U.S. Agricultural Trade: Canadian Wheat Issues (Chapter Report, 10/16/98,
GAO/NSIAD-99-21).

Pursuant to a congressional request, GAO provided information on
Canadian grain exports to the United States, focusing on the operations
of the Canadian Wheat Board (CWB) and the trade remedies applicable to
the activities of state trading enterprises (STE).

GAO noted that: (1) the CWB is a STE with a monopoly on certain Canadian
grain sales and receives Canadian government subsidies in a number of
direct and indirect ways; (2) the Canadian government also provides
other assistance to its wheat and barley farmers; (3) the CWB's
operating environment is undergoing changes, some of which are expected
to make the United States a more attractive market for Canadian grain;
(4) at the same time, there is a greater presence of U.S. grain
companies operating in Canada, and the CWB is dealing more frequently
with private companies in the sale of Canadian grain; (5) little
information on actual CWB contracts is publicly available; (6) although
U.S. Customs Service and the Department of Agriculture collect a great
deal of information on imports of Canadian grain into the United States,
these data cannot be used to ascertain CWB export prices; (7) the format
that countries use to report on their STEs' activities to the World
Trade Organization has recently been revised; (8) however, U.S.
officials are concerned that it does not go far enough to increase the
openness of the pricing practices of certain STEs, such as the CWB; (9)
trade remedies to combat disruptive or trade-distorting imports under
U.S. trade laws do not treat STEs any differently from other entities
involved in international trade; (10) these U.S. trade laws can address
trade issues such as dumping, actionable subsidies, and surges in
imports; (11) in addition, STE activities may be subject to dispute
settlement provisions under international trade agreements if the
activities are inconsistent with an obligation agreed to by the
government of the STE; and (12) relatively few trade remedy actions have
been taken involving STEs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-99-21
     TITLE:  U.S. Agricultural Trade: Canadian Wheat Issues
      DATE:  10/16/98
   SUBJECT:  Foreign trade agreements
             Foreign trade policies
             Grain and grain products
             Import regulation
             International organizations
             International trade restriction
             Economic growth
             Monopolies
             Farm subsidies
IDENTIFIER:  NAFTA
             GATT
             Canada
             North American Free Trade Agreement
             General Agreement on Tariffs and Trade
             
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Cover
================================================================ COVER


Report to the Honorable
Byron Dorgan, U.S.  Senate

October 1998

U.S.  AGRICULTURAL TRADE -
CANADIAN WHEAT ISSUES

GAO/NSIAD-99-21

U.S.  Agricultural Trade

(711335)


Abbreviations
=============================================================== ABBREV

  ABI - Automated Broker Interface
  AE - accredited exporter
  AWB - Australian Wheat Board
  CBOT - Chicago Board of Trade
  CFTA - U.S.-Canadian Free Trade Agreement
  CFTC - Commodity Futures Trading Commission
  CWB - Canadian Wheat Board
  EC - European Community
  EEP - Export Enhancement Program
  FAS - Foreign Agricultural Service
  GATT - General Agreement on Tariffs and Trade
  HTS - Harmonized Tariff System
  ITC - International Trade Commission
  KCBOT - Kansas City Board of Trade
  MGE - Minneapolis Grain Exchange
  MOU - memorandum of understanding
  NAFTA - North American Free Trade Agreement
  OECD - Organization for Economic Cooperation and Development
  PSE - producer subsidy equivalent
  STE - State trading enterprise
  USDA - U.S.  Department of Agriculture
  USTR - U.S.  Trade Representative
  WTO - World Trade Organization

Letter
=============================================================== LETTER


B-280949

October 16, 1998

The Honorable Byron Dorgan
United States Senate

Dear Senator Dorgan: 

As you requested, we have reviewed issues involving Canadian grain
exports to the United States.  Our review focused on the operations
of the Canadian Wheat Board and the trade remedies applicable to the
activities of state trading enterprises. 

As you requested, we plan no further distribution of this report
until 30 days after its issue date, unless you publicly announce its
contents earlier.  At that time, we will send copies of this report
to the Secretary of Agriculture, the U.S.  Trade Representative, the
Commissioner of Customs, the U.S.  Attorney General, the Secretary of
Commerce, the Chairman of the International Trade Commission,
Canadian government officials, and other interested parties.  We will
also make copies available to others on request. 

This report was done under the direction of JayEtta Z.  Hecker,
Associate Director.  If you have any questions concerning this
report, please contact her on (202) 512-8984.  The major contributors
to this report are listed in appendix VIII. 

Sincerely yours,

Benjamin F.  Nelson
Director, International Relations
 and Trade Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

U.S.-Canadian grain trade has been a source of contentious debate
between the two countries over the past dozen years as Canadian wheat
exports to the United States have increased.  Some U.S.  grain
industry participants and observers have been concerned about this
development, partially because grain sales are handled differently in
the two countries.  In the United States, private grain companies
compete to buy and sell grain.  These grain companies typically
transact their own overseas sales on an individual basis.  In Canada,
the majority of the grain trade is handled by the Canadian Wheat
Board (CWB), a government-backed entity referred to as a state
trading enterprise (STE), to which western Canadian farmers must sell
their wheat and barley for domestic human consumption or export. 

Some critics and U.S.  officials are concerned about the CWB's unique
status as a quasi-governmental entity and its possible effects on
U.S.  grain farmers and sellers in international markets.  Some grain
industry observers say that the CWB engages in unfair trade
practices.  There is also some concern about data limitations and
legal remedies available to the United States to counteract these
practices. 

In response to concerns about the CWB's impact in the international
grain market, Senator Byron Dorgan asked GAO to review some key
issues relative to the CWB.  In response, this report discusses the
following:  (1) CWB operations, government assistance to the CWB and
the Canadian farmer, and ongoing changes to the environment in which
the CWB operates; (2) the availability of data to ascertain CWB
pricing practices, and efforts to increase the amount of data
available; and (3) the nature of trade remedies available to address
the operations of STEs, and the frequency with which these remedies
have been applied to STEs.  In addition, GAO is providing information
on the CWB's role in commodities and futures markets, a summary of
studies on the CWB's effect on the Canadian farmer, and the
applicability of U.S.  antitrust laws to the CWB (see apps.  II, III,
and VII). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

STEs, such as the CWB, are enterprises that are authorized to engage
in trade and are owned, sanctioned, or otherwise supported by the
government.  STEs are legitimate trading entities under the World
Trade Organization (WTO) and are subject to rules established by the
General Agreement on Tariffs and Trade (GATT).\1 The WTO Agreement
requires that STEs purchase and sell their goods solely on the basis
of "commercial considerations," including factors such as quality,
price, market, and transportation.  In addition, countries must
report certain types of information on the operations of their STEs
to the WTO annually to provide members with information to help
assure that STEs operate in accordance with WTO disciplines.\2

The CWB, Canada's fifth largest export earner, was established in
1935 to regulate Canada's grain trade.  It is currently the largest
grain marketing board in the world, handling about 20 percent of the
world wheat and barley trade.  The CWB has a monopoly on certain
Canadian grain sales.  It has statutory authority to acquire all
western Canadian wheat and barley sold for domestic human consumption
or export.  Western Canadian farmers are required to sell their wheat
and barley for domestic human consumption or export to the CWB, which
then markets the commodity in domestic and foreign markets. 
Generally, the CWB pays the farmers an initial payment for their
wheat, sells the wheat, and then may pay the farmers an interim and a
final payment by the end of the marketing year.\3 The Canadian
government backs the CWB operations through the CWB's status as a
crown corporation.\4

Changing rules under trade agreements and increases in Canadian grain
imports into the United States have contributed to concerns about
U.S.-Canadian grain trade over the past 10 years.  The 1989
U.S.-Canada Free Trade Agreement (CFTA), the 1994 North American Free
Trade Agreement (NAFTA), and the WTO agreements modified the rules
regarding U.S.-Canadian grain trade and provided additional dispute
resolution mechanisms to address concerns.  Between 1990 and 1997,
U.S.  imports of Canadian red spring wheat increased by more than
2,000 percent to 1,449,600 tons, and imports of Canadian durum wheat
increased by 57 percent to 427,600 tons. 


--------------------
\1 The WTO was created in 1994 by the WTO Agreement to be the formal
organization that encompasses all disciplines (practices) established
by the GATT.  As an organization, GATT officially ended on December
31, 1995. 

\2 The 1994 Understanding on the Interpretation of Article XVII of
the General Agreement on Tariffs and Trade defines STEs as
"governmental and non-governmental enterprises, including marketing
boards, which have been granted exclusive or special rights or
privileges, including statutory or constitutional powers, in the
exercise of which they influence through their purchases or sales the
level or direction of imports or exports." STEs are also defined in
U.S.  law at 19 U.S.C.  2906(6). 

\3 If the net value of the grain is greater than the initial payment
to the farmers, the farmers receive the difference in interim and/or
final payments. 

\4 A crown corporation, or a semiautonomous government organization,
is used to administer and manage public services in which enterprise
and public accountability are combined. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

The CWB is a state trading enterprise with a monopoly on certain
Canadian grain sales and receives Canadian government subsidies in a
number of direct and indirect ways.  The Canadian government also
provides other assistance to its wheat and barley farmers.  The CWB's
operating environment is undergoing changes, some of which are
expected to make the United States a more attractive market for
Canadian grain.  At the same time, there is a greater presence of
U.S.  grain companies operating in Canada, and the CWB is dealing
more frequently with private companies in the sale of Canadian grain. 

Little information on actual CWB contracts is publicly available. 
Although U.S.  Customs and the U.S.  Department of Agriculture (USDA)
collect a great deal of information on imports of Canadian grain into
the United States, these data cannot be used to ascertain CWB export
prices.  The format that countries use to report on their state
trading enterprises' activities to the WTO has recently been revised. 
However, U.S.  officials are concerned that it does not go far enough
to increase the openness of the pricing practices of certain state
trading enterprises, such as the CWB. 

Trade remedies to combat disruptive or trade-distorting imports under
U.S.  trade laws do not treat STEs any differently from other
entities involved in international trade.  These U.S.  trade laws can
address trade issues such as dumping,\5 actionable subsidies,\6 and
surges in imports. 

In addition, STE activities may be subject to dispute settlement
provisions under international trade agreements if the activities are
inconsistent with an obligation agreed to by the government of the
STE.  Relatively few trade remedy actions have been taken involving
STEs--15 since 1980--with 8 actions involving an export STE and 7
actions involving an import STE. 


--------------------
\5 "Dumping" is generally defined as the sale of an exported product
at a price lower than that charged for a like product in the "home"
market of the exporters or at a price below cost. 

\6 As used in this report, an "actionable" subsidy is a subsidy for
which U.S.  law provides a remedy in the form of an increased or
"countervailing" duty.  Not all benefits that governments confer on
their products are actionable or countervailable subsidies.  Rather,
in general, subsidies must be limited to a specific group of firms or
industries or to a firm's export activities in order to be covered
under the countervailing duty law. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      CWB OPERATIONS AND
      GOVERNMENT ASSISTANCE
-------------------------------------------------------- Chapter 0:4.1

Besides operating as a state-sanctioned monopoly, the CWB receives
Canadian government subsidies in a number of direct and indirect
ways.  The government guarantees the CWB's initial payments to
farmers, finances overseas credit sales, and provides research and
development funding and marketing assistance through the Canadian
International Grains Institute.  Also, the CWB's government backing
allows it to borrow money at favorable interest rates.  In addition,
rail shipment costs for CWB grains are reduced by the government's
provision of hopper cars to the sector. 

Through its status as an STE, the CWB has a system of reimbursing
farmers in multiple payments, rather than in a lump sum at the time
of delivery.  According to the government of Canada, the CWB pays
farmers an initial payment of 70-75 percent of the expected final
return for their grain.  This payment system gives the CWB
flexibility in setting its export prices and protects it from
operating losses due to decreases in market prices. 

The Canadian government also provides other assistance to its wheat
and barley farmers, including payment of the costs associated with
insurance programs and one-time payments that compensate agricultural
landowners for the removal of a long-standing subsidy on railroad
shipments.  In 1996, the combined subsidies for wheat and barley
farmers amounted to $922 million, or 19 percent of production valued
at $4.8 billion.\7

The CWB's operating environment is undergoing change.  Canadian
Parliament Bill C-4, which passed on June 11, 1998, will make a
number of structural changes to the CWB's mandate, including the
establishment of a producer-majority Board of Directors.  Other
changes to the CWB's operating environment include (1) the removal of
a transportation subsidy in 1995, changes to freight charges, and the
privatization of the railcar fleet in 2002, all of which are expected
to make the United States a more attractive market for Canadian
grain; and (2) a reduction in import-oriented STEs to conduct
business with the CWB, compelling the CWB to deal with private
companies more frequently. 


--------------------
\7 Unless otherwise noted, all Canadian dollars have been converted
to constant 1997 U.S.  dollars using a market exchange rate and the
U.S.  gross domestic product deflator. 


      CWB EXPORT PRICING
      INFORMATION IS LIMITED
-------------------------------------------------------- Chapter 0:4.2

Little information is available on CWB sales transactions.  The CWB
discloses limited details about its prices for the wheat and barley
that it sells to its trading partners.  USDA officials believe that
the lack of transparency (openness) in the CWB's pricing methods
provides the CWB with a greater ability to distort trade than is
found among private grain traders.  The CWB states that it reveals as
much about its prices as its competitors in the private sector.  Some
U.S.  government officials and U.S.  farmers believe that
nontransparent CWB prices make it difficult to assess whether the
CWB's practices are consistent with its international obligations
under trade agreements.  The data collected by Customs and USDA,
which include origin, volume, and value of the grain, cannot be used
as part of such an assessment.  This is because the data lack certain
details on the quality of the grain and other specifics of the
transaction. 

Officials from USDA and U.S.  Customs Service are discussing the
possibility of gathering more details on Canadian wheat when it comes
into the United States.  However, USDA acknowledges that it would be
difficult for Customs to collect at the border the detailed
information that would be useful in determining whether the CWB is
engaging in improper pricing, i.e.  pricing that would justify the
use of a trade remedy based on U.S.  law or through the dispute
settlement process available under international agreements.  For
example, the international tariff classification system would have to
be expanded to take into account variation in wheat protein levels. 
The United States is also working through the WTO to increase the
amount of information STEs, such as the CWB, must report on pricing
and other activities.  Thus far, the United States and other
countries' efforts to expand STE reporting requirements on pricing
have had limited success.  The WTO has recently updated its format
for STE reporting to require more information on STE pricing
practices.  However, U.S.  officials believe that the newer format
does not require the level of detail necessary to determine if the
CWB and other STEs are engaging in improper pricing. 


      TRADE REMEDIES HAVE BEEN
      APPLIED TO STE ACTIVITIES
-------------------------------------------------------- Chapter 0:4.3

Some U.S.  grain industry observers have questioned whether trade
remedies under U.S.  law and international trade agreements are
applicable to STEs, such as the CWB.  In fact, a wide range of trade
remedies are available and have been used to address trade issues
involving STEs.  Trade remedies available under U.S.  law to combat
the effects of disruptive or trade-distorting imports do not accord
STEs special treatment or recognition.  Regardless of whether events
or actions giving rise to a trade remedy were caused by STEs, these
remedies may be applied to address trade issues such as dumping of
goods in the U.S.  market, actionable subsidies, or import levels
that injure U.S.  industry.  In addition, because of the
quasi-governmental nature of STEs, their activities may be subject to
dispute settlement procedures under international trade agreements,
if those activities are inconsistent with an obligation agreed to by
the government of the STE. 

GAO found that 15 trade remedy actions have been taken since 1980
involving an STE.  Three of the actions involving an export STE,
including one dumping investigation and two investigations regarding
actionable subsidies, resulted in the United States imposing
additional duties as a remedy.  The United States prevailed in all
four of the GATT dispute settlement procedures it invoked challenging
an import STE's restrictive trade practices.  The United States
believed that these practices had impeded U.S.  exporters' ability to
sell in the foreign market; the GATT dispute panels found that they
violated GATT prohibitions against quantitative restrictions.  The
panel rulings prompted the countries in which the import STEs in
question operated to either remove the restrictions in question or
sign an agreement with the United States to work toward resolving the
problem. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is not making recommendations in this report. 


   AGENCY AND COUNTRY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO requested comments on a draft of this product from USDA, the U.S. 
Trade Representative (USTR), the U.S.  Department of Commerce, the
U.S.  Customs Service, the U.S.  Department of Justice, and the U.S. 
International Trade Commission.  USDA, USTR, and Commerce found the
report to be accurate, fair, and balanced.  In addition, USDA noted
that the calculations in the report on Canadian rail subsidies and
the value of the CWB's lower interest rates constituted new and
useful information.  However, USDA emphasized that the CWB, as the
sole buyer of Canadian wheat for domestic human consumption and for
export, is able to engage in trade-distorting actions.  USDA believes
that GAO did not sufficiently emphasize the CWB's pricing flexibility
due to its practice of making initial payments to its farmers of only
70-75 percent of the expected value of their grain.  GAO believes
that point was sufficiently established in the draft.  However, GAO
did not attempt to quantify the impact of CWB activities on grain
trade. 

GAO received technical comments from USDA, USTR, the U.S.  Department
of Commerce, the U.S.  Customs Service, the U.S.  Department of
Justice, and the U.S.  International Trade Commission.  These
technical comments were incorporated into the report where
appropriate. 

GAO also discussed portions of the draft report with embassy
representatives from Canada and the CWB.  The CWB did not agree with
GAO's observation regarding the CWB's pricing flexibility as compared
to private firms.  Rather, the CWB stated that it has a competitive
disadvantage in obtaining grain because private grain traders know
the CWB's acquisition cost.  GAO has included the CWB's statement in
its discussion of this issue. 

Canada and the CWB also provided technical comments that were
incorporated into the report where appropriate. 


INTRODUCTION
============================================================ Chapter 1

State trading enterprises (STE)\1 have existed for some time and have
been considered legitimate trading entities by the General Agreement
on Tariffs and Trade (GATT) since 1947.  STEs\2 have developed in
various countries for various reasons at different points in history. 
The current Canadian Wheat Board (CWB) was formally established in
1935, after other cooperative-like organizations disbanded.  It is
one of the largest grain traders in the world, and the largest
exporter of wheat and barley to the United States. 


--------------------
\1 STEs are generally considered to be governmental or
nongovernmental enterprises that are authorized to engage in trade
and are owned, sanctioned, or otherwise supported by the government. 
The 1994 Understanding on the Interpretation of Article XVII of the
General Agreement on Tariffs and Trade defines STEs as "governmental
and non-governmental enterprises, including marketing boards, which
have been granted exclusive or special rights or privileges,
including statutory or constitutional powers, in the exercise of
which they influence through their purchases or sales the level or
direction of imports or exports." STEs are also defined in U.S.  law
at 19 U.S.C.  2906(6). 

\2 Two different types of STEs exist in world markets--those that
regulate exports and those that regulate imports of commodities.  In
this report, any references to STEs allude to export STEs unless
specifically stated otherwise. 


   STES ARE ESTABLISHED FOR A
   VARIETY OF REASONS
---------------------------------------------------------- Chapter 1:1

STEs have been formed for various reasons.  For example, the
Australian Wheat Board (AWB) was created in 1939 to help Australian
farmers manage difficulties in marketing wheat during wartime
conditions, while Cyprus' Carrot and Beetroot Marketing Board was
established in 1966 because competition among producers was
depressing the domestic and export prices of carrots and beetroot. 
Generally, a goal of export-oriented STEs is to maximize financial
returns through the regulation of commodity sales from a particular
country or region.  The level of government involvement and overall
size of the STEs' operations vary widely; thus, it is difficult to
generalize about STE operations or motivations on a global basis. 


   PREVIOUS GAO REPORTS ON STES
---------------------------------------------------------- Chapter 1:2

We have already published a number of reports on state trading
issues, including (1) a July 1995 report that provides a brief
summary of trade remedy laws available to investigate and respond to
activities of entities trading with the United States, including
STEs;\3 (2) an August 1995 report on the General Agreement on Tariffs
and Trade/World Trade Organization (WTO) practices that apply to STEs
and the effectiveness of those disciplines to date;\4 and (3) a June
1996 report that focuses on the activities of three STEs, including
the CWB, and their potential capabilities to distort trade in their
respective commodity markets.\5


--------------------
\3 Summary of Trade Remedy Laws Available to Investigate State
Trading Enterprises and Encourage Behavior Consistent With Fair Trade
(GAO/OGC-95-24, July 28, 1995). 

\4 State Trading Enterprises:  Compliance With the General Agreement
on Tariffs and Trade (GAO/GGD-95-208, Aug.  30, 1995). 

\5 Canada, Australia, and New Zealand:  Potential Ability of
Agricultural State Trading Enterprises to Distort Trade
(GAO/NSIAD-96-94, June 24, 1996). 


   CWB HISTORY
---------------------------------------------------------- Chapter 1:3

In Canada, prairie provincial wheat pools were formed in 1924 but
went into temporary receivership after the stock market crash of
1929.  Following the financial hardship faced by farmers during the
Depression, the Canadian government passed the Canadian Wheat Board
Act of 1935, establishing the CWB.  The CWB was also given control of
marketing oats and barley, although oats were removed from the CWB's
purview in 1989. 

The CWB is currently managed by three commissioners, who are
appointed by the government of Canada.  A producer advisory
committee, composed of 11 farmer-elected representatives from the
prairie provinces, provides the CWB with advice on operational
matters.\6 The CWB employs over 500 people and has annual revenues of
over $4.4 billion.\7


--------------------
\6 On June 11, 1998, the Canadian Parliament passed legislation that
will lead to changes in the CWB's corporate structure and operations. 
For more details, see our discussion on changes in the Canadian grain
system, in chapter 2. 

\7 Unless otherwise noted, all Canadian dollars have been converted
to constant 1997 U.S.  dollars using a market exchange rate and the
U.S.  gross domestic product deflator. 


   CWB IS A MAJOR GRAIN TRADER IN
   THE WORLD MARKET
---------------------------------------------------------- Chapter 1:4

Although Canada produced only 5 percent of the world's wheat and 10
percent of the world's barley in 1996, it held a 20-percent share of
the world's wheat export market and about 20 percent of the world's
barley export market in that year (see figs.  1.1 and 1.2.) In 1996,
the United States ranked fourth in the world in both wheat and barley
production, while Canada ranked fifth in wheat and third in barley
production. 

   Figure 1.1:  Share of World
   Exports of Wheat by Country,
   1994-97

   (See figure in printed
   edition.)

Note:  Wheat includes wheat flour; shares based on volume. 

Sources:  Statistics Canada and the U.S.  Department of Agriculture
(USDA). 

   Figure 1.2:  Share of World
   Exports of Barley by Country,
   1994-97

   (See figure in printed
   edition.)

Note:  Shares based on volume. 

Sources:  Statistics Canada and USDA. 

The United States imports more red spring wheat, durum wheat, and
barley from Canada than from any other country.  These imports
constitute a significant share of the U.S.  market.  In crop year
1996-97, about 14 percent of the durum wheat and 7 percent of the red
spring wheat supply in the United States came from Canada.  The
United States imported this wheat in part because of problems with
disease, adverse weather conditions, and a shortfall in domestic
supply.  Also, U.S.  food use of durum has risen 125 percent over the
past 2 decades; thus, as the demand for durum wheat has increased, so
too have U.S.  imports of this wheat from Canada.  The vast majority
of durum wheat, red spring wheat, and barley arrives in the United
States from Canada by rail direct from Thunder Bay, Ontario, and the
Canadian western prairie provinces of Manitoba, Saskatchewan,
Alberta, and the Peace River district of British Columbia.  In 1997,
70 percent of these Canadian grains were shipped by rail, 18 percent
by vessel, and 13 percent by truck. 

For some export sales, the CWB relies on "accredited exporters" (AE),
who are national and multinational companies authorized to purchase
grain from the CWB for resale to customers.  Some of the AEs are
subsidiaries of U.S.-based multinational firms; some of the
transactions that the AEs facilitate involve selling grain to other
subsidiaries of the same company.  Although the majority of the CWB's
sales are made directly to an end user, CWB officials told us that
AEs facilitate all wheat sales to buyers in the United States. 


   U.S.-CANADIAN RELATIONS--GRAIN
   TRADE AND THE CWB
---------------------------------------------------------- Chapter 1:5

With the rise in U.S.  imports of Canadian wheat beginning in the
mid-1980s, U.S.  wheat farmers became increasingly concerned about
what they perceived as Canadian wheat export subsidies and unfair
barriers to U.S.  wheat exports.  U.S.  wheat farmers thought that
Canadian transportation subsidies gave Canadian wheat farmers an
unfair advantage in foreign markets.  Canadian wheat and barley
producers have historically received transportation subsidies that
reduced shipping costs.  U.S.  wheat farmers' market access concerns
centered on Canadian import permits, or license requirements, which
essentially prevented U.S.  farmers from selling their grain to
Canada without a permit.  In addition, the U.S.  government was
concerned that the CWB might be selling its grain in an unfair
manner. 

Specific provisions of the U.S.-Canada Free Trade Agreement (CFTA),
effective January 1, 1989, dealt with several of these aspects of
U.S.-Canadian grain trade.  For example, under the CFTA, Canada
agreed to eliminate Canadian transportation subsidies for
agricultural goods originating in Canada and shipped via West Coast
ports for consumption in the United States.  CFTA called for ending
Canadian import permits for grain pending changes in the comparative
level of U.S.  and Canadian support for producers.  CFTA also dealt
with the pricing of agricultural products, including wheat, providing
that neither the United States nor Canada could export agricultural
goods to the other at a price below the acquisition price of the
goods plus any storage, handling, and other costs.  Differences in
U.S.  and Canadian interpretations of this provision eventually led
the United States to invoke CFTA dispute settlement procedures in May
1992.  The subsequent 1993 CFTA dispute panel decision called for an
audit of CWB pricing.  An audit was conducted and its findings were
reported in December 1993 (see ch.  4 for a discussion of the CFTA
dispute panel decision). 

The Canada-United States Joint Commission on Grains, mandated by a
1994 U.S.-Canadian memorandum of understanding (MOU), released its
final report in October 1995.  Comprised of 10 nongovernment U.S. 
and Canadian officials with equal representation, it was formed to
assist the two governments in reaching long-term solutions to
existing problems in the grains sector.  The report addressed policy
coordination, cross-border trade, grain grading and regulatory
issues, infrastructure, and domestic and export programs and
institutions (see app.  I for a chronology of U.S.-Canadian grain
trade relations). 

