|español - français - português|
UNITED STATES – FINAL COUNTERVAILING DUTY
Report of the Panel
The Report of the Panel on United States – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada is being circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted document from 29 August 2003 pursuant to the Procedures for the Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with the DSU only parties to the dispute may appeal a panel report. An appeal shall be limited to issues of law covered in the Panel report and legal interpretations developed by the Panel. There shall be no ex parte communications with the Panel or Appellate Body concerning matters under consideration by the Panel or Appellate Body.
Note by the Secretariat: This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60 days after the date of its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report. If the Panel Report is appealed to the Appellate Body, it shall not be considered for adoption by the DSB until after the completion of the appeal. Information on the current status of the Panel Report is available from the WTO Secretariat.
A. COMPLAINT OF CANADA
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL
C. PANEL PROCEEDINGS
II. FACTUAL ASPECTS
A. THE USDOC INVESTIGATION
B. RELATED WTO PROCEEDINGS
A. REQUEST OF CANADA
B. REQUEST OF THE UNITED STATES
A. FIRST WRITTEN SUBMISSION OF CANADA
B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES
(a) Canada Bears the Burden of Proving Its Claim
(b) The Final Countervailing Duty Determination Is Consistent with the SCM
(c) The Conduct of This Investigation Was Consistent with the Obligations of Article 12 of the SCM
(d) The United States Initiated the Softwood Lumber Investigation Based on Adequate Domestic Industry Support Consistent with the Requirements of Article 11.4 of the SCM
C. FIRST ORAL STATEMENT OF CANADA
D. FIRST ORAL STATEMENT OF THE UNITED STATES
(a) Financial Contribution
(c) Calculation Issues
(a) Financial Contribution
(c) Market Distortion
(d) Calculation Issues
(e) Administrative Reviews
E. SECOND WRITTEN SUBMISSION OF CANADA
5. Other Claims
(b) Conduct of the Investigation
F. SECOND WRITTEN SUBMISSION OF THE UNITED STATES
G. SECOND ORAL STATEMENT OF CANADA
H. SECOND ORAL STATEMENT OF THE UNITED STATES
A. THIRD PARTY WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES
(a) Financial contribution
(c) Failure to Examine and Determine the Existence of a Benefit to all Producers of the Subject Product (“Pass Through”)
B. THIRD PARTY ORAL STATEMENT OF THE EUROPEAN COMMUNITIES
(a) Violation of Article 12.3 of the SCM Agreement
(b) Violation of Article 12.8 of the SCM Agreement
C. THIRD PARTY ORAL STATEMENT OF INDIA
D. THIRD PARTY WRITTEN SUBMISSION OF JAPAN
(a) Provision of “goods”
(b) A Benefit Conferred
(c) A Pass-through of an Alleged Subsidy
VI. INTERIM REVIEW
A. CLAIM 1: INCONSISTENT FINDING OF THE EXISTENCE OF A FINANCIAL CONTRIBUTION
(b) United States
(a) What do the stumpage programmes provide: the right to harvest or standing timber ?
(b) Is standing timber a "good" in the sense of Article 1.1 (a) (1) (iii) SCM Agreement?
B. CLAIM 2: INCONSISTENT DETERMINATION OF BENEFIT UNDER ARTICLE 14 (D) SCM AGREEMENT
(b) United States
C. CLAIM 3: USDOC IMPERMISSIBLY ASSUMED A PASS-THROUGH OF THE ALLEGED SUBSIDY
(b) United States
(a) Legal requirements concerning pass-through analysis
(b) Pass-through analysis in the present dispute
(c) Has Canada introduced a new claim, i.e., a violation of Article 1.1, which is outside the Panel's terms of reference?
D. CLAIM 4: CANADIAN STUMPAGE PROGRAMMES ARE NOT SPECIFIC TO CERTAIN ENTERPRISES
(b) United States
E. CLAIM 5: INCONSISTENT CALCULATION OF THE AMOUNT OF SUBSIDIZATION
(a) Alleged improper conversion from US to Canadian log volume measurement system
(b) Alleged failure to account for the multiple uses of softwood logs produced from Crown timber
(c) Alleged understatement of the value of "final mill" sales
F. CLAIM 6: FAILURE TO CONDUCT THE INVESTIGATION IN ACCORDANCE WITH ARTICLE 12 SCM AGREEMENT
(b) United States
G. CLAIM 7: INCONSISTENT INITIATION OF THE INVESTIGATION
(b) United States
PARTIES' RESPONSES TO QUESTIONS
PARTIES' RESPONSES TO QUESTIONS
PARTIES' RESPONSES TO QUESTIONS
THIRD PARTY RESPONSES TO
REQUEST FOR THE ESTABLISHMENT
TABLE OF CASES CITED IN THIS REPORT
1.1 On 3 May 2002, Canada requested consultations with the United States pursuant to Article 4 of the Dispute Settlement Understanding ("the DSU"), Article XXII of the General Agreement on Tariffs and Trade 1994 ("GATT 1994"), and Article 30 of the Agreement on Subsidies and Countervailing Measures ("the SCM Agreement"), concerning the final affirmative countervailing duty determination by the US Department of Commerce ("USDOC") (File No. C-122839) issued on 25 March 2002, with respect to certain softwood lumber from Canada.1
1.2 On 18 June 2002, Canada and the United States ("the US") held the requested consultations, but failed to reach a mutually satisfactory resolution of the matter.
1.3 On 18 July 2002, Canada requested the establishment of a panel to examine the matter.2 Canada subsequently withdrew that request, and on 19 August 2002 made a new request for establishment of a panel to examine the matter.3
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL
1.4 At its meeting of 1 October 2002, the DSB established a panel in accordance with Article 6 of the DSU and pursuant to the request made by Canada in document WT/DS257/3.4
1.5 At that meeting, the parties to the dispute also agreed that the Panel should have standard terms of reference. The terms of reference are, therefore, the following:
1.6 On 4 November 2002, Canada requested the Director-General to determine the composition of the Panel, pursuant to paragraph 7 of Article 8 of the DSU. This paragraph provides:
1.7 On 8 November 2002, the Director-General accordingly composed the Panel as follows:
1.8 The European Communities, India and Japan reserved their third-party rights.
C. PANEL PROCEEDINGS
1.9 The Panel met with the parties on 11-12 February 2003 and 25 March 2003. The Panel met with third parties on 12 February 2003.
II. FACTUAL ASPECTS
A. THE USDOC INVESTIGATION
2.1 This dispute concerns the final countervailing duty determination made by USDOC on 21 March 2002 in respect of certain softwood lumber imports from Canada, classified under headings 4407.1000, 4409.1010, 4409.1090, and 4409.1020.
2.2 The investigation was initiated by USDOC on 30 April 2001, pursuant to an application filed with USDOC on 2 April 2001 (amended 20 April 2001 to add certain applicants). The applicants were the Coalition for Fair Lumber Imports Executive Committee; the United Brotherhood of Carpenters and Joiners; the Paper, Allied-Industrial, Chemical and Energy Workers International Union; Moose River Lumber Co., Inc.; Shearer Lumber Products; Shuqualak Lumber Co.; and Tolleson Lumber Co., Inc.
2.3 On 17 August 2001, USDOC published in the Federal Register a notice of preliminary affirmative countervailing duty determination, preliminary affirmative critical circumstances determination, and alignment of final countervailing duty determination with final antidumping duty determination. Provisional measures were imposed on the basis of a preliminary subsidy rate of 19.31 per cent.
2.4 On 2 April 2002, USDOC published in the Federal Register a notice of final affirmative countervailing duty determination. Definitive measures were imposed on the basis of a final subsidy rate of 19.34 per cent, with 19.25 per cent being the amount attributable to stumpage programmes. On 22 May 2002, USDOC published in the Federal Register a notice of amended final affirmative countervailing determination and notice of countervailing duty order, which decreased the final subsidy rate to 18.79 per cent as a result of corrections for ministerial errors. Of this amount, 18.70 per cent was attributable to stumpage programmes.
B. RELATED WTO PROCEEDINGS
2.5 At its meeting of 5 December 2001, the DSB established a panel, pursuant to a request by Canada, in respect of USDOC's preliminary determinations in the investigation at issue in this dispute. On 27 September 2002, that panel's report, United States – Preliminary Determinations with Respect to Certain Softwood Lumber from Canada (WT/DS236/R), was circulated to all WTO Members.5
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
3.1 Canada requests the Panel to:
B. REQUEST OF THE UNITED STATES
3.2 The United States requests that the Panel reject Canada's claims in their entirety.
4.1 The arguments of the parties are set out in their written and oral submissions to the Panel, and in their answers to questions. The parties' arguments as presented in their submissions are summarized in this section. The parties' written answers to questions are set out in full as Annexes to this report. (See, List of Annexes, page v).
A. FIRST WRITTEN SUBMISSION OF CANADA
4.3 At issue in this dispute are countervailing duties on certain softwood lumber products from Canada imposed on 21 March 2002, by USDOC pursuant to a final affirmative countervailing duty determination
4.4 Article 1.1 sets out the exclusive definition for what constitutes a subsidy for the purposes of the SCM Agreement. A subsidy has two discrete elements: (i) a financial contribution that (ii) confers a benefit. The US has not established the existence of a subsidy for the following reasons.
4.5 USDOC erred in determining that provincial stumpage programmes “provide goods”. The US has imposed countervailing duties on practices that do not constitute a “financial contribution” within the meaning of Article 1.1(a)(1)(iii). In Canada, natural resources are, for the most part, the property of provincial governments. Many of these resources have traditionally been managed through the transfer of real property interests and exploitation rights. Forests are one among many of these resources; harvesting trees is but one aspect of the overall management of forestry resources. At issue in this dispute is the legal characterization of these forestry resources management systems.
4.6 Forestry management regimes in Canada reflect three critical considerations: (1) the land is publicly owned; (2) forestry resources such as air, water, wildlife, plants, trees and parkland may be put to a variety of uses; and (3) forestry resources must be carefully managed in the best interests of the public. Forestry resources are managed through a system of interlocking rights and obligations between the Crown and timber harvesters. This system of resource management is based most frequently on tenure and licensing agreements. The details of such tenure and licensing agreements vary, but they are all similar in that they are a complex bundle of rights and obligations, containing at a minimum: the right to harvest standing timber on Crown land or “stumpage”; service and maintenance obligations (e.g., road-building, protection against fire, disease, and insects); implementation of forestry management and conservation measures, including silviculture; and payment of a volumetric “stumpage charge” that is levied upon the exercise of the harvesting right.
4.7 Stumpage takes two different forms in Canada: a real property right (generally referred to as a profit à prendre) or a licence to harvest standing timber. A profit à prendre is a form of real property right that conveys a non-possessory interest in the land to the recipient. A licence is a revocable right to do something on, or to the detriment of, the land of another that would otherwise not be permitted – in this case, the right to harvest standing timber.
