THE SECTION 301 ACTION AND EFFECTS OF THE CANADIAN WHEAT BOARD ON U.S. HARD RED SPRING AND AMBER DURUM WHEAT

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1 375 THE SECTION 301 ACTION AND EFFECTS OF THE CANADIAN WHEAT BOARD ON U.S. HARD RED SPRING AND AMBER DURUM WHEAT William W. Wilson and Bruce L. Dahl INTRODUCTION Another trade dispute was initiated in 2001 involving parties in the U n i t e d S t a t e s a g a i n s t t h e C a n a d i a n W h e a t B o a r d ( C W B ). T h i s t r a d e d i s - pute was initiated by concerns raised by the North Dakota Wheat Commission, and represented through their council and experts. Compared to prev i o u s t r a d e d i s p u t e s, t h i s o n e d i f f e r s i n t h a t i t f o c u s e d o n t r a d e p r a c t i c e s both within North America and in third countries and it included both hard red spring (HRS) and durum wheat. Ultimately these concerns were deemed legitimate by the U.S. International Trade Commission (ITC), and the Spec i a l T r a d e R e p r e s e n t a t i v e ( S T R ) c o n c u r r e d. M o s t i m p o r t a n t w a s t h a t a n affirmative decision was reached in the early stages of the action, as well a s a d e t e r m i n a t i o n t h a t t h e C W B a c t s a s a n a r m o f t h e G o v e r n m e n t o f C a n a d a. The case has been resolved (as of early 2002) and the Trade Repr e s e n t a t i v e i s n o w s e e k i n g a p p r o p r i a t e r e m e d i e s. N o t a l l t h e p a p e r s a n d e v i d e n c e f r o m t h e c a s e a r e a v a i l a b l e a n d t h e r e s o l u t i o n p r o c e s s i s c u r - r e n t l y p r o c e e d i n g. T h e s e f a c t o r s a f f e c t t h e s c o p e o f t h i s p a p e r. T h e p u r - pose of this paper is to describe the evolution and findings of the case. In

2 376 Keeping the Borders Open the next section we describe the evolution and findings of previous related cases. Then, we identify the details of the Section 301 case and present the m a j o r c l a i m s a n d r e s p o n s e s b y t h e p a r t i e s. W e p r o v i d e t h e r e s u l t s o f t h e ITC investigation and the interpretation of the Trade Representative. In the last section, we discuss the likely next steps and issues that economists and p o l i c y a n a l y s t s m a y c o n s i d e r i n f u t u r e d e l i b e r a t i o n s. EVOLUTION OF TRADE DISPUTES The trade practices of the Canadian Wheat Board (CWB) have been a long-standing area of contention between the United States and Canada. S e v e r a l i n v e s t i g a t i o n s a n d n e g o t i a t i o n s h a v e b e e n c o n d u c t e d c o n c e r n i n g the behavior of the CWB and its impacts on U.S. farmers since These investigations/negotiations have been undertaken under different auspices, w h i c h r e m a i n a p o i n t o f c o n t e n t i o n w i t h i n t h e W T O. T h e r a n g e i n c l u d e s the Canada/United States Free Trade Agreement (CUSTA); the U.S. International Trade Commission (ITC), Sections 22 and 332; General Accounti n g O f f i c e ( G A O ) ; N o r t h A m e r i c a n F r e e T r a d e A g r e e m e n t ( N A F T A ) ; C a n a d a / U n i t e d S t a t e s J o i n t C o m m i s s i o n o n G r a i n s ; a n d t h e U. S. D e p a r t - ment of Commerce,. Investigations have focused primarily on trade in durum w h e a t a n d w i t h i n N o r t h A m e r i c a. T h e s e a r e s u m m a r i z e d b y S c h m i t z a n d Furtan in Table 1. T h e i s s u e s b e t w e e n C a n a d a a n d t h e U n i t e d S t a t e s w e r e f i r s t a d - dressed during the period within the Canada/United States Free Trade Agreement ( C U S TA). Under CUSTA, concerns over pricing, Canadian transportation subsidies, market access and import restrictions for wheat were addressed. Under this agreement, both sides agreed that neither country could sell agricultural products at a price below the acquisition price of g o o d s p l u s s t o r a g e, h a n d l i n g a n d o t h e r c o s t s. C U S T A d i d n o t d e f i n e t h e acquisition price so it failed to resolve concerns of the United States. T h e U n i t e d S t a t e s r e q u e s t e d a d i s p u t e r e s o l u t i o n p a n e l u n d e r CUSTA in 1992 to address their belief that Canada was selling exports at below acquisition costs. The panel in this dispute ruled in favor of Canada a n d d e f i n e d t h e a c q u i s i t i o n p r i c e i n C a n a d a a s t h e i n i t i a l p r i c e p a i d t o

3 Wilson and Dahl 377 Table 1: Canada/United States Grain Border Disputes. Investigation Conducted by Completed Outcomes Durum: conditions U.S. ITC, under 1990 CWB deemed clean. of competition Section 332 of the No evidence of price cutting Tariff Act of 1930 by CWB in U.S. market Review of CWB U.S. GAO 1992 No evidence of unfair and Australian trade practices Wheat Board CUSTA Bi-National Panel 1993 Ruled in favor of Canada. under CUSTA Received 3.5 year audit of durum sales. Wheat and U.S. ITC, under /1995 cap on exports products: Section 22 of the to the US precluding more harm to U.S. Agricultural severe trade restrictions farm programs? Adjustment Act of 1930 Canada/U.S. grain Joint Commission 1995 Many recommendations market and policy on Grains were made to improve trade environment in both directions. Ability of state U.S. GAO 1996 Acknowledged that there trading enterprises was no evidence that the to distort trade CWB was violating existing trade agreements. U.S. agricultural U.S. GAO 1998 No solid conclusions, but trade; Canadian focused on areas of U.S. wheat issues concern Countervailing U.S. Department of 1999 Final ruling confirmed that duty on live cattle Commerce the CWB did not provide a from Canada subsidy to cattle producers alleging CWB April 1997 to July results in barley subsidy. Sources: CWB and Schmitz and Furtan (2002) farmers. Canadian sales into the U.S. market were again brought up in the negotiations for NAFTA. However, under NAFTA, the same commitments a n d d e f i n i t i o n o f a c q u i s i t i o n p r i c e c o n t a i n e d i n C U S TA were maintained d e s p i t e a p p e a l s f r o m U. S. w h e a t f a r m e r s f o r c h a n g e s.

