E. SECOND WRITTEN SUBMISSION OF CANADA

1. Introduction

5.144 Canada notes that its second written submission responds to the first oral statement of the United States. As a preliminary matter, Canada notes that the United States continues to claim that what Canada seeks in this dispute is an "advisory opinion" under the SCM Agreement. Canada disagrees, arguing that what Canada is seeking a ruling against the US measures at issue that treat an export restraint as a "financial contribution." Ultimately, in Canada's view, such a ruling will require resolution of the differences between the United States and Canada as to whether the US measures at issue are inconsistent with the provisions of the SCM and WTO Agreements invoked by Canada. Canada states that the resolution of these differences is of particular concern to it because of the direct impact that the treatment of export restraints under US CVD law has had and continues to have on Canada and Canadian industry. This impact is exemplified, for example, by Canada's request for WTO consultations in Live Cattle and, as was evident from the discussion at the first substantive meeting, by the immediate threat posed to Canadian lumber exports to the United States by threats of a countervailing duty investigation being commenced after the imminent expiry of the Softwood Lumber Agreement.

2. The Role Of The Mandatory/Discretionary Distinction As A Defence In WTO Jurisprudence

5.145 Canada argues that it has already demonstrated that whether or in what degree a challenged measure is discretionary with respect to an alleged violation of WTO rules is not properly characterized as a procedural or jurisdictional issue. Furthermore, Canada states, it has demonstrated in its Response that the GATT and WTO cases relied on by the United States turn out, on examination, not to depend on whether a measure was wholly or partly mandatory or discretionary in the abstract. Rather, the Panels in those cases, after resolving any controversy as to the requirements of the GATT/WTO rules at issue, found that the defending party had demonstrated adequately that it had sufficient discretion to conform with those rules. Further, in all of these cases it was explicit or implicit that the defending party not only could, but would, use the discretion in question to conform with the proper interpretation of the relevant rules.

5.146 Canada submits that the United States has continued to claim that the mandatory/discretionary distinction means that the challenged US measures cannot be found inconsistent with the SCM and WTO Agreements, regardless of the proper interpretation of those agreements, based on an argument that errs both in its interpretation of GATT and WTO precedent and in its representation of the legal force of the US measures as a matter of US law. In Canada's view, the US argument concerning the "mandatory/discretionary doctrine" in this dispute can be summarized as follows: (i) the United States considers that the WTO does not permit dispute settlement rulings on the conformity of challenged measures with WTO rules if the measures, as a matter of domestic law, do not "require" or "mandate" the action that is alleged to be inconsistent with WTO rules; and (ii) the United States is of the view that under US law the measures challenged by Canada do not either separately, or as a whole, ever "require" treating an export restraint as a financial contribution. Canada disagrees with the US arguments both under WTO law and under US law.

(a) GATT/WTO Case Law

5.147 Canada asserts that it is well established that a WTO Member can challenge legislation of another Party, independent of any specific application of that legislation, on grounds that the legislation, as such, is inconsistent with rules of the WTO. The purpose of permitting such challenges is to ensure predictability of conditions for trade by allowing parties to challenge measures that necessarily will result in action inconsistent with GATT/WTO obligations. This is so in Canada's view since such measures can themselves "chill" trade by compelling Members to modify their behaviour in order to comply with a measure which they reasonably anticipate will be applied to their exports. Canada recalls that in United States - Anti-Dumping Act of 1916, the Appellate Body cited with approval statements by the Panel in United States - Superfund that indicated that GATT 1947 is not only directed at protecting current trade but also at creating the predictability needed to plan future trade and that contracting parties must therefore be able to challenge existing legislation mandating actions at variance with the General Agreement and not wait until such legislation has actually been applied to their trade.

5.148 Canada states that it has already demonstrated in its previous submissions why the measures challenged by Canada require that export restraints be treated as "financial contributions" under US countervailing duty law and why this treatment is inconsistent with the United States' obligations under the SCM and WTO Agreements. Canada notes that the United States argues that United States - Anti-Dumping Act of 1916 and other cases considering the mandatory/discretionary distinction support the US contention that the Panel cannot find the US measures at issue to be inconsistent with the SCM and WTO Agreements because the measures do not require the treatment of which Canada has complained (and which the United States does not consider to be inconsistent with the obligations in question). In Canada's view, however, the cases cited by the United States do not support this argument.