While some areas of debate have been resolved, recent events have
shown that difficulties remain in U.S-Canadian relations regarding
the grains trade.  Neither CFTA nor the use of trade remedies has
resolved U.S.  producer concerns about U.S.  access to the Canadian
wheat market, CWB practices, and increasing Canadian wheat imports
into the United States.  Despite CFTA's gradual elimination of all
duties between Canada and the United States by January 1, 1998, and
the removal of Canadian import license requirements in 1995, some
barriers continue to impede trade.  Canada still requires an end-use
certificate and subsidizes grain transportation through its ownership
of railcars, and reciprocal access to grain handling and
transportation systems in the two countries is yet to be achieved. 
In addition, the U.S.  Trade Representative (USTR) remains concerned
that the CWB may be using its monopoly to undercut U.S.  wheat prices
and that U.S.  farmers continue to be hurt by increased Canadian
wheat imports. 

Regarding market access, Canada removed its import license
requirement in 1991 but still requires that U.S.  wheat be
accompanied by an end-use certificate to maintain Canada's varietal
controls and quality standards.  The U.S.  requirement that imports
be accompanied by an end-use certificate is a direct response to
Canada's requirement and will remain in effect until Canada removes
its end-use requirement.  It also serves as a method to prevent
imports from being used in U.S.  foreign aid, export, and credit
guarantee programs.  The Canada-United States Joint Commission on
Grains recommended that both countries remove these requirements. 

Another long-standing issue involves U.S.  wheat exporters' access to
Canada's primary grain elevator system.  Canadian access to U.S. 
elevators, on the other hand, is relatively less impeded.  In
addition, Canada provides its wheat farmers with government railcars
to transport their wheat.  The Canada-United States Joint Commission
on Grains recommended that both countries pursue the long-term goal
of providing reciprocal access to each other's grain infrastructure. 
In January 1998, the United States and Canada announced plans to
implement a pilot program to facilitate U.S.  wheat exports to Canada
that would enable the United States to ship its grain directly to
Canadian grain elevators.\8 The United States is negotiating with
Canada over Canada's current requirement that U.S.  grain be
accompanied by a phytosanitary certificate--an assurance that the
grain is disease free.\9 The United States is also concerned about
the costs of the pilot program and how it will be applied to imports. 

The United States continues to disagree with Canada's interpretation
of CFTA provisions defining the acquisition price of grains and the
decision of the CFTA durum panel.  In her May 1998 testimony before
the Senate Agriculture Committee, the U.S.  Trade Representative
stated that there was a problem with CFTA in this regard and that the
United States may try to revisit this issue in the upcoming 1999 WTO
multilateral trade negotiations involving agriculture.  In March
1998, the United States requested a new audit of the CWB's grain
pricing related to the acquisition price.  Canada agreed to the new
audit but disagreed with the United States on its terms.  Canada
wants to maintain the audit terms both countries agreed to after the
1993 CFTA dispute settlement panel decision.  The United States wants
to (1) deviate from the panel decision by applying a broader
definition of "acquisition price"; (2) expand the audit to cover not
only durum but also spring wheat and barley; and (3) include in the
audit Canadian grain export prices to countries other than the United
States. 

Wheat imports from Canada into the United States have risen since
1990, as shown in figure 1.3.  Since the early 1990s, durum and red
spring wheat imports have increased.  Between 1990 and 1997, Canadian
red spring wheat imports grew by more than 2,106 percent to 1,449,600
tons, while Canadian durum wheat imports have risen by 57 percent to
427,600 tons. 

   Figure 1.3:  U.S.  Imports of
   Canadian Wheat, 1990-97

   (See figure in printed
   edition.)

Note:  "Other" wheat category includes seed (durum and other wheat)
and all wheat other than durum and red spring wheat. 

Source:  U.S.  Census Bureau, imports for consumption. 


--------------------
\8 Currently U.S.  wheat can only enter Canadian elevators on a
case-by-case basis requiring approval from the Canadian Grain
Commission. 

\9 Sanitary and phytosanitary measures are regulations or other
measures taken to protect human, animal, or plant life or health. 
The Agreement on the Application of Sanitary and Phytosanitary
Measures in the 1989-95 Uruguay Round of GATT contains disciplines
(practices) in the use of such measures.  NAFTA contains similar
disciplines. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:6

In our 1996 report on STEs, we developed an economic framework to
assess the capabilities of three STEs, given their relationships to
domestic producers, governments, and foreign buyers.  In this report,
at the request of Senator Byron Dorgan, we look more closely at one
of those three STEs--the CWB--and review a number of issues regarding
its exports to the United States.  We reviewed the following:  (1)
CWB operations, government assistance to the CWB and the Canadian
farmer, and ongoing changes to the environment in which the CWB
operates; (2) the availability of data to ascertain CWB pricing
practices, and efforts to increase the amount of data available; and
(3) the nature of trade remedies available to address the operations
of STEs, and the frequency with which these remedies have been
applied to STEs.  In addition, we are providing information on the
CWB's role in commodities and futures markets, a summary of studies
on the CWB's effect on the Canadian farmer, and the applicability of
U.S.  antitrust laws to the CWB. 

To explore the operations of the CWB and the government assistance
available to the CWB and Canadian farmers, and ongoing changes to the
environment in which CWB operates, we reviewed background documents
on the CWB and the North American grain trade provided by officials
in the Canadian embassy in Washington, D.C., the CWB, the USDA's
Foreign Agricultural Service (FAS), the Department of Commerce, and
USTR.  We also traveled to Canada to gather documents and interview
officials from various agencies within the Canadian government who
are involved with the Canadian grain trade, including Agriculture
Canada, the Department of Foreign Affairs and International Trade,
the Canadian Grain Commission, Finance Canada, the Canadian
International Grains Institute, and Transport Canada.  In addition,
we interviewed officials from the CWB, representatives from the
Canadian railroad industry, and private sector representatives in the
grain trade. 

To learn about the CWB from the U.S.  government perspective, we
interviewed officials from FAS and USTR.  We also travelled to North
Dakota to speak with state government officials, local farmers'
groups, private grain traders, and academics about the impact of
Canadian grain imports on the U.S.  grain industry. 

To learn about the availability of data on CWB pricing practices and
determine the efforts to increase the amount of data available, we
built upon the information we gathered by reviewing the data
collected by the U.S.  Customs Service, the U.S.  Bureau of the
Census, and USDA on Canadian wheat imports.  Specifically, we
obtained Customs' detailed data base on all wheat and barley
shipments from Canada entered from 1992 through 1996.  From Census,
we obtained aggregate import data for 1992 through 1997.\10 We also
obtained information collected and compiled by USDA on the end use of
wheat imported from Canada for the most recent
3 marketing years.  We then reviewed all of the data to determine
what they revealed about Canadian wheat imports.  We requested a
variety of data from the CWB, including transactional data, but were
denied access. 

We also interviewed officials from Customs, Census, and USDA about
their import data.  Our discussions included what procedures they use
for collecting and compiling the data and for ensuring quality
control, how the data are used by government agencies and private
industry, and what the strengths and limitations of the data are.  We
also reviewed the agencies' written procedures and regulations
governing the collection and compilation of the data as well as
internal evaluations of their data programs.  In addition, we relied
on previous GAO evaluations of the systems and processes for
measuring U.S.  trade with other countries. 

To identify efforts to increase the amount of data available we
evaluated whether the WTO has made progress in increasing the amount
of information available on the CWB and other STEs as well as WTO
members' compliance with STE reporting requirements.  We reviewed the
annual reports and minutes of formal meetings of the WTO Working
Party on STEs, and WTO members' STE reporting submissions for
1995-97, as well as USDA and USTR documents.  We also interviewed WTO
Secretariat officials, individual members of the Working Party on
STEs, and USDA and USTR officials.  In addition, we reviewed relevant
documents, including the 1994 Understanding on the Interpretation of
GATT article XVII, which deals with STEs. 

To identify the nature of trade remedies available to address the
operations of STEs, we reviewed relevant U.S.  statutes and documents
published by the International Trade Commission (ITC), the
Congressional Research Service, and GAO.  We also reviewed the
dispute settlement mechanisms within the CFTA, the 1994 North
American Free Trade Agreement (NAFTA), and the WTO.  We reviewed
appropriate provisions of international trade agreements. 

To determine the frequency with which dispute settlement procedures
have been used for matters involving the CWB and other STEs, we
reviewed appropriate provisions of international trade agreements. 
We identified WTO member country STEs; the type of information
available about STEs; and STEs' compliance with the WTO's article
XVII, by reviewing article XVII STE notifications\11 submitted to the
WTO Secretariat from 1995 to 1997.  We also reviewed past GAO work. 
We requested that USTR identify all disputes under international
agreements that involved an STE that had been notified to the WTO. 

To determine the frequency with which U.S.  trade remedy laws have
been applied to matters involving the CWB and other STEs, we reviewed
those laws and spoke with officials at USTR, the ITC, the Department
of Commerce, USDA, the Department of Justice, and the NAFTA
Secretariat.  We obtained a list of STEs that provided notifications
to the WTO Secretariat.  We then asked USTR, the ITC, and Commerce to
search their trade remedy enforcement records for any actions
involving those STEs, going back to 1980.  We asked the agencies to
provide us with a description of the actions and their outcomes.  All
of the agencies responded to our request by identifying trade remedy
actions that, according to their records, had involved STEs.  The
agencies stated, however, that it was difficult to determine
conclusively whether the cases the agencies had identified
represented the entire universe of such matters involving STEs.  The
agencies provided several reasons for this difficulty:  (1) the
voluminous amount of documentation on some types of cases coupled
with an absence of electronic records to facilitate searches; (2) the
possibility that an STE's foreign name translation in a case file
would differ from the translation on our STE list; (3) the fact that
under U.S.  law, STEs as institutions would not be the primary
subject of a trade remedy action; and (4) the fact that the trade
remedy action may not be country or foreign exporter specific; that
is, it may involve imports of a particular product from all sources. 
We also examined Federal Register notices and reports issued by the
agencies on their findings. 

To review CWB participation in U.S.  futures and commodity
markets/exchanges, we met with CWB officials and reviewed CWB
documents concerning CWB objectives in participating in U.S. 
markets.  We also discussed the participation of STEs in these
markets with the U.S.  Commodity Futures Trading Commission (CFTC)
and officials representing the Minneapolis Grain Exchange (MGE), the
Chicago Board of Trade (CBOT), and the Kansas City Board of Trade
(KCBOT). 

To gather information on the CWB's impact on the Canadian farmer, we
reviewed Canadian and U.S.  studies that measured the economic impact
of the CWB and spoke with some of the authors of those studies.  We
also spoke with private grain traders and Canadian farm groups that
represented both general farmers' interests and specific commodity
interests. 

To determine the applicability of U.S.  antitrust law to the CWB, we
interviewed officials at the Department of Justice's Antitrust
Division and the Federal Trade Commission and reviewed the Antitrust
Enforcement Guidelines for International Operations, issued by those
agencies in 1995.  We also reviewed statutes and case law relevant to
the extraterritorial applicability of U.S.  antitrust law. 

We conducted our review from September 1997 to June 1998 in
accordance with generally accepted government auditing standards. 

We requested comments on a draft of this report from the Secretary of
Agriculture, the U.S.  Trade Representative, the Secretary of
Commerce, the Commissioner of Customs, the U.S.  Attorney General,
and the Chairman of the ITC.  We received technical comments from all
six agencies, and incorporated them into the report where
appropriate.  USDA, USTR, and Commerce found the report to be
accurate, fair, and balanced. 

We also discussed the factual content of the report as it related to
the CWB and the Canadian government with embassy representatives from
Canada and with representatives from the CWB.  Canada and the CWB
provided technical comments, which were incorporated into the report
where appropriate. 


--------------------
\10 The Census import data are the official import data of the U.S. 
government. 

\11 WTO members are expected to provide responses, called
"notifications," to questionnaires collecting information about their
STEs.  Ideally, the notifications should provide enough transparency
(openness) about STEs to determine whether or not they are adhering
to GATT disciplines. 


CWB OPERATIONS AND GOVERNMENT
SUPPORT FOR THE GRAIN SECTOR
============================================================ Chapter 2

As an STE, the CWB has certain marketing characteristics and
government support.  These include a monopoly over most sales of
Canadian wheat and barley and pricing flexibility through guaranteed
supply and delayed payments to farmers.  It also enjoys government
guarantees of its financial operations and favorable interest rates
on loans.  Through other programs, the Canadian government provides
additional subsidies to wheat and barley producers.  However, the CWB
faces changes in its structure and operations due to recently
completed legislative reforms.  These alter its corporate governance
and relations to the government.  Additionally, other changes in the
Canadian grain marketing system are underway, including potential
changes in rail regulation, U.S.  investment in the industry, and the
decline of import STEs in other countries. 


   OPERATIONAL CHARACTERISTICS
   OFFER CWB UNIQUE STATUS
---------------------------------------------------------- Chapter 2:1

The CWB has the sole authority to market for export and for domestic
human consumption wheat and barley grown in the western prairie
provinces of Manitoba, Saskatchewan, Alberta, and the Peace River
district of British Columbia.\1 The CWB controls all exports of wheat
and barley products through an export licensing process and directly
markets most of its exports, including those made to import STEs. 
The operating costs of the CWB are deducted from payments made to
producers.  It enjoys pricing flexibility due to its assured supply
of grain and ability to price discriminate.  This assurance of supply
is not absolute, however, as producers are free to plant non-CWB
crops.  In addition, the CFTA established that CWB sales into the
United States could not fall below the acquisition price. 


--------------------
\1 The small quantities of wheat and barley grown outside of this
area are not handled by the CWB.  For example, white winter wheat
grown in Ontario is marketed by the Ontario Wheat Producers Marketing
Board under provincial legislation.  In addition, feed wheat and feed
barley grown throughout Canada can be sold by the producer
domestically.  However, wheat and barley produced in eastern Canada
requires permission of the CWB for interprovincial or export sales. 


      CWB MONOPOLY STATUS
-------------------------------------------------------- Chapter 2:1.1

The CWB reports that its monopoly status as a "single-desk seller" of
western Canadian wheat allows it to extract more money from the world
market on behalf of farmers than would be the case without this
government-mandated status.\2 This status allows the CWB to capture
premiums through price differentiation, a practice in which the CWB
sells grain at differing prices into different markets and to
different customers.  CWB-contracted economic studies have concluded
that the single-desk status of the CWB gives it market power in the
world wheat and barley trade and increases farmer revenue through
price discrimination.  One study\3 found that for 1981-94, the CWB on
average increased wheat revenues by $14.56 per ton, or $289 million
per year when compared to a system of multiple sellers offering wheat
in competition with each other.\4

These premiums represent about 8 percent of CWB wheat revenues for
those years.  A second study found that the CWB increased barley
producer revenues on average by $70.5 million per year (1986 to 1995)
when compared to what they would have received in a system of
multiple sellers.\5 These premiums represent about 15 percent of the
CWB barley revenues for those years. 

In contrast, a study financed by the provincial government of Alberta
concludes that the CWB lacks market power and finds that the Canadian
grain system is more costly than the comparable U.S.  system.\6 The
study concluded that Japan is the only market where a single-desk
premium may exist, and that, based on Japan's share of CWB sales, the
single-desk seller premium is small. 

As a single-desk seller, the CWB has market power and can price
discriminate, according to officials at six grain companies located
in the United States and in Canada.  "Price discrimination" is the
practice of charging a higher price to some buyers and a lower price
to others in order to maximize profits.  CWB contracts include a
provision that stipulates that the grain is for shipment to and
consumption in a specific country.  Grain companies reported that
this stipulation prevents the AEs from competing against each other
on price.  One grain company characterized this as being good for
Canadian and foreign producers but bad for consumers. 

As a single-desk seller, the CWB may also choose to sell quantities
to a certain market that differ from what would be supplied by the
private trade.  Several grain industry officials representing grain
companies, grain consumers, and industry organizations reported that
they believe the CWB withholds grain sales to the United States, with
some citing the sales' political sensitivity.  An implication of
withheld sales is that exports to the United States would increase in
the absence of the CWB.  Representatives of wheat farmers in Canada
and the United States, as well as Canadian government officials, also
believe that grain exports to the United States would be greater if
the CWB ceased to exist. 


--------------------
\2 See appendix III for details concerning the costs and benefits of
the CWB for the Canadian farmer. 

\3 Daryl F.  Kraft, W.  Hartley Furtan, and Edward W.  Tyrchniewicz,
"Performance Evaluation of the Canadian Wheat Board" (Winnipeg,
Canada:  Canadian Wheat Board, Jan.  1996) covers CWB sales of
Canadian hard red spring wheat. 

\4 Unless otherwise noted, all Canadian dollars have been converted
to constant 1997 U.S.  dollars using a market exchange rate and the
U.S.  gross domestic product deflator. 

\5 CWB sales of feed and malting barley are analyzed by Drs.  Andrew
Schmitz, Richard Gray, Troy Schmitz, and Gary Storey in "The CWB and
Barley Marketing:  Price Pooling and Single-Desk Selling" (Winnipeg,
Canada:  Canadian Wheat Board, Jan.  1997). 

\6 Colin A.  Carter and R.M.A.  Loyns, "The Economics of Single Desk
Selling of Western Canadian Grain" (Edmonton, Canada:  Alberta
Agriculture, Food and Rural Development, Mar.  1996). 


      CWB PRICING FLEXIBILITY
-------------------------------------------------------- Chapter 2:1.2

As the sole buyer of most Canadian wheat, the CWB has pricing
flexibility and can deal in long-term contracts.  The CWB has an
assured supply of grain that it does not compete for and, according
to a Canadian government official, acquires the grain from farmers at
about 70-75 percent of the expected final return.\7 This provides the
CWB with a large margin within which to set prices and absorb any
risk from changes in market conditions.\8 The Canadian government
confirms that, within its mandate to maximize returns to producers,
the CWB has a certain latitude in pricing grain to customers.  In
contrast, private grain companies compete to acquire farmer-held
stocks of grains and then compete to market it to buyers.  Their
profits and operations are funded from this margin between the two,
and they encounter considerable risk from changes in market
conditions.\9

CWB officials note that the CWB engages in price discrimination to
benefit from differing market conditions around the world.  Certain
customers may be willing to pay more for CWB grain than other
customers, so the CWB could charge them a higher price.  In turn, the
CWB may be able to lower its price to certain importing countries
without affecting its sales to premium customers.\10 We were not able
to analyze the conditions under which this occurred, since we did not
have access to CWB transactions, which the CWB considers commercially
sensitive. 

CWB pricing flexibility into the U.S.  market was restricted as part
of the CFTA, which went into effect in 1989.  According to the
agreement, sales into the United States could not be for less than
the acquisition price plus the cost of transportation and handling of
the grain.  The United States and Canada disagreed on what
constituted the Canadian acquisition price.  A CFTA dispute
resolution panel determined that the acquisition price is the initial
payment the CWB gives farmers when they deliver their grain (see
ch.  4).  The initial payment is set by the government of Canada in
consultation with the CWB.  However, changes in how the government
establishes the initial payment since the CFTA went into effect may
have increased CWB flexibility in pricing grain headed into the
United States. 

A USTR negotiator of the CFTA recalls that during the 1980s the
initial payment was established close to 90 percent of the expected
final payment to producers.  During the early 1990s, the CWB initial
payments were set at 80 percent while, according to an official of
the government of Canada, the initial payment is now set at between
70 and 75 percent.  We requested data on the expected final payment
to producers from the government of Canada to confirm this trend, but
the request was declined.  According to a Canadian government
official, the decisions on the amount of the initial payment are
considered to be "Advice to Ministers" and thus confidential.  A USTR
official believes that the reduction in the initial payment gives
Canada more latitude in lowering its prices to the U.S.  market. 
This effectively lowers the pricing floor established by the CFTA. 
The government of Canada interprets these changes differently. 
According to government officials, while the events during the 1980s
and early 1990s may well have influenced the subsequent judgments of
those involved in making decisions concerning initial payment levels,
to attribute any trend in government decision making in this area to
the CFTA or the relationship to acquisition prices would be
misleading. 


--------------------
\7 Testimony of Mike Gifford, Director General, International Trade
Policy Directorate, Market and Industry Services Branch, Agriculture
and Agri-Food Canada, before the Standing Committee of the Canadian
Senate on Agriculture and Forestry (Dec.  4, 1997).  According to
Canadian government officials, producers will grow other crops if
they are not satisfied with the performance of the CWB.  Oilseed and
specialty crop areas have expanded in recent years. 

\8 Producers receive an initial payment based on grade and quality
when they deliver grain to a primary elevator and a final payment at
the end of the marketing year after marketing and CWB administrative
costs are deducted.  During the crop year, the CWB may increase the
initial payment if forecasted revenues rise.  The CWB may also make
an interim payment to producers following the end of a crop year but
prior to closing the accounts on the marketing year. 

\9 In addition, with assured supply, the CWB is able to market some
of its grain under long-term contracts.  Canadian government
officials report that the CWB markets very little grain under
long-term agreements at this time. 

\10 USDA has charged the CWB with engaging in noncommercial
activities such as dumping wheat on world markets and undercutting
exporting countries' prices.  See "Non-Commercial CWB Pricing
Activities:  Some Examples of Unfair CWB Practices," Staff Paper
prepared for the Canada-United States Joint Commission on Grains by
the USDA Support Staff (Washington, D.C.:  USDA, Mar.  29, 1995). 
This is reprinted in volume II of the Commission's 1995 Final Report. 


   CANADIAN GOVERNMENT ASSISTANCE
   TO THE CWB
---------------------------------------------------------- Chapter 2:2

The Canadian government provides important financial assistance to
the CWB.  The government has covered CWB wheat and barley pool
deficits on seven occasions over the course of its 63 year history. 
The government of Canada guarantees certain export credit sales of
the CWB and compensates the CWB in case of losses or defaults.  As a
crown corporation,\11 the CWB's financing activities are guaranteed
by the government.  Thus the CWB is able to show net profits on its
financing activities. 


--------------------
\11 A crown corporation, or a semiautonomous government organization,
is used to administer and manage public services in which enterprise
and public accountability are combined. 


      DIRECT CANADIAN GOVERNMENT
      SUPPORT OF THE CWB
-------------------------------------------------------- Chapter 2:2.1

The Canadian government offers direct financial support to the CWB
under certain conditions.  The Canadian government guarantees CWB
initial payments and adjustments to initial payments as paid to
farmers.  In any year that sales revenue is insufficient to cover the
initial payments, including any adjustments to the initial payment,
the government pays the shortfall.  Since the first CWB deficit in
1969, the government has provided monies in 6 other years for
deficits in the wheat and barley pools.\12 The total value of these
transfers for losses in wheat and/or barley marketing operations is
$1.3 billion.\13 See table 2.1 for more details on these deficit
payments. 



                               Table 2.1
                
                  Occurrences of CWB Wheat and Barley
                   Price Pooling Deficits Covered by
                     Government Assistance, 1943-97

                (U.S. dollars in millions (1997 constant
                               dollars))

                                                 Barley
Crop year                  Wheat deficit        deficit  Total deficit
-------------------------  -------------  -------------  =============
1968-69                           $142.9          $35.3         $178.3
1970-71                                0           38.0           38.0
1971-72                                0           12.9           12.9
1982-83                                0            6.9            6.9
1985-86                             23.1          172.0          195.1
1986-87                                0          112.8          112.8
1990-91\a                          749.0            1.0          750.0
======================================================================
Total                             $915.0         $378.9     $1,293.9\b
----------------------------------------------------------------------
Note:  The CWB maintains separate pool accounts for wheat, durum
wheat, barley, and malting barley.  However, in order to simplify the
presentation, we have combined the two wheat accounts and the two
barley accounts. 

\a No pooling deficits have occurred since 1990-91. 

\b Totals may not add due to rounding. 

Source:  Canada's Department of Foreign Affairs and International
Trade. 


--------------------
\12 The CWB experienced deficits that were covered by government
payments in 12 of its 63 years when deficits in the oats pool are
also considered.  Oats are no longer controlled by the CWB and those
payments are not included in our calculations. 

\13 In October 1995, the Canada-United States Joint Commission on
Grains reported that the pool deficits have accounted for 1.1 percent
of the total sales of wheat, durum, feed barley, malting barley, and
oats made by the CWB over the approximately 50 year period when
initial payment guarantees have been in effect. 


      INDIRECT CANADIAN GOVERNMENT
      SUPPORT OF THE CWB
-------------------------------------------------------- Chapter 2:2.2

In addition to direct government support in cases of operational
deficits, the government provides indirect support through guarantees
of CWB borrowings.  These guarantees allow the CWB to borrow in
commercial markets at favorable interest rates.  In parliamentary
testimony, a CWB official estimated that in 1995, CWB borrowing costs
were $30 million lower than if the CWB had borrowed at the rate faced
by a large multinational grain company and $46 million lower when
compared to the normal commercial business rate of borrowing.\14 The
effect of this difference varies over time.  In order to update the
estimated interest savings, we recomputed the savings based on data
provided by the CWB on the interest difference between rates the CWB
posts to investors on its commercial paper and market rates of
commercial paper from highly rated, nongovernment-guaranteed issuers. 
As of December 1997, the annual interest savings on CWB borrowing
were between $9.4 million and $14 million, substantially lower than
the 1995 value. 

The CWB is in a position to profit from the interest rate
differential between government borrowing costs and commercial rates
on behalf of producers.  In addition to enjoying reduced borrowing
costs, the CWB can also earn interest on funds held following a grain
sale but before making final payment to the producers.  During the
interim, the CWB can invest the funds at market rates and earn
interest.  The CWB does not distinguish in its public reporting
between its earnings related to the indirect government support of
below market rates of interest and its earnings from the reinvestment
of sales revenues on behalf of producers.  The latter earnings do not
represent a benefit of the CWB since individual producers could also
have invested the revenues at market rates if the CWB paid them at
the time of sale.  In 1997, the net interest from both of these
sources was reported by the CWB to be about $61 million, nearly
double the CWB's $34 million in administration costs.\15

In addition to the contributions of the government to the CWB's
operational borrowing, the government also provides guarantees for
export credit sales.  The government of Canada provides export credit
guarantees for government buyers of CWB wheat through the Credit
Grain Sales Program.  As of March 1998, the CWB had outstanding loans
to foreign countries of $4.7 billion.  At the end of the 1997
marketing year, the CWB accounts receivable from foreign customers
was $4.6 billion.  Of those loans, only
3.6 percent were classified as current, with 83 percent rescheduled,
9.1 percent overdue, and 4.5 percent subject to a Paris Club
rescheduling.\16 In certain cases, the government of Canada
negotiates debt relief agreements with nations as do other exporting
countries under the Paris Club process.  Where there has been a
rescheduling, this occurred for reasons of national policy, including
reasons related to humanitarian concerns.  In cases where a country
with outstanding CWB exposure under the Credit Grain Sales Program
receives concessional (favorable) treatment, the government of Canada
makes up the difference owed to the CWB by the debtor country.  For
the CWB, both the principal and the interest are guaranteed by the
government.  Over the last 6 years, the government has reimbursed the
CWB $918 million for lost principal and interest under Paris Club
debt relief. 