4 378 Keeping the Borders Open T h e I T C h a s c o n d u c t e d s e v e r a l i n v e s t i g a t i o n s i n t o c o n d i t i o n s o f c o m p e t i t i o n b e t w e e n t h e U n i t e d S t a t e s a n d C a n a d a. I n , t h e I T C i n - v e s t i g a t e d t h e d u r u m w h e a t m a r k e t f r o m t o a n d f o u n d n o s i g - nificant difference in prices paid by U.S. processors for Canadian or similar quality U.S. durum. In 1992, the ITC within Section 22, was asked to e x a m i n e i f i m p o r t s o f w h e a t, f l o u r o r s e m o l i n a a f f e c t e d w h e a t s u p p o r t p r o g r a m s. S i n c e C a n a d a i s t h e l a r g e s t e x p o r t e r t o t h e U n i t e d S t a t e s f o r w h e a t, t h e I T C f o c u s e d i t s a n a l y s i s o n C a n a d a a n d f o u n d t h a t C a n a d i a n imports were interfering with U.S. wheat. This was resolved with a Memorandum of Understanding negotiated between the United States and Canada w h i c h i m p l e m e n t e d t a r i f f r a t e q u o t a s o n C a n a d i a n i m p o r t s t o t h e U n i t e d States for one year. T h e G A O i n v e s t i g a t e d i s s u e s i n v o l v i n g t h e o n g o i n g d i s p u t e b e - tween the United States and Canada over wheat on several occasions, foc u s i n g o n s e v e r a l s p e c i f i c i s s u e s. I n , t h e G A O c o n f i r m e d t h a t t h e CWB had received payments from the Canadian government for shortfalls i n t h e i r p o o l a c c o u n t i n a n d I n , t h e G AO examined the C W B a s a s t a t e t r a d i n g e n t e r p r i s e ( S T E ) i n t h e c o n t e x t o f G ATT and the WTO. In 1996, the GAO again examined STEs including the CWB. They found that the CWB benefitted from government subsidies covering occas i o n a l o p e r a t i o n a l d e f i c i t s, m o n o p o l y o v e r d o m e s t i c c o n s u m p t i o n a n d e x - p o r t m a r k e t s, a n d p r i c i n g f l e x i b i l i t y o b t a i n e d t h r o u g h d e l a y e d p r o d u c e r payments. In 1998, the GAO again examined Canadian wheat imports into the United States with regard to STE activities of the CWB. They reiterated that the CWB is an STE, but indicated that available information was insufficient to determine whether the CWB was operating within existing laws. In all cases, the CWB s response to these investigations has been to c l a i m v i n d i c a t i o n a s a f a i r t r a d e r. T h e C W B r e p e a t e d l y s t a t e s t h a t i t h a s w i t h s t o o d t h e e i g h t t r a d e c h a l l e n g e s i n i t i a t e d b y t h e U n i t e d S t a t e s s i n c e

5 Wilson and Dahl 379 THE SECTION 301 CASE I n O c t o b e r t h e U. S. T r a d e R e p r e s e n t a t i v e, a t t h e r e q u e s t o f the North Dakota Wheat Commission, initiated an investigation under Sect i o n o f t h e Trade Act o f e x a m i n i n g t h e w h e a t m a r k e t i n g p r a c - tices of the CWB. This case differs from prior cases in that it extends the areas of competition examined beyond direct comparisons within the North A m e r i c a n m a r k e t t o o f f s h o r e m a r k e t s a n d i n c l u d e s t h e H a r d R e d S p r i n g (HRS) wheat market as well as the durum wheat market. In the first subs e c t i o n s b e l o w, w e s u m m a r i z e t h e c l a i m s, c o u n t e r - c l a i m s a n d i n t e r p r e t a - t i o n s b y t h e p a r t i e s a n d g o v e r n m e n t a g e n c i e s. T h i s i s d o n e w i t h o u t c r i - tique. Then, in the following section we provide our economic interpretation of the claims and interpretations. U.S. Claims The United States advanced several claims against the CWB in this action. It was argued that the CWB had special privileges and protections b y v i r t u e o f i t s r e l a t i o n s h i p w i t h g o v e r n m e n t t h a t g a v e t h e C W B u n f a i r a d v a n t a g e s t h a t c o u l d n o t b e r e p l i c a t e d o r w o u l d i n c u r a d d i t i o n a l c o s t s / r i s k s i f i m p l e m e n t e d b y c o m m e r c i a l f i r m s i n t h e U n i t e d S t a t e s. S p e c i f i - cally, it was argued the CWB, as a government monopoly, has six benefits: g o v e r n m e n t b o r r o w i n g f o r o p e r a t i o n s a n d e x p o r t c r e d i t e x t e n - s i o n s a t r e d u c e d r a t e s ; g o v e r n m e n t - g u a r a n t e e d i n i t i a l p a y m e n t t o p r o d u c e r s ; p r i c e p o o l i n g ; l a c k o f p r i c e t r a n s p a r e n c y ; p r e f e r e n t i a l t r a n s p o r t a t i o n l e g i s l a t i o n a n d r e g u l a t i o n s ; a n d n o n - t a r i f f i m p o r t b a r r i e r s. In addition, the CWB benefits due to its supply monopoly, which allows it to enter into long-term contracts risk free. Due to the supply monopoly, the C W B c a n c a l l s u p p l i e s a t a n y t i m e w i t h o u t r e g a r d f o r p r i c e s o r m a r k e t signals. Extension of longer-term commercial contracts would incur higher costs/risks that would have to be accounted for. Finally, it was argued that the CWB has no mandate to maximize producer profits; that its only mand a t e i s t o a v o i d t h e u n d u e a c c u m u l a t i o n o f C a n a d i a n w h e a t s t o c k s.

