INTRODUCTION

Canada appeals certain issues of law and legal interpretations in the Panel Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products – Second Recourse to Article 21.5 of the DSU by New Zealand and the United States (the “Panel Report”). The Panel was established to consider a complaint by New Zealand and the United States that certain measures taken by Canada to comply with the recommendations and rulings of the Dispute Settlement Body (the “DSB”) in Canada – Dairy are not consistent with Canada's obligations under the Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures (the “SCM Agreement ”).

In Canada – Dairy, the original panel and the Appellate Body found, inter alia, that Canada provided, through Special Milk Classes 5(d) and 5(e), “export subsidies” within the meaning of Article 9.1(c) of the Agreement on Agriculture. The original panel and the Appellate Body also found that Canada provided these export subsidies in excess of the quantity commitment levels specified in its Schedule to the General Agreement on Tariffs and Trade 1994 (the “Schedule”) and that, therefore, Canada had acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture. On 27 October 1999, the DSB adopted the original panel and Appellate Body reports.

On 23 December 1999, pursuant to Article 21.3(b) of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the “DSU”), Canada, New Zealand, and the United States agreed that the reasonable period of time for Canada to implement the recommendations and rulings of the DSB would expire on 31 December 2000. On 11 December 2000, the parties agreed to extend this period of time until 31 January 2001.

Canada subsequently adopted certain measures with a view to implementing the recommendations and rulings of the DSB. These measures are described in Section II of this Report. Taking the view that certain of these measures were not consistent with Canada's obligations under the Agreement on Agriculture and the SCM Agreement, New Zealand and the United States requested, on 16 February 2001, that the matter be referred to a panel pursuant to Article 21.5 of the DSU.