The Export Development Corporation, another Canadian crown
corporation, provides export insurance and financing services for
export sales; for example, providing insurance against the risk of
nonpayment by a foreign bank in export transactions involving a
letter of credit.\17 The Export Development Corporation does not
release information by commodity for reasons of commercial
confidentiality; thus, we are unable to report on what share of its
business involves CWB exports.  Public reporting of government export
finance subsidies is limited to the aggregate costs of the negotiated
debt relief that is published in Canada's Main Estimates.  The
structure of Canadian credit guarantees by commodity or by nation is
not released by the government to the public or to GAO for reasons of
commercial confidentiality. 

The government's support of the CWB is supplemented by the fact that
the CWB is not taxed on its activities.  The CWB is exempt from tax
on its income and capital because it is a crown corporation.  The
returns paid to the farmers are taxed as regular income. 


--------------------
\14 Testimony of Lorne Hehn, Chief Commissioner of the CWB, before
the Standing Committee of the Canadian House of Commons on
Agriculture and Agri-Food (Dec.  12, 1995). 

\15 The CWB declined to provide us with any information on the
composition or values of the components of "net interest" beyond what
is available in the CWB's annual report, due to its confidentiality. 

\16 The Paris Club is an informal group of creditor countries that
meets, as needed, to negotiate debt rescheduling and relief efforts
for public or publicly guaranteed loans.  In addition to the 18
countries that regularly participate in the Paris Club, other
countries are invited to the negotiations on an ad hoc basis if they
hold a significant share of the debt being discussed. 

\17 A letter of credit is a financial document issued by a bank at
the request of the consignee guaranteeing payment to the shipper for
cargo if certain terms and conditions are fulfilled. 


   CANADIAN GOVERNMENT ASSISTANCE
   TO THE WHEAT AND BARLEY
   PRODUCERS
---------------------------------------------------------- Chapter 2:3

The Canadian government also provides other subsidies to the grain
sector through income support policies, income and crop insurance,
and provision of railroad hopper cars.  While Canadian government
support for wheat and barley is substantial, it has fallen
significantly in the last several years. 

Many nations, including Canada and the United States, support their
agricultural producers through direct and indirect assistance and
subsidies.  The government of Canada provides an annual estimate of
this support for wheat and barley.\18 The reported Canadian subsidies
include costs associated with insurance programs\19 for farmers;
one-time payments that compensate agricultural landowners for the
removal of the long-standing subsidy of railroad shipments of western
agricultural products; other federal government expenditures on
research and development, marketing, and promotion; and subsidies
provided by provincial governments.  In 1996, the combined subsidies
for wheat and barley amounted to $922 million, or 19 percent of
production valued at $4.8 billion.  (See table 2.2 for the breakout
by category.) This reflects a substantial reduction from 1990, when
the combined subsidies for wheat and barley amounted to $3.2 billion,
or 68 percent of production valued at $4.7 billion. 



                               Table 2.2
                
                 Canadian Wheat and Barley Subsidies in
                                  1996

                                                       U.S. dollars in
                                                        millions (1997
Government sectoral subsidies                        constant dollars)
--------------------------------------------------  ------------------
Insurance                                                       $162.9
Payments for end of rail subsidies                               470.3
Other federal subsidies                                          117.0
Provincial government subsidies                                  172.0
======================================================================
Total                                                           $922.2
----------------------------------------------------------------------
Source:  OECD. 

Moreover, the payments to landowners for the end of Canada's subsidy
for the transport of western grain ended with the 1996 payments. 
Thus, according to a Canadian official, for 1997 Canada projects that
the reported subsidies will be about half of the 1996 rate and will
be 10 percent of the farmgate value of production. 

The subsidy data provided by Canada are, however, incomplete, as
several government subsidies are not included.\20 These consist of
the previously discussed lower interest loans of the CWB and
government reimbursements for losses on credit sales, as well as
government support of the Canadian International Grains Institute. 
In addition to these excluded CWB subsidies, Canadian government data
also exclude the value of government-provided hopper railcars that
are supplied to transport prairie grains. 

The government of Canada acquired 13,120 hopper cars during the 1970s
and early 1980s, with 12,780 now in service.  According to a
Transport Canada official, these cars are an indirect subsidy to
western grain producers, because producers are not charged for their
services.  This subsidy applies to all prairie grains, including the
CWB grains.  In addition to the federal government-owned hopper cars,
the government leases another 1,982 hopper cars, and two provincial
governments contribute another 1,973 cars.  In total,
government-provided cars constitute about two-thirds of the 25,000
grain cars in Canada.\21

The government of Canada does not have an estimate of the subsidy
value of the government-owned and -leased cars that it provides to
the western grain industry.  We estimate that the government grain
car fleet, if procured through private sector leases, would cost
between $61 million and $68 million per year.  This subsidy benefits
all western grain producers, including barley and wheat producers. 
The proportion of this subsidy accruing to wheat and barley producers
is about 64 percent, so the subsidy to wheat and barley producers is
between $39 million and $44 million.\22


--------------------
\18 Canada submits data on its agricultural policies to the
Organization for Economic Cooperation and Development (OECD).  These
are included in the OECD's computation of the "producer subsidy
equivalent" (PSE).  The PSE is an indicator of the value of monetary
transfers to agricultural production from consumers of agricultural
products and from taxpayers resulting from a given set of
agricultural policies in a given year. 

\19 For example, the Canadian government established a program to
stabilize farmers' net income under the Net Income Stabilization Act. 
The program allows farmers to make contributions to individual
accounts, which are matched by the federal and provincial
governments.  Producer deposits earn a 3-percent interest bonus over
and above the competitive rates.  When income is low, the program
triggers farmer withdrawals from their accounts. 

\20 The OECD data submissions do not include indirect subsidies
related to the issuance of credit. 

\21 Hopper cars purchased and owned by the CWB are not included in
the subsidy calculations. 

\22 The annual rental value of the railcars was based on recent,
long-term (2 to 5 years) lease rates available in the North American
railcar rental market.  Three leasing companies were contacted for
estimates of the rental value of grain hopper cars of the same size,
age, condition, and terms of maintenance as those in the CWB fleet. 
Railcar maintenance is not provided by the government.  The
proportion of the estimated subsidy attributed to wheat and barley is
based on Agriculture Canada apportionment of other government
subsidies among different western grains. 


   CANADIAN GRAIN SYSTEM IS
   UNDERGOING CHANGES
---------------------------------------------------------- Chapter 2:4

Changes to the Canadian grain system are ongoing, and several events
have the potential to alter the U.S.-Canadian grain trading
environment.  The Canadian government has recently enacted
legislation that alters the operational structure of the CWB.  Also,
recent changes in government subsidies for the transportation system
and proposed further deregulation may have an impact on grain flows
to the United States.  Meanwhile, increasing foreign investment and
consolidation of the grain distribution and handling system in
Canada, as well as privatization of grain import functions by many of
the CWB's customers, are changing the CWB's operating environment. 


      LEGISLATIVE CHANGE TO THE
      CWB'S MANDATE
-------------------------------------------------------- Chapter 2:4.1

A law to amend the Canadian Wheat Board Act of 1935 was passed by the
Canadian parliament on June 11, 1998.  This law, known as Bill
C-4,\23 provides for a number of changes to the CWB in the areas of
corporate governance and operational flexibility (see table 2.3),
although it is too early to speculate about the legislation's effects
on Canadian farmers and the Canadian grain system as a whole.\24 Bill
C-4 was first put before the Canadian House of Commons on September
25, 1997, after more than
2 years of consultation with farmers and the Canadian grain industry. 
The bill builds on the principle of increasing direct producer input
into the priorities and operations of the CWB while retaining the
reporting mechanisms that allow the Canadian government to provide
the CWB with financial guarantees and monopoly exporter status. 



                                    Table 2.3
                     
                       Comparison Between the 1935 Canadian
                      Wheat Board Act and the 1998 C-4 Bill

Provision           Canadian Wheat Board Act       Bill C-4
------------------  -----------------------------  -----------------------------
Status              CWB qualifies as an agent of   CWB ceases to be an agent of
                    Her Majesty and a crown        Her Majesty or a crown
                    corporation                    corporation

Governance          Consists of three to five      Consists of a part-time, 15-
structure and       commissioners appointed by     member board of directors (10
operations          the government                 producer-elected
                                                   representatives and 5
                                                   government appointees,
                                                   including a full-time
                                                   President; the board also
                                                   designates a chairperson)

                                                   The board may authorize cash
                                                   purchasing, expedited
                                                   adjustment payments, early
                                                   pool cash-outs, negotiable
                                                   producer certificates, and
                                                   use of modern risk management
                                                   tools


Monopoly            Holds monopoly on wheat and    No change
                    barley marketed for export
                    and domestic human
                    consumption

Contingency fund    None                           Establishes a producer-
                                                   funded contingency fund to
                                                   provide financial support
                                                   for
                                                   certain operations

Initial payments    Adjustments to initial         Eliminates government
                    payments guaranteed by the     guarantee on adjustments to
                    government                     initial payments; the
                                                   contingency fund may be used
                                                   to guarantee adjustments

Borrowing           Repayment with interest of     No change
                    loans and advances guaranteed
                    by the government

Pool period         Is defined as a crop year      Is defined as any period(s)
                                                   not exceeding 1 year in total
--------------------------------------------------------------------------------
Note:  The inclusion and exclusion clauses that would allow the board
to add or remove crops from the CWB's jurisdiction did not pass. 
Under Bill C-4, no changes to the CWB's marketing jurisdiction can be
made without first gaining approval from producers. 

Source:  GAO analysis of Canadian legislation. 

A key provision in the new law replaces the CWB's commissioner
structure of management with a President and board of directors.  Ten
representatives on the 15-member board will be directly elected by
producers; 5 board members, including the President, will be
government appointees.  Since the directors will not be elected until
later this year, the new management structure of the CWB is unlikely
to be in place in time to affect this year's sales policy.  Under
Bill C-4, the board has numerous administrative powers, including the
authority to designate its own chairperson; determine the salaries of
the directors, chairperson, and President; and review the performance
of the President.  Furthermore, all directors will have full access
to information about CWB operations, including audited financial
statements; they will also be able to review the efficiency of the
CWB with respect to grain sale prices, price premiums achieved, and
operating costs. 

Bill C-4 also grants the CWB the ability to buy grain and reimburse
producers for grain on more flexible terms.  The CWB can now offer
new payment options for farmers and enhance producers' cash flows.\25
For instance, the CWB will be able to close pool accounts before
January 1 and thereby make final payments to producers before the
beginning of the calendar year.  These actions will be at the
discretion of the new board. 


--------------------
\23 Now known as "Statutes of Canada 1998, Chapter 17."

\24 See appendix III for a summary of studies on the effect of the
CWB on Canadian farmers and comments from some farmers' groups on
this effect. 

\25 Currently, the CWB is a participant in the U.S.  futures
exchanges for grain and currency.  See appendix II for a discussion
of this participation. 


      CHANGES IN CANADIAN
      TRANSPORTATION SYSTEM
-------------------------------------------------------- Chapter 2:4.2

Canadian wheat and barley producers have historically received
transportation subsidies that reduced shipping costs.  The direct
subsidies paid to the railroads under the 1983 Western Grain
Transportation Act peaked at $925 million in 1986-87 and declined to
$445 million in 1994-95, their last year.  The subsidy, since the
CFTA in 1989, did not apply to shipments to the United States from
Canadian west coast ports, but to shipments traveling overseas and to
the United States through Thunder Bay, Ontario.  The cash subsidy
ended in 1995 with its elimination due to internal budget constraints
and Canada's need to meet its obligations under the WTO agreements. 
With the removal of the subsidy in 1995, freight rates were capped
until at least the year 2000.\26 Owners of prairie land received a
$1.2-billion payment paid out in 1995-96 to compensate them for the
removal of the subsidy.\27

The CWB expects the end of the grain transportation subsidies to make
the United States a more attractive export market.\28 According to a
CWB official, the shipping costs of moving grain to Canadian coastal
ports more than doubled when the subsidy ended, while costs to ship
to the United States were left unchanged.  The observed impact of the
removal of the subsidies has been obscured by concurrent factors that
have influenced export volumes and destinations.  The CWB official in
charge of U.S.  marketing explained that at the same time the end of
the rail subsidies made the United States a more attractive market,
the decline of U.S.  usage of the USDA's Export Enhancement Program
was working in an offsetting fashion, making the United States a less
attractive market.\29

According to a Canadian transportation official, it is too soon after
the changes in the rail subsidy to see the effect, but Transport
Canada anticipates the changes will lead to greater shipments to the
United States or increased Canadian grain processing. 

During the same period in which the government rail subsidies ended,
the CWB changed the way it computes the freight charges that it
deducted from the payments it made to individual producers when they
delivered their grain.  This change in the pooling points for
computing freight rate changes raised the shipping costs of grain for
producers in the eastern prairies, making the United States a more
attractive market.  The impact of the subsidy elimination and of the
CWB changes in freight charges is estimated to have a significant
impact on the Canadian exports to the United States.  The Producer
Payment Panel, a Canadian government-appointed group representing
industry, government, and academics, used an economic model of
Canadian agriculture to estimate the impact.  The panel estimated
that the two changes would increase export shipments of wheat to the
United States by 46 percent and barley by 44 percent.\30 This assumed
that commodity flows are allowed to respond to market signals and do
not face U.S.  border restrictions or diversion by the CWB. 

The government of Canada gave notice in 1997 that by 2002, the fleet
of government-owned rail hopper cars would be privatized.  The
privatization of these hoppers is expected to change the
attractiveness of shipment to the U.S.  market relative to shipments
to Canadian ports in a way reminiscent of the impact of ending the
direct transportation subsidies.  Currently, railcars are provided to
the industry without cost\31

for rail movements east, north, or west, but charges are levied if
the cars are used for shipments to the United States.  According to a
Canadian rail manager, the application to rail shipments of full
costs for the railcars will make it relatively cheaper to move grain
to the United States than to port positions once privatization takes
place. 

Recently, the Canadian government began a review of the grain
handling and transportation system, with completion scheduled by the
end of 1998.  The grain review secretariat describes its scope as
comprehensive, covering all handling and transportation actions
between the farm bin and the loading of vessels for export.  The
objectives of the review are to ensure that the Canadian system meets
expectations of customers; maximizes system efficiency,
competitiveness, and capacity utilization; provides
cost-effectiveness; promotes necessary investment; and establishes
roles, responsibilities, and accountability for each system
participant.  A Montana State University study reviewed changes
underway in the Canadian grain handling and transportation system and
concluded that any reduction in freight costs due to system
improvements is unlikely to fully offset the large increase in
shipping costs due to the end of the direct subsidies and change in
pooling costs.\32 This suggests that changes in the transportation
system will provide increased economic incentives for Canada to ship
to the U.S.  market.\33


--------------------
\26 The rates can be adjusted for inflation and a partial reduction
in cost due to branch line abandonment. 

\27 The $1.2 billion payment was treated as capital rather than
income for tax purposes, so the effective value of the subsidy was
about $1.7 billion, according to a Canadian official.  An additional
one-time adjustment assistance fund of $224 million was established
to partially offset other changes in the transportation system. 

\28 This view is shared by academic researchers.  See Demcey Johnson
and William W.  Wilson, "Canadian Rail Subsidies and Continental
Barley Flows:  A Spatial Analysis," Logistics and Transportation
Review (Mar.  1995).  The Western Grain Transportation Act
elimination may also affect livestock production and trade; the ITC
calculated that the maximum effect of a drop in feed grain prices in
the Canadian prairies due to the elimination of the Western Grain
Transportation Act would result in a 1 to 2 percent increase in beef
supply and an equivalent 3 percent increase in Canadian beef exports
to the United States.  See Cattle and Beef:  Impact of NAFTA and URA
on U.S.  Trade, ITC publication 3048 (July 1997). 

\29 The Export Enhancement Program raised U.S.  domestic prices for
grain above world prices, which made the United States an attractive
destination for Canadian grain.  For discussions of this
relationship, see Kenneth Hanson, Stephen Vogel, and Sherman
Robinson, "Sectoral and Economywide Impacts of Eliminating the Export
Enhancement Program" (Washington D.C.:  USDA, Economic Research
Service, Nov.  1995); and Richard Gray and Bruce Gardner, "The Impact
of Canadian and U.S.  Farm Policies on Grain Production and Trade,"
in Canada-United States Joint Commission on Grains, Final Report,
Vol.  II (Winnipeg, Canada, and Washington D.C.:  Oct.  1995). 

\30 "Delivering the Western Grain Transportation Act Benefit to
Producers:  Technical Appendix," Producer Payment Panel (government
of Canada:  June 1994). 

\31 The government does not pay for maintenance of the railcar fleet. 

\32 Linda M.  Young, "Changing Canadian Grain Policies:  Implications
for Montana's Grain Industry," Northern Plains and Rockies Center for
the Study of Western Hemisphere Trade, Policy Issues Paper No.  1
(Bozeman, Montana:  Montana State University, undated). 

\33 Recent rail mergers are improving the links of the Canadian rail
system to ports on the U.S.  Gulf Coast.  This may facilitate exports
of Canadian grain through U.S.  ports. 


      OTHER CHANGES TO THE CWB'S
      OPERATING ENVIRONMENT
-------------------------------------------------------- Chapter 2:4.3

U.S.  companies have been investing more heavily in the Canadian
grain system, both in new infrastructure and the commercial
operations of the system, in recent years.  This shift in ownership
reflects U.S.  business' interest in the Canadian grain system.  For
example, officials at ConAgra, Inc., told us that their company has
invested in terminal operations in western Canada; and
Archer-Daniels-Midland purchased a 43-percent share of a Canadian
grain company, United Grain Growers.  This change means the CWB
interacts on more levels with U.S.-based companies within Canada. 

Historically, the CWB completed a lot of business on a state-to-state
basis, especially with nonmarket economies, such as China; this trade
involved working with other STEs.  The decline of import-oriented
STEs in other countries has changed the way the CWB does business
with these countries, however.  While some countries, such as China,
still conduct business with the CWB through an STE, the majority of
the CWB's sales involves private companies.  According to CWB
officials, sales to other STEs now only comprise 10 to 15 percent of
their entire business; at one time, this figure was as high as 35
percent.  A Canadian farmers' organization noted that private
entities tend to prefer trading with other private entities as
opposed to STEs; so the CWB increasingly uses its AEs to facilitate
transactions with these private companies. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:5

As an STE, the CWB receives direct and indirect government support,
and it has some flexibility in setting its export prices.  Moreover,
wheat and barley producers also enjoy other government subsidies. 
The CWB faces structural changes due to recently completed
legislative reforms, and other changes in the Canadian grain
marketing system are underway; however, it is unclear how these
changes will affect the way that the CWB conducts its business. 


   AGENCY AND COUNTRY COMMENTS
---------------------------------------------------------- Chapter 2:6

We received technical comments from USDA, USTR, ITC, the government
of Canada, and the CWB on a draft of this chapter.  We incorporated
their suggestions where appropriate. 


CWB EXPORT PRICES HAVE LIMITED
TRANSPARENCY
============================================================ Chapter 3

The United States collects extensive information on imports of
Canadian grain, including the value of each shipment entering the
United States, but because this information lacks important details
on such grain aspects as quality, it reveals little about the CWB's
prices.  The CWB discloses only limited information about its prices
for the wheat and barley that it sells to its trading partners.  U.S. 
officials believe that the lack of transparency in the CWB's prices
may provide it with more flexibility than is found among private
grain traders.  The CWB states that it reveals as much about its
prices as its competitors in the private sector.  U.S.  government
officials and U.S.  farmers believe that nontransparent CWB prices
make it difficult to assess whether the CWB's practices are
consistent with its international obligations under trade agreements. 
Officials from USDA and Customs--agencies that gather import
data--are discussing the possibility of collecting more details on
Canadian grain prices; however, they acknowledge that much of the
information necessary to determine pricing practices would be
difficult for Customs to readily collect at the border.  The United
States is also working through the WTO to increase the amount of
information STEs, such as the CWB, must report on pricing and other
activities.  Thus far, the United States' and other countries'
efforts to expand STE reporting requirements on pricing have had
limited success.  For example, while the WTO has recently introduced
a new format for STE reporting that requires more information on STE
pricing practices, that format does not go as far as the United
States would like in increasing the pricing transparency of STEs such
as the CWB. 


   CWB PROVIDES LIMITED
   INFORMATION ON ITS EXPORT
   PRICES
---------------------------------------------------------- Chapter 3:1

The United States and other grain trading nations, and members of the
U.S.  grain industry, are concerned that without greater
transparency, the CWB may be able to price its grain exports
unfairly.  The CWB makes public some aspects of its pricing methods,
such as its use of prices on U.S.  grain markets as the basis for
sales into the United States.  However, the CWB declines to reveal
other important information, such as the actual contract prices for
its sales to foreign grain buyers.  The nontransparency makes it
difficult for farmers to review CWB operations or to identify
contract prices for individual sales.  These contract prices could be
useful in determining whether the CWB is engaging in pricing
practices for which a trade remedy would be available, either through
dispute settlement procedures under international agreements or
through U.S.  trade law.  The CWB has recently made its contract
records available to economists performing reviews of the CWB's
marketing performance under contracts with the CWB. 

The CWB and the government of Canada defend the lack of full price
transparency by noting that the CWB behaves like other private sector
grain companies that also do not reveal their sales prices.  The CWB
believes that it should not be held to higher pricing disclosure
standards than its competitors in the private sector.  The CWB
reports that revealing transactional data violates its
confidentiality agreement with its customers. 


      CWB PRICING
-------------------------------------------------------- Chapter 3:1.1

Some aspects of CWB pricing are better known than others.  The CWB
allocates sales between Canada, the United States, the Caribbean and
Latin America, Europe, the Middle East, the former Soviet Union, and
the Asia-Pacific area based on expected returns, using different
pricing strategies in different markets.  According to CWB officials,
prices for sales into the Canadian and U.S.  markets are based on the
trading values of grain on the MGE, adjusted for commercial freight. 
During hours when the MGE is closed, the price is based on the prior
day's closing price.  The CWB sends its daily mill closing price to
all mill customers, and it is published in several publications. 
According to the CWB, the objective of this strategy is to assure
that Canadian domestic millers have grain prices that are consistent
with what the wheat price would be in an open market.  A Canadian
grain company confirmed that sales to Canadian consumers are based on
the MGE prices.  The CWB's domestic sales practices have created
substantial domestic price transparency, although quantity
information is only provided on an aggregate annual basis. 

The CWB established a program that provides daily price quotes based
on the MGE's futures and cash markets for Canadian farmers wishing to
market directly to the United States.  These prices are posted daily
for CWB producers.  Without access to CWB transactional data, we were
not able to confirm that sales into the United States were at the
published prices.  Several U.S.  companies we spoke with reported
that the CWB appeared to use prices based on the MGE. 

CWB sales to other markets are less transparent, with the CWB
reporting that sales reflect conditions of supply and demand in the
various export markets.  The CWB publishes daily export prices for
its grains that are available at various port locations along the St. 
Lawrence Seaway and in-store at Vancouver, British Columbia. 
According to CWB officials, these "card" prices represent the prices
paid by the top-paying customers for top grain and represent 10-12
percent of CWB sales volume.  Of the 1.7 million-1.9 million tons
sold at "card" prices, about 1.4 million tons were sold to Japan.  In
other cases where grain purchases are done through public tender,
similar transparency is achieved.  Remaining CWB sales are
nontransparent. 


      VIEWS OF INTERESTED PARTIES
      ON CWB TRANSPARENCY
-------------------------------------------------------- Chapter 3:1.2

There are mixed views on CWB price transparency.  Some U.S. 
government officials and U.S.  farmers believe that nontransparent
CWB prices make it difficult to assess whether the CWB's practices
are consistent with its international obligations under trade
agreements.  Representatives of the Western Canadian Wheat Growers
Association reported that the lack of transparency hampers their
ability to evaluate the performance of the CWB as their grain
marketer.  Moreover, critics of the CWB believe that it is erroneous
to compare a government-sponsored monopoly with a private company. 
In parliamentary hearings, some farmers testified that they do not
trust the CWB, which they believe lacks transparency and
accountability, and advocate that the Auditor General of Canada be
the auditor of the CWB.\1

Officials at USDA emphasize that U.S.  export prices are more readily
available than those of Canada and other exporters.  As an example,
they cite an analysis of reported sales and export prices published
by the International Grains Council that they prepared for the
Canada-United States Joint Commission on Grains.  They found that for
a study period during the early 1990s, there were over 1,000 entries
for the United States, 220 for the European Union, 71 for Canada, 44
for Argentina, and 11 for Australia on reported sales of grain and
products. 

Several grain industry experts believe that differences in price
transparency between the U.S.  and Canadian systems may give the CWB
strategic advantages when compared to private grain traders.  Studies
prepared for the Canada-United States Joint Commission on Grains
highlighted differences in price transparency between the grain
systems of the two countries.  According to one analysis, private
export and domestic grain pricing in the United States is done in a
transparent manner, with government-subsidized export sales also open
to public view, while in Canada the prices of export sales by the CWB
are closely held, though the price of grain in the domestic Canadian
market is transparent.\2

This difference in transparency between the U.S.  and Canadian
pricing practices places U.S.  firms at a strategic disadvantage when
competing with the CWB.  Another Commission analysis concluded that
the single-desk seller, with more knowledge of pricing behavior by
U.S.  firms, can win more bids and can expect to earn a higher
profit.\3

In comparing the CWB with private firms, the CWB is further benefited
by its monopoly sourcing requirement.  Because it does not compete in
procuring grain, it has the ability to undertake longer contracts and
has a larger margin between the price at which it acquires its
product and the price it asks for its grain.  This advantage in
sourcing gives the CWB considerable flexibility and latitude in
pricing in comparison with private firms.  The CWB, however, disputes
this and believes that it may have a competitive disadvantage in
grain procurement since private traders know the CWB acquisition cost
and can use this information as a competitive advantage over the CWB. 