6 380 Keeping the Borders Open As evidence, the North Dakota Wheat Commission (NDWC) indic a t e d a n e i g h t - p e r c e n t p r i c e a d v a n t a g e o n C W B o f f e r s i n t h i r d c o u n t r y markets. The NDWC indicates that traders in third countries report a longstanding pattern of the CWB offering wheat at average selling prices five percent under U.S. bids. In addition, the practices of over-delivery of protein and over-cleaning of Canadian wheat amounts to an additional advant a g e o f t w o p e r c e n t a n d o n e p e r c e n t, r e s p e c t i v e l y. F u r t h e r, t h e N D S W C i n d i c a t e s o t h e r t r a n s p o r t a t i o n ( r a i l ) b e n e f i t s. T h e N D W C p r o p o s e d f i v e c h a n g e s t o i n d u c e m o r e c o m p e t i t i v e p r a c t i c e s : e l i m i n a t i o n o f t h e C W B s u p p l y a n d e x p o r t m o n o p o l i e s ; d e f i n i t i o n o f C W B a c q u i s i t i o n c o s t s u n d e r C U S T A m u s t b e c h a n g e d t o i n c l u d e a l l p a y m e n t s t o p r o d u c e r s ; full transparency of CWB operations including acquisition costs, export pricing and other sales information unique to single desk e x p o r t e r s ; n a t i o n a l t r e a t m e n t ( i. e., t r e a t i n g U S a n d C a n a d i a n w h e a t s i m i - larly in each others s market system) for any U.S. wheat entering Canada including full and equal access to Canada s marketi n g a n d t r a n s p o r t a t i o n s y s t e m ; a n d tariff rate quotas on imports of Canadian durum wheat ($50/ton for imports exceeding 300,000 tons) and non-durum wheat ($50/ ton for imports exceeding 500,000 tons) into the United States. Responses by the CWB The responses by the CWB to the complaint and the requests of the I T C w e r e g e n e r a l l y l i m i t e d, n o n - f o r t h c o m i n g a n d p r e d i c t a b l e. M o s t o f their arguments are contained in the paper by Sumner and Boltuck (2001) s u m m a r i z e d b e l o w. S u m n e r a n d B o l t u c k e v a l u a t e d t h e a r g u m e n t s i n t h e S e c t i o n case for wheat for the CWB. Their responses were in three areas: the struct u r e o f t h e g l o b a l w h e a t m a r k e t, p r i c e d i s c r i m i n a t i o n, a n d t h e C W B a s a f a r m e r c o - o p e r a t i v e i n p r o c u r e m e n t. T h e y a l s o c o m m e n t e d o n c e r t a i n a s -

7 Wilson and Dahl 381 p e c t s o f c o m p e t i t i o n a n d t r a d e b e t w e e n t h e U n i t e d S t a t e s a n d C a n a d a. T h e i r m a j o r c o n c l u s i o n i s t h a t t h e c o m p l a i n t s l e v e l e d a g a i n s t t h e C W B w e r e a s i m p l i s t i c v i e w o f c a u s e a n d e f f e c t w i t h r e g a r d t o U. S. / C a n a d i a n w h e a t t r a d e. T h e y i n c l u d e d f o u r s p e c i f i c a r g u m e n t s : the analysis does not take into account the world global market, n a t i o n a l p r o d u c e r s, a n d c o m p e t i n g e x p o r t e r s ; the focus on sales to eight specific countries ignores the losses in market share that are offset by gains in other markets; t h e a n a l y s i s i g n o r e s t h e p e r f o r m a n c e o f c o m p e t i n g e x p o r t e r s ; t h e a n a l y s i s d o e s n o t c o n s i d e r t h a t t h e e f f o r t s o f t h e C W B m a y a c t u a l l y i n c r e a s e U. S. e x p o r t s. F u r t h e r, S u m n e r a n d B o l t u c k i n d i c a t e d f o u r a s p e c t s o f t h e s t r u c - t u r e o f t h e g l o b a l w h e a t m a r k e t t h a t m u s t b e c o n s i d e r e d w h e n a n a l y z i n g c o m p e t i t i o n b e t w e e n C a n a d a a n d t h e U n i t e d S t a t e s : while the United States and Canada are large exporters (Canada is the third largest exporter), they are not the largest producers of w h e a t ; the United States is a special case in that it exports wheat, yet it also imports wheat from other countries to supplement different c l a s s / q u a l i t y n e e d s ; U. S. / C a n a d i a n w h e a t t r a d e i s a f f e c t e d g e o g r a p h i c a l l y ; p r o d u c - tion areas in Canada are closer to demand sources in the United States than some U.S. production. In turn, U.S. production areas are closer to export locations than U.S. demand areas; and marketing performance of U.S. farmers is affected by actions of multinational traders who contract with importers and can source from multiple origins (Canada, the United States, and other count r i e s ). In response to these arguments, the experts for the U.S. case indic a t e d t h a t C a n a d a i n c o r r e c t l y c o m b i n e d t h e d u r u m m a r k e t a n d t h e w h e a t m a r k e t i n i t s p r e s e n t a t i o n. T h e U. S. e x p e r t s a r g u e d t h a t d u r u m d o e s n o t have close substitutes and should be evaluated separately. If durum is exa m i n e d s e p a r a t e l y, C a n a d a i s t h e s e c o n d l a r g e s t p r o d u c e r, b e h i n d t h e E u - ropean Union and accounts for 59 percent of world durum exports. These

8 382 Keeping the Borders Open large market shares suggest that the CWB may be able to exercise unilateral market power in the world durum market. T h e N D W C s a i d t h a t t h e C W B p r a c t i c e s p r i c e d i s c r i m i n a t i o n ( a s h a s K r a f t F u r t a n a n d T y r c h n i e w i c z, S c h m i t z a n d t h e C a n a d i a n W h e a t B o a r d ). S u m n e r a n d B o l t u c k a r g u e t h a t N D W C a l l e g a t i o n o f p r e d a t o r y pricing as related to price discrimination is simply not credible because the C W B c o u l d n o t e x p e c t t o r e c o v e r p r o f i t s l o s t b y e n g a g i n g i n p r e d a t o r y p r i c i n g. T h e y c l a i m t h a t t h e p r i c e d i s c r i m i n a t i o n p r e s e n t i n i n t e r n a t i o n a l markets is classic third degree discrimination (Phlips). Further, the ability to price discriminate is limited by the integration of importing markets into the global market; the prevalence of alternative sources of wheat including d o m e s t i c a n d i n t e r n a t i o n a l s u p p l i e s ; t h e c o n t e s t a b i l i t y o f t h e m a r k e t b y p o t e n t i a l e n t r a n t s ; d o w n s t r e a m c o m p e t i t i o n i n f l o u r, s e m o l i n a a n d p a s t a ; a n d t h e c o m p e t i t i o n a m o n g w h e a t c l a s s e s. F i n a l l y, t h e p r e s e n c e o f t h i r d d e g r e e p r i c e d i s c r i m i n a t i o n m a y n o t n e c e s s a r i l y b e h a r m f u l t o U. S. p r o - ducers and may in fact benefit them. The prime example of this benefit is the CWB restricting exports to the United States. In response, the U.S. experts argued that Sumner and Boltuck indic a t e d t h e C W B w o u l d h a v e n o i n c e n t i v e t o e n g a g e i n p r e d a t o r y p r i c i n g b e c a u s e t h e y w o u l d n o t b e a b l e t o r e c o v e r p r o f i t s l o s t. T h e U. S. e x p e r t s a r g u e t h i s w o u l d h a v e s o m e r e l e v a n c e i f t h e C W B s o v e r r i d i n g o b j e c t i v e w e r e t o m a x i m i z e p r o f i t s f o r C a n a d i a n f a r m e r s. H o w e v e r, t h e y a r g u e t h e CWB has neither a statutory requirement nor actual incentive to maximize profits. Further, they argue that Sumner and Boltuck later indicate the objective of the CWB is to maximize revenues. The U.S. experts argue that maximizing revenues from the sales of wheat bought from Canadian farmers is not consistent with maximizing profits for Canadian farmers. T h e N D W C a r g u e d t h a t t h e C W B h a s a g o v e r n m e n t m o n o p s o n y f o r s u p p l y. S u m n e r a n d B o l t u c k i n d i c a t e t h a t w h i l e n o t t e c h n i c a l l y t h e s a m e, t h e C W B o p e r a t e s m u c h l i k e U. S. c o - o p e r a t i v e s. I n a d d i t i o n, t h e CWB cannot have a monopsony in procurement because it does not retain p r o f i t s.