4.8 A “financial contribution” exists where “a government provides goods or services other than general infrastructure”. Interpreted in accordance with the principles of treaty interpretation in customary international law, “goods” refers to tradable items that are capable of bearing a tariff heading.
4.9 The ordinary meaning of “goods” is “tangible or movable personal property other than money; [especially] articles of trade or items of merchandise ‹goods and services›”. The term “goods” excludes resources such as intangible property, i.e., property rights, and real property. A profit à prendre, for example, is a real property right. The panel in US – Softwood Lumber III agreed that the ordinary meaning of “goods” is “tangible or movable personal property, other than money.” Despite this, the panel adopted an interpretation of “goods” that was broader than the ordinary meaning of the term. Article 1.1(a)(1) (financial contribution) is drafted in precise terms. Article 1.1 (a)(1)(iii) does not refer to provision of “economic resources” or “property”, but rather to “goods or services”. As well, “goods or services” are not examples or species belonging to a bigger genus “economic resources”. Real property and other resources or instruments of value do not fall under subparagraph (iii) unless they fit within the terms, “goods” or “services other than general infrastructure”.
4.10 Article 3.1 provides relevant context. It defines “prohibited” subsidies as “subsidies within the meaning of Article 1”. Article 3.1(b) includes the phrase “subsidies contingent … upon the use of domestic over imported goods” (emphasis added) in defining a particular prohibited subsidy. The use of the adjective “imported” to modify “goods” implies that the “goods” so modified may only be items that are capable of being “imported” – that is, traded across international borders or tradable items with an actual or potential customs classification. The proper conclusion is that the meaning of “goods” in both provisions is identical: tradable items with an actual or potential customs classification. Further, Parts III and V of the SCM Agreement refer to “products” or “imports”. Given that Article 1.2 ties Article 1.1 to Parts III and V, the “products” or “imports” referred to in these Parts may not be interpreted to be different from the “goods” referred to in Articles 1 or 3 of the SCM Agreement.
4.11 The WTO Agreement also provides instructive context. Countervailing measures are provided for in Article VI of GATT 1994, as an exception to Article II. Therefore, the coverage of Part V of the SCM Agreement which imposes disciplines on countervailing duties and that of Article II of GATT 1994 must be the same. The SCM Agreement is one of the agreements set out in Annex 1A to the WTO Agreement. Annex 1A sets out “multilateral agreements on trade in goods”. More important, the interpretative note to that Annex provides a rule of conflict between GATT 1994 and the covered agreements. A rule of conflict suggests a possibility of conflict and implies that the subjects or scope of coverage of the agreements are the same. Thus coverage of GATT 1994 and the agreements on trade in goods, including the SCM Agreement, must have the same scope. The panel in US – Softwood Lumber III used only one contextual element to support its view that “goods” has an “unqualified meaning”. The panel believed that the only exception in Article 1.1(a)(1)(iii) is general infrastructure and this reinforced its view “concerning the unqualified meaning of the term goods.” The panel rejected the contextual guidance offered by the use of “goods” and “products” in the SCM Agreement and the WTO Agreements as a whole.
4.12 The term “goods” in Article 1.1(a)(1)(iii) is equivalent to “products”, and these terms are used throughout GATT 1994, the SCM Agreement and the other covered agreements to mean items on which tariff concessions may be given under Article II of GATT 1994. This is confirmed by the object and purpose of the SCM Agreement. The class of activity defined in Article 1.1(a)(1)(iii) to constitute a financial contribution within Article 1.1(a)(1) is discrete and carefully delineated. This demonstrates that the scope of Article 1.1(a)(1)(iii) is limited; the object of this provision is not to capture all potential in-kind transfers of economic resources that a government may provide. Furthermore, Article 1.1 provides a definition of a subsidy for the purposes of the SCM Agreement, and Article 1.1(a)(1) provides that a “financial contribution” is a constituent element of a subsidy. Subparagraphs (i) to (iv) of Article 1.1(a)(1) set out categories of activity that constitute a financial contribution for the purposes of the subsidy definition. Subparagraphs (i) to (iv) are carefully crafted and use precise terminology. If the object and purpose of Article 1.1(a)(1) were to bring all transfers of economic resources within the ambit of “financial contribution”, there would have been no need to delineate specific categories of activity.
4.13 USDOC erroneously found that Canadian stumpage programmes constituted a financial contribution. Specifically, USDOC held that provincial tenure systems provide lumber producers with standing timber and that standing timber is a “good”. According to USDOC even a license or right to harvest timber would constitute the provision of a good, because “goods” encompasses “all a person’s legal rights of whatever description.”
4.14 First, stumpage programmes involve the granting of rights to harvest standing timber pursuant to tenure and license agreements. “Goods” refers to tradable items with an actual or potential customs classification. Rights to harvest, the only thing provided by governments through stumpage programmes, are not “goods”. Even assuming that stumpage programmes provide standing timber, stumpage programmes do not involve a financial contribution. Standing timber – i.e., trees firmly rooted in the ground – is not a “good” within the meaning of Article 1.1(a)(1)(iii). Properly understood, a profit à prendre and a license to harvest standing timber are economic resources that are not “goods” within the meaning of Article 1. “Stumpage” – the right to exploit an in situ natural resource – is akin to the right to extract oil from public lands, quotas to harvest fish, or the right to exploit inland water and water currents. Second, standing timber is not a “good” within the meaning of Article 1.1(a)(1)(iii). Standing timber is an in situ natural resource that is not capable of being traded across borders.
4.15 The term “goods” in Article 1.1(a)(1)(iii) cannot be interpreted to include rights such as “stumpage”, profits à prendre, and timber harvesting licenses. USDOC erred in determining that provincial governments provide goods to lumber producers and erred specifically in finding that standing timber is a “good”. As stumpage does not involve a “financial contribution” USDOC’s subsidy determination and the imposition of countervailing duties violates Articles 10, 19.1, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994.
4.16 USDOC’s Use of “Cross-Border” Benchmarks to Determine and Measure a “Benefit” Violates the SCM Agreement. Having concluded that the provinces provided goods, USDOC determined that this alleged financial contribution conferred a benefit by using selected short-term auction prices for the right to cut standing timber on specific tracts of public lands in the US or, in the case of Québec, private timber sales in Maine, as benchmarks for comparison to Canadian provincial stumpage charges. Articles 1.1(b) and 14(d) of the SCM Agreement require the US to use in-country benchmarks to determine the existence and measurement of any alleged benefit. The Agreement does not permit the investigating authority to use cross-border (out-of-country) benchmarks, nor to reject benchmarks from within the country under investigation.
4.17 In the Preliminary Determination ("PD"), USDOC purported to establish that Canadian stumpage programmes conferred a benefit by comparing: (1) stumpage charges related to the exercise of the right to harvest; with (2) alleged prices for short term rights to cut standing timber on selected US public lands and private timber sales in Maine. USDOC did not modify this cross-border methodology in any material respect for purposes of the Final Determination ("FD"). In the FD, USDOC determined that Article 14(d) does not restrict the market benchmark to the country of export, but was intended to require that adequacy of remuneration be determined with reference to “comparable” market-based transactions.
4.18 USDOC sought to avoid the plain meaning of the Article 14(d) by focusing on the phrase “in relation to”. It concluded that “in relation to” means “taking account of”. USDOC also referred to the purported context provided by the illustrative list of conditions of purchase or sale set out in Article 14(d). After concluding that cross-border benchmarks were acceptable for determining “benefit”, USDOC then rejected evidence of in-country benchmarks and asserted that US stumpage was a “reasonable benchmark”. USDOC argued, erroneously: (1) Private prices in Canada are not market-based and cannot be used as benchmarks because a government-dominated market will distort the market; (2) US stumpage is an acceptable benchmark because it is commercially reasonable for Canadian producers to bid on US stumpage (that is, a natural resource not located within the political boundaries of Canada), and producers located within Canada “have access to US prices of stumpage”; and (3) US stumpage prices are world market prices that are available to Canadian producers. USDOC determined that the US benchmark prices were higher than the charges levied by Canadian provinces and concluded, as it had done in the PD, that Canadian stumpage charges conferred a benefit.
4.19 Article 1.1 of the SCM Agreement provides that a subsidy exists where there is a financial contribution by a government and “a benefit is thereby conferred”. The Appellate Body considered the meaning of “benefit” in Article 1 of the SCM Agreement in Canada – Aircraft and found that a benefit under Article 1.1(b) suggests some form of comparison. The Appellate Body indicated that there could be no “benefit” unless this comparison demonstrated that the recipient was made “better off” than it would have been absent that contribution. Article 14(d) sets out guidelines for determining whether a benefit exists and how the amount of the benefit should be measured in cases involving the provision of goods. The text of Article 14(d) is unambiguous: “In the country of provision or purchase” means “in the country of provision or purchase.” Nothing in the context, object and purpose or the negotiating history of Article 14 permits reading “in” as anything other than “in”.
4.20 The recent panel report in US – Softwood Lumber III, confirms this interpretation. In that case, the panel found that the adequacy of remuneration in Article 14(d) must be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase. According to the panel, this means that Article 14(d) requires that the prevailing market conditions to be used as a benchmark are those “in the country of provision” of the goods. The panel concluded that no other meaning could be ascribed to the reference to market conditions “in the country of provision”. Therefore, the only benchmarks that may be used in a provision of goods context are those determined on the basis of prevailing market conditions in the country of provision. USDOC sought to avoid the plain meaning of “prevailing market conditions … in the country of provision” by interpreting the phrase “in relation to” to mean “taking account of”. However, the panel in US – Softwood Lumber III disagreed with this interpretation. It found the phrase means “on the basis of” or “in comparison with”. USDOC’s interpretation effectively read out of the text of Article 14(d) the clear and explicit reference to “in the country of provision”, and turned the mandatory “shall” in Article 14(d) into the discretionary “may”. Finally, any determination under Article 14(d) must consider the ordinary meaning of “adequate remuneration”. The ordinary meaning of “adequate” is sufficient or satisfactory, not “maximum”.
4.21 USDOC rejected evidence concerning in-Canada benchmarks for the alleged good, based on: (1) its unfounded assumption that it could legally reject in-country benchmarks; and (2) the unsupported factual conclusion that there are no usable market determined prices because prices were suppressed as a result of government involvement. USDOC also sought to avoid the prohibition in Article 14(d) against using out-of-country benchmarks by arguing that US stumpage prices are world market prices for stumpage available in Canada, and are therefore part of in-country prevailing market conditions. This conclusion is without foundation for three reasons.