--------------------
\1 Report on Bill C-4, Standing Committee of the Canadian Senate on
Agriculture and Forestry (May 14, 1998).  Recent Canadian legislation
permits the Auditor General to conduct an audit of the accounts and
financial transactions of the CWB. 

\2 Martin Abel, "A Comparison of the U.S.  and Canadian Marketing
Systems for Wheat and Barley:  Transparency, Differential Pricing,
and Monopolistic Behavior," Canada-United States Joint Commission on
Grains, Final Report, Vol.  II (Winnipeg, Canada, and Washington,
D.C.:  Oct.  1995). 

\3 William W.  Wilson, Demcey Johnson, and Bruce Dahl, "Pricing to
Value:  U.S.  Analysis and Issues," Canada-United States Joint
Commission on Grains, Final Report, Vol.  II (Winnipeg, Canada, and
Washington, D.C.:  Oct.  1995). 


   EFFORTS TO INCREASE CWB PRICING
   TRANSPARENCY
---------------------------------------------------------- Chapter 3:2

U.S.  concerns that the CWB has an unfair pricing advantage have led
to efforts to increase the transparency of CWB pricing practices. 
USDA and Customs officials are discussing the possibility of
collecting more detailed price information on Canadian wheat imports. 
The data that Customs currently collects on Canadian grain, as well
as on all other imports, lack the transactional detail necessary to
be useful in determining whether the CWB engages in pricing practices
for which a trade remedy may be available.  For example, this
information could be important to the United States in determining
whether the CWB's exports to the United States are priced below the
acquisition price, and thus, not consistent with Canada's obligations
under CFTA and NAFTA.  However, given the limited availability of
detailed contract information, USDA officials acknowledge that
expanded data collection at the Canadian border would be of only
limited benefit in revealing CWB pricing practices, because much of
the information necessary to determine these practices cannot be
readily collected by Customs.  The United States is also working
through the WTO to increase the amount of pricing information the CWB
and other STEs are required to submit in notifications to the WTO on
their activities.  So far, the United States has had limited success
in achieving this objective.  The WTO has changed its STE reporting
format to include more information on pricing, but the United States
does not believe that the changes are sufficient to determine if the
CWB and other STEs are engaging in improper pricing. 


      GRAIN IMPORT DATA ARE
      INSUFFICIENT TO DETERMINE
      CWB PRICING PRACTICES
-------------------------------------------------------- Chapter 3:2.1

In general, the information on the value of imported merchandise
collected by Customs on the entry forms submitted by importers is
used to calculate duties\4 as well as to compile U.S.  trade
statistics (see app.  IV for a detailed discussion of processes for
collecting and compiling import data).  However, most imports from
Canada, including wheat and barley, are duty free under NAFTA. 
Therefore, the value information collected by Customs on Canadian
wheat and barley shipments is used only for statistical purposes. 
Census aggregates this value information to show the total value of
wheat and barley entering the United States from Canada.  Further
aggregations allow Census to determine the U.S.  trade balance with
Canada as well as the overall U.S.  trade balance. 

While the value information collected by Customs is used for
calculating duties and compiling trade data, there are several
reasons why this information lacks the detail that would be useful to
determine whether the CWB is engaging in pricing practices for which
a remedy may be available, either through use of dispute settlement
procedures or through U.S.  law.  The entered value data currently
collected by Customs do not provide specific detail on all of the
elements affecting the price of a shipment, for example, protein
content and payment terms.  According to the Department of Commerce,
additional information regarding imports may be useful in assessing
whether foreign exporters are engaging in unfair pricing practices. 
However, Commerce officials state that the lack of additional
information should not prevent a domestic industry from seeking
relief under U.S.  trade laws since petitions filed under those laws,
in most cases, need not provide specific price information.  Commerce
states that while pricing information is an important element of a
dumping petition, such information has been compiled from a variety
of alternative sources by the petitioning industry.  Moveover,
Customs' aggregate data have often been used by domestic industries
when filing an antidumping petition. 

In addition, the value information collected by Customs is of only
limited use in determining the competitiveness of the price of
Canadian grain in the U.S.  market.  In order to make an accurate
determination of the price of Canadian grain, detailed information
about the nature of the grain is required.  For example, wheat's
protein and moisture content as well the amount of foreign material
it contains are important pricing determinants in the wheat market. 
The price of durum wheat, for instance, can vary significantly
depending on its protein level.  In the 1996-97 marketing year, the
CWB paid Canadian farmers $198 for a metric ton of a particular grade
of durum wheat at a 14-percent protein level as compared to $188 for
a metric ton of the same grade of wheat at a 12.5-percent protein
level.  Customs' import entry form does not require this level of
detail.  The form only requires that wheat be classified according to
the Harmonized Tariff Schedule (HTS), which provides separate
classifications for varieties of wheat such as durum and red spring. 
The HTS also divides some wheat varieties, such as red spring, into
broad grade categories. 

Customs' entry information, therefore, can only be used to estimate
the border price per metric ton of varieties of Canadian wheat, such
as durum.  Without the detailed quality information, Canadian wheat
import prices are not comparable to U.S.  market prices. 

Customs' entry information also does not reflect important
information about the contract between the exporter and importer,
which is necessary for determining the competitiveness of the price
of Canadian grain entering the U.S.  market.  For example, the value
of a shipment of durum wheat entering the United States from Canada
in October could be based on a contract that was signed in February. 
The contract price is usually based on the current price of durum on
the Minneapolis grain market.  The market price of durum wheat can
vary considerably from month to month.  Therefore, a direct
comparison of Canadian durum import prices and market prices on the
date of importation is often inappropriate.  Moreover, Customs' entry
form does not require information on payment terms, such as credit. 


--------------------
\4 It is important to note that the duty rate for some merchandise,
such as wheat from countries not covered by trade preference programs
such as NAFTA, is based on quantity rather than value; for example,
the duty rate for durum wheat is $0.71 per kilogram. 


      CUSTOMS AND USDA DISCUSSING
      EXPANDING AMOUNT OF DATA
      COLLECTED ON CANADIAN WHEAT
      SHIPMENTS
-------------------------------------------------------- Chapter 3:2.2

Customs and USDA recently began discussions on increasing the amount
of information Customs collects on wheat shipments.  USDA has asked
Customs to consider the feasibility of collecting more detail on
wheat protein levels on Customs' entry forms.  According to Customs,
some invoices for wheat presented to Customs at entry contain quality
and protein information.  Customs can also obtain such information by
sending a "request for information" (form CF28) to the importer,
although the information is not part of Customs' automated reporting
system, and, thus, not publicly available. 

USDA wants the HTS classifications for wheat to be expanded to take
into account variations in protein levels.\5 Customs told us that the
HTS classifies durum and some other types of wheat merely by the name
of the wheat, with no consideration of various quality levels being
imported.  Currently, the HTS only allows for reporting varying
grades for red spring wheat.  USDA hopes that expanding the HTS
classification for wheat would allow it to better estimate the price
of Canadian wheat entering the U.S.  market.  However, USDA
acknowledges that even if such an expansion of the HTS occurs,
estimates of Canadian wheat prices entering the United States would
still be limited.  USDA notes that these estimates would still lack
important wheat pricing information such as moisture and foreign
substance content, as well as contract details such as the prevailing
market price at the time of the contract.  In addition, USDA does not
believe it is feasible for Customs to collect such detailed
information on the automated import entry form.  Customs officials
expect opposition to such changes from some importers and Customs
brokers who would consider the additional information requirements to
be burdensome. 


--------------------
\5 To expand the HTS to take into account wheat protein levels, USDA
must petition the ITC.  Administrative changes to the HTS are carried
out through an interagency committee, the Committee for the
Statistical Annotation of the Tariff Schedule, composed of the ITC,
Census, and Customs. 


      NEW STE NOTIFICATION
      QUESTIONNAIRE MAY NOT
      SUFFICIENTLY INCREASE CWB
      PRICING TRANSPARENCY
-------------------------------------------------------- Chapter 3:2.3

The issue of the potential trade-distorting practices and lack of
transparency of STEs, such as the CWB, is being discussed
multilaterally through the WTO.\6 The WTO will soon implement a new
questionnaire for collecting information on STE activities, including
their pricing practices.  In negotiations on the format of the new
questionnaire, the United States argued strongly for adding questions
that would help bring greater transparency to the pricing activities
of STEs and therefore be of use in determining whether STEs such as
the CWB are engaging in improper pricing.\7 U.S.  officials believe
that the new questionnaire does not go far enough in increasing the
pricing transparency of the CWB and other STEs.  The United States
plans to continue pursuing the issue of STE transparency in the WTO. 

The WTO agreement provided for the creation of a Working Party on
STEs tasked with ensuring and, in the long run, improving the
transparency of STE activities.  The agreement also established a
formal STE definition.\8 The Working Party has allowed the WTO to
better track the activities of STEs but has had mixed success in
increasing their transparency.  One of the tasks of the Working Party
has been to revise the WTO's questionnaire on STEs. 

After over 2 years of negotiation, in April 1998 the Working Party
reached agreement on a revised questionnaire that will now be used as
the basis for WTO members' STE notifications (for more information on
WTO members' recent STE notifications, see app.  V.) While the new
questionnaire requests more descriptive information about the
functioning of WTO members' STEs and additional quantitative
information on STE import and export activities, it may not increase
the transparency of the CWB. 

Obtaining detailed information on STE pricing activities has been a
major U.S.  objective for revising the questionnaire because U.S. 
officials think that such data may assist the United States in
determining whether certain STEs use their special status to operate
unfairly.  To this end, the United States forwarded several proposals
to the Working Party.  One proposal requested that members be asked
to provide transaction-level pricing data on an ad hoc basis; that
is, at the request of another member.  Another proposal asked that
members provide, on a quarterly basis, information on average prices
for STE imports and exports, broken down by country of origin or
destination.  However, while supported by some Working Party members,
the United States faced significant opposition from other Working
Party members, including Canada, to these proposals.  Opposing WTO
members were concerned about providing commercially confidential
information and about the possible administrative burden this would
impose on countries.  Ultimately the Working Party could not agree
that this more detailed pricing data should be provided; instead, the
new questionnaire asks for information on STEs' average annual prices
for individual commodities. 

U.S.  government and WTO officials believe that the new questionnaire
represents an improvement over the 1960 questionnaire.  According to
USDA and USTR officials, the new version provides greater
"organizational clarity" for WTO members to make their notifications. 
Specifically, the new questionnaire sets forth detailed guidelines
and a structure for presenting descriptive and statistical
information on members' STE practices.  In addition, the
questionnaire now asks members to submit information on their STEs'
domestic pricing practices, something that was not previously
required.  The new questionnaire may be particularly useful in
obtaining more information on the STE practices of prospective WTO
members with market transition economies.  In these countries, such
as China or Russia, public information on their STEs is not always
readily available.  According to a WTO Secretariat official, the new
questionnaire asks for information on STE practices in a much clearer
way; the more precise language in the new questionnaire will
"discourage one-line answers" and may result in less variation in the
level of detail members provide on their STEs.  Other Working Party
members we spoke with echoed this view. 

According to USDA officials, whether the new questionnaire is able to
bring greater transparency specifically to the CWB's activities will
largely depend on how Canada responds to the questionnaire.  USDA
officials told us that if Canada acts in the spirit of the new
questionnaire, Canada could use its new notification to provide new
information on the CWB's activities.  However, one USDA official also
told us that the new questionnaire may provide virtually no new
information about CWB pricing.  This official told us that the CWB
has provided much more information and transparency on domestic
prices in recent years; Canada now publishes prices daily in various
publications, and these data are essentially the same kind of price
data that are available in the United States for U.S.  grain prices. 
Therefore, according to this official, the new questionnaire does not
necessarily provide for new information on Canada's domestic grain
prices.  In addition, this official could not identify any sections
of the new questionnaire that would definitely constitute new
information that is not in the public domain with respect to the CWB. 
Canadian officials did not respond to our request to identify areas
where the new questionnaire will require them to provide additional
information on the CWB. 

In addition to the questionnaire, the Working Party has been
developing an illustrative list of state trading activities.  This
list will be used in conjunction with the new questionnaire to help
WTO members identify what entities in their trading regimes should be
reported in the notification questionnaire. 

Working Party members have agreed to continue work defining possible
further information needed to enhance the transparency of STEs. 
According to one WTO member we spoke with, it may be appropriate for
the Working Party to review the adequacy of the new questionnaire and
the list after a few years, because countries may initially "report
the bare minimum" in the first trial run of the questionnaire. 
However, the working party has only met twice since the questionnaire
was approved and, according to the WTO Secretariat,\9 the Working
Party has not begun discussing any future work program beyond
continuing the review of notifications and finalizing the
illustrative list.  USDA and USTR officials told us they intend to
pursue obtaining greater transparency of STEs through the Working
Party, but they have not yet outlined their strategy for doing so. 
These officials stated that the United States is beginning to "think
beyond transparency" about the need to develop disciplines on STEs in
agriculture; they anticipate that STEs will be a significant focus in
the WTO negotiations on agriculture set to begin at the end of 1999
or shortly thereafter. 


--------------------
\6 Regional forums, including ongoing negotiations under the Free
Trade Area of the Americas and the OECD, are discussing STE
activities, but their endeavors are mostly in support of WTO efforts. 
Discussions in these forums are focused on various issues that can
relate to STE activities, including anticompetitive business conduct;
price pooling, export subsidies, and other export practices; and
export credit guarantees. 

\7 While U.S.  concerns regarding the CWB relate to the pricing
activities of export STEs, the United States also sought to obtain
greater pricing transparency for import STEs through a revised
questionnaire. 

\8 These provisions were included in the Understanding on the
Interpretation of Article XVII of the General Agreement on Tariffs
and Trade 1994, which was annexed to the WTO agreement. 

\9 The WTO Secretariat is responsible for servicing WTO delegate
bodies, including individual working parties within WTO. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:3

While the United States collects extensive Canadian grain import
data, it has been unable to shed light on the CWB's grain export
prices.  Although the existing grain import data are insufficient to
determine CWB export prices, expanding the amount of data collected
on Canadian wheat import shipments would be difficult and may not
provide the desired pricing information.  The United States has
worked closely with the STE Working Party at the WTO but has had
limited success in increasing STE pricing transparency in that forum,
as well. 


   AGENCY AND COUNTRY COMMENTS
---------------------------------------------------------- Chapter 3:4

In comments on our draft report, USDA emphasized that, in its view,
the CWB, as the sole buyer of Canadian wheat for domestic human
consumption and for export, is able to engage in trade-distorting
actions.  USDA also said that we did not sufficiently emphasize the
CWB's pricing flexibility that comes from its practice of making
initial payments to its farmers of only 70-75 percent of the expected
value of their grain.  We believe that point was sufficiently
established in the draft.  However, we did not attempt to quantify
the impact of CWB activities on grain trade. 

The CWB did not agree with GAO's assertion that the CWB has
flexibility in pricing compared to private firms because it does not
compete to procure grain.  Rather, the CWB believes that it has a
competitive disadvantage in obtaining grain because private grain
traders know the CWB's acquisition cost.  GAO included the CWB's
statement in its discussion of this issue. 


TRADE REMEDY ENFORCEMENT AFFECTING
STES
============================================================ Chapter 4

The CWB and other STEs are allowable under the WTO Agreements and
NAFTA.  They operate throughout the world in various forms and for
various purposes.  Trade remedies have not been fashioned
specifically to deal with imports from STEs.  However, products
imported into the United States that are manufactured, produced, or
marketed by STEs are subject to the same laws regulating imports as
any other product, including laws that restrict imports or provide
remedies to U.S.  industry competing with unfairly traded goods.  We
asked the U.S.  government entities charged with enforcing
international trade agreements and U.S.  trade laws, including USTR,
Commerce, and the ITC, to search their records from 1980 to the
present to determine how trade laws have been applied to STEs.  We
found a total of 15 trade remedy actions involving an STE, the most
recent taken in 1995.  Some of the trade remedy actions resulted in
increased duties, while others prompted the country in which the
import STE was operating to remove import restrictions that limited
U.S.  exports. 


   TRADE REMEDIES UNDER U.S.  LAW
   AND INTERNATIONAL TRADE
   AGREEMENTS
---------------------------------------------------------- Chapter 4:1

Trade remedies under U.S.  law allow government and private parties
to seek redress for disruptive, trade-distorting, or unfair trade
practices.\1 The United States has various trade remedy laws at its
disposal to deal with trade issues, dumping,\2 actionable
subsidies,\3 or increased imports causing domestic injury.  Dispute
settlement provisions under international trade agreements, including
the WTO\4 and NAFTA, provide a means of seeking relief from measures
or actions taken by other governments, which could include actions by
STEs.  The following is a brief summary of the relevant U.S.  laws
(for a more detailed description of each trade remedy, see app.  VI). 

  -- Title VII of the Tariff Act of 1930, as amended,\5 provides the
     most common means of dealing with antidumping issues.  Under
     title VII, private parties can petition the Department of
     Commerce and the ITC on behalf of a U.S.  industry to determine
     whether a class or kind of merchandise is being sold in the
     United States at "dumped" prices and whether a U.S.  industry is
     materially injured or threatened with material injury by reason
     of such dumped imports.  If the agencies find that both dumping
     and injury or threat of injury exist, Commerce then calculates
     the amount of duties imposed on each importer to offset the
     price difference between the U.S.  price and the normal value of
     the imported merchandise. 

  -- Title VII of the Tariff Act of 1930, as amended,\6 also provides
     for the imposition of countervailing (or equalizing) duties
     whenever a government or public entity provides certain
     subsidies for the manufacture, production, or export of articles
     subsequently imported into the United States and a U.S. 
     industry is materially injured or threatened with material
     injury by reason of such subsidized imports.  As in the case of
     antidumping law, petitions are filed with Commerce and the ITC,
     and countervailing duties are imposed if Commerce finds a
     subsidy and the ITC finds that a U.S.  industry is materially
     injured or threatened with material injury by reason of imports
     of such subsidized imports. 

  -- Under section 332 of the Tariff Act of 1930, as amended,\7 the
     ITC has broad authority to investigate matters pertaining to
     U.S.  customs laws, foreign competition with domestic industry,
     and international trade relations.  Most ITC investigations
     under section 332 are conducted at the request of USTR or the
     House Committee on Ways and Means or the Senate Committee on
     Finance. 

  -- Section 22 of the Agricultural Adjustment Act of 1933, as
     amended,\8 authorizes the President to impose fees or quotas on
     imported products that undermine any USDA domestic commodity
     support or stabilization program.  Since 1995, such actions may
     be applied only against imports from non-WTO countries. 

  -- Sections 201 to 204 of the Trade Act of 1974, as amended,\9
     authorize the ITC to conduct investigations concerning whether
     an article is being imported into the United States in such
     increased quantities as to be a substantial cause of serious
     injury, or the threat thereof, to the domestic industry
     producing a like or directly competitive article.  If the ITC
     makes an affirmative determination, it recommends a remedy to
     the President, who makes the final decision as to whether to
     impose a remedy and, if so, in what form and amount.  Remedies
     generally take the form of increased tariffs and import quotas. 

  -- Sections 301-309 of the Trade Act of 1974, as amended,\10
     commonly referred to as "Section 301," give the President broad
     discretion to enforce U.S.  trade rights granted by trade
     agreements and to attempt to eliminate acts, policies, or
     practices of a foreign government that violate a trade agreement
     or are unjustifiable, discriminatory, or unreasonable and
     burdensome or restrict U.S.  commerce. 


--------------------
\1 For a catalog of available trade sanctions or other remedies that
may be used to ensure that other countries' STEs operate fairly, see
the Related GAO Products list at the end of this report. 

\2 "Dumping" is generally defined as the sale of an exported product
at a price lower than that charged for a like product in the "home"
market of the exporters or at a price below cost. 

\3 As used in this report, an "actionable" subsidy is a subsidy for
which U.S.  law provides a remedy in the form of an increased or
"countervailing" duty.  Not all benefits that governments confer on
their products are actionable or countervailable subsidies.  Rather,
in general, subsidies must be limited to a specific group of firms or
industries or to a firm's export activities in order to be covered
under the countervailing duty law.  Subsidies provided by a
government or public body may confer benefits on the recipient that
provide an unfair advantage in international trade, such as allowing
a producer to sell its products at a lower price than that of the
competition. 

\4 With the establishment of the WTO in 1995, the GATT dispute
settlement mechanism was strengthened. 

\5 19 U.S.C.  1673 et seq. 

\6 19 U.S.C.  1671 et seq. 

\7 19 U.S.C.  1332. 

\8 7 U.S.C.  624. 

\9 19 U.S.C.  2251-54. 

\10 19 U.S.C.  2411 et seq. 


   CWB AND OTHER STE INVOLVEMENT
   IN TRADE REMEDY ACTIONS
---------------------------------------------------------- Chapter 4:2

The CWB and other STEs have been involved in investigations under
U.S.  trade law, and their activities have been the subject of formal
disputes under international trade agreements.  As shown in table
4.1, the CWB has been involved in three different trade remedy
actions since 1980.  The ITC conducted two investigations involving
U.S.  imports of Canadian grain, and USTR reported one CFTA dispute
settlement action about CWB export pricing.  As for other STEs, the
Department of Commerce found that five STEs had been involved in
antidumping or countervailing duty investigations or reviews.  The
ITC reported no actions involving STEs under sections 201 to 204. 
USTR identified three Section 301 investigations involving STEs,\11
which led to three GATT dispute settlement procedures.  USTR found
one additional dispute settlement procedure involving an STE, not
preceded by a Section 301 investigation.  USTR found no WTO or NAFTA
disputes involving STEs.  All of the GATT dispute settlement cases
involved restrictive practices of import STEs, whose actions impeded
U.S.  exporters' access to foreign markets. 



                               Table 4.1
                
                Number of Trade Remedy Actions Involving
                            STEs Since 1980

                                                U.S.        Type of
                                     Number of  agency      STE
Trade remedy type                      actions  overseeing  involved
----------------------------------  ----------  ----------  ----------
U.S. antidumping law                         1  Commerce/   Export
                                                ITC

U.S. countervailing duty law                 4  Commerce/   Export
                                                ITC

Section 332                                1\a  ITC         Export

Section 22                                 1\a  ITC/USDA    Export

Sections 201 to 204                          0  ITC

Section 301                                  3  USTR        Import

Dispute settlement -GATT                     4  USTR        Import

Dispute settlement -CFTA                   1\a  USTR        Export
----------------------------------------------------------------------
Note:  There were no WTO or NAFTA dispute settlement cases involving
STEs. 

\a The STE involved was the CWB. 

Sources:  USTR, Department of Commerce, and the ITC. 


--------------------
\11 USTR identified four additional section 301 cases and two GATT
dispute cases that we did not include in our analysis.  Given the
products and countries involved, these cases could have involved an
STE, but either no STE was identified by name or the STE mentioned in
the case was not one notified to GATT.  In addition, one of the four
countries was not a GATT member. 


      USE OF TRADE REMEDIES
      INVOLVING THE CWB
-------------------------------------------------------- Chapter 4:2.1

The CWB was involved in three trade remedy actions, including two ITC
investigations and one CFTA formal dispute.  The ITC investigations
both involved Canadian wheat imports into the United States--one
looking at the competitiveness of the two markets, and the other
examining the effect of those imports on U.S.  farm sector support
programs.  The CFTA dispute involved the interpretation of provisions
in the agreement on export prices of agricultural goods. 


         ITC INVESTIGATIONS OF
         U.S.  GRAIN IMPORTS
------------------------------------------------------ Chapter 4:2.1.1

The increase in imports of Canadian grain to the United States
prompted two ITC investigations.  In 1990, the ITC began a section
332 investigation on the conditions of competition between the U.S. 
and Canadian durum wheat industries.  The ITC found that it was not
apparent that prices paid by U.S.  processors during 1986-89 for
Canadian durum wheat were significantly different than prices paid
for similar quality U.S.  durum. 

At the President's request, the ITC launched an investigation in
January 1994 under section 22 of the Agricultural Adjustment Act to
determine whether wheat, wheat flour, and semolina were being
imported into the United States under such conditions and such
quantities as to "render or tend to render ineffective, or materially
interfere with, the price support, payment and production adjustment
program conducted by.  .  ." USDA for wheat.  Canada was the
principal source of wheat imports into the United States, Canadian
production and U.S.  production being the two most important sources
of supply. 

The ITC completed its section 22 review in July 1994.  The six
commissioners rendered a split decision:  three commissioners found
that wheat was not being imported under such conditions and in such
quantities as to materially interfere with USDA wheat programs; three
Commissioners found that wheat was being imported under such
conditions and in such quantities as to materially interfere with
USDA wheat programs.  The commissioners had differing
recommendations.  Previous negotiations and the ITC investigation
resulted in a 1-year MOU between the two countries (see app.  I). 


         CFTA DISPUTE PANEL RULING
         ON CANADIAN DURUM WHEAT
         EXPORTS
------------------------------------------------------ Chapter 4:2.1.2

In May 1992, the United States requested that a binational dispute
panel under CFTA consider pricing policies for Canadian durum wheat
exports.  The United States believed that Canada was acting contrary
to the CFTA requirement that neither country export agricultural
goods to the other country at a price below the acquisition price. 
Among other things, the panel was asked to determine whether the
acquisition price included solely the initial payments made to
farmers by the CWB--the Canadian position--or all payments made to
farmers with respect to a durum wheat crop (initial plus interim and
final payments, if any)--the U.S.  position.  The United States was
concerned that the Canadians' more narrow definition would allow
Canada to undercut U.S.  grain prices and still meet the terms of
CFTA. 

