Crop Production/Industries, International Relations/Trade,

Norman, Terry

English

Research Papers in Economics

404 Keeping the Borders Open
Discussion
U.S. SECTION 301 INVESTIGATION OF CANADIAN
WHEAT TRADING PRACTICES
Terry Norman
Wilson and Dahl did an excellent job of presenting the history of
the various U.S. investigations into the Canadian Wheat Board (CWB) and,
in particular, the most recent Section 301 investigation of CWB trading
practices. Given that this is the ninth investigation of this subject by the
United States since 1990, I find it amazing that there can continue to be so
much misinformation and misunderstanding about how the CWB operates
and what it does.
As part of this recent investigation, the United States Trade Repre-
sentative (USTR) requested the United States International Trade Commis-
sion (USITC) to carry out an investigation of the competitive conditions
between U.S. and Canadian wheat. The public version of this report was
released December 21, 2001.
FINDINGS
The USITC report refuted the two most serious allegations made
by the North Dakota Wheat Commission, namely that the CWB engaged
in price discounting and over-delivery of protein. Contrary to previous
investigations, some of which had only concluded that CWB prices were
an unsolved mystery, this investigation actually involved talking to the
importers and purchasers of Canadian and U.S. wheat to obtain compa-
rable price information. This resulted in the finding that the prices for Ca-
nadian wheat were normally higher than prices for the most comparable
quality U.S. wheat.
In addition, the USITC report concluded that the over-delivery of
protein occurs for both U.S. and Canadian wheat, but that this over-deliv-
ery is so small that it is not commercially significant. In fact, protein over-405
delivery occurred to a slightly greater degree for U.S. wheat than for Cana-
dian wheat. Wheat delivery contracts which specify a minimum protein
level normally have a price penalty clause for any under-delivery of the
specified protein content. As a practical matter, given the vagaries of sam-
pling, wheat shippers normally try to provide slightly more than the agreed
protein level to avoid having any specific sample trigger the penalty clause.
While these most important allegations were refuted based on the
factual information obtained from the importers and purchasers, regret-
fully the USITC report also contained some factual errors and unsubstanti-
ated conclusions. For example, the USITC concluded that, since imports
of U.S. wheat into Canada are quite limited, there must be some barrier in
place limiting such imports. This is a completely unsubstantiated conclu-
sion which is factually wrong. There are no commercially significant im-
pediments to imports of U.S. wheat into Canada.
Canada and the United States operate end use certificate systems
for imports of wheat from the other country. The purpose of Canada’s
system is to ensure that imported wheat, which may be of varieties not
registered for production in Canada, is not commingled with Canadian
wheat in the commercial wheat handling system. This purpose is neces-
sary to maintain the integrity of Canada’s wheat quality control system
which is based to a considerable extent on allowing production of only
those varieties that meet minimum disease and performance requirements.
These end use certificates are freely available and do not restrict imports of
any variety or quality of wheat. In addition, the USITC seemed to think in
error that Canada’s wheat varietal registration system itself constitutes a
barrier to trade. This system restricts the varieties that may be planted in
western Canada, but has no influence on the importation of any variety for
any purpose other than seeding. Wheat varieties not registered for seeding
can still be imported freely for milling or feeding or any use other than
planting. Most countries other than the United States have similar varietal
registration systems.
Norman406 Keeping the Borders Open
The USITC report stated, again in error, that the Wheat Facilitation
Program had been cancelled. This program, which allows sales of wheat
by U.S. producers to elevators in western Canada, is still in effect.
The USITC also concluded that Canada’s transportation policy
favours the movement of CWB wheat and barley over other grains and
oilseeds, but this is not the case. The railways must operate within a gov-
ernment established revenue cap, but within this cap, they are free to charge
different rates for different commodities. So far, they have chosen not to
do so. The revenue cap applies only to shipments to Thunder Bay or west
coast ports and has no relevance for shipments to the United States. The
USITC report overlooked the fact that CWB owned railway cars were paid
for by prairie wheat and barley producers, not by the Canadian govern-
ment, and that CWB- and government-owned railway cars are both pro-
