UNITED STATES � FINAL COUNTERVAILING DUTY
 DETERMINATION WITH RESPECT TO CERTAIN
 SOFTWOOD LUMBER FROM CANADA
 

Report of the Panel

(Continued)  

C. CLAIM 3: USDOC IMPERMISSIBLY ASSUMED A PASS-THROUGH OF THE ALLEGED SUBSIDY

7.66 Canada's pass-through claim is based on the arguendo assumption that stumpage provides subsidies, i.e., that stumpage constitutes a financial contribution in the form of provision of a good, and that that financial contribution confers a benefit. That is, Canada's claim is that even if stumpage does provide subsidies, the USDOC erred in not conducting a pass-through analysis in determining subsidization of softwood lumber in the case of certain upstream transactions for inputs. Notwithstanding our finding that the US failed to determine benefit in a manner consistent with Article 14 SCM Agreement, we address this claim adopting the same arguendo assumption for purposes of our analysis.

7.67 We note that the US seems to raise a jurisdictional challenge to Canada's citation of Article 1.1 SCM Agreement in connection with this claim. We address this jurisdictional issue in section VII.C.2(c), infra.

1. Arguments of the parties

(a) Canada

7.68 Canada claims that by not investigating whether alleged subsidy benefits from stumpage programmes were passed through in arms'-length transactions between timber harvesters and unrelated sawmills, and between sawmills and unrelated re-manufacturers, the United States countervailed subsidies the existence and amount of which it presumed instead of determined. In particular, Canada takes issue with the conclusions in the USDOC's final determination that, in respect of sawmills that purchase logs at arms'-length, no subsidy pass-through analysis was required because the alleged subsidy is a subsidy "to the production of lumber, not the production of timber or logs"¹⁴⁷, and in respect of re-manufacturers that purchase lumber from stumpage holders at arms'-length, 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".¹⁴⁸

7.69 According to Canada, the Appellate Body has confirmed, in US � Lead and Bismuth II, that in a countervailing duty investigation, the existence of a subsidy may never be presumed.¹⁴⁹ Furthermore, Canada notes, the Panel in US � Softwood Lumber III found in favour of Canada and against the US in respect of the pass-through issue in the preliminary countervailing duty investigation on softwood lumber.¹⁵⁰

7.70 Canada further argues that where lumber producers do not harvest timber but obtain inputs from upstream producers, any alleged subsidy by definition must be indirect, and that indirect subsidization is established by demonstrating the existence of both an indirect financial contribution, through entrustment or direction under Article 1.1(a)(1)(iv), and a benefit under Article 1.1(b). According to Canada, USDOC made no finding in respect of financial contribution by government to lumber producers or re-manufacturers in respect of inputs purchased at arms'-length, nor did USDOC find that the alleged benefit was conferred to lumber producers or re-manufacturers through downstream purchases. Thus, Canada claims, the failure by the USDOC to establish the existence of a subsidy in respect of arms'-length transactions for lumber inputs violated the SCM Agreement.¹⁵¹

7.71 Canada argues that there was substantial record evidence demonstrating arms'-length transactions between timber harvesters and lumber producers, and between lumber producers and re-manufacturers: British Columbia, where approximately 24 per cent of the timber from Crown licenses was harvested by companies that did not own sawmills; Ontario, where some 30 per cent of the softwood timber harvested from Crown lands was sold by tenure holders to third parties for processing; British Columbia, where at least 18 per cent of the volume of logs harvested from Crown lands were purchased at arms'-length; and the fact that many companies applied for exclusion from the countervailing duty order on the grounds of having received no subsidies due to sourcing their log and lumber inputs at arms'-length.¹⁵²

7.72 Canada argues that under SCM Articles 10, 19.1, 19.4, and 32.1, and GATT 1994 Article VI, a countervailing duty may be imposed only where it has been demonstrated that the producer of the subject merchandise has benefited from a "subsidy" as defined in SCM Article 1.1. Canada argues that the US presumed rather than demonstrated the existence of a subsidy where arms'-length transactions separated the recipients of the alleged financial contribution and the producers of the subject merchandise, that the US thereby acted inconsistently with Article 1.1, and thus violated: (1) Article 10 by failing to impose countervailing duties in accordance with the provisions of the SCM Agreement; (2) Article 19.1 by imposing countervailing duties in the absence of a final determination of the existence and amount of a subsidy; (3) Article 19.4 by levying countervailing duties in excess of the amount of the subsidy found to exist; (4) Article 32.1 by taking action against a subsidy not in accordance with the provisions of GATT 1994, as interpreted by the SCM Agreement; and (5) Article VI:3 of the GATT 1994 by imposing duties in the absence of an indirect subsidy finding.¹⁵³