9 Wilson and Dahl 383 S u m n e r a n d B o l t u c k i n d i c a t e d t h a t w h i l e t h e C W B i s m o r e s u c - c e s s f u l i n f o r w a r d s a l e s t h a n U. S. f i r m s, U. S. f i r m s a r e f r e e t o c o n d u c t b u s i n e s s t h a t w a y. T h e y a l s o a r g u e d t h a t t h e B o a r d s u c c e s s i n o f f e r i n g l o n g - t e r m c o n t r a c t s i s p r i m a r i l y d u e t o s c a l e o f s a l e s a n d n o t d u e t o a s u p p l y m o n o p s o n y. In response the U.S. experts indicated that while the CWB cannot e a r n m o n o p s o n y p r o f i t s f r o m C a n a d i a n f a r m e r s, i t c a n b e n e f i t f r o m r u n - n i n g u p e x c e s s i v e a d m i n i s t r a t i o n c o s t s a t t h e e x p e n s e o f C a n a d i a n f a r m - e r s. F u r t h e r, t h e C W B c a n e n t e r i n t o l o n g - t e r m c o n t r a c t s b e c a u s e i t f a c e s no market determined acquisition risks as the Canadian Wheat Board Act p r o v i d e s f o r j a i l s e n t e n c e s f o r f a r m e r s w h o a t t e m p t t o m a r k e t w h e a t t o anyone other than the CWB. U.S. grain firms have no such assured supply and would need to purchase futures contracts to reduce risks to acceptable levels. The CWB does not have to hedge long-term contracts because the C a n a d i a n f a r m e r s ( c o l l e c t i v e l y t h r o u g h t h e p o o l s ) b e a r t h e r i s k s o f u n e x - p e c t e d p r i c e c h a n g e s. ITC Interpretation T h e I T C e x a m i n e d a s p e c t s o f c o m p e t i t i o n b e t w e e n C a n a d a a n d t h e U n i t e d S t a t e s a n d m a d e s t a t e m e n t s o n n i n e d i m e n s i o n s. T h e I T C i n d i c a t e d f o u r s t r u c t u r a l d i f f e r e n c e s b e t w e e n t h e C a n a - d i a n a n d U. S. d u r u m m a r k e t s : Canada s durum production is three times larger than in the United States, and the U.S. durum market is more heavily dominated by Canada than the HRS market; t h e r e a r e n o c l o s e s u b s t i t u t e s f o r d u r u m w h e a t, u n l i k e t h e H R S wheat market where HRS and Hard Red Winter (HRW) typically c o m p e t e f o r t h e s a m e p r o d u c t s ; t h e m a r k e t f o r d u r u m i s d o m i n a t e d b y a f e w l a r g e s e l l e r s a n d a f e w l a r g e b u y e r s. T h i s d o m i n a t i o n h a s r e s u l t e d i n d u r u m p r i c e discovery being more opaque due to limited observed trades and t h e d e m i s e o f t h e M i n n e a p o l i s G r a i n E x c h a n g e d u r u m f u t u r e s

10 384 Keeping the Borders Open c o n t r a c t. T h e d e m i s e o f t h e M G E d u r u m c o n t r a c t h a s b e e n a t - tributed to the presence of the CWB. Canada can forward contract durum sales while the United States t y p i c a l l y s e l l s o n t h e s p o t t r a n s a c t i o n s. T h e I T C a r g u e s t h a t b e - cause the few trades occur for durum futures and cash sales are s p o t t y a n d t h i n, t h e p r o c e s s o f p r i c e d i s c o v e r y i s m o r e o p a q u e. Thus, the CWB can make forward sales which no U.S. firm could due to the high level of risk and price volatility facing traders in a thinly traded market. T h e I T C a l s o i d e n t i f i e d s e v e r a l s t r u c t u r a l d i f f e r e n c e s b e t w e e n t h e U n i t e d S t a t e s a n d C a n a d a i n o r d i n a r y w h e a t. F i r s t, T h e C W B h a s b o t h m o n o p s o n y a n d m o n o p o l y p o w e r s i n m a r k e t i n g o f w e s t e r n C a n a d i a n wheat. Also, the ITC claimed the CWB has several deductions applied to prices paid to farmers which they control and dictate (cleaning, transportat i o n, h a n d l i n g c h a r g e s ). T h e s e d e d u c t i o n s h a v e b e e n a r g u e d t o b e p h a n - tom charges which can be manipulated to Canada s advantage when prici n g. T h e N D W C i n d i c a t e s t h a t c h a r g e s a r e d e d u c t e d f r o m a l l p r o d u c e r deliveries and that these do not reflect actual costs for all shipments. The e x c e s s c a n b e u s e d e i t h e r t o i n c r e a s e f i n a l p a y m e n t s t o p r o d u c e r s o r t o lower bids to the United States. The CWB disputes these allegations. The ITC found three significant differences between the CWB and p r o d u c e r s c o - o p e r a t i v e s : the CWB has financial security from government and backing of i t s b o r r o w i n g a n d l e n d i n g ; all western wheat producers must use the CWB to market, howe v e r p r o d u c e r p a r t i c i p a t i o n i n a c o - o p e r a t i v e i s v o l u n t a r y. T h u s, t h e C W B h a s n o f r e e r i d e r s a d d i n g t o C a n a d i a n s u p p l y, n o r u n d e r - c u t t i n g t h e C W B s p r i c i n g s t r u c t u r e. the CWB does not have to accept all saleable western wheat off e r e d t o i t ( b u t i t i s c o n t r a c t u a l l y o b l i g e d t o r e q u e s t d e l i v e r y o f 100% of the amount it does accept), whereas a cooperative does. T h i s c o n t r o l g i v e s t h e C W B p o w e r o v e r q u a n t i t i e s a s w e l l a s p r i c e s.