5.149 According to Canada, the mandatory/discretionary distinction does not mean that discretion of any type or degree will allow a defending party to successfully avail itself of this defence. In United States - Anti-Dumping Act of 1916, Canada states, the Appellate Body stated that in light of the case law developing and applying the mandatory/discretionary distinction, the discretion enjoyed by the US Justice Department to initiate or not to initiate criminal proceedings "is not discretion of such a nature or of such breadth as to transform the 1916 Act into discretionary legislation … ."⁶⁴ Similarly, in United States - Malt Beverages, the Panel found the discretion not to enforce a law that was inconsistent with the GATT did not make the law as such consistent with the GATT.⁶⁵

5.150 Regarding the measures at issue in this dispute, Canada notes that Section 771(5)(B)(iii) does not specifically address export restraints. Section 771(5)(B)(iii) can be considered "discretionary", in the limited sense that Commerce, as the investigating authority, has to determine whether an export restraint, or any other practice subject to a countervailing duty investigation, is a financial contribution. However, Canada states, Section 771(5)(B)(iii) does not exist in isolation. Consistent with the reasoning of the Panel in United States - Section 301, Section 771(5)(B)(iii) is "inseparable" from the SAA, Preamble and US practice and, therefore, cannot be considered in isolation.

5.151 In each of the cases cited by the United States where a measure was held to be "discretionary", Canada states, the Panel found not only that sufficient discretion existed for the executive to be able to apply the law consistently with its GATT obligations, but also that the defending party both could use that discretion to act in a manner consistent with the GATT rule at issue and either had done so or was in some sense committed to do so.⁶⁶ Canada asserts that in each of these cases, the Panel satisfied itself, often on the basis of assurances from the defending party as to how it would interpret its legislation, that the executive authority had sufficient discretion under the challenged legislation to avoid any violation of the GATT.

5.152 Further, Canada argues, the Panel in United States - Section 301 found that a Member could "curtail its discretion" to violate a WTO obligation, by its interpretation of such discretion in the SAA and subsequent actions. For Canada, the converse must follow. A complaining Member must similarly be allowed to challenge whether a Member has "curtailed its discretion" not to violate a WTO commitment. Thus, while Section 771(5)(B)(iii) itself does not mandate inconsistent action in the sense that it can (and properly should) be interpreted and applied consistently with WTO rules, the SAA and the Preamble in Canada's view "curtail the discretion" of executive authority in the context of this dispute such that the legislation will be interpreted and applied in a WTO-inconsistent manner.

(b) The US Measures At Issue

5.153 For Canada, the sharp contrast between the above cases and the circumstances of this dispute is clear. In this dispute, rather than providing assurance that the United States will not treat export restraints as a financial contribution, the US measures in Canada's view demonstrate that the US executive authority has committed itself to interpret its legislation in a WTO-inconsistent manner. Canada notes that the United States argues that it could interpret its legislation otherwise, but argues that the US measures and statements make clear that it will not, at least in the absence of a decision of the DSB confirming that this is required by US obligations.

5.154 For Canada, this is not to say that the United States is acting in bad faith. Rather, in this situation, unlike that of the cases on which the United States seeks to rely, it is apparent to Canada that United States believes, wrongly, but in good faith, that its interpretation is not inconsistent with its WTO obligations. The fact that the United States believes its interpretation to be WTO consistent is made clear in the SAA, Preamble and through US practice. In Canada's view, given the importance that GATT/WTO Panels have placed on statements by the United States regarding how it intended to interpret its legislation (especially United States - Superfund, United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco and United States - Section 301), the interpretation set out in the US measures in this dispute, requiring a WTO-inconsistent treatment of export restraints, should be given significant weight. To Canada it demonstrates that Commerce is committed to act in a manner that is inconsistent with the United States' WTO obligations. As a result, Canada argues, the US measures at issue nullify and impair benefits accruing to Canada under the SCM and WTO Agreements.

5.155 Canada states that in invoking the mandatory/discretionary distinction as a defence in this dispute, the United States claims that the measures at issue provide Commerce with sufficient discretion not to treat export restraints as financial contributions while at the same time asserting that to do so would not be inconsistent with the United States' WTO obligations. However, for Canada, this discretion which the United States argues is provided for in the SAA proviso and the "would permit" language of the Preamble is so curtailed that Commerce's ability to act in a WTO-consistent manner has been effectively foreclosed. In other words, to the extent that there is any element of discretion in these measures, in Canada's view it is not of a nature to allow the United States to invoke the mandatory/discretionary distinction as a defence in this dispute because the SAA has directed how that discretion is to be exercised and the Preamble and US practice reflect this direction.