7.73 Canada, responding to the US argument, concludes on this point that the fact that the investigation was conducted on an aggregate basis did not excuse the USDOC for its failure to correctly establish the existence and amount of the alleged subsidy to producers of subject merchandise. Canada argues that, contrary to the US's characterization, the issue of pass-through is not simply about calculating the amount of the alleged stumpage subsidy, but rather, about whether a subsidy exists. For Canada, the amount of a subsidy cannot be calculated, aggregated or allocated until a subsidy is first determined to exist.¹⁵⁴

(b) United States

7.74 The United States characterizes this claim by Canada as an issue of calculation of the rate of subsidization (and hence the amount of countervailing duty), rather an issue concerning the existence of the subsidy. According to the US, the USDOC correctly established the overall amount of subsidy under the provincial stumpage programmes, as the per unit subsidy times the total quantity of Crown logs entering sawmills, on a province-by-province basis. Then, the US argues, because the USDOC performed its investigation on an aggregate basis, no pass-through analysis was necessary or required. Rather, the USDOC simply spread the total subsidy amount that it had calculated over the value of sales of the products produced from the "lumber production process". The US argues that requiring a pass-through analysis would effectively amount to requiring a company-specific analysis, which even Canada does not argue is required by the Agreement. In this context, the US further argues that the implication of Canada's argument in respect of pass-through would mean that a Member would violate the SCM Agreement every time it imposed a countervailing duty on an uninvestigated exporter or producer, although the last sentence of Article 19.3 makes clear that this does not constitute a violation.¹⁵⁵

7.75 The United States argues that there are two basic situations in which Canada argues that a pass-through analysis is required. First is the case of a timber harvester that does not own a sawmill and sells logs to sawmills at arms'-length. Second is the case of re-manufacturers that purchase lumber from sawmills for use in their re-manufacturing operations.

7.76 In respect of the first situation, the United States considers that the existence of arms'-length log sales by harvesters who are not lumber producers might reduce the amount of subsidy from stumpage programmes that benefits the softwood lumber products produced from those logs, but that as a factual matter, the record demonstrates that the "vast majority" of Crown timber entering sawmills (i.e., the basis for the subsidy calculation) is obtained from the sawmills� own tenures. According to the US, any portion of that timber that was purchased from independent harvesters could only constitute a "comparatively small portion of the total"¹⁵⁶, and the many restrictions imposed on tenure holders, including requirements to process timber locally, "suggests that all or most of the sales by independent loggers may not be at arms'-length".¹⁵⁷ The US further argues that subsidies to independent companies can only be addressed through an examination of individual producers of the subject merchandise because of the necessity to examine the specific relationships and transactions that may be at issue, and that such a company-specific analysis is not required by the Agreement, nor does Canada make such a claim.¹⁵⁸

7.77 Concerning the second situation, the United States provides a numerical example to explain why, in its view, no pass-through analysis is necessary in respect of sales of lumber to re-manufacturers.¹⁵⁹ According to the US, in an aggregate case, such a pass-through analysis is not required because the total subsidy amount from the sawmills' stumpage inputs is known, and can be used in its entirety as the appropriate numerator in the subsidization calculation. This numerator is then spread equally over a sales denominator consisting of the total amount of sales of the subject product produced by both first mills and re-manufacturers. Changing the denominator does not affect the total subsidy amount, but rather, only the rate of subsidization.

7.78 As for Canada's legal argument, the US argues that Canada has raised in its arguments before the Panel certain new provisions, in particular Article 1.1 SCM Agreement, which were not referred to in the Request for Establishment of a Panel in connection with this claim. The US also argues that the other provisions cited by Canada either do not contain the obligations asserted by Canada, or are completely dependent on such provisions.¹⁶⁰