11 Wilson and Dahl 385 The ITC surveyed market participants for terms and conditions of p r i c i n g i n t h e U n i t e d S t a t e s. R e s p o n d e n t s i n d i c a t e d t h a t m a n y p u r c h a s e s of Canadian wheat are quoted and contracted relative to U.S. prices, often using the Minneapolis HRS prices. Prices for U.S. grain typically included premiums and discounts for grade factors not meeting specifications while C a n a d i a n s a l e s c o n t a i n e d o n l y p r e m i u m s f o r g r a d e d i f f e r e n c e s. T h e I T C indicated that the premium for No. 1 over No. 2 CWRS was three cents per b u s h e l w h i c h i s c o n s i s t e n t w i t h U. S. p r i c e d i f f e r e n t i a l s f o r g r a d e s. O t h e r d i f f e r e n c e s i n p r i c i n g c e n t e r e d a r o u n d d e l i v e r y t e r m s, w h e r e C a n a d i a n sales were more likely to be forward sales than spot sales and were more l i k e l y t o h a v e l o n g e r d e l i v e r y t e r m s. T h e I T C a l s o e x a m i n e d t h e i s s u e o f o v e r - d e l i v e r y o f p r o t e i n f o r U. S. a n d C a n a d i a n s a l e s i n t h e U. S. m a r k e t b y s u r v e y i n g m a r k e t p a r t i c i - pants. They found that 65 percent of U.S. HRS and durum shipments exa m i n e d w e r e o v e r - d e l i v e r e d o n p r o t e i n, w h i l e 5 4 p e r c e n t o f t h e C a n a d i a n contracts were over-delivered on protein. Most of the over-deliveries were small with all deliveries within 1.5 percent of the protein level specified in the contract. None of the respondents indicated adjustments in price due to over-delivery on protein. However, the ITC s analysis indicated that when a d e l i v e r y e x c e e d e d t h e c o n t r a c t p r o t e i n s p e c i f i c a t i o n, t h e d e l i v e r e d p r i c e e x c e e d e d t h e c o n t r a c t p r i c e i n a b o u t o n e f i f t h o f t h e r e p o r t e d p u r c h a s e c o n t r a c t s. The ITC examined prices of U.S. and Canadian wheat. Direct comparison of contracted and delivered prices were not possible due to differe n c e s i n r e p o r t i n g c o n t r a c t t e r m s ( g r a d e, p r o t e i n, t i m i n g, a n d o t h e r f a c - tors). Two analyses were conducted. The first examined contracted (largely g a t e w a y ) p r i c e s f o r c o m p a r a b l e w h e a t s ( N o. 1 C W A D a n d N o. 1 H A D ; N o. 1 C W R S a n d N o. 1 H R S ; a n d N o. 2 C W R S a n d N o. 2 H R S ). T h e second analysis examined delivered prices, basis Minneapolis. Results ind i c a t e d t h a t p r i c e s b a s i s M i n n e a p o l i s f o r C WAD were higher than HAD for all months except one over the period 1996/1997 to 2000/2001. Comp a r i s o n s f o r N o. 1 C W R S v e r s u s H R S w e r e m i x e d. S o m e C W B p r i c e s were higher and some lower than U.S. prices. For No. 2 CWRS, prices at Minneapolis were generally higher than No. 2 HRS.

12 386 Keeping the Borders Open The ITC sought to examine market practices and prices for exports from Canada and the U.S. to selected countries. Issues examined included q u a l i t y d i f f e r e n c e s i n c l u d i n g o v e r d e l i v e r y o n s p e c i f i c a t i o n s a n d e x p o r t p r i c e c o m p a r i s o n s. F o r e i g n a n d U. S. b u y e r s i n d i c a t e d t h a t C a n a d a w a s more likely to over-deliver on quality than U.S. shippers. Most over-delivery for protein was within 0.2 percent. However, Canada was more likely t o o v e r - d e l i v e r i n e x c e s s o f 0. 8 p e r c e n t h i g h e r t h a n s p e c i f i c a t i o n s v e r s u s e x p o r t s f r o m t h e U n i t e d S t a t e s. P r i c e s w e r e o f t e n n o t a d j u s t e d f o r o v e r - d e l i v e r i n g o n p r o t e i n. T h e C o m m i s s i o n a s k e d s u r v e y r e s p o n d e n t s f o r i n f o r m a t i o n o n monthly export prices for HRS/CWRS and HAD/CWAD for the eight exporting countries examined. Direct comparisons of export prices were limi t e d d u e t o n o n - r e s p o n s e a n d t h e u n a v a i l a b i l i t y o f p r i c e s. S o m e c o u n t r i e s bought only from either Canada or from the United States so prices were available from only one of the exporters. Others received exports directly through the CWB where no price data were supplied. Direct comparisons w e r e m a d e f o r t h e Ve n e z u e l a n m a r k e t ( a m a r k e t s e r v e d b y C W B a c c r e d - ited exporters). They indicated that prices for No. 2 HAD and No. 2 CWAD o f f e r e d t o i m p o r t e r s i n Ve n e z u e l a g e n e r a l l y m o v e d i n t h e s a m e p a t t e r n. Otherwise, the ability to verify claims about price discrimination and mark e t i n g w e r e e x t r e m e l y l i m i t e d. T h e r e a r e s e v e r a l i m p o r t a n t f e a t u r e s o f r a i l t r a n s p o r t a t i o n t h a t a r e i m p o r t a n t f o r w h e a t t r a d e b e t w e e n C a n a d a a n d t h e U n i t e d S t a t e s. C a n a d a has regulated rates (now regulated for maximum revenue) to eastern and western ports for export of wheat. These rates are below comparable comm e r c i a l r a t e s a n d s i g n i f i c a n t l y b e l o w U. S. r a t e s. S h i p m e n t s o f C a n a d i a n wheat to the United States are not covered by regulated rates. The CWB is the shipper of record (in other words, is presumed to pay the bill) and rates a r e n e g o t i a t e d b e t w e e n t h e s h i p p e r a n d t h e r a i l w a y s. T h e C W B a l s o p r o - vides some rail cars without charge to the railroads. The CWB argues that higher U.S. rail rates are due to a greater railway monopoly concentration in the United States. However, the ITC saw no difference in Class 1 railroad servicing areas or the layout of shortlines between the United States a n d C a n a d a. T h e y i n d i c a t e t h a t w h e n a l t e r n a t i v e m o d e s o f t r a n s p o r t a t i o n