4.22 First, USDOC asserted that US stumpage was purportedly available in Canada. Although a small quantity of logs harvested from some US comparison areas is exported to some Canadian provinces this, does not mean that the right to harvest US timber is somehow imported into Canada. USDOC consistently blurs the distinction between standing timber and logs. The record makes clear, however, that what is provided is either timber harvesting rights or “standing timber”. Neither may be “imported” into Canada and neither is “available” in Canada. In fact, logs harvested from standing timber in the US comparison areas for over half of the exports subject to countervailing duties cannot be exported to Canada. Second, USDOC conceded that no world market price for stumpage existed when it found that there was not a single US price for stumpage or even a single price within individual US states. Third, prices outside the country of provision do not become acceptable because such prices are available in another country with allegedly “comparable market conditions.” Even if market conditions in the US were “comparable”, USDOC must base its determination on prevailing market conditions “in” the country.
4.23 The panel in US – Softwood Lumber III concluded that although “conditions of purchase or sale” and “availability” were listed as market conditions in Article 14(d) this did not mean that US stumpage was available to Canadian producers. It found that the fact that a good may also be bought on a market outside the country of provision, did not imply that the prices for that good in the other country become part of the market conditions “in the country of provision”. The panel further noted that acceptance of the US argument would mean that the phrase “prevailing market conditions in the country of provision” refers to world market conditions. As the text of Article 14(d) did not support this conclusion it could not be correct. Instead the panel indicated that “availability” was an aspect of the market conditions existing in the country of provision. Finally, the panel noted that the US interpretation would effectively read out of the SCM Agreement the explicit reference to the country of provision, thereby violating the principle of effectiveness.
4.24 The US recourse to the same cross-border methodology in the FD consists again of simply substituting “prevailing market conditions” in the US for “prevailing market conditions” in Canada. This is the only way the US was able to determine the existence of a “benefit” and construct a subsidy rate of nearly 20 per cent.
4.25 A treaty interpreter must ensure that its interpretation of a treaty provision does not give rise to absurd or unreasonable results. An interpretation of Article 14(d) that would permit the use of cross-border comparisons would give rise to such unreasonable results for several reasons.
4.26 International borders affect market conditions and, in particular, prices; these effects are substantial and notoriously difficult to quantify. Political boundaries drive differences in government regulatory regimes, tax regimes, investment regimes, currency, banking and financial systems, business practices, and business climate. Government policies and other factors in different jurisdictions affect economic conditions, including wage rates, taxes, capital costs, labour costs and exchange rates.
4.27 Cross-border comparisons also do not reflect the effect of differences in the natural resource endowments between two countries. Prices of goods and services will generally differ between countries for reasons relating to comparative advantage. In US – Softwood Lumber III the panel found that USDOC’s methodology for determining a benefit would lead to an automatic determination of subsidization in a resource-rich exporting country, even where the perceived price difference simply reflected the exporting country’s comparative advantage.
4.28 A wide variety of other factors also affect forestry resources in different countries. These factors include differences in: timber characteristics and operating conditions such as the type, mix, quality and location of forest resources as well as costs of harvesting and transporting timber; measurement systems; and the rights and obligations associated with tenures such as the duration of harvesting rights and obligations associated with silviculture, road building and forest management responsibilities.
4.29 USDOC itself confirmed that cross-border comparisons are illogical in its own previous determinations in Lumber I, II and III. In each of these prior lumber cases, USDOC rejected the use of such comparisons on the basis that they simply could not be done. In particular, in Lumber I USDOC found that cross-border comparisons were “arbitrary and capricious” and that no unified North American market for stumpage existed. In this proceeding USDOC dismissed these decisions by claiming that they were made “in the context of a different legal framework.” The change in law is irrelevant, however. All of the facts that led USDOC to reject the use of cross-border comparisons in the past still exist today.
4.30 In the FD, USDOC concluded there were no usable benchmarks in Canada that would allow USDOC to analyze whether Canadian stumpage programmes provided a benefit to the softwood lumber producers. This conclusion is contradicted by the record, which provided several in-country benchmarks as well as economic analysis of the adequacy of remuneration charged by provincial governments. This information included private timber sales, cost-revenue comparisons, an economic analysis of provincial stumpage charges, competitive auction prices, and private sector assessments of timber value.
4.31 Private Timber Sales ‑ Canada provided substantial information regarding in-country sales of private stumpage, including private stumpage prices in Québec. In Québec, private forest lands account for 17 per cent of the total softwood sawmill supply. Private stumpage transactions in Québec are the basis for that province’s parity approach, which Québec uses to determine the market value of standing timber on public land. The evidence before USDOC included three years of annual private stumpage surveys and the original survey results reporting private forest stumpage transactions in Québec. In response to questions from USDOC about the private forest in Québec, comprehensive economic data and analyses were submitted showing that private forest stumpage transactions in Québec occur in a large, open market consisting of hundreds of well-informed buyers and sellers, including competing private timber sources outside Québec.
4.32 Similarly, the information for Ontario demonstrated that the volume of private sales was significant, representing 7 per cent of total softwood stumpage sales. Canada submitted an expert study by Resource Information Systems Inc. (RISI) that provided a detailed assessment of the private market in Ontario. The RISI Study found that the private market in Ontario was competitive, efficient, and independent from the market for Crown timber. Another study of the private market in Ontario, prepared by Charles River Associates Inc., evaluated the market conditions for private timber sales, concluded that the prices for private timber were established by the “marginal” price for timber, and calculated the average price for private timber purchased by sawmills.
4.33 Competitive Auctions ‑ The record also included information on competitive sales of stumpage by provincial governments, including information from B.C. on the volume and value of competitive sales of stumpage through the Small Business Forest Enterprise Programme, which are made through competitive auction to the highest bidder.
4.34 Private Sector Assessments of Timber Value ‑ Canada also provided information regarding the market values for standing timber based on an amalgam of public bid and private sale values. These market values are known as “timber damage assessments” (TDAs). Three industry sectors in Alberta, the oil and gas sector, the mining sector and the forest sector, jointly developed the TDA methodology. After a series of negotiations, all parties agreed on a TDA methodology to provide a fair and balanced estimate of the market value of Alberta’s standing timber. The TDA data represent the full value of the resource, both because they come from this arm’s-length process and because the prices used to develop TDA are from market transactions between unrelated buyers and sellers where each participant is free to decide not to buy or sell.
4.35 Evidence Demonstrating Consistency With Market Principles ‑ Canada submitted information demonstrating that provincial stumpage systems collected more than adequate remuneration and were consistent with market principles. This information established that substantial profits were earned from the provision of timber harvesting rights. Evidence demonstrated, for example, that B.C. received adequate remuneration because it produced a return of 75 per cent of expenditures on its timber harvesting system. Consistent with market principles, this enormous profit on timber harvesting operations demonstrated that harvesters cannot be said to be receiving stumpage for “less than adequate remuneration”. The other major producing provinces also showed substantial profits on their stumpage programmes – 35 per cent for Ontario, 67 per cent for Québec, and 25 per cent for Alberta.
4.36 Cost-revenue comparisons provided USDOC with in-country information to evaluate the adequacy of remuneration collected for rights to harvest Crown timber. As USDOC's existing practice and regulations confirm, this information is relevant to USDOC’s adequacy of remuneration determinations. This analysis is consistent with the requirement in Article 14(d) that the provision of a good be for “adequate,” not “maximum,” remuneration. In addition, an analysis of the economics of B.C.’s stumpage system demonstrated that the province’s stumpage system is administered consistent with market principles. B.C. stumpage charges are a volumetric levy imposed upon the exercise of previously conferred timber harvesting rights. The economic analysis shows that a profit-maximizing forestland owner would not impose a volumetric charge upon the exercise of those rights. Further, the tenure system imposes costs on tenure holders that they would not bear in a competitive market. Therefore, consistent with market principles, harvesters again cannot be said to be receiving stumpage for “less than adequate remuneration”.
4.37 In the FD USDOC rejected “transaction-based” in-country Canadian benchmarks because of alleged “price suppression” allegedly resulting from government involvement in the marketplace. There is no basis for the rejection of in-country benchmarks in the SCM Agreement. Article 14(d) refers to “prevailing” market conditions. In this context, the meaning of “prevailing” is “as they exist”. Nothing in the context, object and purpose or negotiating history of the SCM Agreement suggests that the “market conditions” referred to are those of a perfectly competitive market. In US – Softwood Lumber III the panel found that even if the alleged “price suppression” existed, this would not permit USDOC to reject in-country benchmarks. The panel concluded that Article 14(d) SCM Agreement did not require that prevailing market conditions be those of an “undistorted” market. It also concluded that USDOC provided no acceptable rationale for rejecting Canadian stumpage prices. Even assuming, arguendo, that Article 14(d) permitted the rejection of in-country benchmarks because of “price suppression”, USDOC’s evidence and analysis was clearly inadequate to establish that such distortion existed.
4.38 For these reasons USDOC’s rejection of in-country Canadian benchmarks and reliance on “cross-border” US benchmarks is inconsistent with Articles 1.1(b) and 14(d) of the SCM Agreement. The US has therefore imposed countervailing duties in the absence of the required finding of “subsidy” in violation of Articles 10, 14, 14(d), 19.1, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994.
4.39 Evidence demonstrating no trade advantage - USDOC also had before it substantial evidence demonstrating that the provincial stumpage charges imposed in Canada do not increase the production of logs or lumber or lower their prices, or increase the quantity or lower the prices of lumber exports to the US, in comparison with the outcome in a market in which government is not involved. The SCM Agreement requires the investigating authority to consider the existence of a benefit and adequacy of remuneration in relation to the “prevailing market conditions” for the good in the country of provision. The prevailing market for standing timber is a natural resource market, which is an economic rent market. Rent markets have different characteristics than many other markets. This must be taken into account in making any determination of whether provincial stumpage systems confer a benefit.
4.40 Analyzing benefit in the particular market context under investigation is consistent with panel and Appellate Body interpretations of Article 1.1(b) and the object and purpose of the Agreement, which is to discipline subsidies, as defined in the SCM Agreement, that distort trade. All panel and Appellate Body decisions concerning Article 1.1(b) confirm that the word “benefit” implies a comparison that is market-based. As the Appellate Body has stated, this permits identification of any “trade-distorting potential.” The analysis of remuneration in relation to prevailing market conditions in this case should therefore include a review of whether provincial stumpage fees or charges are capable of causing trade distortion in downstream markets. USDOC asserted that “the whole point” of the investigation was to “quantify and remedy” alleged distortion of the US market. In reaching these determinations, USDOC by its own admission ignored the economic evidence offered by Canada. Had USDOC analyzed, rather than assumed, the existence of trade distortion in the downstream markets for logs and lumber, it would have found that not only is there no benefit as measured by existing market comparators, but that economic analysis shows that there is no trade-distorting potential from provincial stumpage programmes, because positive stumpage charges neither increase production of logs and lumber nor lower their prices relative to a private competitive market.