The panel's final report\12 supported Canada's definition of the term
but stated that it was not possible or desirable for the panel to
determine whether the CWB had violated the CFTA provision.  However,
the panel recommended that a bilateral working group should be
established for the general purpose of overseeing an audit of the
CWB.  An initial audit was conducted, which found that out of the 105
contracts or durum wheat sales to the United States CWB signed and
completed from January 1, 1989, to July 31, 1992, 3 contracts were
not in compliance with the CFTA prohibition against selling below
acquisition price.  By volume, the
3 contracts represented 13,985 metric tons in durum wheat sales, or
1.34 percent of the 1.04 million metric tons in total sales for the
105 contracts. 


--------------------
\12 In the Matter of the Interpretation of and Canada's Compliance
With Article 701.3 With Respect to Durum Wheat Sales, Final Report,
Before the Panel Convened Pursuant to Chapter 18 of the Canada-United
States Free Trade Agreement, CDA-92-1807-01 (Washington, DC:  NAFTA
Secretariat, Feb.  8, 1993). 


      USE OF TRADE REMEDIES UNDER
      U.S.  LAW
-------------------------------------------------------- Chapter 4:2.2

STEs have been involved in trade remedy actions under U.S.  law. 
These actions included products exported to the United States through
STEs, and actions addressing STEs' alleged unfair trade practices
restricting U.S.  exporters' access to foreign markets. 


         ANTIDUMPING AND
         COUNTERVAILING DUTY
         INVESTIGATIONS
------------------------------------------------------ Chapter 4:2.2.1

Commerce reported that it had conducted one antidumping investigation
and four countervailing duty investigations involving STEs (see table
4.2).  The 1990-91 antidumping investigation was prompted by a
petition from the Ad Hoc Committee for Fair Trade of the California
Kiwifruit Commission.  Commerce found that fresh kiwifruit was being
dumped at less than fair value by a New Zealand STE, the New Zealand
Kiwifruit Marketing Board, through which all New Zealand kiwifruit
for export must pass, except for such exports to Australia.  The ITC
then found that U.S.  industry was injured/threatened by the imports. 
As a result, the United States imposed a dumping duty of 98.6 percent
on those imports, effective November 1991.  In two out of the four
countervailing duty investigations, Commerce concluded that the STEs
in the case, the New Zealand Meat Producers Board in one case and the
Turkish Grain Board in the other case, were providing actionable
subsidies.  Commerce subsequently required Customs to levy a
countervailing duty on imports from these two STEs.\13 In the two
remaining countervailing duty investigations, the petitioners
terminated one, and the ITC found no injury on the other, and
therefore no countervailing duties were levied. 



                                    Table 4.2
                     
                     U.S. Antidumping and Countervailing Duty
                      Investigations Involving STEs Notified
                         to the WTO, 1980 to the Present

                    Case type
                    (initiated  Commerce and ITC
STE                 )           determinations                Outcome
------------------  ----------  ----------------------------  ------------------
New Zealand         AD          Commerce: fresh kiwifruit     Customs initially
Kiwifruit           (1991)      from New Zealand is being,    charged NZKMB a
Marketing Board                 or is likely to be, sold in   weighted-average
(NZKMB)                         the United States at less     dumping margin of
                                than fair value               98.6 percent\a

                                ITC: made affirmative
                                determination on injury

(Israeli)           CVD         In a 1980 countervailing      No CVD order
Production and      (1980)      duty investigation, Commerce  issued due to
Marketing Board of              found no government support   Commerce finding
Ornamental Plants               of PMBOP                      no improper
(PMBOP); and                                                  subsidy (1980)
Flower Board                    In a 1986 countervailing
                                duty investigation, Commerce  No CVD order
                                found the Flower Board\b had  issued due to ITC
                                received funds from the       negative
                                Ministry of Agriculture and   determination on
                                that this financial support   injury (1986)
                                was countervailable

                                ITC: made negative
                                determination on injury

Australian Meat     CVD         Commerce: preliminarily       Investigation was
and Live-stock      (1981)      determined that funds from    terminated at
Corporation (AMLC)              AMLC to Australian            petitioners'
                                producers, processors, and    request\c
                                exporters of lamb meat
                                qualify as subsidies

                                ITC: no ruling due to
                                termination of case

New Zealand Meat    CVD         Commerce: certain benefits    Customs charged a
Producers Board     (1985)      that constitute subsidies     CVD duty on
                                within the meaning of         subject products
                                countervailing duty law are   entering the
                                being provided to producers   United States,
                                The net subsidy amount is     equal to the net
                                NZ$0.3602/lb                  subsidy

                                ITC: not required to rule

Turkish Soil        CVD         Commerce: one company,        Customs initially
Product Office      (1995)      Filiz, received free wheat    charged a CVD duty
(Turkish Grain                  from the Turkish Grain Board  of 3.87 percent ad
Board)                          in exchange for exporting a   valorem\\ from
                                certain amount of its         Filiz\d
                                product. This was found to
                                be a countervailable
                                subsidy

                                ITC: made affirmative
                                determination on injury


--------------------------------------------------------------------------------
Legend

AD= Antidumping
CVD= Countervailing duty

\a The "dumping margin" is the fair market value minus the U.S. 
price divided by the U.S.  price.  The fair market value can have one
of three meanings:  (1) the price of a like product in the home
market, (2) the cost of production in the home market, or (3) the
price of a like product in a surrogate market.  In this case, the
fair market value is the price in a surrogate market--Japan.  Once
Commerce issues an antidumping order, Customs requires that the
importer post a cash deposit in an amount equal to the previously
found margin of dumping.  The amount of these deposits is
periodically adjusted as a result of administrative reviews of
antidumping orders conducted by Commerce.  Any extra deposits are
refunded. 

\b Commerce stated that the Flower Board was an entity established by
the Ornamental Plants Production and Marketing Board Law of 1976 and
that the record of its investigation did not indicate what
relationship, if any, existed between the Flower Board and the PMBOP. 

\c By the withdrawal of the petition and termination of the
investigation, this determination is without legal force or effect. 

\d Percent ad valorem means percent of value of the subject
merchandise entering the United States. 

Source:  U.S.  Department of Commerce, International Trade
Administration. 

A Commerce official reiterated that Commerce does not make a
determination regarding STE status and that STEs are not accorded
special treatment or recognition under U.S.  antidumping and
countervailing duty law.  However, Commerce said that to the extent
that an STE sells goods into the United States that are dumped or
unfairly subsidized, U.S.  antidumping and countervailing duty laws
could provide a potential remedy.  The official cautioned that it was
difficult to determine conclusively which STEs had been the subject
of antidumping or countervailing duty investigations or reviews, due
to the length and complexity of the cases, the possible involvement
of an STE in a case in an indirect or insubstantial way, and
potential difficulties in translating foreign STE names. 


--------------------
\13 The ITC found injury in the countervailing duty case on pasta
from Turkey.  However, the ITC was not required to find injury in the
second countervailing duty case--lamb meat from New Zealand.  This is
because, at the time, New Zealand was not a "country under the
Agreement" with respect to the GATT countervailing duty code and thus
was not entitled to an injury finding. 


      SECTION 301 CASES LEADING TO
      A GATT DISPUTE SETTLEMENT
-------------------------------------------------------- Chapter 4:2.3


         CANADA - RESTRICTIONS ON
         BEER IMPORTS
------------------------------------------------------ Chapter 4:2.3.1

USTR initiated a Section 301 investigation in June 1990 related to
alleged discriminatory distribution and pricing practices of the
provincial liquor boards of Ontario, including an STE, the Ontario
Liquor Control Board.  The USTR investigation was prompted by
petitions filed by two U.S.  brewing companies.  These practices
included listing requirements, discriminatory mark-ups, and
restrictions upon distribution.  After negotiations between Canada
and the United States failed to resolve the issue, USTR requested
that a GATT dispute settlement panel examine Canadian practices.  In
October 1991, the GATT panel reported that many of the Canadian
practices were inconsistent with GATT prohibitions on quantitative
restrictions and recommended they be removed.  Because Canada did not
discontinue the practices, in December of that year USTR determined
that, consistent with the GATT panel finding, duties should be
increased on beer and malt beverages from Canada.  After resuming
negotiations with Canada and again failing to reach agreement, the
United States did increase duties by 50 percent ad valorem.\14 Canada
responded in kind by raising duties on beer imports from the two U.S. 
brewing companies that had originally submitted the Section 301
petitions.  USTR initiated new negotiations with Canada in 1993, and
the two countries ultimately signed an MOU in August of 1993.  The
MOU, among other things, increased U.S.  brewers' access to Canadian
stores and reduced the Ontario Liquor Board's fees for handling U.S. 
beer and removed the duties imposed earlier. 


--------------------
\14 Percent ad valorem means percent of value of the subject
merchandise entering the United States. 


         THAILAND - RESTRICTIONS
         ON CIGARETTE IMPORTS
------------------------------------------------------ Chapter 4:2.3.2

The U.S.  Cigarette Export Association filed a Section 301 petition
in 1989 alleging that the Royal Thai Government and its
state-controlled import monopoly and STE, the Thailand Tobacco
Monopoly, engaged in taxing and licensing practices that effectively
prohibited the importation and sale of cigarettes into Thailand. 
USTR initiated a Section 301 investigation and, on February 5, 1990,
requested that a GATT panel be formed to consider the issue.  The
GATT panel issued a report in September 1990 concluding that Thai
cigarette import restrictions violated GATT prohibitions on
quantitative restrictions.  The panel recommended that Thailand bring
its practices into conformity with its obligations under GATT.  In
October 1990, the Thai government said that it would remove its
import restrictions and, in response, USTR terminated the Section 301
investigation. 


         KOREA - RESTRICTIONS ON
         BEEF IMPORTS
------------------------------------------------------ Chapter 4:2.3.3

The United States challenged quantitative import restrictions imposed
by Korea's STE, the Livestock Products Marketing Organization,
arguing that they violated GATT prohibitions against quantitative
restrictions.  The United States also argued that the very existence
of an import monopoly controlled by domestic producers constituted a
prohibited import restriction.  The GATT panel concluded that the
existence of a producer-controlled monopoly was not a GATT violation
but found that the Livestock Products Marketing Organization import
restrictions did violate GATT prohibitions against import
restrictions.  In 1989, a GATT panel report was adopted recommending
that the two countries consult and that Korea conform to GATT. 
Pursuant to the panel recommendation, the United States and Korea
signed a bilateral agreement.  Two subsequent agreements, one in 1993
and one under the Uruguay Round, were entered into force to achieve
free market conditions for the importation and distribution of U.S. 
beef in Korea.  Each year, both countries meet quarterly to ensure
full implementation of the beef agreement provisions. 


      USE OF GATT DISPUTE
      SETTLEMENT PROVISIONS UNDER
      INTERNATIONAL AGREEMENTS
-------------------------------------------------------- Chapter 4:2.4


         JAPAN - RESTRICTIONS ON
         CERTAIN AGRICULTURAL
         PRODUCTS
------------------------------------------------------ Chapter 4:2.4.1

In 1988, a GATT dispute settlement panel's report was adopted on a
GATT dispute case.  The United States alleged that a variety of
quantitative restrictions maintained by Japan on 11 agricultural
categories were inconsistent with Japan's GATT obligations.  Some of
these restrictions were imposed by an STE - the Livestock Industry
Promotion Corporation.  The Livestock Industry Promotion Corporation
is an import monopoly that regulates imports of beef and certain
dairy products, including condensed skim milk, whole milk powder,
skimmed milk powder, whey powder, and buttermilk powder, into Japan. 
Japan acknowledged that the Livestock Industry Promotion Corporation
maintained import restrictions but argued that the GATT prohibition
on quantitative restrictions did not apply to state-trading
monopolies.  The dispute settlement panel concluded that GATT
provisions, including those prohibiting quantitative restrictions,
apply to all import restrictions, whether or not they are instituted
through quotas or by STEs.  The panel further ruled that while GATT
permits measures such as those limiting private imports necessary to
enforce the exclusive trading rights of import monopolies, it does
not permit quantitative restrictions otherwise inconsistent with GATT
obligations. 

On August 2, 1988, the United States and Japan signed an agreement to
resolve the GATT dispute.  Japan partially lifted its quotas and
provided increased access as compensation.  Japan eliminated quotas
on 7 of the 11 product categories by April 1, 1990. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:3

While relatively few trade remedy actions have been taken involving
STEs--15 since 1980-- some of these actions have resulted in
increased duties on imports found to be injurious to U.S.  industry. 
In addition, the United States prevailed in all of the GATT dispute
settlement cases involving STEs.  In every case, the GATT dispute
panel found that the import STE's restrictions that limited U.S. 
exports had violated GATT rules.  A wide range of trade remedies can
be applied to STEs, such as those seeking redress for dumping,
actionable subsidies, and sufficiently injurious imports, and those
seeking relief, through dispute settlement, from actions taken by
other governments as well as by STEs. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 4:4

We received technical comments from USDA, USTR, the U.S.  Department
of Commerce, the U.S.  Department of Justice, and the ITC on a draft
of this chapter.  We incorporated their suggestions, where
appropriate. 


CHRONOLOGY OF U.S.-CANADIAN GRAIN
TRADE
=========================================================== Appendix I

The United States and Canada have addressed many issues related to
grain trade between the two countries, through bilateral and
multilateral trade agreements, including dispute resolution
procedures, domestic trade laws, and other venues.  The following is
a chronology of the major events affecting U.S-Canadian grain trade
over the past dozen years.  Figure I.1 is a time line of those major
events. 

   Figure I.1:  Time Line of
   U.S.-Canadian Grain Trade
   Related Events

   (See figure in printed
   edition.)

Source:  GAO. 


   1985--THE EXPORT ENHANCEMENT
   PROGRAM
--------------------------------------------------------- Appendix I:1

By 1985, the prices of many U.S.  commodities, including wheat, had
become significantly higher than those of foreign commodities,
particularly from the European Community (EC), and were no longer
competitive in the international marketplace.  In May 1985, the U.S. 
Secretary of Agriculture announced the establishment of the targeted
Export Enhancement Program (EEP), providing subsidies in kind to U.S. 
exporters to enable them to lower prices of their commodities to be
competitive with subsidized foreign agricultural exports.  Although
EEP did not specifically target U.S.  exports to Canada, Canadians
contended that EEP sales artificially raised the supply of wheat on
world markets, thereby causing lower world prices.  They also said
that EEP displaced Canadian exports. 


   1986--U.S.  IMPORTS OF CANADIAN
   WHEAT RISE
--------------------------------------------------------- Appendix I:2

In 1986, U.S.  imports of Canadian wheat began to rise from
previously very low levels.  American farmers blamed these higher
imports on the grain selling practices of the CWB and on Canadian
transportation subsidies.  Canadian agricultural officials attributed
the rise to U.S.  commodity programs, including U.S.  Department of
Agriculture (USDA) supply management programs and EEP. 


   1989--U.S.-CANADA FREE TRADE
   AGREEMENT
--------------------------------------------------------- Appendix I:3

The U.S.-Canada Free Trade Agreement, implemented on January 1, 1989,
addressed the pricing of agricultural products, including wheat,
Canadian transportation subsidies, market access, and the imposition
of import restrictions.  To allay U.S.  concerns that the CWB might
be selling its wheat to the United States at below Canadian farmers'
cost of production, CFTA stated that neither country could sell
agricultural goods to the other at a price "below the acquisition
price of the goods plus any storage, handling or other costs incurred
by it with respect to those goods." However, this provision did not
ultimately resolve U.S.  concerns on the matter, primarily because
CFTA did not define "acquisition price." The United States believed
that the CWB was continuing to offer wheat export prices below the
cost of acquisition.  The United States eventually requested a disute
resolution panel under CFTA in May 1992.  The subsequent 1993 panel
decision recommended an audit of CWB pricing of durum wheat sales to
the United States.  The panel ruled in favor of the Canadian
interpretation of acquisition price.  An audit was concluded, and its
findings were reported in December 1992 (for a discussion of the CFTA
dispute, see ch.  4). 

In its Statement of Administrative Action accompanying the CFTA
implementing legislation, the United States called for consultations
with Canada directed toward establishing a method to determine the
price at which the CWB was selling agricultural goods to the United
States.  The Statement of Administrative Action said that the United
States would review agricultural commodities sales for export to the
United States by the Canadian government and public entities,
including necessary price, quantity, and quality information, to
ensure compliance with CFTA.  To assist in this review, the U.S. 
Customs Service was to provide information in its possession as
necessary (for a discussion of U.S.  data collection efforts, see ch. 
3). 

Regarding transportation subsidies, CFTA eliminated those established
under the 1984 Western Grain Transportation Act for agricultural
goods originating in Canada and shipped via west coast ports for
consumption in the United States.  CFTA did not remove the so-called
"Canadian Crow's Nest" subsidies at eastern Canadian ports, such as
Thunder Bay, Ontario.  A U.S.  Department of Agriculture official at
the time stated that this subsidy was not removed because it was
generally available and not conditioned upon exports. 

As for market access, CFTA called for a staged elimination of all
U.S.  and Canadian tariffs, with a phase-out for most grains, and
duty-free status by January 1, 1998.  Canada agreed to eliminate any
import permit requirements when the level of government support for
any of the grains--wheat, oats, or barley--in the United States
became equal to or less than the level of government support for that
grain in Canada.  However, Canada could require that the grain be
accompanied by an end-use certificate completed by the importer,
declaring that it is to be imported for consumption in Canada.\1

Finally, CFTA restricted both countries' ability to impose import
restrictions for grain products, such as under section 22 of the U.S. 
Agricultural Adjustment Act of 1933.  CFTA provided that each country
could reintroduce import restrictions or import fees on grains only
if "imports increase significantly as a result of a substantial
change in either Party's support programs for that grain (includes
wheat, oats, barley, rye, corn, triticale and sorghum)." The Uruguay
Round of the General Agreement on Tariffs and Trade (GATT) further
restricted U.S.  use of section 22 in 1995 (see later discussion in
this app.). 


--------------------
\1 Canada removed its import license requirement in 1991, under the
terms of CFTA--when U.S.  government support programs for wheat
declined below the Canadian support program levels.  To date,
however, Canada has retained its end-use certificate requirement for
wheat.  The United States implemented its own end-use certificate
requirement in February 1995. 


   1990--INTERNATIONAL TRADE
   COMMISSION SECTION 332
   INVESTIGATION
--------------------------------------------------------- Appendix I:4

In 1990, the ITC conducted a section 332 investigation on the
competitiveness between the U.S.  and Canadian durum wheat
businesses.  The ITC found that it was not apparent that prices paid
by U.S.  processors for Canadian durum were significantly different
than prices paid for U.S.  durum (see ch.  4). 


   1994--NORTH AMERICAN FREE TRADE
   AGREEMENT
--------------------------------------------------------- Appendix I:5

The North American Free Trade Agreement, effective on January 1,
1994, retained the previously negotiated CFTA market access
provisions affecting Canada and the United States, while adding new
bilateral commitments on agriculture between the two countries and
Mexico.  NAFTA provisions applicable to trade among all three
countries included dispute settlement provisions based on those
contained in CFTA. 


   1994--U.S.-CANADIAN MEMORANDUM
   OF UNDERSTANDING
--------------------------------------------------------- Appendix I:6

Following the July 1994 ITC section 22 decision on wheat, wheat
flour, and semolina imports (see ch.  4), the United States and
Canada signed an MOU in September 1994.  The United States stated
that it would apply a new schedule of tariffs on the importation of
wheat, for a 12-month period.  The two countries also agreed to
establish a joint commission on grains to further examine their
mutual grain problems and to set a 12-month hold on all
countermeasures under either NAFTA or GATT. 

The MOU set an overall limit on Canadian wheat exports to the United
States of 1.5 million metric tons, with separate limits on durum
wheat and all other wheat, excluding eastern soft wheat.  Up to
300,000 metric tons of durum wheat could enter the United States with
a preferential tariff, with an additional 150,000 metric tons allowed
into the United States at a higher tariff level.  Imports of other
wheat would be limited to 1.05 million metric tons. 

Upon the expiration of the MOU in September 1995, the United States
ended import restrictions and continued monitoring Canadian grain
exports, stating that it would apply its trade remedy laws should
Canadian wheat imports cause market disruption. 


   1995--UNITED STATES AGREES TO
   LIMIT USE OF SECTION 22, PER
   URUGUAY ROUND AGREEMENTS
--------------------------------------------------------- Appendix I:7

In January 1995, WTO members agreed, as part of the Uruguay Round
Agreement on Agriculture, to convert quotas, such as those maintained
by the United States under section 22 of the Agricultural Adjustment
Act, to tariff-rate equivalents such as tariff-rate quotas.\2 These
tariff equivalents would initially offer the same level of protection
as quotas but would be reduced over time.  In addition, the Agreement
on Agriculture prohibited WTO members from imposing quantitative
restrictions on products whose non-tariff barriers had to be
converted to tariffs.  The U.S.  implementing legislation, the
Uruguay Round Agreements Act, amended section 22 to prohibit the use
of section 22 for products of WTO members. 


--------------------
\2 A tariff-rate quota is the application of a lower tariff rate for
a specified quantity of imported goods.  Imports above this specified
quantity face a higher tariff rate. 


   1995--CANADA'S IMPOSITION OF
   DUTIES ON BARLEY PROMPTS
   DISPUTE
--------------------------------------------------------- Appendix I:8

In January 1995, Canada increased duties on imports of certain
agricultural goods, including barley.  Canada converted its quotas
and import license requirements to tariff-rate quotas as part of its
implementation of the WTO agreements.  In 1995, the United States
requested a dispute settlement panel under NAFTA claiming that these
new duties violated NAFTA. 

In December 1996, the NAFTA dispute panel issued its final report,
concluding that Canadian tariffs of up to 350 percent on such goods
qualified under an exception to NAFTA's general prohibition against
raising or imposing import tariffs on other member countries'
products. 


   1995--CANADA-UNITED STATES
   JOINT COMMISSION ON GRAINS
--------------------------------------------------------- Appendix I:9

The Canada-United States Joint Commission on Grains released its
final report in October 1995.  Comprised of 10 nongovernment U.S. 
and Canadian officials with equal representation, it was formed to
assist the two governments in reaching long-term solutions to
existing problems in the grains sector.  The report addressed policy
coordination, cross-border trade, grain grading and regulatory
issues, infrastructure, and domestic and export programs and
institutions.  The report noted that "the use of discretionary
pricing by governments, directly through their programs or entities,
had led to trade distortions." The report recommended that both
countries "eliminate the excessive discretionary pricing practices of
their institutions; and .  .  .  modify their domestic agricultural
policies to remove trade distorting effects .  .  ." To do so, the
report recommended that both countries consult regularly and create a
bilateral producer/industry-based consultative committee for
cross-border issues. 


   1996--WESTERN GRAIN MARKETING
   PANEL
-------------------------------------------------------- Appendix I:10

In 1995, the Canadian Minister of Agriculture and Agri-Food appointed
the Western Grain Marketing Panel to lead a comprehensive examination
of western Canadian grain marketing issues.  The panel released its
report in July 1996 and concluded that (1) a growing number of
farmers were asking for more options and flexibility in marketing
grains and (2) common concerns about the CWB by farmers were the lack
of accountability to farmers for its performance and the
inflexibility of its operating policies.  The panel proposed amending
the 1935 Canadian Wheat Board Act to allow changes in CWB governance
and to increase the flexibility of its operations and the services it
provides to farmers (for a discussion of CWB operations, see ch.  2). 


   1998--PLAN FOR PILOT PROGRAM TO
   FACILITATE WHEAT EXPORTS
-------------------------------------------------------- Appendix I:11

In January 1998, the United States and Canada announced plans to
implement a pilot program to facilitate U.S.  wheat exports to Canada
that would enable the United States to ship its grain directly to
Canadian grain elevators.\3 The United States is negotiating with
Canada over Canada's current requirement that U.S.  grain be
accompanied by a phytosanitary certificate--an assurance that the
grain is disease-free.\4 The United States is also concerned about
how the cost of the pilot program will be applied to imports. 


--------------------
\3 Currently U.S.  wheat can only enter Canadian elevators on a
case-by-case basis requiring approval from the Canadian Grain
Commission. 

\4 Sanitary and phytosanitary measures are those taken to protect
human, animal, or plant life or health.  The Agreement on the
Application of Sanitary and Phytosanitary Measures in the Uruguay
Round of GATT contains disciplines in their use.  NAFTA contains
similar disciplines. 


   1998--UNITED STATES REQUESTS
   NEW AUDIT OF CWB WHEAT PRICING
-------------------------------------------------------- Appendix I:12

In March 1998, the United States requested a new audit of the CWB's
grain pricing related to the acquisition price.  Canada agreed to the
new audit but disagreed on its terms.  Canada wants to maintain the
audit terms both countries agreed to after the 1993 CFTA dispute
settlement panel decision.  According to a USTR official, the United
States wants to (1) deviate from the panel decision by applying for a
broader definition of "acquisition price"; (2) expand the audit to
cover not only durum but also spring wheat and barley; and (3)
include third country pricing, that is, Canadian grain exports to
countries other than the United States. 


CWB USAGE OF THE U.S.  FUTURES
MARKETS AND COMMODITY EXCHANGES
========================================================== Appendix II

The CWB is a participant in the U.S.  futures exchanges for grain and
for currency.  It enters into wheat futures and options contracts to
price a portion of anticipated sales.  It also enters into foreign
exchange forward and option contracts in order to manage the foreign
exchange risk of a portion of anticipated sales.  The CWB reported
that it conducts its operations in order to reduce risk.  Under
certain conditions, the CWB can face restrictions in its
participation in futures markets at the Chicago Board of Trade (CBOT)
and the Kansas City Board of Trade (KCBOT) that prevent Canadian
grain from being delivered against a futures contract.  Both
exchanges allow the entity that takes physical delivery of wheat
against a futures contract to specify that the wheat be of U.S. 
origin.  According to officials at both exchanges, this option helps
ensure that wheat exported under a U.S.  government export program is
of U.S.  origin. 

Officials at the U.S.  Commodity Futures Trading Commission (CFTC),
the Minneapolis Grain Exchange (MGE), the CBOT, and the KCBOT
confirmed that there are no specific restrictions placed on state
trading enterprises such as the CWB.  Rather, these entities must
face the same market rules that all other traders face.  As with all
traders, those who want to take an unusually large position in the
cash or futures markets must file an application with the relevant
exchange and the CFTC (if applicable).  In addition, those traders
must file periodic reports with the exchanges and the CFTC (if
applicable) detailing their cash positions. 