13 Wilson and Dahl 387 included (barge, truck), transportation concentration is lower in the United States than in Canada. F i n a l l y, t h e I T C e x a m i n e d e f f e c t s o f C a n a d i a n t r a d e a n d m a r k e t regulation on U.S. exports to Canada. They found participants in the U.S. industry indicated Canadian regulation and laws, as well as the CWB operations, have virtually precluded the marketing of U.S. milling grade wheat o r m i l l e d f l o u r t o C a n a d i a n m i l l s a n d b u y e r s. S p e c i f i c a l l y, they identified v a r i e t a l r e g i s t r a t i o n a n d e n d - u s e c e r t i f i c a t e s a s h i n d e r i n g U. S. m o v e m e n t s into Canada. Further, U.S. interests argued that the CWB lowers prices to Canadian mills to eliminate any possibility of U.S. wheat or flour coming into Canada. The Wheat A c c e s s Facilitation Program which was designed to allow U.S. wheat access to Canadian rail is no longer in use. Response by the Special Trade Representative T h e U. S. T r a d e R e p r e s e n t a t i v e f o u n d i n f a v o r o f t h e N D W C t h a t t h e C W B s m o n o p o l i s t i c s y s t e m d i s a d v a n t a g e d U. S. f a r m e r s a n d u n d e r - mined the integrity of the U.S. trading system (USTR, 2002). Specifically, t h e U S T R i n d i c a t e d t h a t t h e m o n o p o l y C W B h a s t a k e n s a l e s f r o m U. S. farmers, and is able to do so because it is insulated from commercial risks, benefits from subsidies, has a protected domestic market and special privileges, and has competitive advantages due to its monopoly control over a g u a r a n t e e d s u p p l y o f w h e a t ( p. 8 ). T h e U S T R c o m m i t t e d t o u n d e r t a k i n g s e v e r a l s t r o n g i n i t i a t i v e s t o address problems with the CWB and specified four steps: examine prospects for a dispute settlement case against the CWB in the WTO; w o r k w i t h t h e N D W C a n d t h e U. S. w h e a t i n d u s t r y t o e x a m i n e the possibilities of filing U.S. countervailing duty and anti-dumping petitions with the U.S. Dept. of Commerce and the ITC; w o r k w i t h t h e i n d u s t r y t o i d e n t i f y s p e c i f i c i m p e d i m e n t s t o U. S. w h e a t e n t e r i n g C a n a d a a n d p r e s e n t t h e s e t o C a n a d i a n s ; p r o v i d e o n g o i n g e f f o r t t o v i g o r o u s l y p u r s u e c o m p r e h e n s i v e a n d meaningful reform of monopolistic STEs within the WTO agric u l t u r e n e g o t i a t i o n s.

14 388 Keeping the Borders Open The USTR decided not to apply tariff rate quotas at this time as this applic a t i o n w o u l d v i o l a t e N A F TA 1 a n d W TO c o m m i t m e n t s, i t c o u l d r e s u l t i n r e t a l i a t i o n b y C a n a d a, a n d i t w o u l d n o t a c h i e v e a l o n g e r - t e r m s o l u t i o n t o market distortions caused by the CWB. Post-Announcement Positioning and Spin-Doctoring A s h a s b e c o m e u s u a l i n t h e s e t y p e s o f p r o c e e d i n g s, a l l a f f e c t e d p l a y e r s b e g a n s p i n - d o c t o r i n g t h e i r p o s i t i o n s. F o l l o w i n g i s a s y n o p s i s o f w h a t h a s b e e n s a i d. Canadian Wheat Board and Other Canadian Interests. The CWB released an initial statement indicating that because the U.S. did not i m p o s e t a r i f f s, w e h a v e s u c c e s s f u l l y c o m e t h r o u g h o u r n i n t h t r a d e c h a l - lenge (Canadian Wheat Board, 2002; p. 1). Other respondents from Canada w e r e l e s s o p t i m i s t i c. A r t E n n s, p r e s i d e n t o f t h e W e s t e r n C a n a d i a n W h e a t Growers Association indicated that the ruling was a serious threat to western grain producers. He also indicated that it was interesting that the main targets of the investigation are the very same things that the CWB claims as i t s s t r e n g t h s W e s t e r n C a n a d i a n W h e a t G r o w e r s, p. 1 ). F u r t h e r, t h e f a c t t h a t t h e f o c u s i s o n l y o n t h e p r a c t i c e s o f t h e C W B a n d n o t o n n o n - b o a r d g r a i n m a r k e t s, p o s e s a m a j o r c h a l l e n g e f o r w e s t e r n f a r m e r s ( Western Can a d i a n W h e a t G r o w e r s ). T h e p r e s i d e n t o f t h e ( C a n a d i a n ) Western Barley Growers Association s a i d, T h e C W B s l a c k o f t r a n s p a r e n c y c o n t i n u e s t o be an irritant to our trading partners, which results in continual action against C a n a d i a n f a r m e r s. I t i s t i m e t h a t t h e C W B a n d t h e C a n a d i a n g o v e r n m e n t took action to make participation in the Canadian Wheat Board voluntary, thereby removing the basis of complaints and trade investigations (Western Barley Growers A s s o c i a t i o n, p. 1 ). U.S. Responses. Responses from U.S. parties included the Secretary of Agriculture Ann Veneman, who supported the decision. She indicated that the investigation clearly establish that the trade-distorting pract i c e s o f t h e C a n a d i a n W h e a t B o a r d a n d t h e c o u n t r y s r e s t r i c t i o n s o n i m - p o r t s o f w h e a t a r e d e t r i m e n t a l t o t h e U. S. w h e a t I n d u s t r y ( U. S. W h e a t 1 However, since then there has been disagreement on this interpretation of NAFTA.