4.41 The FD impermissibly assumes a pass-through of an alleged subsidy. This case requires an analysis of whether and to what extent alleged upstream subsidies benefited downstream producers. A significant portion of logs is sold by timber harvesters to unrelated lumber producers and other entities at arm’s length. In addition, a great number of sales of logs and lumber inputs occur at arm’s length between unrelated producers of subject merchandise.
4.42 In the FD, USDOC concluded that no subsidy pass-through analysis of any kind was required because the alleged subsidy is a subsidy “to the production of lumber rather than the production of timber or logs”. With respect to producers of remanufactured lumber that do not hold provincial stumpage rights and that purchase lumber from stumpage holders at arm’s length, USDOC concluded that as the case was conducted on an aggregate basis, “a review is the appropriate avenue to determine if there are specific companies that do not receive countervailable benefits.”
4.43 Under the SCM Agreement, a “direct subsidy” exists where government makes a financial contribution that confers a benefit to the recipient of that contribution. Similarly, an “indirect subsidy” exists where a government “entrusts or directs” a private body to provide a financial contribution that confers a benefit to the recipient. If the recipient of a subsidy enters into transactions with other entities, an investigating authority may not presume that those other entities have benefited from the alleged subsidy. An investigating authority must always establish that both elements of the subsidy definition exist. In US – Lead and Bismuth II, the Appellate Body found that an authority must establish that a benefit has been conferred upon the recipient of the alleged subsidy, and may not irrebuttably presume that the benefit has been passed through a subsequent transaction. This analysis is even more apt in respect of original determinations where an investigating authority must establish each element of a subsidy. In transactions that take place in the market and at arm’s-length, the applicable presumption is that fair market value has been paid.
4.44 USDOC was required to find that the alleged subsidy to a harvester of timber was passed through to the downstream producer of subject merchandise. USDOC did not provide any analysis of either requirement of Article 1 in respect of downstream producers. USDOC did not establish that any “financial contribution” by government had been made to lumber producers or remanufacturers in respect of the inputs they purchased at arm’s-length. USDOC also did not find that the alleged “benefit” was conferred to lumber producers or remanufacturers through downstream purchases.
4.45 Moreover, there was substantial evidence demonstrating arm's-length transactions between timber harvesters and lumber producers, and between lumber producers and remanufacturers, including: (1) In B.C. approximately 24 per cent of the timber from Crown licenses was harvested by companies that did not own sawmills. Similarly, in Ontario approximately 30 per cent of the softwood timber harvested from Crown lands was sold by tenure holders to third parties for processing; (2) At least 18 per cent of the volume of logs harvested in B.C. from Crown lands were purchased at arm’s length; and (3) Numerous company exclusions filings demonstrated that arm’s-length purchases of logs and lumber were significant. On this basis 230 companies applied for exclusion.
4.46 In US – Softwood Lumber III the US indicated that it knew that a portion of the logging companies did not own sawmills, and sell their logs in arm’s-length transactions. The panel found that the US had conceded that pass-through analysis was required; it found that the US had violated its obligations under the SCM Agreement because USDOC had failed to consider evidence regarding arm’s-length transactions and because an authority may not assume that a subsidy provided to producers of the “upstream” input product automatically benefits unrelated producers of downstream products (especially where there is evidence of arm’s-length transactions between these entities). In the FD, USDOC ignored these facts and presumed that all producers of subject merchandise received countervailable subsidies in all cases. USDOC had the data to calculate and correctly deduct from the numerator the alleged benefit incorrectly attributed to arm’s-length log and lumber sales. USDOC instead chose to presume the existence of a subsidy arising from such sales, and as a result, overstated the amount of the alleged subsidy (and the subsidy rate).
4.47 USDOC has therefore failed to establish the elements of a subsidy by failing to demonstrate a pass-through of financial contribution and benefit. Accordingly, the US has violated Articles 10, 19.1, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994.
4.48 USDOC concluded that recipients under provincial stumpage programmes are limited to a group of industries; it found that this factor alone established the programmes as specific in fact. USDOC’s finding was based on its definition of the term “group of industries”, by which it meant those companies and individuals that use the programme.
4.49 Under Article 2, a subsidy may be determined to be specific to an enterprise, industry or group of enterprises or industries (certain enterprises) either in law or in fact. A subsidy is specific in law where a government expressly limits access to that programme to certain enterprises. Where a subsidy is not specific in law, a Member may still determine that it is specific to certain enterprises based on evidence of the factors listed in Article 2.1(c), subject to consideration of the diversification of economic activities in the jurisdiction and the length of time the programme has been in operation. Where these factors do not indicate that a Member is deliberately limiting access, the programme is not specific. Article 2.4 requires that any specificity determination be “clearly established” on the basis of “positive evidence”. This exacting burden of proof requires both reasoned analysis and “positive evidence” supporting the factual conclusion. An investigating authority must therefore correctly analyze and weigh all evidence of the factors set out in Article 2.1(c), as applied in a given case, in the light of the standard in Article 2.4.
4.50 The term “certain enterprises” is a defined term for the purposes of Article 2: “an enterprise, industry, or group of enterprises or industries”. At issue in this case is the meaning of the terms “industry” and in particular “group of… industries”. The meaning of “industry” is “[a] particular form or branch of productive labour; a trade, a manufacture”. In the context of the WTO Agreement and the SCM Agreement this requires an examination of product-based criteria. Part V of the SCM Agreement provides that the term “domestic industry” “shall … be interpreted as referring to the domestic producers as a whole of the like products or to those of them whose collective output of the products constitutes a major proportion of the total domestic production of those products …” [emphasis added]. The term “domestic industry” thus refers to the producers on the basis of “products”. The logical inquiry to be undertaken by the investigating authority of an importing Member is therefore whether the parallel foreign industry is subsidized on a specific basis. Accordingly, an “industry” in the sense of Article 2 is properly interpreted to refer to enterprises engaged in the manufacture of similar products. The nature of the output products is also an important link that holds “a group of enterprises or industries” together; in the absence of a product-based identification of industries, no “group of industries” may be found.
4.51 USDOC explained that the label “limited group of wood products industries” identified “pulp and paper mills and the saw mills and remanufacturers which are producing the subject merchandise”. In concluding that the alleged benefits of stumpage programmes are limited to those entities specifically authorized to cut timber on Crown lands, USDOC’s determination amounts to the statement that “stumpage is specific to those using stumpage”, and assumes the ultimate conclusion under the “limited users” factor. USDOC’s finding renders the specificity requirement redundant and inutile. This is achieved also by USDOC’s use of the entire Canadian economy as a benchmark and finding that the majority of companies and industries in Canada do not receive benefits under these programmes. As a result of its circular reasoning, USDOC failed in particular to accurately determine the actual users of stumpage programmes and failed to address the record evidence that established that many enterprises and industries use stumpage programmes. USDOC also failed to analyze the industries that use stumpage programmes, based on the types of enterprises, in order to determine whether they properly constitute a “group of industries”.
4.52 Canada submitted significant evidence pertinent to the specificity issue, including voluminous questionnaire responses and expert studies on factual issues relevant to specificity. These studies considered the number and types of industries using stumpage, the types of products produced by stumpage users, and the proportionate distribution of the wood fibre harvested in Canada to various product categories. These studies demonstrated that there were 23 separate classes of industries, producing over 200 products, that used stumpage programmes. They also showed that softwood lumber was not the dominant end use. Many producers of subject merchandise also produce products not subject to the investigation, and other stumpage users include, inter alia, producers of pulp and paper products, hardwood products, shakes and shingles, kitchen cabinets, furniture, and sporting gear. Moreover, by arguing that a subsidy programme that does not subsidize the “vast majority of companies and industries” is “specific”, USDOC is stating a negative rather than determining the required positive – that the government has deliberately limited access to the programme to certain industries.
4.53 USDOC also failed to analyze whether stumpage programmes were specific in fact within the context of all four factors found in Article 2.1(c). In an analysis under Article 2.1(c), evidence must be analyzed and factors must be weighed in the light of differing explanations. The US has, by its own admission, recognized that it is the inherent characteristics of the alleged good that limit the number of users of the programme, rather than any deliberate government favouritism. In the light of the nature of the forestry resource in question, it is untenable to base a specificity finding on the “limited users” factor alone. To hold otherwise impermissibly merges the tests of Articles 1 (provision of a good) and 2 (government favouritism), by rendering the specificity requirement superfluous where the provision of a natural resource has been found to be a subsidy under Article 1.1.
4.54 The US specificity finding in the FD amounts to an irrebuttable presumption, based on the nature of the subject merchandise and the alleged “good” provided, that the alleged subsidy is specific. A determination of de facto specificity under Article 2.1(c) in this case would have required at a minimum examination of the other listed factors. Moreover, Article 2.1(c) mandates the consideration of economic diversification. Evidence of economic diversification in the Canadian provinces, and in particular in B.C., greatly reduces the weight to be given to the “limited users” factor in this case. When account is taken of the evidence of the diversity of provincial economies, the correct conclusion under the first factor is that, (1) stumpage programmes are not used only by two or three industries and, to the contrary, (2) stumpage programmes are widely available to more than a limited number of industries. Even if this were not the case, the lack of diversity of provincial economies and the inherent characteristics of stumpage would provide the reason.
4.55 The US imposed countervailing duties in excess of the amount of the alleged subsidy to the subject merchandise. First, USDOC inflated the alleged subsidy rate by adopting an outdated and factually unsupportable “national” factor for converting US log volume measurements into Canadian log measurements in order to determine comparison prices for its illegal cross-border analysis. Second, USDOC calculated the total alleged benefit based on all Crown logs entering sawmills, rather than basing the alleged benefit on the log volume (less than 40 per cent of the total) that becomes softwood lumber, and then allocated that alleged benefit over the sales value of only certain products produced from the logs. The effect, again, was to overstate the alleged subsidy. Third, USDOC inflated the duty rate by understating the sales value of subject merchandise; it purported to calculate the subsidy rate on a “final mill” basis (including sales of remanufacturers), but contrary to the record evidence, devised a final mill sales estimate that largely excluded such sales. All of these actions inflated the amount of the alleged subsidy, thereby violating the SCM Agreement.
4.56 Countervailing duties may not be imposed in an amount that exceeds the subsidy. Article 19.4 of the SCM Agreement and Article VI:3 of GATT 1994 establish this fundamental discipline on countervailing duties. A countervailing duty so imposed also violates Articles 10 and 32.1, which provide that a countervailing duty may only be imposed in accordance with the provisions of the SCM Agreement and GATT 1994.