5.156 Canada submits that it has demonstrated in its Response that the SAA gives Commerce explicit direction as to the determination it should make under the proviso with regard to export restraints. In Canada's view, if the proviso leaves any discretion to Commerce, it is limited to satisfying itself that an alleged indirect subsidy involves a "formal, enforceable measure." If it does, Canada argues, Commerce must conclude that the standard in Section 771(5)(B)(iii) has been met. Since an export restraint by its nature involves a formal, enforceable measure, and the SAA has so declared, it is Canada's position the SAA mandates Commerce to conclude that in the case of an export restraint, the standard of Section 771(5)(B)(iii) of the statute and Article 1.1(a)(1)(iv) of the SCM Agreement have been satisfied, and to find a countervailable subsidy if Commerce makes a factual finding in an investigation of a "benefit" to the industry subject to investigation.

5.157 Likewise for Canada the language in the Preamble that the United States claims provides Commerce with sufficient discretion to not treat export restraints as financial contributions, the "would permit" language, fails to provide the United States sufficient discretion to successfully avail itself of the mandatory/discretionary distinction in this case. Because in Canada's view the SAA and Preamble have already determined that an export restraint meets the financial contribution requirement, the scope of any discretion under the "would permit" language is therefore limited to Commerce's analysis of benefit and specificity.

5.158 For Canada, the extent to which the United States has curtailed its discretion in the context of export restraints is most clearly demonstrated by the passage in which the SAA authoritatively directs Commerce to consider circumstances similar to Leather and Lumber to come within the meaning of Section 771(5)(B)(iii). By demonstrating that in those particular circumstances Commerce must treat an export restraint as a financial contribution, in Canada' view this passage conclusively refutes the US position that, in effect, the Panel must rule in favour of the United States if it concludes that there is any set of circumstances in which an export restraint could ever be a financial contribution. While Canada considers that an export restraint does not constitute a financial contribution, Canada argues that it is well established that a measure is inconsistent with a WTO rule if that measure mandates action inconsistent with the WTO in particular circumstances, even if in other circumstances the action might not be inconsistent with the WTO.⁶⁷

3. US Contentions That The Preamble Has No Legal Effect Misstate US Administrative Law And The Role Of The Commerce Preamble

5.159 According to Canada, the various US contentions that the Preamble to the Commerce Department's final countervailing duty regulations reflects merely "tentative opinions" or "at most a non-binding statement by the DOC regarding its views at the time" are inconsistent with US administrative law and misstate the role of the Preamble. Canada notes that, under US law, Commerce must conform to its declared interpretation of the statute in the Preamble absent a "compelling reason for departure".⁶⁸

5.160 Canada states that the United States relies in particular on an argument that only a regulation published in the Code of Federal Regulations (CFR) has general applicability and legal effect, and claims that the fact that Commerce's Preamble to its final regulations was not published in the CFR is "a strong indication" that it does not have legal effect. In Canada's view, this is not, however, a rule of US administrative law. Kenneth Culp Davis, a renowned authority on US administrative law, states in his treatise that "courts should not rely on publication, or lack of publication, in the Code of Federal Regulations as evidence that an agency statement is, or is not, a rule." Criticising the decision in American Portland Cement Alliance v. EPA for its reference to CFR publication, Professor Davis notes that the American Portland Cement Alliance court relied on an outdated case and "apparently overlooked" a subsequent opinion in which the court of appeals emphasised that "publication, or lack of publication, in the Code of Federal Regulations is not more than 'a snippet of evidence of agency intent.'"⁶⁹ Moreover, Canada submits, the US assertion as to the significance of CFR publication is not even supported by the cases on which the United States relies, both of which involved the reviewability of proposed, as opposed to final, regulations. Commerce promulgated its countervailing duty regulations, including the Preamble, as final and effective upon the date of publication in the Federal Register. Although parts of the regulation were later codified and published in the CFR, for Canada that later CFR publication neither diminishes nor adds to the legal authority of the regulations, including the Preamble, as published in the Federal Register.

5.161 Canada argues that the United States' other primary basis for asking this Panel to dismiss the language of the Preamble is its assertion to this Panel that Commerce did not intend the Preamble to have legal effect. Canada asserts, however, that it has been unable to locate any such prior statement, and it does not comport with the record of Commerce determinations, US court decisions reviewing Commerce determinations, or the US reliance on the Preamble as having legal effect before WTO panels.