15 Wilson and Dahl 389 Associates, 2002 p. 1). North Dakota s congressional delegation and Governor supported the ruling, yet they had wanted a stronger, more immedia t e a c t i o n. S e n a t o r B y r o n D o r g a n ( D - N D ) s a i d, W e s h o u l d w e l c o m e a n o p p o r t u n i t y t o w a t c h C a n a d a d e f e n d t h e m a i n t e n a n c e o f a s t a t e - r u n m o - nopoly in the middle of a free-trade zone U.S. Wheat Associates, 2002, p. 1). Other players including the North American Millers Association chairm a n B e r n a r d J. R o t h w e l l I I I, i n d i c a t e d t h a t t h e y w o u l d l o o k f o r w a r d t o w o r k i n g w i t h t h e A d m i n i s t r a t i o n a n d g r o w e r s t o w a r d t h e m u t u a l g o a l o f e l i m i n a t i n g m o n o p o l y p o w e r s o f S T E s ( U. S. W h e a t A s s o c i a t e s, , p. 1 ). ASSESSMENT AND DISCUSSION OF POSITIONS IN THE ACTION Given that this case is ongoing at the time of preparing this paper a n d t h a t d o c u m e n t s a n d e v i d e n c e a r e n o t a l l p u b l i c l y a c c e s s i b l e, t h e d i s - cussion below is somewhat limited. The ruling is being discounted by some as just another finding without teeth or solid evidence. It is important that the findings were affirmative in terms of the allegations and that the CWB is an arm of the government. These findings differ from previous proceedi n g s. T h e y f u r t h e r i l l u s t r a t e t h e p r o b l e m s o f m a r k e t i n t e g r a t i o n w i t h d i s - parately organized marketing systems and the resulting difficulties of harm o n i z a t i o n o f p o l i c i e s a n d b u s i n e s s p r a c t i c e s. There are several potential paths that could ensue, such as a negotiated agreement, the Trade Representative pursuing remedies inclusive of t h e W T O r e s o l u t i o n, o r s i m p l y a l l o w i n g t h e i s s u e s t o p a s s a w a y w i t h a n u n d i g n i f i e d d e a t h. T h e c l a i m s t h a t N A F T A p r e c l u d e s t h e i m p o s i t i o n o f tariff rate quotas are apparently debatable. Nevertheless, for our purposes there are a number of major issues that will no doubt be revisited by econom i s t s, i n d u s t r y a n d p o l i c y a n a l y s i s. The major theme or logic to this paper is intended to coincide with what appears to be the economic logic of the case. There are three points to that logic: there are special rights and privileges enjoyed by the CWB that are not easily replicated by competitive rivals;

16 390 Keeping the Borders Open t h e s e s p e c i a l r i g h t s a n d p r i v i l e g e s f a c i l i t a t e g r e a t e r d i s c r e t i o n i n pricing, strategy and positioning than could be enjoyed by comm e r c i a l r i v a l s ; t h e s e p o w e r s r e s u l t i n a n u n f a i r c o m p e t i t i v e a d v a n t a g e r e l a t i v e t o r i v a l s u p p l i e r s.. While these comprise a general proposition, it is normally reflected in the claim that the CWB uses extensive price discrimination in off-shore marketing. The CWB and its proponents are on record many times making this very point (see on p15). The notion is that these special rights and privil e g e s f a c i l i t a t e a g r e a t e r e x t e n t o f p r i c e d i s c r i m i n a t i o n t h a n w o u l d e v o l v e i n a m o r e c o m p e t i t i v e m a r k e t i n g s y s t e m. These aspects of CWB operation are discussed in the remainder of t h i s p a p e r. Special (Exclusive) Rights and Privileges of the CWB STEs can influence numerous regulations and policies to their advantage which are much more difficult to implement in a competitive commercial marketing system. Exporter STEs have advantages in sales arrangem e n t s, q u a l i t y r e g u l a t i o n s, t o n a m e t w o. F o r t h e s e r e a s o n s, a n y t h i n g t h a t u n d e r m i n e s t h e p o w e r s o f S T E s ( b o t h i m p o r t a n d e x p o r t ) w o u l d r e d u c e disadvantages of competitive rivals because it is extremely difficult (costly and/or risky) to replicate these advantages within a commercial marketing s y s t e m. T h e W T O d e f i n e s a n S T E a s, G o v e r n m e n t a n d n o n - g o v e r n m e n t e n t e r p r i s e s, i n c l u d i n g m a r k e t i n g b o a r d s, w h i c h h a v e b e e n g r a n t e d e x c l u - s i v e o r s p e c i a l r i g h t s o r p r i v i l e g e s, i n c l u d i n g s t a t u t o r y o r c o n s t i t u t i o n a l powers, in the exercise of which they influence through purchases or sales the level or direction of imports or exports (U.S. GAO, 1995; p. 16). The CWB conforms to every definition of an STE and is acknowledged as an STE through past submissions to the GATT/WTO. Most important are the

17 Wilson and Dahl 391 n u m e r o u s e x c l u s i v e r i g h t s a n d p r i v i l e g e s b e s t o w e d o n t h e C W B t h a t a r e n o t a v a i l a b l e t o r i v a l s. 2 I n t h e c a s e o f t h e C W B t h e r e a p p e a r t o b e n u m e r o u s r i g h t s a n d p r i v i l e g e s. W e i n c l u d e t h r e e o f g r e a t e s t i m p o r t a n c e, a s e x a m p l e s o n l y : guarantees on initial payments made to producers- -the Government of Canada guarantees the CWB (as a selling organization) f o r t h e s e p a y m e n t s, n o t i n d i v i d u a l p r o d u c e r s ; m o n o p o l y o n p r o c u r e m e n t ; a n d monopoly on selling wheat and barley from Canada to domestic a n d o f f - s h o r e b u y e r s. I n a d d i t i o n t o t h e s e, t h e C W B m a i n t a i n s o t h e r e x c l u s i v e r i g h t s a n d p r i v i - l e g e s, n o t n o r m a l l y a c k n o w l e d g e d, b u t w h i c h c o u l d l i k e l y b e i n t e r p r e t e d s i m i l a r l y : 2 C a n a d a s position is that Canada should maintain the ability to choose how to market its products. Agriculture Minister Vanclief has said that, If other countries have concerns regarding alleged trade effects of orderly marketing systems, Canada is prepared to discuss factual concerns. But Canada will not engage in sterile debates over alternative marketing philosophies. Also, it is Canada s position that it was willing to discuss practical trade concerns. However, Canada will seek to ensure that any new disciplines proposed to deal with the perceived market power of such enterprises apply equally to all entities, public or private, with similar market power (Agriculture and Agri-Food Canada 1999). The CWB s stance is to reinforce STEs as legitimate commercial enterprises. They have been advocates for further reductions in support programs, and future agreements must continue to ensure that Canada has the right to establish its own approach to marketing, including the CWB. (CWB, July 1999). In the case of the Australian Wheat Board, Chairman Trevor Flugge said, We also expect that the issue of state trading enterprises will be considered during the course of negotiations. The issue should not be STEs per se, but rather whether the entity concerned contravenes any established world trade rules. In light of this, we believe each STE should be examined on a case by case basis and we would strongly refute the claims made by the United State in relation to so-called trade distorting practices of AWB Limited as an STE (Australian Wheat Board, May 31, 1999).

