supplies are adequate.

History of Canada-New Zealand "Butter" Relations

2. Under the Canada-New Zealand Trade Agreement of May 24th, 1932, New Zealand was accorded a rate of 5 cents per pound on butter.⁵³ This rate is still in effect. (Other rates are: preferential, 8 cents; intermediate, 12 cents; general, 14 cents). Section IV of the Agreement provided that Section 6 of the Canadian Customs Act might, upon one month's notice to the New Zealand Government, be applied to goods if their importation would seriously affect the producers of similar goods in Canada. At the time of the Agreement, Section 6 of the Customs Act provided for a dumping duty:

(1) When the export price is less than the domestic price in country of origin;

(2) When a "fair market value" has been established, under Section 43 of the Customs Act, for goods the entry of which is prejudicial to Canadian producers;

(3) In the case of goods from countries of depreciated currencies, when the Gov­ernor in Council has, for customs purposes, fixed a rate of exchange higher than the current rate.

3. The second provision for "arbitrary valuation" was withdrawn in respect to Empire Preference countries on November 25th, 1932 by amendment of the Cus-toms Act. The third provision for "exchange dumping duties" was withdrawn in 1948, following Canada's adherence to G.A.T.T. The first provision is the only one valid at present.

4. On March 13th, 1933, formal notice was given by Canada under Section IV. When New Zealand replied that remedial measures could not be taken, an"exchange dumping duty" was applied. On August 19th, 1933, at a meeting between The Hon. Mr. Forbes and The Hon. H.H. Stevens, it was agreed to place before the respective Governments a proposal that Canada should waive dumping duties on New Zealand butter if New Zealand would export only with the prior consent of the Canadian Government and sell at a price not less than a minimum set by Canada. This did not lead to a lasting arrangement. By December, 1933, New Zealand exporters were accepting orders for butter without the New Zealand Government having obtained prior permission from Canada and it was necessary, after an exchange of notes in January, 1934, to reinvoke Section IV.

5. At first it proved sufficient to impound the butter and release it within the thirty day period as and where it could be absorbed by the market. In March, 1934, how­ever, and for the following three years, dumping duties were applied when necessary.

6. In 1937 the New Zealand Government, dissatisfied with the quantity of butter which Canada was taking, asked for removal of dumping duties and admission of a specified minimum quantity. In September, 1937, Canada offered to cancel the dumping duty if New Zealand would return to the 1933 arrangement whereby but­ter would be shipped only when Canada indicated a need and only to the extent of that need. New Zealand rejected the proposal, fearing the loss of even the small trade she then enjoyed.

7. In 1938 the question of entry without dumping duty was again raised by New Zealand. In a note of July 29th, 1938, the Canadian Government offered to abolish exchange dumping duties on butter "if or when, in the opinion of the Canadian Government, shipments of butter threatened the interests of Canadian producers, the New Zealand Government would restrict shipments of butter to Canada to rea­sonable and satisfactory proportions".

8. In a telegram of August 8th, 1938, the New Zealand Prime Minister replied:

"Although your telegram of July 6th contained no reference to possible restric­tions of butter as condition to abolition of exchange dumping duty, my Government appreciates the desire of your Government to afford reasonable safeguards to the interest of Canadian producers. Accordingly, my Government are prepared to take all possible steps to meet any reasonable requests from the Canadian Government regarding the limitation of shipments from New Zealand, but trust that no such measures will be necessary. It will be understood that should any difficulty arise in giving effect to any such requests, the matter may form the subject of consultation with the view to arriving at mutually satisfactory arrangements."

9. The introduction of wartime controls had the effect of suspending this arrange­ment, but it was never formally terminated as the method of procedure for normal times. P.C. 2138 of May 23rd, 1940, established the Dairy Products Board with authority to prohibit the importation of butter into Canada without a permit. In May, 1947, the Dairy Products Board was withdrawn from the National Emergency Transitional Powers Act and was established under the Agricultural Products Act, 1947.

GATT.- The Present Position

10. On January 1st Canada and New Zealand provisionally implemented the Gen­eral Agreement on Tariffs and Trade. The General Agreement established princi­ples of commercial behavior judged to be in the best interests of all the Contracting Parties. The General Agreement permits the application of dumping duties, for example, when the selling price of butter in New Zealand is higher than the price at which it is being offered for export to Canada. This is not the case at the present time. Arbitrary valuation for duty and exchange dumping duties are forbidden under GATT.

11. Canada has legislative authority under the Export and Import Permits Act (1947) to prohibit import of limited classes of goods. However, the provisions of GATT impose the following limitations on the use of this power:

(a) Import controls of this kind may be exercised only when the commodity con­cerned qualifies as an exception under Article XIX "Emergency Action on Imports of Particular Products" or Article XX "General Exceptions". Article XIX 1(a) pro­vides for the suspension of obligations incurred in the Agreement "if any product is being imported into the territory of that Contracting Party in such increased quanti­ties and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or competitive products".