5.162 Canada argues that since 1 January 1995, the Commerce Department has relied on the Preamble to its proposed or final countervailing duty regulations in fully 103 anti-dumping and countervailing duty determinations. In none of these instances, according to Canada, did Commerce intimate that it did not consider the Preamble to have legal effect, or that it was relying on mere "tentative opinions" to determine duties in trade remedy cases. Rather, in all cases, it cited the Preamble as stating the applicable interpretation or rule, and simply proceeded to apply it to affect the legal rights of parties to the proceedings. In some of these cases, Canada states, the Preamble statement relied upon provided critical elaboration of, or described exceptions to the interpretation stated in, an accompanying regulation, while in many of the cases, the declaration on which Commerce relied occurred only in the Preamble. Canada notes that it has set out a number of examples in which, in Canada's view, Commerce has relied solely on the Preamble for its determinations on issues.⁷⁰

5.163 For Canada, the most dramatic examples of Commerce application of the Preamble's interpretations and methodologies with conclusive legal effect are in the context of whether a benefit is passed through in an arm's-length privatisation, and in the Live Cattle and Korea Stainless Steel cases. In parallel to its lengthy statements on export restraints, Canada states, the Preamble extensively addresses whether an arm's-length privatization eliminates a benefit from pre-privatization subsidies.⁷¹ In that discussion, Commerce declared that it was not promulgating a regulation and emphasized that the statute left it discretion to determine the impact of a change in ownership on a case-by-case basis. According to Canada, Commerce nonetheless declared that it would continue its pre-WTO practice of only examining benefit at the time of bestowal of subsidy, and that its pre-WTO "repayment/reallocation methodology", under which some portion of the benefit of past subsidies is passed through, "achieves th[e] objective" of retaining its discretion to make case-by-case determinations. In other words, Canada states, Commerce decided the key legal issue - that at least some "benefit" survives an arm's-length privatization - by declaring in the Preamble that its pre-WTO methodologies continued to apply, and limited its "discretion" to applying a formula to measure the amount of the benefit. Canada states that Commerce has subsequently applied its pre-WTO methodology in numerous post-WTO privatisation cases.

5.164 For Canada, the Korean Stainless Steel cases provide another stark example of Commerce application of the Preamble as conclusive of an issue, and in circumstances that make clear just how controlling are the Preamble's references to Argentine Leather and Softwood Lumber. In a portion of the Preamble, Commerce interprets Section 771(5)(D)(iii) of the statute, which implements Article 1.1(a)(1)(iii) of the SCM Agreement and lists as a financial contribution "the provision of goods or services, other than general infrastructure." Canada states that in declaring that roads or bridges may benefit particular industries rather than society as a whole, Commerce cites the pre-WTO Certain Steel Products from Korea case - the same case that is referenced in the indirect subsidies discussion in the SAA and Preamble - in which Commerce had found port facilities at Kwangyang Bay not to constitute "general infrastructure" for purposes of its pre-WTO "specificity" test, and therefore to be countervailable.⁷² When the issue arose again in the post-WTO Stainless Steel cases, Canada notes, Commerce stated:

"The infrastructure provided at Kwangyang Bay was not provided for the good of the general public; . . .therefore, it is not "general infrastructure." . . . Therefore, the infrastructure at Kwangyang Bay is countervailable. Indeed, the "Explanation of the Final Rules" (the Preamble) to the new CVD regulations . . . specifically cites to the infrastructure provided at Kwangyang Bay in Steel Products From Korea as an example of industrial parks, roads, rail lines, and ports that do not constitute 'general infrastructure,' and which are countervailable. . . . See CVD Final Rules, 63 FR at 65378-79."⁷³

5.165 Thus, according to Canada, Commerce, in deciding a significant issue in post-WTO cases, found that the Preamble's interpretation of "general infrastructure", and in particular its citation to a pre-WTO case finding Kwangyang Bay not to be "general infrastructure" was dispositive. In Canada's view, it is difficult to conceive, therefore, how Commerce would not find the Preamble's interpretation concerning export restraints and its citation of Softwood Lumber from Canada equally dispositive in a case posing the same issue.

5.166 Finally, for Canada, the US contention that the Preamble reflects mere "tentative opinions" is belied by US court cases and the United States' own use of a preamble in WTO dispute settlement proceedings. According to Canada, in US courts, Commerce relies on the Preamble as the legal basis for its determinations and the courts uphold Commerce on that basis.