4.57 In conducting the investigation, the US failed to provide the interested parties with critical information and evidence, failed to give notice of its use of information highly relevant to its determination, and failed to give interested parties an opportunity to present evidence, make presentations, and otherwise defend their interests. In imposing countervailing duties pursuant to an investigation that did not conform with Articles 12.1, 12.3 and 12.8 of the SCM Agreement, the US violated Articles 10 and 32.1 of the SCM Agreement.
4.58 As noted, in its illegal cross-border comparisons, USDOC used prices for short-term cutting rights on US state lands as the benchmarks against which to compare Canadian provincial stumpage charges, making the choice of a particular comparator state central to the determination of an alleged provincial subsidy. Yet in the cases of Alberta and Saskatchewan, USDOC switched the comparator state from Montana in the PD to Minnesota in the FD, without any notice to interested parties or opportunity to provide evidence or argument concerning the inappropriateness of the Minnesota benchmark. As the Guatemala – Cement II panel reasoned, “[d]isclosure of the ‘essential facts’ forming the basis of a preliminary determination is clearly inadequate in circumstances where the factual basis of the provisional measure is significantly different from the factual basis of the definitive measure.”
4.59 Similarly, USDOC failed to give interested parties the opportunity to present full evidence and arguments concerning information that was highly relevant to the calculation of the US benchmark price applied to Québec. Specifically, USDOC requested and obtained timely information from the Maine Forest Products Council (MFPC), yet withheld it from the record until Quebec formally demanded its production. USDOC then characterized the MFPC information as “untimely”, yet subsequently accepted and relied upon two reports submitted by the petitioner to reject the MFPC information. Interested parties were given no opportunity to rebut the petitioner’s reports.
4.60 USDOC initiated the Lumber IV investigation, based on a finding that 67 per cent of the US softwood lumber producing industry supported the petition. Softwood lumber producers that brought or supported the petition are eligible to receive cash payments under the Dumping and Subsidy Offset Act of 2000 (Byrd Amendment) for supporting the petition. Counsel for the petitioner, the Coalition for Fair Lumber Imports Executive Committee, used the prospect of Byrd Amendment payments as inducement to garner support for the petition. The investigation was therefore initiated on the basis of domestic producer support that was actively solicited by promise and prospect of a direct payment by the US government.
4.61 Article 11.4 requires Members to conduct an “examination” of the degree of support for an application and to “determine”, on the basis of that examination, that the application has been made by or on behalf of the domestic industry. The words “determine” and “examination” denote, singly and collectively, an active consideration, assessment or weighing of evidence that results in a conclusion. This plain reading of the words is further confirmed by the context. In addition to “quantitative thresholds”, Article 11 also provides that the original complaint of alleged injury to an industry must contain evidence that has to be substantiated. The obligation under 11.4 is therefore not simply on the applicants to present evidence of domestic industry support, but also on the investigating authority to conduct an objective determination and examination of the level of that support. The panel in US – Offset Act (Byrd Amendment) described the object and purpose of Article 11.4 as requiring an authority to examine the degree of support which exists for an application and to determine whether the application was thus filed by or on behalf of the domestic industry.
4.62 If Article 11.4 is to have any meaning, the “examination” of the degree of support for the petition and determination that the petition was made by or on behalf of the domestic industry must be objective and impartial. The countervailing duty order resulting from the Lumber IV investigation is subject to the Byrd Amendment. As payments by the US under the Byrd Amendment induce domestic producers to support such petitions, the US is precluded from making an objective and impartial examination and determination of the level of support among domestic producers for such petitions. This is consistent with the finding of the panel in US – Offset Act (Byrd Amendment). That panel found that the low costs of supporting a petition coupled with the strong likelihood that all producers would feel obliged to keep open their eligibility for offset payments would mean that the vast majority of petitions would achieve the required level of support. The panel concluded that by requiring support for the petition as a prerequisite for receiving offset payments, the CDSOA in effect mandates domestic producers to support the application and renders the threshold test of Article 11.4 meaningless. Since the initiation of Lumber IV is inconsistent with Article 11.4, the US has, as a consequence, imposed countervailing measures in violation of Articles 10 and 32.1 of the SCM Agreement.
4.63 Canada raised certain questions concerning the operation of US law on administrative reviews in the course of consultations. In particular, Canada asked whether individual producers and exporters may request and receive company-specific administrative reviews under US law. In its panel request, Canada claimed US law relating to administrative reviews violated Articles 10, 19.3, 19.4, 21.1, 21.2 and 32.1 of the Agreement and Article VI:3 of GATT 1994. Canada raised similar issues in the US – Softwood Lumber III case. In that proceeding, the US took issue with Canada’s characterization of its law and stated that it had the discretion to conduct company-specific administrative reviews. The panel in US – Softwood Lumber III made findings in this regard substantially endorsing the US explanation of the source and extent of USDOC’s discretion. The US confirmed these statements in the consultations held for this case. In the light of the foregoing statements and findings, it is Canada’s understanding that the US possesses and will use discretion in the conduct of administrative reviews in a WTO-consistent manner. Canada reserves the right to advance additional arguments in respect of these claims, if its understanding of the US position is incorrect.
B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES
4.64 The following summarizes the United States' arguments in its first written submission.
4.65 The recurring theme of Canada’s case is succinctly presented in its assertion that no countervailing duties may be imposed on government programmes “that are adopted in the context of a Member’s broader economic and social policy framework, such as the sustainable exploitation of natural resources.” Canada’s assertion rings hollow when compared to the obligations undertaken by Members in the SCM Agreement.
4.66 Over 60 per cent of Canada’s subsidized lumber is exported to the US. The countervailing duty provisions of the SCM are designed to ensure that, when Canada chooses to subsidize the production of lumber in the interest of social policy, the US lumber industry is not required to pay the price. The United States’ right to impose countervailing duties to offset the subsidy on billions of dollars of injurious imports of Canadian lumber is protected in the SCM and, therefore, should not be denied.
4.67 Article 11 of the DSU sets forth the standard of review that applies to this case. Article 11 requires a panel to make an objective assessment of the matter before it and determine whether the identified measure is consistent with the provisions of the WTO agreement upon which the claim is based. In that regard, it is important to bear in mind that panels cannot add to or diminish the rights and obligations provided in the SCM or the GATT 1994. It is also well settled that a panel must not conduct a de novo review of the evidence nor substitute its judgment for that of the competent authority.
(a) Canada Bears the Burden of Proving Its Claim
4.68 The complainant in a WTO dispute bears the burden of proof. This means, as an initial matter, that Canada, as the complainant, bears the burden of coming forward with evidence and argument that establish a prima facie case of a violation. It also means that, if the balance of evidence is inconclusive with respect to a particular claim, Canada must be held to have failed to establish that claim.
(b) The Final Countervailing Duty Determination Is Consistent with the SCM
(i) USDOC Properly Determined That Provincial Stumpage Programmes Constitute a “Financial Contribution"
Timber Is a Good within Article 1.1(a)(1)(iii) of the SCM
4.69 Article 1.1(a)(1)(iii) states that a financial contribution shall be deemed to exist where the government “provides goods or services other than general infrastructure.” The SCM does not specifically define the meaning of “provides” or “goods.” The Panel therefore should look to the ordinary meaning of these terms. The dictionary definition that Canada itself cites explicitly defines the term “goods” as encompassing all “property or possessions,” including “growing crops, and other identified things to be severed from real property.” “Goods” is similarly defined under Canadian law. Through their tenure systems, the Canadian provinces provide an “identified thing to be severed from real property,” i.e., timber.
4.70 Canada makes the extraordinary contention that a good must be a tradeable product. Canada bases this conclusion on logically flawed arguments, and ignores the basic principles of treaty interpretation reflected in Article 31 of the Vienna Convention on the Law of Treaties. Canada asks the Panel to infer, from the use of the phrase “imported goods” in Article 3.1(b) of the SCM and the word “products” in Parts III and V of the SCM Agreement, that “goods” can only mean traded goods that fall within the GATT 1994 Article II schedules. The fact that “products” are goods and “imported goods” are goods does not, however, logically give rise to the inference that nothing else can come within the meaning of “goods.”
Provincial Tenures “Provide” Timber
4.71 Canada argues that provincial governments are not providing timber to lumber producers, but rather are merely granting certain property rights in the timber: the right of access to, or the right to harvest, the timber. According to the New Shorter Oxford English Dictionary, however, “provides” means to “make available” in addition to “supply or furnish for use.” Thus, even if provincial tenures are viewed as simply providing the right to access or harvest the timber rather than providing the timber itself, such a provision would still constitute the provision of a good within the meaning of Article 1.1(a)(1)(iii) of the SCM because the government is making the timber available to lumber producers.
4.72 A review of the facts further demonstrates that Canada is attempting to elevate form over substance. USDOC found, and the US – Softwood Lumber III panel agreed,6 that from the tenure holder’s point of view, there is no difference between the government granting a right to harvest timber and the government actually supplying the timber through the holder’s exercise of this right. In fact, the only way to provide standing timber (the good in question) is by providing the right to harvest the timber. It should be beyond dispute that when a government gives a company the right to take a good, whether it is the right to take widgets from a government warehouse or timber from government land, the government is “providing” that good within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
(ii) The United States Properly Determined That Provincial Stumpage Programmes Provide a Benefit
A Benefit Is Something More Favorable Than the Market Would Provide Absent the Financial Contribution
4.73 The US, having properly determined that a financial contribution was provided to Canadian softwood lumber producers, was required to determine whether a benefit was “thereby conferred” within the meaning of Article 1.1(b) of the SCM Agreement. The SCM Agreement does not define the term “benefit.” The meaning of the term as used in Article 1.1(b) has, however, been explored by previous WTO panels and the Appellate Body, which have established that a benefit is something better than the market would otherwise provide, absent the financial contribution, and that “the ‘market’ to which reference must be made is the commercial market, i.e., a market undistorted by government intervention.”7
Comparing the Government’s Price for a Good to the Fair Market Value of the Good in the Country of Provision Is Consistent with Article 14(d) of the SCM
4.74 Article 14 of the SCM contains guidelines for calculating a subsidy benefit, providing that “the provision of goods or services . . . by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration.” “Adequate remuneration” is not defined in the text of the SCM Agreement. In the context of Article 14(d), however, “adequate” remuneration must mean remuneration that is sufficient to eliminate any benefit. As discussed above, a benefit is something more favorable than would otherwise be available in the commercial market, i.e., fair market value. Logically, therefore, “adequate” remuneration is fair market value. Article 14(d) therefore provides that the benefit should be measured by comparing the government’s price for goods or services with the fair market value of the goods or services in the country of provision.
