This research examines the WTO disputes on Canadian CEM. While WTO ruled CEM was illegally cross-subsidized from the remunerative domestic in-quota milk market, circumstantial evidence suggests more portion of CEM than WTO estimated, especially in Quebec, was provided due to efficiency.; Upon finding several biases in the CDC annual cost of production survey data (used by WTO as a standard for the proper value of milk), the research suggests possible remedies. The research also suggests, as a rule, use of individual level costs for the determination of cross-subsidization. However, considering the limitation of information on individual costs, WTO's finding of cross-subsidization based on industry-wide cost may be justified for CEM provision by the domestic market participants.; When CEM is eliminated as compliance to the WTO ruling in the implementation of the U.S. and Canadian bilateral dairy trade with a spatial equilibrium model, the results suggest minimal impacts of CEM on the U.S. dairy industry. Considering CEM amounts to less than 0.4% of U.S. milk production, the limited trade impacts may be natural. However, the implication of the analysis of the WTO disputes is substantial since it sets the precedent for the possible future WTO disputes.; Without CEM, Canadian exports to the U.S. decrease. Since the trade with the rest of the world is fixed exogenously, the impacts are interpreted as the upper bounds. Under partial bilateral trade liberalization through 60% tariff reductions and 100% access increases, the quantity measures (access restrictions) are the primary determinants of trade volume.; Under complete bilateral trade liberalization, comparative advantage determines trade patterns, as international trade theory suggests. Accordingly, Canada (with absolute disadvantage due to higher farm milk prices) specializes in exports of mostly highly value-added products (fluid milk, soft products, and frozen products) mainly due to the U.S. classified pricing structure. The U.S. and Canada being two neighboring countries, geographic proximity plays an important role in the determination of regional trade patterns in bilateral dairy trade. In general, the eastern Canadian regions export to the eastern U.S. regions and the western U.S. to the western Canadian regions, creating North-South trade.
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