4. "Practice" Is A Measure, And Fits Within The WTO Concept Of "Mandatory"

5.167 Canada asserts that as the United States well knows, agency "practice" is an extremely common concept in US law. Commerce routinely and expressly refers to its "practice" in anti-dumping and countervailing duty determinations, giving legal effect to that "practice" as determinative of the interpretations and methodologies it applies, as shown by cases cited by Canada.⁷⁴ Further, Canada argues, practice is related to precedent, in that an interpretation or methodology will often be developed in a single case or group of cases, and becomes the "practice" followed in subsequent cases. For Canada therefore, practice is not an individual determination in a countervailing duty case (although a determination normally will reflect "practice") but rather is an institutional commitment to follow declared interpretations and methodologies that is reflected in cumulative determinations.

5.168 Canada states that when Commerce issues countervailing duty and anti-dumping regulations, it sets forth its practice in those regulations, including the Preamble. Commerce practice is often not, however, articulated in regulations. Indeed, until final substantive countervailing duty regulations were issued in 1998, Canada argues, Commerce had never issued final regulations setting forth its substantive interpretations of US law and the methodologies it would apply. Consequently, for much of the last twenty years, the interpretations and methodologies that dictated Commerce determinations in countervailing duty cases were simply a function of Commerce "practice". Thus, Canada submits, although "practice" is reflected in Commerce regulations when those are issued, "practice" is an independent basis for Commerce action that is given legal effect in addition to or in the absence of a statement of that practice in regulations.

5.169 That practice is independent of regulations is evident to Canada in Commerce's issuance of an Amended Regulation Concerning the Revocation of Anti-dumping and Countervailing Duty Orders in response to the WTO Panel determination on DRAMs from Korea.⁷⁵ In the preamble to that regulation, Canada notes, Commerce declared that while the WTO decision necessitated a change to a commerce standard, it did not invalidate several aspects of Commerce "practice", which would continue in effect.

5.170 Moreover, Canada asserts, it is a fundamental principle of US law that an agency may not depart from its practice and precedents except in narrow circumstances, where the change from prior policies and standards is express, deliberate, and adequately explained. In Canada's view those narrow circumstances cannot arise here, where the United States plainly has no intention of departing from a treatment of export restraints that it insists is correct.

5.171 Canada argues that the "practice" challenged here is the Commerce Department's commitment to adhere to a particular legal view and to apply a particular interpretation or methodology. With respect to the treatment of an export restraint as a financial contribution, in Canada's view it includes pre-WTO practice of Commerce in Leather from Argentina and Softwood Lumber from Canada, because that practice has expressly been incorporated in current US practice through the SAA and Preamble. It further includes post-WTO practice of the Commerce Department, as confirmed in Live Cattle and the Korea Stainless Steel cases, which are cumulative examples evidencing Commerce's commitment to apply the practice stated in the Preamble, notably, to apply "a standard no narrower than the prior US standard for finding an indirect subsidy".

5.172 In Canada's view, because Commerce has articulated its "practice" with respect to export restraints in the Preamble to final countervailing duty regulations that are in effect, there is currently no substantive distinction between Commerce's treatment of export restraints under the SAA and the Preamble and its treatment of export restraints under its "practice". Moreover, the SAA and Preamble are inconsistent with the United States' obligations under the SCM Agreement, independent of the "practice" Canada is challenging. In that sense, while Canada believes that "practice" is as much a measure susceptible to dispute settlement as any law, regulation or other act of a Member, Canada considers that a finding by this Panel with regard to "practice" is not essential to a finding that the other US measures are inconsistent with WTO obligations.

5.173 To Canada, however, "practice" is relevant to compliance by the United States with a WTO ruling in Canada's favour. That is, if this Panel finds that the US statute, as interpreted by the SAA, the Preamble, and in US practice, is inconsistent with the SCM Agreement in that it commits the United States to treat an export restraint as a financial contribution, Canada believes that the United States would need to, inter alia, alter its practice by ceasing to treat an export restraint as a financial contribution in initiating and making determinations in countervailing duty cases. Canada states that it has therefore included "practice" as a measure to underscore this point, and seeks a specific recommendation from the Panel that the United States bring its measures into conformity with the SCM Agreement and the WTO Agreement, including by ceasing to treat an export restraint as a financial contribution.