4.75 The issue is what evidence may be used to establish that fair market value pursuant to the guidance in Article 14(d) of the SCM that adequate remuneration must be measured “in relation to prevailing market conditions . . . in the country of provision.” Article 14(d) does not address the type of evidence to be used in evaluating the question of benefit. Observed prices in Canada were either unavailable or unreliable indicators of fair market value. Thus, after a thorough analysis to ensure comparability, the US used market prices for timber from the northern US border states as the starting point for the calculation of fair market benchmarks for each of the provinces, then analyzed the prevailing market conditions in Canada (e.g., obligations for road building, silviculture, and fire and disease protection) and adjusted the benchmark calculation accordingly to arrive at the fair market value of timber in Canada.
4.76 Canada itself acknowledged that price data from sources outside of the country of provision can be used as the basis for assessing fair market value in the country of provision. The issue at the heart of Canada’s complaint is thus not whether Article 14(d) precludes the use of “out of country” prices (e.g., import prices) to assess fair market value in the country of provision. Rather, the issues at the heart of Canada’s claim are questions of fact: (1) did the US have a reasonable basis to reject private prices in Canada as a basis for assessing fair market value; and (2) could price data for comparable timber in the northern United States provide a reasonable factual basis for assessing the fair market value of timber in Canada. As discussed below, the answer to both inquiries is yes; therefore, Canada’s claim must fail.
Private Prices in Canada Did Not Provide a Reliable Basis to Determine Fair Market Value
4.77 As noted above, the Appellate Body and previous WTO panels have found that “the marketplace provides an appropriate basis for comparison”8 and that “the ‘market’ to which reference must be made is the commercial market, i.e., a market undistorted by government intervention.”9 Prices suppressed by the government’s financial contribution do not represent a commercial market price against which a benefit can be measured because they do not represent a “market undistorted by government intervention.”
4.78 In the present case, the US sought evidence on non-government prices for Canadian timber. The record evidence demonstrates, however, that the limited non-government price data submitted by the Canadian parties was inadequate and that such prices were significantly affected by the financial contribution itself, i.e., the supply of provincial government timber. These observed prices were therefore simply uninformative of adequate remuneration, i.e., fair market value.
Prices for Comparable Timber in Northern US States, Properly Adjusted, Provide a Reasonable Basis for Assessing the Fair Market Value of Timber in Canada
4.79 As discussed above, there was no appropriate market price data from Canadian sources on which to base a fair market value assessment. Canada’s claims notwithstanding, starting with prices for comparable timber of the same species immediately across the border and adjusting those prices, as appropriate, for provincial market conditions is a reasonable basis to assess the fair market value of timber in Canada. An examination of the underlying facts and the assessment performed by the US in this case demonstrates this point.
4.80 It is undisputed that the North American market for lumber is highly integrated. Canada, in fact, exports over 60 per cent of its softwood lumber to the US. US and Canadian timber are therefore supplying the same North American demand for lumber products. Thus, because of the derived nature of timber prices, market prices for US timber are a logical and reasonable starting point for an assessment of the fair market value of Canadian timber. US timber is also commercially available to lumber producers in Canada. Canada does not contest the fact that Canadian mills actually do purchase US timber – both on the stump and as logs – and consume it in their mills in Canada.
4.81 To compensate for any differences in species mix, the US calculated species-specific fair market value benchmarks. The US also used averages – an average, species-specific fair market value benchmark for each province and an average administered price for each province – to account for other differences that may affect the value of specific stands of timber. The use of averages is an accepted and widespread aspect of Canadian stumpage systems. In addition, the US made appropriate adjustments to the US price data to arrive at an assessment of the fair market value of timber in Canada. As evidenced in the Final Determination,10 the US conducted a thorough analysis of the conditions of sale in Canada and made necessary adjustments for obligations such as road building and silviculture that are conditions of sale in Canada. The result was a reasonable assessment of the fair market value of timber in Canada that is entirely consistent with Article 14(d) of the SCM Agreement.
The SCM Does Not Define “Benefit” in Terms of Increased Output or Lower Prices for the Subject Merchandise and Does Not Create an Exception for Natural Resource Inputs
4.82 Without any justification in the text of the WTO agreements, Canada asserts that the Panel should graft onto the SCM a special rule for financial contributions that take the form of a government provision of a natural resource that is fixed in supply. According to Canada, the conditions that prevail in such a market are such that no failure by the government to collect adequate remuneration can result in increased output or have an adverse trade impact. Thus, Canada claims that “any benefit analysis should assess” the trade effects of the subsidy.
4.83 This argument is completely without foundation in the SCM Agreement. Article 14, which is titled “Calculation of the Amount of a Subsidy in Terms of the Benefit to the Recipient,” provides that the existence of a benefit to the recipient, not the existence of demonstrable trade effects, is determinative of whether a benefit exists for purposes of Article 1.1. Nothing in Article 14 describes benefit in terms of the effect on the output of the recipient. If the government makes a financial contribution, and the recipient obtains a benefit, then the definition of a subsidy in the SCM Agreement is fulfilled. What Canada asserts “should” be added to this definition cannot supersede the actual text of the SCM Agreement.
(iii) The United States Calculated the Subsidy Rate in a Manner Consistent with the SCM and GATT 1994
4.84 In industries, such as softwood lumber, with an extremely large number of producers, it is not feasible, in an investigation, to examine the subsidies received by each individual producer. As reflected in Article 19.3 of the SCM Agreement, Members are accorded the flexibility to conduct investigations other than on a company-specific basis. In this case, rather than investigate specific producers, the US examined the government subsidy programmes at issue and, based on data supplied by the provincial and federal governments, calculated the aggregate amount of all subsidies to producers of the subject merchandise (the numerator). The US then allocated the aggregate subsidies over all sales of merchandise that benefitted from the subsidies (the denominator).
4.85 This type of aggregate subsidy investigation is entirely consistent with the SCM Agreement, and Canada does not argue to the contrary. Rather, Canada argues that the manner in which the US calculated the countervailing duty is inconsistent with Articles 19.1 and 19.4 of the SCM Agreement, and Article VI:3 of GATT 1994. Canada has failed, however, to make a prima facie case.
4.86 Article 19.1 of the SCM requires a final determination of the amount of the subsidy and a final determination of injury as pre-conditions to the imposition of a countervailing duty. Article 19.1 does not, however, establish any requirements concerning how a subsidy or injury is to be determined. Those obligations are found elsewhere in the SCM Agreement.
4.87 Article 19.4 of the SCM establishes an upper limit on the amount of the countervailing duty that may be levied, i.e., the amount of the subsidy found to exist. The issue addressed by Article 19.4 expressly is the levying of duties after a subsidy has been “found to exist.” The sole calculation requirement in Article 19.4 is a requirement to calculate the subsidy on a per-unit basis. Article 19.4 does not establish any other requirements concerning how the subsidy is to be calculated.11 Canada, in fact, concedes that its claim under Article 19.4 is dependent upon the existence of an inconsistency with some other provision of the SCM that imposes obligations with respect to the subsidy calculation.
4.88 Article 19.3 of the SCM establishes two obligations: (1) when countervailing duties are “imposed,” they must be “levied” on a non-discriminatory basis; and (2) when an uninvestigated exporter is “subject to” countervailing duties, the exporter is entitled to an expedited review to establish an individual countervailing duty rate. Nothing in the text of Article 19.3 establishes any obligations concerning the methodology used to calculate the amount of the subsidy, either in the aggregate or with respect to a specific exporter.
4.89 Thus, while other provisions of the SCM contain obligations regarding the calculation of the benefit, Canada has failed to identify any such obligations in Article 19 or GATT 1994 in support of its claims concerning the subsidy calculation. It has, therefore, failed to establish a prima facie case of a violation.
4.90 Furthermore, to the extent Canada’s claims relate to factual findings used to support the US methodology, the Panel may, of course, make an objective assessment of the facts. The Panel is not, however, charged with conducting a de novo review of the facts. Rather the Panel is to determine whether the US “evaluated all relevant factors, and . . . provided a reasoned and adequate explanation of how the facts support [its] determination.”12 The US findings of facts in this case were well supported and well reasoned.
(iv) Canadian Provincial Stumpage Subsidies Are Specific within the Meaning of the SCM
4.91 Under the SCM Agreement, a subsidy “shall be deemed to exist” where “there is a financial contribution by a government or any public body within the territory of a Member” and a benefit is thereby conferred. Pursuant to Article 1.2 of the SCM Agreement, a programme that otherwise meets the definition of a subsidy shall be subject to countervailing measures if it is “specific” within the meaning of Article 2 of the SCM Agreement. Article 2.1 of the SCM Agreement provides three principles that must be applied to determine whether a subsidy is specific to “an enterprise or industry or group of enterprises or industries” — referred to collectively by the SCM Agreement as “certain enterprises” — within the jurisdiction of the granting authority.
4.92 First, a subsidy is specific as a matter of law if the granting authority explicitly limits access to a subsidy to certain enterprises. Second, a subsidy is not specific as a matter of law where the granting authority establishes objective criteria or conditions governing eligibility for, and the amount of, a subsidy, provided that eligibility is automatic and the criteria or conditions are strictly adhered to. Third, even where the law under which the granting authority operates does not appear to create a de jure specific subsidy under the first two steps of the analysis, Article 2.1(c) of the SCM provides that other factors may be considered to determine if the subsidy is, in fact, specific. Thus, Article 2.1(c) establishes that, even if a subsidy has the “appearance” of being widely available throughout an economy, it may nevertheless be specific if, as a matter of fact, the subsidy is used only or predominantly or disproportionately by a limited number of certain enterprises.
4.93 The US acted consistently with its obligations under the SCM in finding that Canada’s provincial stumpage programmes are specific. The subsidy at issue in this case is the provision of Crown timber to lumber manufacturers at below-market prices. Thus, the proper inquiry under Article 2.1(c) of the SCM is whether the actual recipients of Crown timber, whether considered on an enterprise, industry, or group basis, are limited.
4.94 The record clearly demonstrates that provincial stumpage subsidy programmes were used by a “limited number of certain enterprises” within the meaning of Article 2.1(c). The SCM does not define the term “limited number.” As a factual matter, USDOC found that stumpage subsidy programmes were used by a single group of industries, comprised of pulp and paper mills, and the saw mills and remanufacturers that produce the subject merchandise. Such a small number of users would count as “limited” by any reasonable definition.