7.79 Concerning the various provisions of Article 19 SCM Agreement, the United States argues, first, that Article 19.1 SCM Agreement 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, but does not establish any requirements as to how a subsidy or injury are to be determined. Rather, these requirements are found elsewhere in the SCM Agreement. As for Article 19.4 SCM Agreement, the US argues that the role of this provision is to establish an upper limit to the amount of the countervailing duty that may be levied, i.e., the amount of subsidy found to exist. The issue addressed by Article 19.4 SCM Agreement is expressly the levying of duties after a subsidy has been "found to exist", according to the US. Furthermore, the sole calculation requirement in Article 19.4 is to calculate the subsidy on a per unit basis, and the US states that Canada concedes that its claim under Article 19.4 SCM Agreement is dependent upon the existence of an inconsistency with some other provision of the SCM Agreement that imposes obligations with respect to the subsidy calculation. Concerning Article 19.3 SCM Agreement (no violation of which is claimed by Canada), the US argues that this provision allows Members to conduct investigations other than on a company-specific basis, in that it foresees the possibility to levy countervailing duties on producers not individually investigated. Concerning the obligations in Article 19.3, the US argues that these are: (1) that when imposing countervailing measures, a Member must do so on a non-discriminatory basis; and (2) that when an uninvestigated exporter is subject to countervailing duties, it is entitled to an expedited review to establish an individual countervailing duty rate. As for Article VI:3 of GATT 1994, the US argues that it contains no obligation regarding the methodology that a Member may use in calculating the ad valorem subsidy rate.¹⁶¹

7.80 Turning to the other provisions cited by Canada in connection with the pass-through claim � Articles 10 and 32.1 SCM Agreement � the US argues that these are necessarily derivative of other claims, which Canada has failed to establish.¹⁶² Thus, the US argues, Canada has not made a prima facie case of violation in respect of the pass-through claim.

2. Analysis

7.81 The basic question presented by this claim is whether USDOC was obligated to conduct a pass-through analysis in respect of the input transactions between timber harvesters (both those that produce lumber and those that do not) and unrelated sawmills, and between sawmills and unrelated re-manufacturers, and if so, whether this obligation can be found in any of the provisions cited in Canada's claim.¹⁶³ For Canada, failure to conduct such an analysis means that USDOC did not establish the existence of a subsidy in those cases. For the US, the provisions cited by Canada do not contain a requirement to conduct a pass-through analysis. On the substance, the US argues that the issue is one of calculation of the rate of subsidization, which the US maintains it has done correctly by specifying the total amount of subsidy to softwood lumber from the stumpage programmes, and then allocating that total over all relevant softwood lumber sales. Thus for the US, conduct of the investigation on this aggregate basis obviates the need to perform a pass-through analysis.

(a) Legal requirements concerning pass-through analysis

7.82 We thus must consider whether, under the provisions cited by Canada, the USDOC was required to conduct an analysis of the extent to which any (alleged) subsidy benefits from stumpage were passed through by timber harvesters when they sold logs to unrelated lumber producers or when they sold lumber to re-manufacturers. Here, it seems that the issue of "existence" of a subsidy and calculation of the rate of subsidization on lumber in practice are somewhat conflated in the case before us. In particular, we note that Canada does not challenge the USDOC's aggregate approach to determining subsidization, namely determining a total amount of subsidy provided through the stumpage programmes and then allocating that total subsidy amount over sales of the relevant products.¹⁶⁴ Thus, as a practical matter, given the methodology used by USDOC in the investigation, the question as posed by Canada of the "existence" of subsidization in the transactions at issue would manifest itself in the calculation of the aggregate rate of subsidization. In particular, if any subsidy amounts were improperly imputed to the subject merchandise, due to the absence of a pass-through analysis in respect of the transactions at issue, this would manifest itself as an overstatement of the aggregate rate of subsidization, as no company-specific rates would have been calculated. We note that the panel in US � Softwood Lumber III addressed this same issue.¹⁶⁵

7.83 We now turn to an examination of the provisions cited by Canada in its pass-through claim, starting with Article 10 SCM Agreement and Article VI:3 of GATT 1994.

7.84 In considering Canada's pass-through claim in detail, we recall that countervailing measures are applied to imports of certain products (the subject merchandise), which in the countervailing duty investigation in dispute before us comprises softwood lumber products produced by sawmills from logs, and re-manufactured softwood lumber products produced by re-manufacturers from lumber obtained from sawmills. That is, countervailing duties are not levied on companies that have received subsidies, but rather are additional duties levied on imports of certain products in respect of the manufacture, production or export of which subsidization has been found ("subsidized imports" as referred to in the SCM Agreement)¹⁶⁶.