vided at commercial lease rates for shipments to the United States.
The USITC accuses the CWB of being “an arm of the Government
of Canada.” While we are not quite certain what this is supposed to mean,
by any reasonable interpretation of this phrase it would appear to be quite
clear that the CWB is not “an arm of the Government of Canada.” The
CWB is financed and controlled by western Canadian wheat and barley
growers. It is governed by a 15-member Board of Directors, 10 of whom
are elected directly by wheat and barley growers and 5 are appointed by
the Canadian Government. The USITC also indicated that the Canadian
Government receives “profits” from the CWB. This is clearly not the case,
since CWB revenues, less operating expenses, are distributed to western
Canadian wheat and barley growers in the form of final payments for their
grain.
U.S. GOVERNMENT RESPONSE
On February, 15, 2002, USTR Zoellick announced the conclusion of
the Section 301 investigation and a four-pronged approach to dealing with
the issues raised:407
• to explore a potential WTO challenge.
While the grounds for such a challenge are far from clear, we await devel-
opments.
• to explore possible countervailing duty or anti-dumping duty
investigations.
I can only assume that if reasonable grounds for such investigations ex-
isted, then the North Dakota Wheat Commission would have taken this
step long ago.
• to assess the extent of real access to the Canadian market for
U.S. wheat.
As I have already noted, there are no barriers to the entry of U.S. wheat to
Canada. Canadian importers and milling companies have in the past and
will continue in the future to import U.S. wheat when market conditions
favour such shipments. Canada is always prepared to discuss ways to im-
prove market access for wheat in both directions.
• to seek more stringent disciplines on state trading enterprises
(STEs) in the WTO negotiations.
This search was already an element of the U.S. WTO negotiating position.
The WTO already has disciplines and notification requirements for STEs
and Canada has always been willing to discuss improvements to these
disciplines in the context of concrete trade problems or issues which may
arise from the activities of STEs, but we are not interested in a sterile de-
bate on the “religious issue” of whether STEs are a “good thing” or not.
Finally, what are the prospects for the future? Will this issue ever
be resolved? In my view, this issue is not likely to go away, not even if the
CWB were to disappear one day. I expect that there will be continuing
concern by some U.S. wheat growers so long as there are any significant
imports of wheat into the United States from Canada. Canadian wheat ex-
Norman408 Keeping the Borders Open
ports to the United States currently move by the trainload directly to U.S.
milling and processing facilities. In the absence of the CWB monopoly
control of exports, individual growers in Canada would be more likely to
deliver to U.S. elevators. The June/July 1999 issue of Agricultural Out-
look published by the Economic Research Service of the United States
Department of Agriculture contains an article discussing the economic and
geographic factors influencing U.S./Canadian trade of wheat.
THE UNDERLYING PROBLEM
In my view, there is a real underlying problem in grain trade be-
tween Canada and the United States, but it is not the existence or activities
of the CWB. The real underlying problem is the increasing divergence in
the levels of support being provided to grain growers in Canada and in the
United States. The much higher and ever increasing level of support being
provided to U.S. grain growers is causing significant market distortions to
the long-term detriment of U.S. grain growers. These higher levels of sup-
port are capitalized into land and other assets, driving up their prices, and
making U.S. grain growers less internationally competitive than they could
be. The November 2001 issue of Agricultural Outlook contains a series of
articles dealing with the impacts of U.S. government payments. I expect
that this situation will continue to get worse until the United States finds
some way to get off the “treadmill” of ever higher levels of support to
offset higher asset values which translate into higher costs of production.
REFERENCES
United States Department of Agriculture, Economics Research Service. 2001. Agricul-
tural Outlook.  Washington, D.C. November.
Wilson, William W. and Bruce Dahl. 2003. “Analysis of the Effects of the Canadian
Wheat Board On U.S. Hard Red Spring Wheat”. In Loyns et al, Keeping the
Borders Open. Proceedings of the Eighth Policy Disputes Information Work-
shop. University of Guelph, Texas A&M University and El Colegio De México.
Friesens Printers. Winnipeg. May.

U.S. SECTION 301 INVESTIGATION OF CANADIAN WHEAT TRADING PRACTICES

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