4.95 Canada does not deny that there are no recipients of timber outside of the lumber and pulp and paper industries. Instead, it attempts to redefine the specificity test. Canada would have this Panel ignore the plain language of the SCM Agreement, and instead establish obligations and requirements that exist nowhere in the SCM Agreement. First, Canada attempts to read an intent requirement into the SCM Agreement, notwithstanding that nothing in the text requires any findings as to the granting authority’s intent to limit a subsidy. To the contrary, the very purpose of Article 2.1(c) is to let the facts speak for themselves. Article 2.1(c) refers simply to whether a limited number of enterprises use a subsidy, not why that is so. Next, without any foundation in the SCM Agreement, Canada claims that subsidies are not specific if they are “adopted in the context of a Member’s broader economic and social policy framework, such as the sustainable exploitation of natural resources.” A “policy” exception would, however, obliterate the specificity requirement to the extent that all subsidies fall within some broader social or economic policy framework. Finally, Canada seeks to create an exception to Article 2 that would explain away a finding of specificity where “the inherent characteristics of the alleged good . . . limit the number of users of the programme, rather than any deliberate government favouritism.” However, the “inherent characteristics” of the subsidized good are also not a factor under Article 2.1. The fact that a subsidized input has economic utility for a limited number of potential recipients does not and cannot exempt it from the disciplines of the SCM Agreement.
4.96 Canada also claims that the US undercounted the number of industries that used stumpage subsidies because it used an improper definition of the word “industry.” Canada seeks to constrict the natural meaning of “industry” such that an industry would be identified not by the general class of products it produces, but by a particular product or narrow set of products. Canada further claims that a “group of industries” is similarly restricted to individual members that make similar products. There is absolutely no basis in the text, or logic, for Canada’s argument. Canada’s reading contradicts the ordinary meaning of the word “group,” which in the context of Article 2.1 plainly and simply means “one or more” enterprises or industries; it does not require that all of its members be identical, or even similar, to be called a group.
4.97 The Panel should likewise reject Canada’s argument that the term “domestic industry,” as defined in Article 16.1 of the SCM Agreement, forms the context for understanding what is meant by “industry” in Article 2.1. Article 16.1 defines “domestic industry” within the context of the determination of the domestic “like product,” whereas specificity determinations under Article 2 are not limited to particular “like products.” There is no logical connection between defining the domestic industry that is injured by a specific imported product and determining whether a subsidy is limited to certain enterprises or industries.
4.98 Finally, the US explicitly found that “the subsidies provided by the stumpage programmes are not ‘broadly available and widely used.’ The vast majority of companies and industries in Canada does not receive benefits under these programmes.”13 No matter how Canada attempts to subdivide or redefine the industries that received the subsidy, the simple fact remains that the Canadian economy as a whole and each of the provincial economies are large and diversified, and provincial stumpage programmes are used by a single group of forest product industries within those diverse economies. Canada’s claims with respect to the economic diversification provisions of Article 2.1(c) therefore should be rejected by the Panel.
(c) The Conduct of This Investigation Was Consistent with the Obligations of Article 12 of the SCM
4.99 The US conducted this investigation in full compliance with the obligations in Article 12 of the SCM Agreement. The US ensured that all parties were given notice of the information it required for the investigation, had ample opportunity to submit relevant information, had access to all information submitted to the US during the course of the investigation, and were informed of the essential facts under consideration. The US thus ensured that all interested parties had ample opportunity to defend their interests. Neither of Canada’s two claims of error bears scrutiny under the facts of record.
4.100 The US fully complied with Articles 12.1, 12.3, and 12.8 of the SCM Agreement with regard to the selection of the benchmark for the stumpage programmes of Alberta and Saskatchewan. Consistent with Article 12.1, all interested parties were informed that the US required information on the US northern border states in order to choose appropriate benchmarks for the Canadian stumpage programmes. Because all information submitted to the US was actually served on all of the interested parties participating in the investigation, the US procedures were consistent with Article 12.3. Because the Preliminary Determination14 announced that the United States was using US northern border states as the benchmarks for the Canadian stumpage programmes, set forth the criteria the US used in selecting the benchmarks, identified Minnesota as one alternative USDOC might use, and because all information submitted to the US regarding Minnesota was provided to all of the interested parties, the US informed the interested parties of the “essential facts under consideration” and therefore acted consistently with Article 12.8.
4.101 The US conduct was also in full compliance with the SCM with regard to the Maine Forest Products Council (“MFPC”) letter. The US provided copies of the MFPC letter to all interested parties and afforded them the opportunity to submit information “that clarifies, corrects or rebuts” the information contained in that letter. By providing copies of the letter to all of the interested parties, the US ensured that it met the requirements of Article 12.1. Moreover, the opportunities to comment on and rebut the information more than met the requirements of Article 12.3. Beyond the requirements of Article 12.8, the US specifically identified the information contained in the MFPC letter as “important to certain issues in the proceeding, and relate[d] to an ongoing exchange of expert advice on a technical matter.” The US, therefore, informed the interested parties that the information in the MFPC letter was part of the “essential facts under consideration,” and specifically provided them with the opportunity to use this information in the presentation of their case, or to submit additional information to clarify, correct, or rebut this information. Thus, the disclosure took place in sufficient time for parties to defend their interests.
(d) The United States Initiated the Softwood Lumber Investigation Based on Adequate Domestic Industry Support Consistent with the Requirements of Article 11.4 of the SCM
4.102 The softwood lumber petition contained uncontested evidence establishing that US softwood lumber producers representing 67 per cent of total US softwood lumber production supported the petition. That level of industry support unquestionably satisfies the criteria in Article 11.4 of the SCM Agreement. Canada does not contest this fact.
4.103 Canada is not challenging the provisions of US law governing industry support, but rather the specific factual determination of industry support in this case. Nevertheless, the sole argument presented by Canada is the unsubstantiated claim that the very existence of the Continued Dumping Subsidy Offset Act of 2002 induced support for the petition, thereby precluding an objective determination of industry support. In effect, Canada would inject a requirement into the SCM Agreement that investigating authorities examine the motives of prospective petitioners. In US – Offset Act (Byrd Amendment), however, the Appellate Body unequivocally rejected this argument. Canada’s claim is therefore without any support in the text of Article 11.4 or the facts of record.
4.104 Thus, the United States requests that the Panel reject Canada’s claims in their entirety.
C. FIRST ORAL STATEMENT OF CANADA
4.105 The following summarizes Canada's arguments in its first oral statement.
4.106 “Stumpage” refers to the right of a harvester to enter into a forest owned by a province, select a tree and harvest it. Provincial governments transfer stumpage to harvesters through tenure agreements or licences. Timber refers to the standing tree. Harvesters cut down timber and process it into logs that are processed further to produce softwood lumber and a wide variety of other products. Lumber and certain products manufactured from lumber are the subject merchandise. Lumber and logs, which are physical, tradable items, are goods. Standing trees and timber-harvesting rights are not tradable or physical items; they are not goods. The fact that from each of these rights a good may be produced does not make the right a good in itself.
4.107 In general, the provinces own forests and trees and enter into tenure or licence agreements to transfer to private persons the right to harvest trees. In return for this right, these agreements require tree harvesters to undertake a broad range of forest management responsibilities and significant in-kind costs, as well as the payment of stumpage fees upon harvest.
4.108 At issue in this case, is the interpretation of the phrase “provision of goods” in Article 1.1(a)(1)(iii). The plain meaning of the word “goods” is movable, tangible personal property. In ordinary usage the term “goods” does not cover intangibles, such as intellectual property rights, or real property interests. “Goods” does not include all property, or everything that has economic value or is an economic resource.
4.109 This plain meaning of “goods” is further supported by the context of this term. Nothing in the WTO Agreement justifies interpreting “goods” to encompass everything of economic value. Equally, nothing in the object and purpose of the SCM Agreement requires this Panel to interpret the word “goods” as anything other than its ordinary meaning. As the panel in United States – Export Restraints noted, the SCM Agreement regulates certain government actions, but not others. The objective of the SCM Agreement in general and Article 1 in particular, was not to govern all transfers of economic resources by a government.
4.110 As a matter of law, “goods” are movable personal property; for the purposes of the WTO Agreement, they are tradable items that are capable of bearing a tariff classification.
4.111 In the facts of this case, timber harvesting rights are intangible real property interests. As such, they do not fall under the “provision of goods” heading of Article 1.1(a)(1). The only way to fit the rights in question, or indeed standing trees, into the term “goods” is to suggest that the term encompasses all a person’s legal rights of whatever description. The WTO Agreement does not support this proposition.
4.112 A right to harvest standing timber cannot bear a tariff classification, as it cannot be traded across borders. The transfer of stumpage rights does not constitute the provision of goods.
4.113 In the CVD FD, USDOC compared provincial stumpage charges with stumpage prices on selected lands in its own territory. USDOC found US prices to be higher and concluded that the stumpage charges conferred a benefit through this cross-border comparison.
4.114 This approach to determining and measuring benefit violates the SCM Agreement. The plain meaning Article 14(d) requires that benefit must be determined and measured on the basis of prevailing market conditions in the country of provision. This is a legal issue. It is not a factual debate.
4.115 Canada’s position is based on the ordinary meaning of Article 14(d), which provides that: “[A]dequacy of remuneration shall be determined in relation to prevailing market conditions for the good … in the country of provision…”[emphasis added]. Nothing in the context, object and purpose or the negotiating history of Article 14 permits reading “in” as anything other than “in”. As the panel in US – Softwood Lumber III found: “Article 14 (d) does not just refer to “market conditions” in general, but explicitly to those prevailing “in the country of provision” of the good.”
4.116 Article 14(d) requires the use of “prevailing market conditions … in the country of provision” to determine adequacy of remuneration. The ordinary meaning of the term “prevailing” is “as they exist”. This requirement cannot be avoided by interpreting “in relation to” to mean “taking account of”.
4.117 The SCM Agreement does not provide an authority with the discretion to reject in-country benchmarks. Instead, Article 14(d) requires the use of “prevailing market conditions … in the country of provision”. Notwithstanding this requirement, USDOC rejected in-country benchmarks arguing that government involvement allegedly suppresses private market prices making them unusable.
4.118 The US argues that (1) the information submitted was “limited” and that (2) the “observed prices were simply uninformative of adequate remuneration” because they were “significantly affected by the financial contribution itself.” Both arguments are without merit.
4.119 First, there is no question that USDOC had before it extensive evidence regarding the prevailing market conditions in Québec, Ontario, Alberta and BC. This evidence was not “limited”. Canada also submitted information demonstrating that stumpage systems are operated in a manner consistent with market principles. This information showed that all of the provinces were making substantial profits on the management of their forests.
4.120 Second, the SCM Agreement does not permit dispensing with prevailing market benchmarks because of “price suppression”. This was confirmed by the panel US – Softwood Lumber III . Moreover, the US did no analysis to arrive at the conclusion that price suppression existed.