(b) Before such restrictive action is taken, however, prior consultation with the country affected is normally required. If this is not possible, there must be consulta­tion immediately after taking such action. Further, if the affected country considers the action injurious to it, retaliatory action may be taken.

Recent Discussions with New Zealand

12. On December 29th, 1950, the Minister of Agriculture informed Cabinet that private Canadian importers had contracted for a large shipment of New Zealand butter which was en route to Canada. He stated that if such a shipment were placed indiscriminately on the Canadian market, it might endanger our price support pro­gram. He felt that it was essential that this butter be delivered to the Agricultural Prices Support Board and, if this could be done only by applying import controls, it was desirable that these should be applied and made effective for butter already under contract.

13. The Minister of Agriculture was able to make informal arrangements with the importers to deliver the New Zealand butter to the APSB. To prevent further situa­tions of this sort, the Minister asked and received Cabinet approval on January 15th, 1951, for import control of butter. An enabling Order-in-Council was passed on January 24th.

14. Meanwhile, the New Zealand High Commissioner, in a letter of January 22nd, t having heard of the discussions, asked that no formal steps be taken until his Government had been given a chance to express its views. In a further letter of January 26th,' he drew attention to the exchange of telegrams in July-August, 1938, and stated, on instructions from his Government, that the understanding then reached was considered to be still in operation and that, if the Canadian Govern­ment were concerned about importation of New Zealand butter, the way was open for consultations.

15. In view of this understanding which had apparently been overlooked in Ottawa, Cabinet, on January 26th, rescinded the Order-in-Council placing butter under import control. Later, informal discussions were held with the New Zealand Prime Minister when he visited Ottawa in February.

The Present Controversy

16. Although the Minister of Agriculture is apparently prepared to continue the 1938 understanding, he is anxious to extend its terms and has asked this Depart­ment to obtain the agreement of the New Zealand Government not to export butter to Canada without first advising the Canadian Government of the prospective quan­tity available for such movement and without obtaining the prior agreement of the Canadian Government. The Canadian Government would then reserve the right to:

(a) allow importation of the butter through the normal channels of trade;

(b) request that the butter be sold only to the Canadian Government for their own account and distribution;

(c) ask that the movement of butter to Canada be deferred.

17. Before an approach was made to the New Zealand Government, their High Commissioner in Ottawa wrote to the Prime Minister asking for confirmation of the Canadian Government that it is our understanding "that the 1938 texts con­tained no mention of formal advice to the Canadian Government of proposals to sell butter - nor of obtaining the approval of the Canadian Government before proceeding with negotiations with importers".

18. This is where the matter now stands. The question arises: how far can we insist that the New Zealand Government accept our request for prior notification without retreating from our commitments under GATT? There are two points I might suggest in this regard.

(1) It is perfectly in order to request the New Zealand Government for prior notification and request that they obtain prior consent before shipping. If New Zea­land would voluntarily agree to this proposal it would be our understanding that she would be giving tacit agreement not to question the implementation of such com-mitments at the Sessions of the Contracting Parties to GATT. Thus the arrangement would be a bilateral one entirely apart from any commitment which either they or we may have under GATT.

(2) If New Zealand does not agree with our proposal, and if we wish to insist that our requirements be met, we shall be faced with a difficult situation under GATT. Our proposals are clearly not in accordance with GATT principles; none of the escape clauses cover the case exactly. Since we have taken a leading part in GATT and have constantly pressed for a strict construction of the General Agreement, we should find ourselves in an extremely embarrassing position at future Sessions of the Contracting Parties. In addition, such action would remove the basis for future Canadian complaints against other GATT countries (e.g., our annual potato prob­lem with the United States).

19. Our conclusion is that it would be worthwhile asking the New Zealand Gov­ernment to agree to our proposals, but if they refuse, it would be most unwise to insist. The New Zealand Government has been cooperative in the past and appar­ently appreciates the Canadian situation. Therefore, it would seem preferable to make use of informal devices to meet difficult situations.

20. In addition, while GATT does not give adequate year in-year out protection, it does provide adequately for situations which cause hardship to Canadian producers - as does the 1938 agreement. The relief may be applied only after the first symp­toms appear, but it would seem preferable to take this risk than to jeopardize our integrity as a member of GATT.

A.D.P. H[EENEY]⁵⁴

⁵³ Voir Canada, Recueil des traités, 1932, N°. 2./See Canada, Treaty Series, 1932, No. 2.

⁵⁴ Ce document a aussi été parafé par L.B.P[earson].
This document was also initialled by L.B.P[earson].