Some markets allow U.S.-origin requirements for wheat, which
officials at those markets told us were implemented in order to
ensure that delivered wheat that was benefiting from any U.S.  food
aid, export promotion, or credit guarantee programs was of U.S. 
origin only, as required by law.  Since the importance of U.S. 
export promotion programs has diminished in recent years, some
traders have relaxed their U.S-origin requirements.  For example,
officials at the CBOT told us that Canadian wheat had been delivered
against futures contracts at their exchange. 

We were not able to ascertain the level of involvement of the CWB in
U.S.  commodity and futures trading due to the confidentiality
accorded trading activity.  At the MGE, for example, trading in the
cash market takes place on a trading floor, and no records are kept
by the exchanges recording specific information about the identity of
traders.  Although the CFTC does monitor the activities of traders in
the futures market, confidentiality restrictions contained in the
Commodity Exchange Act\1 prohibit it from revealing such data to the
public. 


--------------------
\1 7 U.S.C.  1. 


EFFECT OF THE CWB ON THE CANADIAN
FARMER
========================================================= Appendix III

The costs and benefits of the CWB's operations to Canadian farmers
are subject to considerable dispute among academics and farmers.  Two
CWB-contracted economic studies suggest the single-desk selling
status of the CWB gives it market power in the world wheat and barley
trade and increases farmer revenue through price discrimination. 
Further, the studies conclude that the CWB marketing system does not
result in a more costly grain system for the farmers.  In contrast, a
study financed by the provincial government of Alberta concludes that
the CWB lacks market power and finds that the Canadian grain system
is more costly than the comparable U.S.  system. 

Canadian farmers are divided in their views of the CWB.  Some believe
that the CWB provides farmers with countervailing power relative to
multinational grain companies.  Other farmers believe that the CWB
reduces their freedom and limits their incomes.  Some believe that
the CWB is withholding exports to the United States and thus reducing
the potential returns to Canadian wheat and barley producers.  A
recent livestock study provides some evidence in support of this
view. 


   CWB PRICE DISCRIMINATION AND
   PRODUCER REVENUE
------------------------------------------------------- Appendix III:1

The CWB has contracted with academic authors for studies that
investigate whether the CWB delivers higher returns to wheat and
barley producers than would be the case in a multiple-seller
environment.\1 Two studies were completed, one in 1996 on CWB wheat
operations and one in 1997 on CWB barley operations.  The CWB
provided its authors with unique access to each CWB contract over an
extensive period of time.\2 This enabled the authors to compare CWB
sales of Canadian western spring wheat and western Canadian feed and
malting barley to customers in Canada, the United States, and other
nations.  Additionally, Alberta Agriculture sponsored an assessment
of the CWB.\3


--------------------
\1 Daryl F.  Kraft, W.  Hartley Furtan, and Edward W.  Tyrchniewicz,
"Performance Evaluation of the Canadian Wheat Board" (Winnipeg,
Canada:  Canadian Wheat Board, Jan.  1996) covers CWB sales of
Canadian hard red spring wheat.  CWB sales of feed and malting barley
are analyzed by Drs.  Andrew Schmitz, Richard Gray, Troy Schmitz, and
Gary Storey in "The CWB and Barley Marketing:  Price Pooling and
Single-Desk Selling" (Winnipeg, Canada:  Canadian Wheat Board, Jan. 
1997).  The CWB has contracted for, but not yet received, a study of
its durum wheat market operations. 

\2 The CWB declined to grant us access to these same contract
records.  This included a GAO request restricted to a 5 percent
sample of contracts.  CWB officials also reported that they would not
make their records available to non-CWB-affiliated scholars. 

\3 Colin A.  Carter and R.M.A.  Loyns, "The Economics of Single Desk
Selling of Western Canadian Grain" (Edmonton, Canada:  Alberta
Agriculture, Food and Rural Development, Mar.  1996). 


      CWB WHEAT STUDY
----------------------------------------------------- Appendix III:1.1

The CWB-sponsored wheat study compared the prices of individual CWB
wheat contracts with a price purported to correspond to a multiseller
competitive price.  This was accomplished by matching the export
price of a Canadian wheat sale of a specific grade, on a specific
day, from a specific Canadian port with the competitive price of a
similar wheat from a competitor nation's port.  For example, a
contract for Canadian western red spring wheat graded 1 or 2 with a
14.5-percent protein content originating from a St.  Lawrence or
Atlantic port was compared to U.S.  dark northern spring wheat with
15-percent protein content originating from U.S.  Gulf of Mexico
ports. 

The study concluded that for 1981-94, the CWB on average increased
wheat revenues by $14.56 per ton, or $289 million per year when
compared to multiple sellers offering wheat in competition with each
other.\4 These premiums represented about 8 percent of the CWB wheat
revenues for those years.  The export market on average accounted for
74 percent of this price premium, while the remainder reflected
higher prices faced by Canadian consumers and by foreign aid wheat
donors.  For 1994, the last year covered in the study, the CWB
premium was $6.38 per ton, which represented 5.4 percent of that
year's sales value of $117.72 per ton.  The study reported that
European buyers offered the highest price for wheat, while in certain
years sales to the United States earned low or no premiums.  An
important consideration of the study was how the single-desk system
performed when the United States was intervening in the world market
with its EEP.  The study found that the CWB premium over revenue
generated by multiple sellers was highest during the years of U.S. 
export subsidies.  The additional premiums in the EEP period
reflected the higher prices the CWB realized from sales to
nonsubsidized EEP markets in comparison with multiple sellers that
are assumed to receive subsidy-reduced prices on all sales. 

The reliability of the study's conclusions is subject to serious
methodological constraints that make it difficult to interpret the
estimated premiums.  First, the matching of a Canadian grain contract
with a U.S.  or another nation's competitive grain price was an
incomplete match.  While grade and protein content were accounted
for, in no comparisons were the grain varieties identical, and other
quality attributes, including moisture level, cleanliness, water
absorption, test weight, consistency, percentage of hard vitreous
kernels, and protein quality were not controlled for in the
comparisons.  Observed price differences due to these other
attributes or differences in trade servicing should not be attributed
to the operations of the CWB.  In addition, CWB contract prices may
reflect the provision of credit and other payment terms so that they
are not comparable to competitive port prices.  Second, for certain
geographic markets, grain originating from Canada can have an ocean
freight cost advantage (or disadvantage) when compared to U.S. 
export prices.  Third, a significant problem with the study is that
its methodology cannot distinguish between premiums that arise from
CWB marketing operations and those that arise from regulatory
activities of the Canadian Grain Commission that establishes and
maintains standards for grain quality and regulates grain handling. 


--------------------
\4 Unless otherwise noted, all Canadian dollars have been converted
to constant 1997 U.S.  dollars using a market exchange rate and the
U.S.  gross domestic product deflator. 


      CWB BARLEY STUDY
----------------------------------------------------- Appendix III:1.2

The CWB-sponsored barley study used a different methodological
approach to evaluate whether the CWB creates revenue benefits for
barley producers greater than they would receive from multiple
sellers.  The study concluded that the CWB successfully discriminates
in the prices it charges consumers in different markets and estimated
that the CWB extracts from barley consumers greater revenues for
producers than would occur in a competitive market. 

As a demonstration of the CWB's market power to price discriminate,
an analysis was conducted of CWB feed barley export contracts from
west coast Canadian ports.  Price differences between sales to the
United States, Japan, and the rest of the world were established on a
monthly basis.  For those months between 1986 and 1995 where
comparable sales to all three destinations took place, CWB prices per
ton for sales to Japan were $28.33 (Canadian dollars) higher than
they were for the rest of the world, and CWB U.S.  sales were $4.47
(Canadian dollars) higher per ton than the rest of the world.\5 Price
discrimination not only existed between export destinations but also
between the Canadian domestic market and the U.S.  market.  For
example, the study estimates that in 1991/92, the CWB's Canadian
customers paid 29.6 percent more than did U.S.  customers for six-row
malting barley and 14.1 percent more for two-row malting barley.\6

In order to estimate the differences between CWB operations and that
of multiple sellers, the study used an economic model to simulate the
prices and revenues that multiple sellers would generate and compare
them with those generated by the CWB.  This exercise required that a
series of assumptions be made about market conditions, which were
subjected to a sensitivity analysis.  For 1986 to 1995, the study
found that the CWB increased producer barley revenues on average by
$70.5 million per year when compared to multiple sellers.  These
premiums represent about 15 percent of the CWB barley revenues for
those years.  However, in 1995, the last year of the study, producer
revenues would have been $5.3 million greater without the CWB, or 1.4
percent of that year's barley revenue.  This loss occurred because
the CWB made its sales early in the crop year, while a tightening
feed barley market resulted in non-CWB feed barley prices exceeding
CWB prices late in the crop year.  Consistent with the wheat study,
the benefits of the CWB were greater during years with heavy EEP
usage. 

The economic model used in the analysis required numerous assumptions
to conduct the study, some of which may limit the reliability of its
conclusions.  Even though the study breaks the barley market into
three components:  feed barley, six-row malting barley varieties, and
two-row malting barley varieties, this degree of product
differentiation may not be sufficient for purposes of analysis.  For
example, there are significant differences between the barley
varieties demanded by U.S.  brewers and those in Canada and other
nations.\7 Thus, price comparisons between CWB sales to Canada, the
United States, and the rest of the world may be comparisons of unlike
products.  Additionally, malting barley contracts can include terms
beyond variety and grade specifications, including plumpness,
protein, germination, varietal purity, and credit terms, which render
comparisons difficult. 


--------------------
\5 Due to the confidential nature of the data, the study's authors
were unwilling to share sufficient data with us to allow its
conversion to 1997 U.S.  dollars. 

\6 The study did not show a price breakout between the domestic and
U.S.  market for any other year. 

\7 U.S.  brewers primarily use malt produced from six-row white
aleurone barley, while Canadian beers use six-row blue aleurone and
two-rowed barley.  See Demcey Johnson and William W.  Wilson, "North
American Malting Barley Trade:  Impacts of Differences in Quality and
Marketing Costs," Canadian Journal of Agricultural Economics (1995),
pp.  335-53. 


      ALBERTA AGRICULTURE STUDY
----------------------------------------------------- Appendix III:1.3

The Alberta study did not have access to the actual contracts of the
CWB and thus used other, more indirect evidence to evaluate whether
the CWB has market power to earn premiums for Canadian farmers.  This
study reviewed the destination of most CWB sales and found that about
80 percent of the sales were to price-sensitive markets where prices
were consistent with a competitive market.  Only sales to Japan, the
United Kingdom, and the United States were deemed to be to markets
that were more sensitive to quality than to price.  With respect to
the United States, the findings of an ITC investigation were cited
that found no premiums were paid for Canadian wheat by U.S.  flour
millers.  The study concluded that Japan is the only market where a
single-desk premium may exist, although it is difficult to
disentangle it from payments for other characteristics such as
cleanliness and uniformity.  Based on Japan's share of CWB sales, the
study concluded that the single-desk premium is small.  Further, a
comparison of farmgate returns between the United States and Canada
fails to show any evidence of price premiums. 


   MARKETING COSTS OF THE CWB
------------------------------------------------------- Appendix III:2

In order to reach a bottom-line conclusion with respect to the costs
and benefits of the CWB for Canadian producers, the two
CWB-contracted studies and the Alberta study reviewed whether
operating costs are higher or lower under the CWB than would be the
case with multiple sellers.  The CWB studies found that costs are
lower, in part due to the government's financial guarantee of CWB
operations, while the Alberta study concluded that the CWB imposes
net costs on the grain sector, especially in restricting its
flexibility to adjust to changes in market conditions. 


      CWB WHEAT STUDY
----------------------------------------------------- Appendix III:2.1

The approach taken in this study was to compare the risk management
costs of wheat to that of two non-CWB-marketed Canadian grains:  flax
and canola.  The wheat study estimated the differences in private
sector risk management and that of the CWB from 1981 to 1994. 
Private operations were shown to have a risk management cost of about
$21.50 per ton for canola and on average $18 per ton for flax.  The
study estimated that the risk management cost of CWB wheat was on
average $3.91 per ton, including taxpayer subsidies to cover deficits
in several marketing years.  This difference suggests a risk
management cost advantage for the CWB. 

For more recent years, however, the record is less decisive.  For the
canola market, the study further refined its estimates of risk
management costs.  It reported that from 1991 to 1994 the adjusted
risk cost per ton was $7.70 per ton of canola which, when compared to
the prior estimate for CWB risk costs of $3.91 per ton (1981-94),
reduces the CWB's risk management advantage to $3.79 per ton. 

This final basis of comparison does not, however, rely on the same
time period.  Comparing the performance of wheat, canola, and flax
for the most recent 4 years of the study (1991-94) shows the risk
management cost per ton of wheat as $8.94,\8 for canola as $7.70, and
for flax as $14.  This suggests that CWB wheat operations are at a
disadvantage in comparison to canola but retain an advantage in
comparison to flax. 

The use of the canola and flax markets as a basis of comparison to
CWB wheat risk management operations may be misleading.  First, flax
and canola represented a small proportion of total grain production
in western Canada.  During the period covered by the wheat study,
flax and canola tonnage averaged only 10 percent of total western
grain production.  Therefore, part of the cost advantage for wheat
marketing could reflect economy of scale rather than the operation
advantage of the CWB.  Second, the financial risk should be expressed
with respect to value and not with respect to weight or volume. 
Canola and flax are more valuable per ton than wheat.  During
1983-94, farmgate prices per ton for canola in western Canada were 96
percent greater than wheat prices, and flax prices were 76 percent
greater.  Therefore, the risk management cost per ton would be
expected to be greater than for wheat.  Hence, part of the risk
management cost disadvantage for these crops can reflect higher crop
values rather than the absence of a government marketing board. 

The study did note that taxpayer monies and guarantees available to
the CWB gave it an advantage over private sector firms.  The study
reported that the government guarantee allowed the CWB to borrow at
the government borrowing rate, which lowered borrowing costs between
$26 million and $45 million for the 1995-96 crop year or between
about $1 and $2 per ton.  Additionally, the CWB profited from being
able to raise money at the government borrowing rate and then lending
to borrowers at commercially competitive rates.  From 1981 to 1994,
the CWB showed net interest earnings in 10 years.  Not mentioned in
the study are the tax advantages the CWB has relative to private
companies. 


--------------------
\8 This estimate is higher due to the large government deficit
payment to the CWB made in 1991. 


      CWB BARLEY STUDY
----------------------------------------------------- Appendix III:2.2

This study focused on cost issues specific to barley.  The study
found that the pooling system created economic efficiency losses due
to the inability of barley export deliverers to adjust to differences
between Canadian domestic prices and U.S.  prices.  On average for
1989-96, the losses were about $4 million per year, although the
losses in 1996, the last year of the study, were estimated to be
about $15 million.  In addition, the study reported that direct
taxpayer transfers to barley producers occurred three times during
1986-95 and noted that rather than being costs, these transfers are
benefits to producers.  The study did not estimate the subsidy value
of the government guarantees that allow the CWB to borrow at the
government borrowing rate and to earn interest during the marketing
year. 


      ALBERTA STUDY
----------------------------------------------------- Appendix III:2.3

This study included in its estimation of CWB costs the costs of
institutional and regulatory factors that are part of the Canadian
grain system but not part of the CWB.  It justified its approach by
asserting that the CWB is responsible for much of the lack of
flexibility in the Canadian system and the limited competition in the
grain handling and transportation areas.  According to the study, the
CWB does not have the economic or political incentive to reduce
system costs and functions instead as a follower, not a leader.  In
computing these system costs, the study reported that for wheat
farmers, direct costs and revenue losses are between $16.94 and
$22.18 per ton, while taxpayer costs are another $4.10 per ton.  For
barley farmers, direct costs and revenue losses are between $18.14
and $24.50 per ton, and taxpayer costs are $6.70 per ton. 

Many of the components of the estimated costs to farmers in this
study are probably independent of whether the CWB exists or not.  For
example, the direct cost of CWB administration includes marketing and
logistical activities that would occur in the private sector.  The
relevant analysis would require a demonstration that CWB costs are
greater (or smaller) than those of private sector grain companies. 
Similarly, storage costs attributed to CWB operations would also
occur in a multiseller environment.  In computing costs of the grain
handling system, the study compared shipping and handling costs with
those of operations in the United States without considering whether
the geography and infrastructure are comparable.  In any event, for
many of the identified costs to change, changes in other government
regulations would be required beyond the elimination or reform of the
CWB.  There are, however, several examples in the study of cases
where the CWB has responded slowly to changes in market conditions
and to the needs of farmers.  In addition, the report showed clearly
that Canadian farmers benefit from taxpayer support of the CWB. 

In summary, while the CWB economic studies provide evidence of
successful price discrimination and single-seller market power, there
are methodological issues that reduce the reliability of the measured
revenue benefits.  Over the time period investigated (1981-94), the
CWB studies' estimated average contribution of the CWB to wheat and
barley revenues were about 8 percent and 15 percent of total revenue,
respectively.  With respect to cost, there is agreement among the
studies that the government guarantee of wheat board operations and
other financial benefits are a significant subsidy to Canadian
farmers.  Otherwise, the evidence presented on the costs of CWB
operations is mixed. 


   GRAIN COMPANY AND CANADIAN
   FARMER VIEWS ON THE CWB
------------------------------------------------------- Appendix III:3

Grain companies located in the United States and in Canada have mixed
views concerning the operations and future of the CWB.  With respect
to pricing practices, six grain companies reported that as a
single-desk seller, the CWB had market power and did price
discriminate.  CWB contracts include a provision that stipulates that
the grain is for shipment to and consumption in a specified country. 
Grain companies reported that it is through these contracts that the
CWB controls the ultimate destination and use of its exports.  This
prevents the accredited exporters (AE) from competing against each
other on price and arbitrating between the markets of different
countries.  This restriction was characterized as being good for
grain producers but bad for grain consumers. 

The Canadian National Farmers Union sees the CWB as part of its
defense against domination by foreign grain traders and the
railroads.  It believes that the CWB provides farmers with market
leverage when dealing with corporations.  The Western Canadian Wheat
Growers Association, a voluntary group representing some western
grain farmers, wants to end the mandatory nature of the CWB and allow
farmers to participate in a dual market where the group could market
through the CWB or for themselves.  The Western Canadian Wheat
Growers Association criticizes the secrecy of the CWB and the
association's inability to examine the CWB's financial books.  While
the association recognizes that the government financial support is
valuable, it believes that the CWB fails to get the highest price for
farmers. 

One issue of interest to Canadian farmers and their U.S. 
counterparts is whether the CWB restricts or encourages grain sales
to the United States.  The CWB wheat study concluded that a
multiple-seller system would so expand exports to the United States
that the U.S.  government would restrict Canadian access to the U.S. 
market.  The CWB barley study found that Canadian prices were lower
than U.S.  prices in 5 of 8 years analyzed, suggesting that multiple
sellers would increase their shipments to the United States.  The
Alberta study pointed to the dramatic increase in barley exports to
the United States when the CWB briefly lost its authority to regulate
sales to the United States for a 40-day period in 1993.  Interviews
with Canadian grain industry participants support the notion that the
CWB withholds grain from the U.S.  market.  Some said the CWB did
this in order to reduce trade conflicts.  Many industry participants
believe Canadian exports to the United States would increase in the
absence of the CWB.  For example, the Western Canadian Wheat Growers
Association notes that exports of oats to the United States increased
when the CWB lost control of that commodity, as did barley exports,
during the brief time period in which the CWB lost control of barley
sales. 

Withholding of Canadian grain from the U.S.  market can have effects
on other agricultural industries, both in Canada and the United
States.  Canadian livestock production in western Canada has
increased since the elimination of rail subsidies for grain exports. 
A recent Canadian government-sponsored study found that western
Canada was the lowest-cost producer mainly due to the low cost of
feed in the western provinces.\9 U.S.  feed costs were 41 percent
greater than they were in the Canadian prairies.  The study concluded
that the price difference was incompatible with an "efficient
market." The CWB controls all barley exports from Canada, including
feed barley exports to the United States and, according to one
analysis, does not maximize farmer returns from higher prices in the
U.S.  market.\10 According to a director of the Canadian Cattlemens'
Association, the CWB exercises a national feed grains policy that
ensures a minimum supply of barley is available for the domestic
livestock industry which, at times, has been detrimental to Canadian
grain farmers.\11 Canadian government officials report that there is
no federal government or CWB policy to ensure that a minimum supply
of barley is available for the domestic livestock industry.  However,
Canada's livestock has expanded, and exports to the United States are
increasing.  Legislation has been introduced in the U.S.  Senate to
establish a joint U.S.-Canada Commission on Cattle and Beef.\12


--------------------
\9 Dr.  Larry Martin, Dr.  Zana Kruja, and John Alexiou, "Prospects
for Hog Production and Processing in Canada" (Guelph, Ontario: 
George Morris Centre, Mar.  3, 1998). 

\10 Submission to the Canada-United States Joint Commission on Grains
by the Alberta Barley Commission and Western Barley Growers
Association, Final Report, Vol.  II (Winnipeg, Canada, and Washington
D.C.:  Oct.  1995). 

\11 Testimony of John Prentice, Canadian Cattlemen's Association,
Before the Standing Committee of the Canadian Senate on Agriculture
and Forestry, Edmonton, Alberta (Apr.  1, 1998). 

\12 S.  617 (105th Cong.  [1998]). 


HOW U.S.  DATA ON CANADIAN GRAIN
ARE COLLECTED
========================================================== Appendix IV

The U.S.  government collects extensive data on imports of Canadian
grain and on how one of these grains, Canadian wheat, is eventually
used in this country.  Grain import data, along with similar data for
all U.S.  imports, are used by government and business for such
purposes as monitoring trade balances with other countries and
developing government trade policies and corporate marketing
strategies.  Import data are collected by the U.S.  Customs Service
and compiled by the U.S.  Census Bureau.  In preparing this summary
of U.S.  data on Canadian grain, we found that the accuracy of data
on Canadian grain imports may be affected by a relaxation of Customs'
regulatory controls because of NAFTA.  Data on the use of Canadian
wheat, known as "end-use data," are collected and compiled by USDA to
prevent Canadian grain shipments from benefiting from U.S. 
agricultural assistance programs. 


   USES OF GRAIN IMPORT AND WHEAT
   END-USE DATA
-------------------------------------------------------- Appendix IV:1

Grain imports from Canada are an important component of U.S.  trade
with Canada.  As noted in chapter 1, U.S.  imports of grains, such as
durum wheat, red spring wheat, and barley from Canada, through the
CWB, have increased significantly in recent years.  Therefore, data
on U.S.  grain imports from Canada have several important uses.  For
example, USDA monitors the data to determine the effect of these
imports on the supply and price of similar commodities in the United
States because these imports can affect U.S.  farmers.  U.S.  Customs
uses the data to administer U.S.  trade laws pertaining to Canadian
grain imports.  For example, the data help Customs determine whether
grain shipped from Canada is in compliance with NAFTA.  However, it
should be noted that because Canadian grain is duty and quota free
under NAFTA, Customs does not need to examine Canadian grain import
data as closely as it does data for imports not covered by NAFTA or
other trade access programs. 

Census and other U.S.  statistical agencies, such as the Bureau of
Economic Analysis, also use Canadian grain import data in compiling
the overall accounting of U.S.  trade with other countries.  Canadian
grain imports are included in the U.S.  merchandise trade data
produced by Census that account for all commodities imported by the
United States or exported to other nations.  Merchandise trade data,
in turn, are used by the Bureau of Economic Analysis in compiling
information on the overall economic performance of the United States. 

Unlike grain import data, which are collected for numerous
administrative and statistical purposes, data on the end use of
Canadian wheat are collected for the sole purpose of assuring that
such wheat is not mingled with U.S.  wheat.  As we discuss in the
next section, the end-use certificate was instituted by the Congress
to prevent Canadian wheat from benefiting from certain U.S. 
assistance programs, including EEP. 


   HOW DATA ON CANADIAN GRAIN
   SHIPMENTS ARE PRODUCED
-------------------------------------------------------- Appendix IV:2

The production of data on Canadian grain shipments is a large
undertaking, involving staff from three federal agencies--Census,
Customs, and USDA--as well as the U.S.  buyers of these shipments. 
The strengths and limitations of data on Canadian grain imports and
data on the end use of Canadian wheat in determining CWB pricing
practices are related to how these data are collected and compiled. 


      GRAIN IMPORT DATA ARE
      COLLECTED BY CUSTOMS AND
      COMPILED BY CENSUS
------------------------------------------------------ Appendix IV:2.1

Producing U.S.  data on merchandise imports involves both the U.S. 
Customs Service and the U.S.  Bureau of the Census.  The production
process is essentially the same for all commodities entering the
United States.  However, the following discussion focuses on the
collection and compilation of data on grain imports from Canada. 

The process begins at the ports where goods enter the United States. 
Grain imports from Canada mainly enter the country through the
northern land border ports, particularly those located in North
Dakota, Montana, and Minnesota.  For grain and other merchandise to
enter the country, importers (or brokers representing them) are
required to present information on the nature, origin, value, and
other aspects of the goods\1 on a form known as an "entry summary."
This entry information is used by Customs to determine the duties and
fees owed and also whether the goods are under quota or other import
restrictions.  However, under NAFTA, most imports from Canada are not
subject to duties, quotas, or other import restrictions.  According
to Census and Customs officials, about 99 percent of the information
is transmitted through an electronic data exchange known as the
Automated Broker Interface (ABI).  ABI is part of Customs' overall
computerized merchandise processing system, the Automated Commercial
System.  If entry information is not transmitted through ABI, it must
be presented on paper at the port of entry. 

The entry information submitted to Customs by importers forms the
basis for the nation's data on merchandise imports.  Each entry lists
the country of origin, the international Harmonized Tariff Schedule
(HTS) number that indicates the type of good being imported, the
value of the merchandise, the quantity, its weight, and several other
items describing the shipment.  Customs' ABI has built in statistical
edits designed by Census that reject entries that do not meet
statistical parameters developed by Customs and Census.  For example,
a shipment of durum wheat from Canada with an unusually high price
per metric ton would fail the edit program.  Rejected entries are
transmitted back over ABI to be corrected by the filer.  ABI entries
accepted by Customs are transmitted to Census headquarters in
Suitland, Maryland. 