4.121 The United States’ most recent attempt to justify its cross-border comparisons consists of an entirely new argument that relies on word substitutions, and on so called “logic” to replace the law. The argument – that Article 14(d) requires is that the “fair market value” (“FMV”) of timber in Canada is the appropriate benchmark for measuring the benefit – is wholly new. It is found nowhere in the Preliminary or Final Determinations, US law or in the SCM Agreement.
4.122 The argument is the latest in a series of changing positions that the US has taken over the course of this dispute. In US – Softwood Lumber III, the US moved from arguing “in” means “out” to arguing “out” really means “in”. In anther attempt to argue for the use of US prices as an appropriate benchmark the US again asserts that “out” really means “in” – but this time with several twists.
4.123 The US begins by arguing that a benefit determination is a “but for” analysis that involves comparing the government’s price for a good with what the price for that good would have been absent the financial contribution. In a provision of goods context, however, the marketplace is the prevailing market as it exists. The panel in US – Softwood Lumber III confirmed this interpretation.
4.124 Building on this erroneous understanding of “benefit”, the US turns to Article 14(d) itself and argues that: “[A] benefit is something more favorable than would otherwise be available in the commercial market, i.e., fair market value. Logically, therefore, “adequate” remuneration is fair market value.” It then argues that it had to look elsewhere for prices to calculate FMV benchmarks because prevailing market conditions in Canada are “unreliable indicators” of FMV. In doing so it turns Article 14(d) into a provision that measures adequacy of remuneration by comparing the government price to a constructed FMV, rather than to in-country prevailing market conditions.
4.125 In a final effort to refashion the requirements for a determination of “adequate remuneration”, the US asserts that FMV “must” be determined “in relation to” “conditions of sale”. The replacement of “prevailing market conditions” by “conditions of sale”, is just another attempt by the US to again evade the plain meaning of “prevailing” which is “as they exist”. The text of the agreement demands a determination that is grounded in existing Canadian market factors, not an adjustment to US prices based on an erroneous interpretation of “conditions of sale”.
4.126 Interwoven through this is the now familiar argument that “in relation to” means “taking account of.” Although the reasons for the US argument have changed, Canada’s response is the same. The ordinary meaning of “in relation to” is “on the basis of”. It is not “taking account of”.
4.127 These word substitutions allow the US to interpret Article 14(d) as if it read: The fair market value shall be determined using a benchmark derived from a market undistorted by government intervention, taking account of conditions of sale for the good … in the country of provision.
4.128 According to the US, this metamorphosis is so compelling that there is “no dispute” about any of it. Every step of this so-called “logic” is in dispute. No amount of word substitution can change the fact that Article 14(d) requires a determination of adequacy of remuneration using in-country prevailing market conditions.
4.129 USDOC also improperly rejected economic analysis that demonstrates that stumpage charges provide no trade advantage to lumber producers or harvesters. USDOC explained in its CVD FD that its task was to “quantify and remedy” distortion of the US market that was at “the heart of this inquiry”. In response, Canada provided USDOC with detailed economic evidence that demonstrated that stumpage programmes do not cause trade distortion.
4.130 USDOC then claimed that it could not examine this evidence because of its “complexity”. The US now contradicts its own investigating authority by claiming that the evidence is not relevant to a “benefit” determination and that Canada is attempting to “graft” a special rule onto the SCM Agreement. Canada is doing no such thing. Rather, Canada provided evidence to USDOC regarding an issue that USDOC itself stated was central to this case.
4.131 Any benefit determination relating to stumpage systems must take into account the fact that the market in this case is a rent market. This approach is consistent with panel and Appellate Body interpretations of Article 1.1(b) and the object and purpose of the Agreement. The Appellate Body has confirmed that the word “benefit” implies a comparison that is market-based and stated that this allows for identification of any “trade-distorting potential.” As such, the analysis of remuneration in relation to prevailing market conditions in this case should include consideration of whether stumpage charges are capable of causing trade distortion.
4.132 The US purports to have determined that provinces subsidize those who harvest standing timber. The US has imposed countervailing duties on lumber. Record evidence demonstrates, and the US does not contest, that there are lumber producers who obtained log or lumber inputs from unrelated sources other than government. The question before the Panel therefore is whether the US may legally presume, as it did, that such producers benefited from an alleged timber harvesting subsidy.
4.133 Under Article 1, to establish that a person is “subsidized” an investigating authority must establish that the person received a financial contribution, and that this confers a benefit. Where lumber producers do not harvest timber but obtain inputs from upstream producers, any alleged subsidy is by definition indirect. An indirect subsidy is established by demonstrating the existence of both an indirect financial contribution under Article 1.1(a)(1)(iv), and a benefit under Article 1.1(b). The Appellate Body has confirmed that in a countervailing duty investigation, the existence of any subsidy may never be presumed. The panel in the US – Softwood Lumber III case came to the same conclusion, finding that the obligation to establish the existence of a subsidy is not excused by conducting an investigation on an aggregate basis. Articles 10, 32.1, 19.1 and 19.4 of the SCM Agreement require the US to establish the existence of a subsidy before it imposes countervailing duties.
4.134 In the CVD FD, USDOC found stumpage to be specific in fact by relying solely on an incorrect and perfunctory application of the “limited users” factor under Article 2.1(c) of the SCM Agreement. The phrase “is specific to” in Article 2 establishes a legal standard. The standard is whether government is limiting access to a programme, in law or in fact, to certain enterprises. Analyzing whether a subsidy is specific in fact under Article 2 is not different from analyzing whether a subsidy is contingent on export performance in fact under Article 3.1(a). A member may find specificity in fact only where the total configuration of facts allows it to infer that government is deliberately limiting access to the programme.
4.135 As a threshold issue, the US determination on the “limited users” factor is wrong. First, it assumes the conclusion. The CVD FD asserts that stumpage programmes “are limited to those companies and individuals specifically authorized to cut timber on Crown lands.” USDOC’s determination says nothing regarding the industries that actually use stumpage, and more fundamentally, whether their number was limited.
4.136 Second, it fails to provide any legal analysis of the meaning of the terms “industry” or “group of industries”. The record evidence demonstrates that the many industries in which these companies operate are not the only users of stumpage and that the actual users are not limited in number. Moreover, an industry must be identified for the purposes of specificity with reference to the products it produces. The US argument amounts to an assertion that the term “industry” means whatever it needs to find a programme specific.
4.137 Third, it compares the purportedly sole users of stumpage to the entire Canadian economy. Using the entire economy as a benchmark misinterprets Article 2, as it ignores the fact that the universe of eligible users under Article 2.1(b) can be something less than “everyone”. The benchmark is the universe of eligible users.
4.138 The determination is wrong on the facts because record evidence demonstrates that enterprises in more than 23 classes of industries manufacturing 201 distinct products use stumpage. Finally, even if the US had been correct in finding that stumpage was used by a limited number of industries, that finding by itself could not establish per se that the programmes are specific in this case, as the US is required to provide legal and factual analysis on this point. As Canada demonstrated in its First Written Submission, the US failed to address in the CVD FD that the purported finding of “limited users” is explained by the nature of the alleged “good” and the nature of the economic diversification of provincial economies.
4.139 Where the amount of a subsidy has been improperly calculated and illegally inflated, a countervailing duty imposed in that amount violates Article 19.4 of the SCM Agreement and Article VI:3 of GATT 1994. The US violated these obligations in three ways.
4.140 First, the US nearly doubled the amount of the alleged subsidy by using wrong conversion factors when comparing Canadian stumpage rates, calculated in dollars per cubic metre, to US timber prices, determined in dollars per thousand board feet.
4.141 Second, the US inflated the amount of the subsidy by considering the total volume of logs entering sawmill establishments as subsidized inputs into subject merchandise, even though not all of the output was subject merchandise. The US should have determined based on evidence the amount of the subsidy attributable to the volume of the log that actually goes into the production of the subject merchandise.
4.142 Third, the US inflated the per unit subsidy rate, and therefore the countervailing duties imposed by approximately US$120 million per year, by spreading the alleged subsidy over an incorrectly determined low sales value.
4.143 In the CVD PD, the US used data from Montana to establish a benchmark rate for Alberta and Saskatchewan. These provinces objected to this choice, both on legal and factual grounds. In the CVD FD, USDOC selected Minnesota as the benchmark state. At no point were the affected provinces made aware of USDOC’s choice of Minnesota as the benchmark state. As a consequence, the US violated Articles 12.1, 12.3 and 12.8.
4.144 With respect to Québec, the investigation was inconsistent with Article 12.3 in two respects. First, USDOC itself requested and received important information from the Maine Forest Products Council concerning its benchmark determination for Québec. It sat on that information for two months. This denied parties the opportunity to see relevant information. Second, USDOC accepted and relied upon new factual information submitted by the petitioners criticizing the Council’s information. Interested parties were then denied the opportunity to prepare presentations on the basis of this relevant information.
4.145 Canada does not consider it appropriate to press its claim set out in paragraph 1 of its panel request.
4.146 Canada has not abandoned the claim in paragraph 3(b) of its panel request. Canada understands that the US believes that it has the discretion to conduct company-specific administrative reviews in this case; that the US will use its discretion to conduct such reviews of requesting exporters; that rates obtained by individual exporters in expedited reviews will not be superseded by an aggregate rate in an administrative review. Canada may advance additional arguments if its understanding of the US position is incorrect.
5 Panel Report, US – Softwood Lumber III.
6 See Panel Report, US – Softwood Lumber III , para. 7.17.
7 Panel Report, Brazil – Aircraft (Article 21.5 – Canada II ), para. 5.29 (emphasis in original).
8 Appellate Body Report, Canada – Aircraft, para. 157.
9 Panel Report, Brazil – Aircraft (Article 21.5 – Canada II ), para. 5.29 (emphasis in original).
10 See Notice of Final Affirmative Countervailing Duty Determination and Final Negative Critical Circumstances Determination: Certain Softwood Lumber Products From Canada, 67 Fed. Reg. 15545 (2 April 2002) (“Final Determination”) (US - 2).
11 Similarly, Article VI:3 of GATT 1994 establishes that the amount of the subsidy found is the upper limit on the amount of the countervailing duty that may be levied. Article VI:3 of GATT 1994 does not address how the subsidy is to be calculated.
12 Appellate Body Report, US – Lamb, para.103.
13 Issues and Decision Memorandum: Final Results of the Countervailing Duty Investigation of Certain Softwood Lumber Products from Canada, 52 (emphasis added) (21 March 2002) (CDA-1).
14 Notice of Preliminary
Affirmative Countervailing Duty Determinations, Preliminary Affirmative Critical Circumstances Determination, and Alignment of Final Countervailing Duty Determination with Final Antidumping Duty
Determination: Certain Softwood Lumber Products from Canada, 66 Fed. Reg. 43186 (17 August 2001) (CDA-20) (“Preliminary Determination”).