18 392 Keeping the Borders Open rail car ownership by governments and allocation authority for CWB g r a i n s ; 3 special legislated rates on rail grains (i.e. for grains grown in western Canada there are separate regulations); 4 and non-reporting of prices (facilitating non-transparency). 5 While there are many issues related to the integration of STE types of functions into more commercially competitive industries, there are three areas of particular importance in grain trading which warrant special attention: the competitive effects of guaranteed initial payments and procurement monopoly, price discrimination and price transparency. Guaranteed Initial Payments One of the important features of some STEs is the guarantee by government of initial payments paid to producers. This is a fundamental tool of the CWB. This mechanism, along with the purchasing monopoly provides advantages to these selling organizations. While there are numerous impacts of these mechanisms, two are particularly apparent in a reasonably competitive market place. One impact is that the initial payment is typically a sharp discount relative to market prices. In recent years, the spread between initials and market price appears to have widened and does not accurately reflect 3 Rail car allocation authority is granted to the CWB for specified movements and provides several benefits, including making adjustments to grain transportation plans, ensuring farmer access, fostering (foisting) competition among handlers via tendering systems, etc. 4 In 1996 the Canada Transportation Act replaced the National Transportation Act with competitive provisions. Concurrently, it created Div VI rates with the maximum rates on grains, which by now were based on 1992 frozen costs, indexed upward. These were for statutory movements defined as grain and grain products with origins in the Prairies, to specific export ports. Exclusions were made for grains not grown in the Prairies (e.g. the United States) and grains exported to the United States. This resulted in two regimes of rates one subject to normal regulatory processes and the other for statutory grain movements. The latter regime of rates was more favorable and has since been assigned a revenue cap. 5 Elsewhere in Canada and the United States, government entities are active in price reporting for purposes of facilitating more symmetric information among rivals.

19 Wilson and Dahl 393 price differentials associated with quality differences. For an exporter STE the initial represents an element of marginal cost for transactions, which could be argued to be the lower bound of marginal cost. This situation contrasts to a private-firm rival for whom a major component of the marginal cost of selling is the current market value. The effect of this differential provides greater pricing flexibility to the extent it can be pursued by the STE. The other impact of these mechanisms in competitive selling is that it provides a greater ability for making fixed price deferred delivery contracts, an important issue in competition among selling organizations and firms. Wilson et al. (1999) first described this relationship. In concept, large export firms could provide similar terms but they would be more costly to execute. Wilson et al. indicated that the policy regime in Canada (identity preservation along with a procurement monopoly) is fundamentally similar to the Canadian government providing a free put option to the CWB. Using typical values at the time of their analysis, the value of the free put option was about 8 cents per b u s h e l. This interpretation is important. If a competitive firm were to provide similar sales terms (i.e. fixed price for distant deferred delivery), that firm would have to assume a position of long-cash/long option (put). Of course, that position presumes there are perfectly efficient futures and options markets for these grains and grades, which of course is not the case even though it is commonly alleged. Hedging costs (i.e. execution costs) and transaction costs are non-zero, basis risks would still be assumed by the seller, and for most of the grains and grain types in questions, futures and options do not exist. Thus, these risks are not easily hedgeable, nor cost-free to assume. These claims have been challenged by several authors. Veeman et al. (1999) argue t h a t r i s k s i n p r o c u r e m e n t c o s t s c a n b e h e d g e d a n d c o s t s f o r s e a r c h o f s u p p l i e s c a n b e o f f s e t b y c o n t r a c t i n g b e t w e e n p r o d u c e r s a n d t r a d e r s. T h e y i n d i c a t e t h a t s i n c e c o n t r a c t i n g f o r s u p p l i e s i s n o t a w i d e - s p r e a d p r a c t i c e i n t h e U n i t e d S t a t e s, t r a d e r s d o n o t f a c e s i g n i f i c a n t p r o b - lems of grain acquisition. Further, they argue that because initial prices are known, U.S. traders know the CWB s acquisi tion cost whereas, the CWB does not know what those prices are for U.S. firms. Finally, they argue that

20 394 Keeping the Borders Open t h e p r a c t i c e o f i n i t i a l p r i c i n g r e s u l t s i n l e s s f l e x i b i l i t y i n t h e p r o c u r e m e n t pricing for the CWB. Schmitz, Furtan and Baylis (1999, p. 31) indicate that government g u a r a n t e e d i n i t i a l p r i c e s a r e a s o f t - p r i c e d i s c r i m i n a t i o n p o l i c y t h a t m a y v i o l a t e W T O r u l e s w h e n p a y m e n t s a r e m a d e b e c a u s e t a x p a y e r r e v e n u e i s transferred directly to producers. This is one of the core arguments of the ITC which indicates there is a tendency for the CWB to have greater prici n g f l e x i b i l i t y a n d a d v a n t a g e s i n d e f e r r e d t r a n s a c t i o n s v e r s u s c o m p e t i t i v e r i v a l s. Price Discrimination P r i c e d i s c r i m i n a t i o n i s d e f i n e d a s t h e s a m e c o m m o d i t y being sold to different customers for different prices (Phlips 1985, p. 5). P r i c e d i s c r i m i n a t i o n m a y a l s o o c c u r w h e n o r i f d i f f e r e n t q u a l i t y p r o d u c t s are sold to different customers for the same price, or if terms of trade are n o t r e f l e c t e d i n p r i c e s. I n e c o n o m i c t e r m s, p r i c e d i s c r i m i n a t i o n i s s a i d t o exist if: P i / MC i P j / MC j where P is price, MC is marginal cost and i and j represent two different c u s t o m e r s. P r i c e d i s c r i m i n a t i o n i s g e n e r a l l y c o n s i d e r e d a n a c c e p t a b l e t r a d e practice and in some cases, a desirable business practice, subject to limits (Phlips) It is a very common practice, particularly among industries with h i g h f i x e d c o s t s b u t r e q u i r e s m a r k e t p o w e r t o e f f e c t u a t e a n d a b i l i t y t o s e p a r a t e m a r k e t s. E x a m p l e s a b o u n d i n c l u d i n g p r i c i n g b y r a i l r o a d s, a i r - l i n e s, u n i v e r s i t i e s, m o v i e t h e a t e r s, e t c. G e n e r a l l y, p r i c e d i s c r i m i n a t i o n i s o p t i m a l f o r a n y s e l l i n g o r g a n i z a t i o n i f i t h a s s o m e m o n o p o l y p o w e r, i f t h e r e a r e d i f f e r e n c e s i n d e m a n d e l a s t i c i t i e s a m o n g d i f f e r e n t c u s t o m e r groups, and/or if there are cost differences in serving different customers. B e c a u s e o f i t s a p p e a l, a n d i r r e s p e c t i v e o f i t s i n n o c u o u s e f f e c t s, i t i s f r e - quently difficult to detect (according to the definition above). It is virtually impossible to prevent or to regulate selling firms/organizations from pract i c i n g p r i c e d i s c r i m i n a t i o n. T h i s i s g e n e r a l l y t r u e i n d o m e s t i c e c o n o m i e s,