If Customs discovers an error in an entry after it is transmitted to
Census, it is supposed to send a corrected version to Census, usually
through an on-line system.  Statistical errors sometimes are found by
Customs import specialists.  These staff, at offices associated with
ports of entry, review selected entries to ensure that the proper
amount of duties and fees are paid on imported merchandise and to
verify that imports comply with various quotas, other restrictions,
and statistical reporting requirements.  Since most Canadian
shipments are exempt from duties and other import restrictions, when
Customs import specialists review Canadian shipments such as wheat,
they are mainly concerned with statistical accuracy and verifying
that the shipments originated in Canada.  Import specialists do not
review all entries.  Rather, a component of the Automated Commercial
System, the Entry Summary Selectivity System, selects entry summaries
for review based on risk criteria. 

After Customs transmits the entry information to Census, Census
subjects all the data to a further array of statistical edits.  Like
the edits done by Customs' ABI program, these edits check whether
import entries fit within established parameters for value, quantity,
country of origin, classification, and other data elements.  Import
entries that fail any of the edits are examined by Census commodity
specialists, who may then contact the importer, broker, or U.S. 
Customs to obtain the information needed to resolve the problem. 
After Census finishes processing the data, they are summarized
monthly and released to the public.  The first monthly release
usually occurs about 45 days after the close of the month and
contains the overall import, export, and trade balance data.  Soon
thereafter, Census releases more detailed reports by commodity and
trading partner and other breakouts. 

Since 1988, the United States and Canada have been exchanging
administrative records on imports and in 1990 started using this
information to determine each country's exports to the other.  The
United States and Canada began this arrangement because of the large
discrepancies that Census and its Canadian counterpart, Statistics
Canada, had identified between U.S.  export and Canadian import data. 
A 1986 reconciliation of U.S.-Canadian merchandise trade data
indicated that reported U.S.  exports were 20 percent lower than
Canada's reported imports from the United States.  Census and
Statistics Canada believe that by exchanging their more accurate
administrative records on imports, they have significantly improved
U.S.  and Canadian export data.  This information exchange between
the United States and Canada is unique. 


--------------------
\1 Customs does not require formal documentation for nontextile
import transactions valued at less than $2,000 nor for textiles
valued at less than $250. 


      WHEAT END-USE DATA ARE
      COLLECTED AND COMPILED BY
      USDA
------------------------------------------------------ Appendix IV:2.2

The 1994 North American Free Trade Agreement Implementation Act that
approved U.S.  participation in NAFTA authorized the wheat end-use
certification program.\2 As noted in the previous section, this
program, which has been in place since April 1996, is intended to
ensure that Canadian wheat does not benefit from U.S.  export
programs such as EEP.  The Canadian government maintains a similar
program for U.S.  wheat imported into Canada. 

The wheat end-use certification program is administered by USDA's
Farm Service Agency.  Under the program, imported Canadian wheat must
be stored separately and may not be commingled or blended with wheat
produced in the United States until the Canadian wheat is delivered
to an end user or is loaded onto a conveyance, such as a train, for
direct delivery to an end user. 

To assure compliance with the requirements of the program, the Farm
Service Agency requires that all importers and subsequent buyers of
Canadian wheat file information relating to their purchases.  The
importer must file a certificate that notes the importer's name, the
class and quantity of wheat imported, the storage location, and the
mode of transportation used to bring the wheat to the United States
from Canada.  The importer and all subsequent purchasers of the wheat
must also submit a wheat consumption and resale report that specifies
the quantity and class of wheat received, the quantity resold, the
identity of the buyers, and the end use.  The wheat consumption and
resale report identifies seven broad categories of end use, including
milling for human consumption, milling for animal feed,
manufacturing, brewing or malting, distilling, re-export to another
country, and other. 

According to statistics compiled by the Farm Service Agency, over 92
percent of imported Canadian wheat is used for milling for human
consumption.  The wheat end-use certificate program does not require
more detailed information concerning the milling of Canadian wheat,
such as the food products (for example, bread or pasta) made from the
milled wheat.  Figure IV.1 shows the end use of Canadian wheat for
March 1995, when the end-use certificate program began, to December
1997. 

   Figure IV.1:  End Use of
   Canadian Wheat, March
   1995-December 1997

   (See figure in printed
   edition.)

Note:  "Other" includes animal feed and manufacturing. 

Source:  USDA. 


--------------------
\2 Public law 103-182, December 8, 1993, section 321(f), 19 U.S.C. 
3391(f). 


   RELIABILITY ISSUES COULD ALSO
   AFFECT IMPORT DATA'S USEFULNESS
   IN DETERMINING CWBS PRICES
-------------------------------------------------------- Appendix IV:3

In preparing this summary, we became aware of two potential problems
with the reliability of Customs data.  The statistical edits employed
by Customs and Census in combination with the entry summary reviews
performed by Customs field personnel are extremely useful for
maintaining the quality of U.S.  import data.  However, in two
instances, these procedures failed to detect errors in the filings
made by importers of Canadian wheat.  In the first instance, USDA
end-use data revealed that a significant number of shipments of
Canadian wheat bound for other countries were incorrectly entered as
U.S.  imports, thus inflating the recorded amount of wheat entering
the country from Canada.  In the second instance, an audit by Customs
revealed that some importers had overstated the value of the wheat on
their Customs entry forms.  These problems are consistent with
concerns raised by some U.S.  officials in a previous GAO report,\3
where they noted that the reduction in duties brought about by NAFTA
may cause the accuracy of U.S.-Canadian trade data to decline.  The
degree to which these errors affect the accuracy of data on Canadian
wheat imports is unclear, and Customs and Census report that they
have taken some steps to improve their quality control procedures. 


--------------------
\3 See Measuring U.S.-Canada Trade:  Shifting Trade Winds May
Threaten Recent Progress (GAO/GGD-94-4, Jan.  19, 1994). 


      RE-EXPORTS OF CANADIAN WHEAT
      CAN AFFECT IMPORT DATA
      ACCURACY
------------------------------------------------------ Appendix IV:3.1

For several years, Census officials have been concerned that
statistical edits and Customs entry reviews are unable to detect
instances in which exports from Canada are entered as U.S.  imports
even though they are to be exported from the United States without
ever entering the U.S.  market.  Census officials noted that if such
Canadian exports, referred to as "in-transit shipments," are often
filed as U.S.  imports, U.S.  data on Canadian imports are
overstated.  The officials said that the initial purchasers of the
re-exported good should have instead filed an in-transit form with
Customs, which indicates that the shipment will only be traveling
through the United States en route to another country.  Customs does
not try to determine whether filers of Canadian import entries are
submitting the correct form, because Customs law permits purchasers
of foreign goods to file them as imports even if they are to be
re-exported from the country. 

According to Census and Customs officials, some U.S.  purchasers of
Canadian goods, such as wheat, find it easier to file an import entry
than an in-transit document.  In-transit documents require detailed
transportation information that Customs needs to assure that goods
bound for another country are not illegally diverted into the U.S. 
market.  Also, because of NAFTA, there are most likely no duties
associated with filing an import entry for Canadian goods.  However,
buyers of Canadian goods must pay brokers' fees regardless of whether
they file import entry or in-transit documents. 

Data collected by USDA on wheat end-use and consumption certificates
reveal that some Canadian wheat shipments transiting through the
United States on the way to other countries have been incorrectly
entered with Customs as U.S.  imports.  As noted earlier, these
certificates must be filed for all Canadian wheat imported into the
United States.  Filers of wheat consumption certificates must
indicate either that the wheat will be used in the United States for
such purposes as human consumption or that the wheat will be
re-exported from the United States.  According to USDA officials,
wheat designated for re-export on the wheat consumption form was
probably incorrectly entered as an import with Customs. 

Data from the wheat consumption and resale reports show that a
significant percentage of wheat shipments from Canada was designated
by purchasers as being for re-export.  For the 1995-96 wheat
marketing year (June 1 through May 31), about 1.5 percent of Canadian
wheat entering the United States was designated for re-export.  This
figure rose dramatically in the 1996-97 marketing year to almost 12
percent.  USDA officials believe that this large increase was
attributable to severe weather in Canada, which prohibited many wheat
shippers from using Canadian ports.  The officials explained that the
shippers decided to move their shipments through available U.S. 
ports and felt it was more expeditious to enter the wheat as a U.S. 
import than to file in-transit documents.  In the 1997-98 marketing
year, wheat re-exports represented about 2 percent of U.S.  imports
of wheat from Canada. 


      RECENT CUSTOMS REVIEW
      REVEALED ERRORS IN CANADIAN
      WHEAT VALUES
------------------------------------------------------ Appendix IV:3.2

A recent review of a small sample of Canadian wheat entries by
Customs and the Department of Commerce revealed that Customs' and
Census' quality control procedures failed to detect mistakes in the
reported value for some entries.  Customs initiated the review in
early 1998 in order to assess the accuracy of value data it collects
on Canadian wheat imports.  Customs was particularly concerned that
the entered value accurately reflected the transaction price between
the CWB and the U.S.  purchaser of the wheat. 

Customs staff at the ports of Pembina, North Dakota, and Duluth,
Minnesota, reviewed recent entries of wheat made under several large
contracts between the CWB-accredited exporters and buyers in the
United States.  By comparing the entered values to information
contained on invoices and contracts, the staff determined that for
all the entries they reviewed, the entered value was based on the
prices used in the transaction between the CWB's accredited exporter
and the purchaser in the United States.  This determination was
important because it indicated that the values submitted by Canadian
wheat importers represented actual transaction prices rather than
estimated prices based on spot prices on the MGE.\4

However, during the course of the review, the Customs staff found
that in some of the entries, some freight charges, which should have
been reported separately, were included in the entered value.  By
including these freight charges, the importer inflated the value of
the shipment.  Customs reported this finding to the Commerce
Department's International Trade Administration, whose staff then
reviewed a sample of Canadian wheat entries.  Of the 19 entries they
examined, 6 included freight in the entered value.  Because of the
small number of entries reviewed by Customs and Commerce, the
agencies were unable to determine the extent to which such errors
affected the accuracy of reported Canadian wheat import data. 
However, Customs officials noted that none of the errors in value
resulting from the inclusion of freight charges exceeded $10,000. 
Census does not require corrections to the import database for value
errors lower than this threshold because it believes that they will
not significantly affect the accuracy of the overall official import
statistics. 

Customs staff interviewed the Customs brokers that filed the entries
in the reviewed sample to determine why freight charges were included
in some of the entered values.  The staff found that in some
instances wheat importers did not separate the freight charges from
the transaction price in the information they provided their broker
because brokers charge more to file entries with freight charges than
entries with no such charges.  Importers that included freight
charges in the entered value did not incur any Customs fees for doing
so because Canadian wheat imports are duty free under NAFTA. 

Although they only reviewed a small sample of Canadian wheat entries,
Customs officials believe that the inclusion of freight charges in
the entered value was a widespread problem on the northern border. 
They note that most Canadian wheat enters the U.S.  through a few
Customs ports, such as Pembina and Duluth, connected to U.S.  rail
lines.  Most of the wheat entries arriving at these ports are filed
by the same few large Customs brokers interviewed by Customs. 

Since the entry review, Customs has informed brokers that file
Canadian wheat entries that they should not include freight charges
in the entered value.  Customs is currently reviewing a sample of
Canadian wheat entries filed in early 1998 to verify that the entered
value is correct. 


--------------------
\4 Customs did not compile the results of its entry reviews and was
unable to tell us how many entries were involved. 


      TRADE LIBERALIZATION MAY
      AFFECT DATA QUALITY
------------------------------------------------------ Appendix IV:3.3

Both the reporting of Canadian wheat for re-export and the inclusion
of freight charges in the entered value for Canadian wheat shipments
appear to confirm concerns expressed by U.S.  officials and others in
our 1994 report on the processes for measuring trade between the
United States and Canada.  In that report, we noted that Census
officials and others in the statistical community had concerns that
the implementation of NAFTA, including the elimination of duties,
would diminish the accuracy of Customs' statistical information.  We
said that these officials believed that Customs would not be inclined
to scrutinize entry documents solely for the purpose of detecting
statistical errors or to reject entries for what it might consider to
be minor statistical inaccuracies. 

Census officials told us that they are concerned about discrepancies
in Canadian wheat import data such as those uncovered in the two
reviews.  However, they remain confident that the data are
sufficiently accurate for their intended uses such as determining
U.S.  trade balances.  Commerce officials, on the other hand, note
that errors in the reported value of Canadian wheat entries present a
major impediment to using import data to analyze trends in Canadian
wheat prices. 


STE NOTIFICATIONS TO THE WTO FOR
1995-97
=========================================================== Appendix V

Every 3 years all members of the WTO are required to submit
information, in the form of a "new and full notification," on the
nature and extent of their country's state trading enterprise
activities.  WTO members traditionally have been required to list
products covered by STEs, report reasons for introducing and
maintaining STEs, provide some description of their STEs' functions,
and include statistics on the extent of trade accounted for by STEs. 
Since 1995, all STE notifications have been reviewed by the Working
Party on STEs, which has allowed the WTO to better track the
activities of STEs.  According to the WTO, 58 countries, or about
half of all WTO members, complied with the full notification
requirement when last due in 1995.  However, compliance problems
remain, including a lack of understanding of what trading entities
should be listed on the notification and the timeliness of members'
notification submissions.  Members' notifications reveal a wide
variety of products covered and reasons for maintaining state trading
enterprises. 


   STE NOTIFICATION COMPLIANCE HAS
   INCREASED, BUT SOME PROBLEMS
   REMAIN
--------------------------------------------------------- Appendix V:1

In 1995, we reported on the compliance with STE reporting
requirements from 1980 to 1994 and found that compliance was
generally poor.\1 The lack of compliance with notification
requirements was attributed to (1) the problem of what constitutes an
STE, (2) the lack of a systematic review of notifications received,
(3) the low priority some member countries assigned to STE reporting,
and (4) the overall burden of reporting.  Since the creation of the
Working Party on STEs in 1995, compliance has improved.  Fifty
percent of all WTO members submitted a new and full STE notification
for 1995, compared to the previous high of 21.2 percent of members in
1981, another full notification year.  In addition, WTO members are
required to submit "updating notifications" in intervening years, and
the response rate for updating notifications in 1996 and 1997, though
lower than that for 1995, represented an improvement over the
response rates recorded for updating notifications between 1980 and
1994.  During that period, the highest response rate was 15.3 percent
of members, and the lowest was 6.7 percent of members; this compares
to a low of 26 percent of members responding in 1997, shown in table
V.1. 



                               Table V.1
                
                       STE Notifications, 1995-97

                                         Number of
                                   notifications\a       Response rate
Notification type                         received         (percent)\b
------------------------------  ------------------  ------------------
New and full (1995)                           58\c                  50
Updating\d (1996)                               48                  41
Updating (1997)                                 30                  26
----------------------------------------------------------------------
\a The number of notifications reflects the fact that the EC submits
a single notification that covers all 15 of its member states. 

\b The response rate has been calculated on a base WTO membership of
117, which counts the EC as a single member.  The official total
membership of the WTO (132) includes the EC's 15 member states
counted individually as well as the EC itself. 

\c According to WTO documents, 23 of the 58 new and full
notifications were also counted as updating notifications, due to
their late submission (see discussion to follow). 

\d In updating notifications, members are supposed to indicate if any
changes to their state trading regimes have taken place since their
last notification. 

Source:  STE notifications to the WTO Secretariat. 

WTO provisions allow countries to question the completeness of other
members' STE notifications.\2 Through the Working Party on STEs,
members submit written questions regarding other countries'
notifications and receive written responses.\3 According to the WTO
Secretariat, this process itself has brought greater transparency to
the notification process.  U.S.  officials told us that the Working
Party provides a good forum to apply pressure on members that are not
in full compliance with the reporting requirements, either for the
lateness or the incompleteness of their submissions.  According to
WTO Secretariat officials, in at least one case, a member that
originally notified that it did not have STEs amended its
notification and reported several STEs, following pressure from the
United States and other Working Party members. 


--------------------
\1 See State Trading Enterprises:  Compliance With the General
Agreement on Tariffs and Trade (GAO/GGD-95-208, Aug.  30, 1995). 

\2 Specifically, these provisions were included in the 1994
Understanding on the Interpretation of Article XVII of the General
Agreement on Tariffs and Trade, which is found in annex 1 of the WTO
agreement. 

\3 If a WTO member is still not satisfied with another members'
notification after questioning and discussion in the Working Party,
the member can submit a "counternotification" to the WTO Council for
Trade in Goods raising its concerns.  As of June 1998, no member has
yet submitted a counternotification against another member.  Although
the provision remains untested, U.S.  officials we spoke with believe
the ability to do so remains important. 


      CONTINUING PROBLEMS
------------------------------------------------------- Appendix V:1.1

Despite progress in the Working Party, some problems remain,
including a lack of understanding of what trading entities fall under
the WTO's definition for state trading enterprises and the timeliness
of member countries' responses to STE questionnaires.  WTO
Secretariat officials we spoke with said that the STE definition
under article XVII is "still very vague." Differing interpretations
of what constitutes state trading enterprises may have resulted in
inconsistencies in members' notifications.  For example, three
Central European countries submitted notifications claiming that they
had no STEs under article XVII, while three other countries with
similarly structured economies from the same region claimed that they
had them.  (For more information on whether individual countries
reported maintaining state trading enterprises, see table V.2.)

Members' timeliness in submitting STE notifications has been one of
the principal areas of concern among Working Party members. 
According to a WTO Secretariat official, "virtually all countries"
have missed the deadlines for submitting notifications.  For example,
WTO documents indicate that 23 out of the 58 new and full
notifications submitted for 1995 were so late that the Secretariat
considered them updating notifications as well.\4




                                    Table V.2
                     
                           WTO State Trading Enterprise
                        Notifications by Country, 1995-97

              New and full     Updating         Updating
              notification     notification     notification     State trading
Country       (1995)           (1996)           (1997)           reported\a
------------  ---------------  ---------------  ---------------  ---------------
Argentina     X                X                X

Australia     X                X                X                X

Barbados      X                                                  X

Botswana      X                X

Brazil        X                X                X                X

Bulgaria      X                X

Canada        X                X                X                X

Chile         X                X                X                X

Colombia      X                X                                 X

Costa Rica    X                                                  X

Cï¿½te          X                X                                 X
d'Ivoire

Cyprus        X                                                  X

Czech         X                                                  X
Republic

El Salvador   X                X

EC            X                X                                 X

Gambia        X                X                X

Guinea,       X
Republic

Haiti         X                X                X

Honduras      X

Hong Kong,    X                X                X
China

Hungary       X                X                X

Iceland       X                X                                 X

India         X                                                  X

Indonesia     X                X                                 X

Israel        X                X                                 X

Jamaica       X                X                X                X

Japan         X                X                X                X

Korea         X                X                                 X

Liechtenstei  X                X                X                X
n

Macau         X                X                X

Malaysia      X                                                  X

Malta         X                X                                 X

Mauritius     X                X                X                X

Mexico        X                X

Morocco       X                                                  X

Namibia       X                X                                 X

New Zealand   X                X                X                X

Nigeria       X                X                X

Norway        X                X                X                X

Pakistan      X                X                X

Peru          X                X                X                X

Philippines   X                X                                 X

Poland        X                                                  X

Qatar         X                X                X

Romania       X                X                X

Singapore     X                X                X

Slovak        X                X                                 X
Republic

Slovenia      X                X                                 X

South Africa  X                X                X                X

Switzerland   X                X                X                X

Thailand      X                X                X                X

Tunisia       X                X                                 X

Turkey        X                X                X                X

United Arab   X                X
Emirates

United        X                X                X                X
States

Uruguay       X                X                X                X

Venezuela     X                X                X                X

Zambia        X                X                X

================================================================================
Total         58               48               30               39
--------------------------------------------------------------------------------
Note:  The WTO Secretariat considered 23 of the "new and full"
notifications as also updating notifications due to the lateness of
their submission. 

\a As reported in the country's latest notification. 

Source:  Article XVII notifications provided to the WTO Secretariat. 


--------------------
\4 According to USDA officials, WTO members' timely submission of
notifications is a pervasive problem in the WTO, affecting many other
issues besides STE monitoring. 


   NOTIFICATIONS SHOW WIDE RANGE
   OF PRODUCTS COVERED AND REASONS
   FOR MAINTAINING STES
--------------------------------------------------------- Appendix V:2

WTO notifications provided some insight into the activities of STEs
in the 39 member countries that reported maintaining some STEs
between 1995 and 1997.  As required by the WTO, these member
countries listed the products or groups of products for which they
maintain STEs in their notifications.  Figure V.1 shows which
commodities were most frequently reported by countries as being
subject to state trading.  While members maintained STEs for a wide
variety of products, the majority of STEs described in members'
notifications operated in the agricultural sector.  In addition to
the products listed in figure V.1, some member countries also
reported maintaining STEs for tea, pork, poultry and eggs, and wool,
among other products.  A few member countries reported maintaining
STEs in nonagricultural products such as chemicals and minerals and
ore. 

   Figure V.1:  State Trading
   Notifications by Product
   Sector, 1995-97

   (See figure in printed
   edition.)

Note:  Data are for products for which at least five WTO members
reported maintaining state trading. 

Source:  GAO analysis of STE notifications. 

WTO members also reported a number of reasons for introducing and
maintaining STEs in their notifications.  For example, many WTO
members reported using STEs to regulate prices in their domestic
market.  Some countries sought to maintain market stability by
limiting excessive price movements and by guaranteeing minimum or
maximum prices for selected products.  Other members reported that
government intervention through STEs made staple foods available to
the general population at an affordable price or to consumers in the
economically weaker sectors at the lowest possible price.  Numerous
member countries also reported using STEs to prevent disruptions in
their domestic food supply.  Additionally, some member countries
reported using STEs to provide producers with "the opportunity to
obtain a fair return for their labor and investment" or to help
"maximize the income" of farmers. 

The notifications also included a description of the operations of
STEs in WTO member countries.  For example, many countries reported
that their STEs held exclusive rights to import and/or export covered
products.  In addition, in some cases STEs acted as the sole agent in
the processing, marketing, distribution, and purchasing of controlled
products.  STEs in some member countries were authorized to issue
licenses or permits to import or export products and to process
controlled products.  Furthermore, some members reported that STEs
were involved in ensuring the quality of covered products and
supporting research and development in those product sectors. 


LEGAL REMEDIES
========================================================== Appendix VI

Various trade remedies are available to the United States under
international agreements and U.S.  law.  These include dispute
settlement mechanisms for resolving government-to-government
disputes, as well as U.S.  laws that authorize U.S.  agencies to
conduct investigations and, where warranted, provide relief to U.S. 
industry.  The following section provides an overview of these
remedies. 


   DISPUTE SETTLEMENT--GATT/WTO
-------------------------------------------------------- Appendix VI:1

The WTO dispute settlement rules are incorporated in the Uruguay
Round's Understanding on Rules and Procedures Governing the
Settlement of Disputes (Dispute Settlement Understanding), which is
annex 2 to the WTO agreement.  These rules apply to disputes under
all the WTO agreements.  The dispute settlement mechanism is intended
to be a central element in providing security and predictability to
the multilateral trading system.  The dispute settlement mechanism is
available for government-to-government disputes in which a WTO member
believes that another has failed to meet an obligation agreed to in
the WTO agreements.  A panel report under the WTO Dispute Settlement
Understanding must be adopted by the Dispute Settlement Body, unless
there is a consensus not to adopt it.  Prior to the establishment of
the WTO in 1995, disputes were settled by GATT panels, whose
decisions could be blocked by any party, including the country that
did not prevail in the dispute. 


   DISPUTE SETTLEMENT--CFTA/NAFTA
-------------------------------------------------------- Appendix VI:2

Three separate dispute settlement provisions of NAFTA are set forth
in chapters 19, 20, and 11.  They provide mechanisms for dealing with
the three primary areas in which disputes can arise; they include,
respectively, antidumping and countervailing duty matters, the
interpretation and application of NAFTA, and the protection of
investor rights.  Chapter 19 lays out the system for the review of
antidumping and countervailing duty final determinations made by the
domestic agency of the importing country in the dispute.  Chapter 19
contains a mechanism for replacing judicial review of final
antidumping and countervailing duty determinations involving imports
from Canada, Mexico, and the United States with review by
independent, five-member, binational panels of experts drawn from an
agreed roster developed by the signatories.  Chapter 20 provides for
five-member panels of experts to render decisions and
recommendations.  Chapter 20 establishes NAFTA's procedures for
settling disputes between signatory governments regarding NAFTA's
interpretation and application.  NAFTA is unique among trade
agreements because, under chapter 11, it contains a comprehensive
regime for settling disputes between foreign investors and host
governments. 


   SECTION 301 INVESTIGATIONS
-------------------------------------------------------- Appendix VI:3

Sections 301-309 of the Trade Act of 1974, as amended,\1 commonly
referred to as "Section 301," gives the President broad discretion to
enforce U.S.  trade rights granted by trade agreements and to attempt
to eliminate acts, policies, or practices of a foreign government
that violate a trade agreement or are unjustifiable, discriminatory,
or unreasonable and burden or restrict U.S.  commerce.  Section 301
provides a domestic procedure under which affected enterprises or
individuals may petition the U.S.  Trade Representative to initiate
actions to enforce U.S.  rights under bilateral and multilateral
trade agreements.  USTR also may initiate Section 301 investigations
at its own discretion. 

Once an investigation is undertaken, USTR must consult with the
foreign country alleged to have engaged in the unfair trade
practices.  If a mutually acceptable solution is not reached, and the
complaint concerns a breach of an international agreement that has a
dispute settlement mechanism, USTR is obligated to commence dispute
settlement procedures as provided for in that agreement.\2

If the determination at the end of the investigation is affirmative
and involves a trade agreement or an alleged unjustifiable practice
that burdens or restricts U.S.  commerce, USTR must take action.  If
the determination is affirmative and involves an unreasonable or
discriminatory practice that burdens or restricts U.S.  commerce,
USTR may decide which actions, if any, are appropriate.  Section 301
permits USTR to decide to forgo trade action if a dispute settlement
panel finds no violation of a trade agreement or that the offending
action does not deny U.S.  legal rights or nullify benefits under an
agreement.\3 Remedies available include suspending trade agreement
concessions; imposing duties, fees, or various import restraints; and
denying service licenses.\4


--------------------
\1 19 U.S.C.  2411. 

\2 19 U.S.C.  2413(a)(2). 

\3 19 U.S.C.  2411(a)(2). 

\4 19 U.S.C.  2411(c). 


   U.S.  ANTIDUMPING LAW
-------------------------------------------------------- Appendix VI:4

The antidumping law is set forth in title VII of the Tariff Act of
1930, as amended.\5 The law allows U.S.  industry, including
agricultural goods producers, to petition the government to impose
additional duties on imports that the government determines are
dumped and where the government determines that there is material
injury to a U.S.  industry producing a like product by reason of the
dumped imports. 

Dumping is generally defined as the sale of an exported product at a
price lower than that charged for the like product in the "home"
market of the exporters or at a price below cost.  U.S.  antidumping
laws seek to redress this practice as a form of unfair price
discrimination if an industry in the United States is materially
injured or threatened with material injury by reason of the dumped
imports.  The U.S.  antidumping law is applied in the context of
internationally negotiated rules on antidumping proceedings and
measures under the WTO antidumping agreement.\6

Under the law, private parties petition the Department of Commerce
and the ITC on behalf of a U.S.  industry to determine whether a
class or kind of merchandise is being sold in the United States at
dumped prices and whether those imports are sufficiently injurious. 
Commerce is to determine whether sales are at "less than fair value"
by calculating the difference between the normal value of the product
(for example, the price in the home market) and the export price (for
example, the price in the United States).  In a parallel
investigation, the ITC determines whether a U.S.  industry is
materially injured or threatened with material injury or whether the
establishment of an industry in the United States is materially
retarded by reason of the imports determined by Commerce to have been
dumped, using criteria specified in the act.\7 If the agencies find
that both dumping and the requisite injury exist, Commerce then
calculates the amount of duties imposed on each importer to offset
the price difference between the U.S.  price and the normal value of
the imported merchandise. 

The information that must be provided in an antidumping petition is
set forth in federal regulations.\8 The Commerce Department
determines whether the petition "alleges the elements necessary for
the importation of a duty," based on "information reasonably
available to the petitioner supporting the allegation."\9 The party
alleged to be dumping must respond to Department of Commerce
questionnaires on sales volumes and prices that the Department
creates and later verifies through on-the-spot investigations.  A
failure to respond to the questionnaire or to permit verification may
lead to a dumping determination supported by the "best information
available," that is, most likely the petitioner's or other
respondent's written submissions.\10 Because this result may be
undesirable to the party alleged to be dumping, the best information
available rule has the effect of a subpoena, and most respondents
answer the Commerce Department's questionnaires.  According to the
Department of Commerce, aggregate values entered on U.S.  Customs
forms have often been used by domestic industries to establish U.S. 
sales prices in an allegation of dumping when filing an antidumping
petition.  Commerce officials further stated that although
information regarding the prices, terms, and physical characteristics
of the merchandise entering the United States is an important element
of a dumping allegation in an antidumping petition, such information
has been compiled from a variety of alternative sources. 


--------------------
\5 19 U.S.C.  1673 et seq. 

\6 Section 1317 of the Omnibus Trade and Competitiveness Act of 1988
(19 U.S.C.  1677k) estabishes procedures for the U.S.  Trade
Representative to request a foreign government to take action against
third-country dumping that is injuring a U.S.  industry. 

\7 19 U.S.C.  1677. 

\8 19 C.F.R.  353.12. 

\9 19 U.S.C.  1673a(c)(1). 

\10 19 U.S.C.  1677e(b). 


   U.S.  COUNTERVAILING DUTY LAW
-------------------------------------------------------- Appendix VI:5

Subsidies provided by a government or public body may confer benefits
on the recipient that provide an unfair advantage in international
trade, such as allowing a producer to sell its products at a lower
price than that of the competition.  U.S.  countervailing duty laws
attempt to redress the adverse effects to a U.S.  industry that seeks
such relief. 

The Tariff Act of 1930, as amended, provides for the imposition of
countervailing duties whenever certain actionable subsidies are
bestowed by a foreign government or public entity within a foreign
country upon the manufacture, production, or export of any article
that is subsequently imported into the United States causing
injury.\11

The process for countervailing duty investigations is similar to that
for dumping.  Commerce must determine whether a country is providing
certain actionable subsidies to its industry or group of industries,
either directly or indirectly.  If Commerce finds that an actionable
subsidy exists and the ITC determines that a U.S.  industry is
materially injured or threatened with material injury or that the
establishment of an industry in the United States is materially
retarded by reason of imports of the subsidized product, Commerce
then calculates the amount of duties to be imposed on each importer
to offset the subsidies provided for the manufacture, production, or
export of that product.  While governments can take many actions that
could be said to confer benefits on their producers, not all of these
actions are viewed as countervailable subsidies.  Generally, the
benefit must be limited to a specific group of firms or industries,
or to a firm's export activities, in order to be covered under this
law.\12


--------------------
\11 19 U.S.C.  1671 et seq. 

\12 19 U.S.C.  1677(5A). 


   SECTION 332 INVESTIGATIONS OF
   TRADE AND TARIFF MATTERS
-------------------------------------------------------- Appendix VI:6

Under section 332 of the Tariff Act of 1930, as amended,\13 the ITC
conducts investigations into trade and tariff matters upon request of
the President,\14 the Committee on Ways and Means of the House of
Representatives, the Committee on Finance of the Senate, either House
of the Congress, or upon the ITC's own initiative.  Unlike other
investigations by the ITC, the statute does not provide for
initiating section 332 investigations by public petition.  The ITC
does, however, seek written submissions and participation in public
hearings during most section 332 investigations. 


--------------------
\13 19 U.S.C.  1332. 

\14 The President has delegated authority to request investigations
to the USTR. 


   INVESTIGATIONS UNDER THE
   AGRICULTURAL ADJUSTMENT ACT
-------------------------------------------------------- Appendix VI:7

Under the provisions of section 22 of the Agricultural Adjustment Act
of 1933, as amended,\15 the President can impose fees or quotas on
imported agricultural commodities that undermine any USDA domestic
commodity support program.  The act directs the Secretary of
Agriculture to advise the President when the Secretary believes that
an article is being imported in such quantities as to interfere with
or affect any USDA support program or other agricultural program.  If
the President agrees, he or she must order an investigation by the
ITC.  Based upon the ITC investigation, the President can make an
affirmative determination and impose import fees or import quotas on
the product in question. 

These provisions are no longer applicable to products of countries or
entities that are WTO members.  Title IV of the Uruguay Round
implementing legislation eliminates the use of quantitative
restrictions on agricultural goods under section 22 for products of
WTO members. 


--------------------
\15 7 U.S.C.  624. 


   SAFEGUARDS--ITC INVESTIGATIONS
   OF SERIOUS INJURY TO U.S. 
   INDUSTRIES FROM INCREASED
   IMPORTS
-------------------------------------------------------- Appendix VI:8

A safeguard is a temporary import control or other trade restriction
a country imposes to assist domestic industry seriously injured by
increased imports that are fairly traded.  Generally they must be
applied to merchandise from all sources without discriminating
against any particular country.  The safeguard clause in article XIX
of GATT allows WTO members to obtain emergency relief from increased
imports.\16 Sections 201-204 of the Trade Act of 1974, as amended,\17
authorize the ITC to conduct investigations concerning whether an
article is being imported into the United States in such increased
quantities as to be a substantial cause of serious injury, or the
threat thereof, to the domestic industry producing a like or directly
competitive article.\18

In making its determination, the ITC is required to take into account
all relevant economic factors.\19 For example, in determining serious
injury, the ITC must consider whether (1) productive facilities in
the industry have been significantly idled, (2) a significant number
of firms have been able to operate at a reasonable level of profit,
and (3) significant unemployment or underemployment has occurred
within the industry.  In determining the threat of serious injury,
the ITC must consider, among other factors, a decline in sales or
market share; a higher and growing inventory; and a downward trend in
production, profits, wages, productivity, or employment in the
industry.  The ITC is required to consider the condition of the
domestic industry over the relevant business cycle and examine
factors other than imports that may be the cause of serious injury,
or threat of serious injury, to the domestic industry. 

If the ITC makes an affirmative injury determination, it is required
to recommend the action that would most effectively address the
serious injury or threat to the domestic industry.\20 The ITC may
recommend to the President relief in the form of new or increased
tariffs, quotas, trade adjustment assistance to workers, or a
combination of these measures.  The President may then take action
consistent with the ITC recommendation or other action deemed
appropriate.\21 The President must report to the Congress on the
action that he or she is taking.  If he or she takes action that
differs from that recommended by the ITC or takes no action at all,
the Congress may, through a joint resolution, direct the President to
proclaim the relief recommended by the ITC.\22


--------------------
\16 Additionally, the WTO Agreement on Agriculture provides for the
imposition of special agricultural safeguards for designated
agricultural products that have been subject to tariffication, such
as beef, cheese, and peanuts.  There are two types of special
safeguards, each of which allows for additional duties to be imposed: 
a "volume-based" safeguard may be applied whenever imports exceed a
certain quantity, and a "price-based" safeguard may be applied to
products whose price is below a price threshold.  These special
agricultural safeguards, however, do not apply to products from
Canada or Mexico. 

\17 19 U.S.C.  2251-54. 

\18 The ITC may initiate an investigation on its own motion; at the
request of the President, USTR, the House Committee on Ways and
Means, or the Senate Committee on Finance; or upon petition of an
entity representative of an industry. 

\19 19 U.S.C.  2252(c). 

\20 19 U.S.C.  2252(e). 

\21 In addition to these recommendations, the ITC may also recommend
that the President initiate international negotiations to address the
underlying cause of the increase in imports of the article or
otherwise to alleviate the injury or threat.  The ITC may, in
addition, recommend that the President implement any other action
authorized under law that is likely to facilitate positive adjustment
to import competition (19 U.S.C.  2252(e)(4)). 

\22 19 U.S.C.  2253(c). 


   SAFEGUARD--BILATERAL EMERGENCY
   ACTION SAFEGUARD PROCEDURES
-------------------------------------------------------- Appendix VI:9

NAFTA provides for a separate bilateral safeguard action in a case of
injury due to the reduction or elimination of duties under NAFTA.\23

Under U.S.  NAFTA implementing legislation,\24 the process for
seeking relief is similar procedurally to that for global safeguard
investigations.\25 If the ITC finds that, as a result of the
reduction or elimination of a duty provided for under NAFTA, a
product from Canada or Mexico is being imported in such increased
quantities and under such conditions that imports of the product,
alone, constitute a substantial cause of serious injury, or the
threat of serious injury, to the domestic industry producing a like
or directly comparable product, it makes a recommendation to the
President.  The President is responsible for making the final
decision on whether to grant relief; available relief is limited to
an increase in duty to the lesser of the pre-NAFTA rate or the
current most-favored-nation rate.  Unlike the general safeguard
provision under GATT, NAFTA requires that a party taking such action
provide mutually agreed compensation in the form of concessions
having substantially equivalent trade effects or the equivalent value
of the additional duties expected to result from the relief
action.\26 Provisional relief is available under these bilateral
emergency action procedures. 


--------------------
\23 As a general rule, these bilateral actions may be taken only
during NAFTA's transitional period (that is, the 10- to 15-year
period during which duties are being phased out). 

\24 19 U.S.C.  3352. 

\25 NAFTA countries retain their rights to use general safeguards,
although NAFTA limits the ability of a NAFTA country to apply a
general safeguard to another NAFTA country.  A NAFTA party wishing to
apply a general safeguard to another NAFTA country must find that
imports from the NAFTA country account for a substantial share of
total imports and contribute importantly to the serious injury or
threat caused by the imports in question. 

\26 NAFTA article 801.4. 


APPLICATION OF U.S.  ANTITRUST
LAWS AND THE CWB
========================================================= Appendix VII

It is well established through statute\1 and case law that U.S. 
antitrust law can reach beyond our borders to address foreign
activity if that activity has the required effect in the United
States.  Antitrust enforcement, whether initiated (1) by the U.S. 
government through the Department of Justice or the Federal Trade
Commission,\2 (2) by private parties,\3 or (3) by state attorneys
general,\4 is carried out through legal proceedings in U.S.  courts,
or in the case of the Federal Trade Commission, through
administrative proceedings.  When a court applies our antitrust laws,
whether domestically or internationally, it must determine whether
particular conduct constitutes a practice covered by a provision
within those laws.  Analyzing the applicability of antitrust law to
the CWB, however, is further complicated by the nature of the CWB as
a quasi-governmental entity, certain acts of which could be covered
by sovereign immunity and related doctrines.  Thus, any potential
applicability of U.S.  antitrust law to the CWB will depend on the
specific conduct or activities of the CWB. 

Department of Justice officials in the Antitrust Division told us
that the division has not, at least within the last 20 years,
initiated any action against the CWB, nor were they aware of any
deliberations contemplating such action.  These officials, as well as
an official at the Federal Trade Commission, stated that they could
not provide a definitive answer to the question of the applicability
of U.S.  antitrust laws to the CWB, emphasizing the fact-specific
nature of such cases.  A general principle that emerges from a review
of applicable case law and discussion with government officials,
however, is that courts would be more likely to apply U.S.  antitrust
law to CWB activities where those activities are not compelled under
Canadian law and where the CWB is acting as a participant in the
wheat market and not as a regulator.  On the other hand, courts are
unlikely to accept a challenge against CWB conduct that is required
under Canadian law governing the marketing and export of wheat even
where that conduct conflicts with U.S.  antitrust law.  Courts are
also unlikely to find jurisdiction over activities of the CWB that
could be considered sovereign activity of the Canadian government. 

While other U.S.  laws may possibly be relevant to potential
antitrust theories,\5 a broad prohibition on anticompetitive behavior
is contained in the Sherman Act of 1890.\6 Section 1 makes illegal
"[e]very contract, combination .  .  .  or conspiracy, in restraint
of commerce or trade among the several States, or with foreign
nations."\7 Section 2 of the Sherman Act prohibits monopolization of,
attempts to monopolize, and conspiracies to monopolize any part of
trade or commerce among the several states or with foreign nations. 
Under U.S.  law, however, U.S.  producers of agricultural products
are permitted to act together in, among other things, processing and
marketing their products and, thus, enjoy a qualified immunity from
antitrust laws.\8


--------------------
\1 15 U.S.C.  6a. 

\2 The Department of Justice and the Federal Trade Commission share
responsibility for enforcing the antitrust laws at the federal level. 

\3 It is reported that private actions accounted for approximately 95
percent of all antitrust litigation in the U.S.  District Courts in
1997.  See Judicial Business of the United States Courts, Table C-2
(Washington D.C.:  Administrative Office of the U.S.  Courts, 1998). 

\4 State Attorneys General enforce U.S.  antitrust laws pursuant to
section 4c of the Clayton Act of 1914, as amended.  15 U.S.C.  15c. 
State Attorneys General also enforce state antitrust laws. 

\5 For example, the Clayton Act of 1914 (15 U.S.C.  12-27), prohibits
a variety of business practices whose effect may be to substantially
lessen competition or tend to create a monopoly.  According to the
"Antitrust Enforcement Guidelines for International Operations"
(April 1995) (Antitrust Guidelines), the Clayton Act expands on the
general prohibitions of the Sherman Act of 1890 and addresses
anticompetitive problems in their incipiency. 

\6 15 U.S.C.  1-7. 

\7 15 U.S.C.  1. 

\8 Capper-Volstead Act, 7 U.S.C.  291. 


   EXTRATERRITORIAL REACH OF U.S. 
   ANTITRUST LAWS
------------------------------------------------------- Appendix VII:1

A number of issues have an effect on the extraterritorial application
of U.S.  antitrust laws.  These issues include subject matter
jurisdiction, personal jurisdiction, international comity, the act of
state doctrine, and foreign sovereign compulsion. 


      SUBJECT MATTER JURISDICTION
----------------------------------------------------- Appendix VII:1.1

U.S.  courts have held that the Sherman Act applies to foreign
conduct that was meant to produce and did in fact produce some
substantial effect in the United States.\9 Thus, for example, where
foreign companies organize a cartel for the purpose of raising the
price of a product in the United States, it will have met the intent
element of the test.  Whether the imports have a substantial effect
in the United States, of course, will depend on the particular facts
present. 


--------------------
\9 Hartford Fire Insurance Co.  v.  California, 509 U.S.  764 (1993). 


      PERSONAL JURISDICTION
----------------------------------------------------- Appendix VII:1.2

In order to bring a suit in a U.S.  court, the court must have
personal jurisdiction over the defendant.  Courts have required that
the defendant have "minimum contacts" with the United States such
that an exercise of jurisdiction comports with "fair play and
substantial justice."\10 The antitrust guidelines state that the
Department of Justice and the Federal Trade Commission interpret the
concept of transacting business pragmatically.  For example,
jurisdiction over a foreign entity may be established through a
related company in the United States acting as its agent or alter
ego. 

The 1976 Foreign Sovereign Immunities Act provides immunity from suit
in U.S.  courts for the sovereign acts of foreign states and agencies
or instrumentalities owned by a foreign state.\11 Under the act, a
key question for establishing personal jurisdiction over the CWB
would be whether the alleged anticompetitive activities are sovereign
or commercial as defined in the act.  A foreign government is not
immune from suit in any case "in which the action is based upon a
commercial activity carried on in the United States by the foreign
state; or upon an act performed in the United States in connection
with a commercial activity of the foreign state elsewhere; or upon an
act outside the territory of the United States in connection with a
commercial activity of the foreign state elsewhere and that act
causes a direct effect in the United States."\12

The antitrust guidelines state that in attempting to distinguish
commercial from sovereign activity, courts have considered whether
the conduct being challenged is customarily performed for profit and
whether the conduct is of a type only a sovereign can perform.  The
guidelines conclude that most activities of government-owned
corporations operating in the commercial marketplace will be subject
to U.S.  antitrust laws to the same extent as the activities of
foreign, privately owned firms. 


--------------------
\10 International Shoe Co.  v.  Washington, 326 U.S.  310 (1945). 

\11 28 U.S.C.  1602, 1603(a),(b). 

\12 28 U.S.C.  1605(a)(2). 


      INTERNATIONAL COMITY
----------------------------------------------------- Appendix VII:1.3

Where two governments prescribe inconsistent conduct of the same
person, the U.S.  courts have held that they must "consider, in good
faith, moderating the exercise of [their] enforcement
jurisdiction."\13 Potential or actual conflicts among national legal
systems are often avoided or moderated by deference shown by one
nation's courts to the courts and laws of another state, a deference
referred to as "comity." Although the application of comity is
discretionary, courts have enumerated specific factors to be
considered, including the degree of conflict with foreign law or
policy. 

In 1993, the Supreme Court had an opportunity to clarify the law
concerning the degree of conflict factor for purposes of comity
analysis.\14 In that case, 19 states and numerous private plaintiffs
had brought cases against domestic insurers and domestic and foreign
reinsurers of general commercial liability.  The plaintiffs alleged
that the insurance companies had conspired to restrict the terms of
coverage of commercial general liability insurance available in the
United States.  The district court dismissed the case on the grounds
of comity, finding that a "significant" conflict with English law and
policy would result from application of U.S.  antitrust law to the
British reinsurers' conduct and operations in the United Kingdom and
that the interference and harm caused by the conflict was not
outweighed by other factors.  The Court of Appeals for the Ninth
Circuit reweighed the factors that figured in the comity balance and
reversed the decision. 

The Supreme Court held that comity did not justify dismissal.  The
Court found that subject matter jurisdiction existed since there had
been foreign conduct that "was meant to produce and did in fact
produce some substantial effect in the United States." The Court
rejected the claim that conflict with foreign law existed, holding
that no conflict exists for purposes of an international comity
analysis if the person subject to the regulation by two states can
comply with both.  The Court determined that conflict did not exist
because the defendants could have complied with the law of both
nations at the same time.  Thus, in a proceeding against the CWB, in
considering whether comity would weigh against review, one factor a
court might look to would be whether the activities that form the
basis of the alleged antitrust violation were required by Canadian
legislation governing the CWB's activities. 


--------------------
\13 Timberlane Lumber Co.  v.  Bank of America, 549 F.2d 597 (9th
Cir.  1976). 

\14 Hartford Fire Insurance Co.  v.  California, 509 U.S.  764
(1993). 


      THE ACT OF STATE DOCTRINE
----------------------------------------------------- Appendix VII:1.4

According to Department of Justice and Federal Trade Commission
officials, a key defense the CWB may raise against the application of
U.S.  antitrust law to activities of the CWB is the act of state
doctrine.  As described in the antitrust guidelines, the act of state
doctrine is a judge-made rule of federal common law.\15 It applies
only if the specific conduct complained of is a public act of the
foreign sovereign within its territorial jurisdiction on matters
pertaining to its governmental sovereignty.  The guidelines explain
further that while the act of state doctrine does not compel
dismissal as a matter of course, judicial abstention is appropriate
in a case where the court must "declare invalid, and thus ineffective
as a rule of decision in the U.S.  courts .  .  .  the official act
of a foreign sovereign."\16

The act of state doctrine, however, has been held to be inapplicable
to the commercial activities of a foreign state.\17 In this regard,
the antitrust guidelines state that the U.S.  government would not
challenge foreign acts of state if the fact and circumstances
indicate that (1) the specific conduct complained of is a public act
of the sovereign; (2) the act was taken within the territorial
jurisdiction of the sovereign; and (3) the matter is governmental,
rather than commercial.  Determining whether a particular action is a
commercial activity rather than an act of state is a fact-specific
question.  According to an Federal Trade Commission official, if the
CWB were viewed as a regulator of wheat rather than a participant in
the wheat market, that is, if the CWB were considered by a U.S. 
court as a regulating arm of government, then its activity could be
immune from the reach of U.S.  antitrust law.\18 On the other hand,
if a court considered the CWB to be, in effect, a
government-chartered entity engaged in a commercial endeavor, the act
of state doctrine may not provide immunity to the CWB. 


--------------------
\15 Banco Nacional de Cuba v.  Sabbatino, 376 U.S.  398 (1964). 

\16 W.S.  Kirkpatrick & Co.  v.  Environmental Tectonics Corp., 493
U.S.  400 (1990). 

\17 Alfred Dunhill of London, Inc.  v.  Republic of Cuba, 425 U.S. 
682 (1976). 

\18 See International Assoc'n of Machinists and Aerospace Workers v. 
OPEC, 477 F.  Supp.  553 (1979), aff'd.  649 F.2d 1354 (1981), cert. 
denied 454 U.S.  1163 (1982). 


      FOREIGN SOVEREIGN COMPULSION
----------------------------------------------------- Appendix VII:1.5

Under circumstances where the foreign sovereign has compelled the
very conduct that the U.S.  antitrust law prohibits, the Department
of Justice and the Federal Trade Commission will recognize a foreign
sovereign compulsion defense.\19

The scope of this defense is considered limited,\20 and the
Department of Justice and the Federal Trade Commission will refrain
from enforcement actions on the grounds of foreign sovereign
compulsion only when three criteria are satisfied:  (1) the foreign
government must have compelled the anticompetitive conduct under
circumstances in which a refusal to comply with the foreign
government's command would give rise to the imposition of penal or
severe sanctions; (2) the compelled conduct can be accomplished
entirely within its own territory; and (3) the order must come from
the foreign government acting in its governmental capacity. 

The foreign sovereign compulsion defense, as well as the act of state
and comity doctrines, were invoked to dismiss a recent antitrust
challenge to an STE.  In that case in which a private plaintiff
alleged that the New Zealand Dairy Board violated the Sherman Act,
the District Court dismissed the action, finding that there was an
actual and material conflict between U.S.  antitrust law and New
Zealand law regarding the export of dairy products.\21 The court
looked to the underlying statutory scheme empowering the Board and
essentially determined that the Board's conduct was required by its
statute.  The court declined jurisdiction on the grounds of foreign
sovereign compulsion, act of state, and international comity.  While
not specifically explained in the decision, to the extent the Board
is a participant in the market engaging in activities compelled by
New Zealand law, the foreign sovereign compulsion doctrine would
appear to apply.  According to the Department of Justice and Federal
Trade Commission officials, however, the foreign sovereign compulsion
doctrine is usually limited to private parties.  The decision of the
court demonstrates the interrelationship of these doctrines, each of
which could be significant in analyzing the potential applicability
of U.S.  antitrust law to a quasi-governmental entity like the CWB. 


--------------------
\19 See Antitrust Guidelines; Interamerican Refining Corp.  v. 
Texaco Maracaibo, Inc., 307 F.  Supp.  1291 (1970) (antitrust
immunity if illegal acts were compelled by foreign sovereign). 

\20 See In re Japanese Electronic Products Antitrust Litigation, 723
F.2d 238 (1983). 

\21 Trugman-Nash, Inc.  v.  New Zealand Dairy Board, 954 F.  Supp. 
733 (1997). 


MAJOR CONTRIBUTORS TO THIS REPORT
======================================================== Appendix VIII


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------ Appendix VIII:1

Phillip Thomas
Kimberly Gianopoulos
Emil Friberg
Nina Pfeiffer
Carolyn Black-Bagdoyan
Rona Mendelsohn


   OFFICE OF THE GENERAL COUNSEL,
   WASHINGTON, D.C. 
------------------------------------------------------ Appendix VIII:2

Richard Burkard
Herbert Dunn


   OFFICE OF THE CHIEF ECONOMIST,
   WASHINGTON, D.C. 
------------------------------------------------------ Appendix VIII:3

Loren Yager
Daniel Coates


   LOS ANGELES FIELD OFFICE
------------------------------------------------------ Appendix VIII:4

Edward Laughlin
Larry Thomas

RELATED GAO PRODUCTS

Agriculture Trade Agreements:  Selected Implementation Issues
(GAO/T-NSIAD-98-106, Feb.  12, 1998). 

U.S.  Agricultural Exports:  Strong Growth Likely But U.S.  Export
Assistance Programs' Contribution Uncertain (GAO/NSIAD-97-260, Sept. 
30, 1997). 

Canada, Australia, and New Zealand:  Potential Ability of
Agricultural State Trading Enterprises to Distort Trade
(GAO/NSIAD-96-94, June 24, 1996). 

State Trading Enterprises:  Compliance With the General Agreement on
Tariffs and Trade (GAO/GGD-95-208, Aug.  30, 1995). 

Summary of Trade Remedy Laws Available to Investigate State Trading
Enterprises and Encourage Behavior Consistent with Fair Trade
(GAO/OGC-95-24, July 28, 1995). 

International Trade:  Canada and Australia Rely Heavily on Wheat
Boards to Market Grain (GAO/NSIAD-92-129, June 10, 1992). 

*** End of document. ***