7.85 With this as background, we understand Canada's claim, in essence, to be that where upstream transactions between unrelated entities exist for inputs, any subsidies to the producers of those inputs cannot be assumed also to be subsidies to the downstream product under investigation. We note that Article 1.1, which contains the definition of a subsidy, and which Canada identifies as the underlying substantive basis of its claim, uses relatively abstract language as to what a subsidy is, but does not itself make the link between the existence of a subsidy as such and the subsidization of a particular product.¹⁶⁷ Indeed, while Article 1.1's reference to "benefit" certainly implies the existence of a recipient, Article 1.1 makes no reference to the nature of the recipient or its link to any particular product. For us, the core of the pass-through issue is the notion of subsidization of a product, i.e., in respect of its manufacture, production, or export. Where the subsidies at issue are received by someone other than the producer of the investigated product, the question arises whether there is subsidization in respect of that product. The question before us in this claim, therefore, is whether any of the provisions cited by Canada require an investigating authority to make a determination linking subsidies (in the sense of Article 1.1) with a product subject to a CVD investigation.

7.86 Turning first to Article 10 SCM Agreement, Canada's argument is that in failing to establish the existence of a subsidy in the sense of Article 1.1 in respect of the upstream transactions at issue, the US failed to impose countervailing duties in accordance with the provisions of the SCM Agreement, a violation of Article 10 SCM Agreement, as that provision contains the general requirement to respect the provisions of Article VI of GATT 1994 and the SCM Agreement in applying countervailing measures. Canada further argues that by not establishing the existence of a subsidy, the US also violated Article VI:3 of GATT 1994 by imposing duties in the absence of an indirect subsidy finding.

7.87 Article 10 SCM Agreement reads as follows:

Article 10

Application of Article VI of GATT 1994 [footnote omitted]

7.88 The first sentence of Article 10 makes explicit that, as Canada argues, imposition of a countervailing duty must be in accordance with Article VI of GATT and with the SCM Agreement. On its own, however, this does not shed much light on the question before us in this claim, i.e., whether a pass-through analysis is required to establish subsidization of the subject product where there are upstream transactions between unrelated parties. By contrast, we find footnote 36 to Article 10 to be illuminating. This footnote defines what a countervailing duty is, and in so doing makes explicit the link between a �subsidy� to a recipient in the sense of Article 1.1 and the manufacture, production or export of a product that is the subject of a CVD investigation and ultimately a countervailing duty. In particular, we note in this regard the phrase �any subsidy bestowed directly or indirectly upon the manufacture, production or export of any merchandise, as provided for in paragraph 3 of Article VI of GATT 1994�.

7.89 Article VI:3 of GATT 1994 reads as follows:

�No countervailing duty shall be levied on any product of the territory of any contracting party imported into the territory of another contracting party in excess of an amount equal to the estimated bounty or subsidy determined to have been granted, directly or indirectly, on the manufacture, production or export of such product in the country of origin or exportation, including any special subsidy to the transportation of a particular product. The term �countervailing duty� shall be understood to mean a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly, upon the manufacture, production or export of any merchandise.�

7.90 Thus, the definition of a countervailing duty that appears in the second sentence of Article VI:3 of GATT 1994 mirrors the definition in footnote 36 to Article 10 SCM Agreement, by referring to �any bounty or subsidy bestowed, directly, or indirectly, upon the manufacture, production or export of any merchandise�. In other words, both of these provisions make explicit that there must be direct or indirect¹⁶⁸ subsidization in relation to the manufacture, production or export of a product for a "countervailing duty" in the sense of the Agreement and GATT Article VI to be imposed on that product.

7.91 The heart of the pass-through issue is whether, where a subsidy is received by someone other than the producer or exporter of the product under investigation, the subsidy nevertheless can be said to have conferred benefits in respect of that product. If it is not demonstrated that there has been such a pass-through of subsidies from the subsidy recipient to the producer or exporter of the product, then it cannot be said that subsidization in respect of that product, in the sense of Article 10, footnote 36, and Article VI:3 of GATT 1994, has been found. Thus, we find that a pass-through analysis is required by these provisions, both of which were cited in Canada�s pass-through claim, where there are such upstream transactions. Given this conclusion, the US argument that none of the provisions cited by Canada requires a pass-through analysis fails.

7.92 Our analysis is consistent with the findings of the 1990 GATT Panel on US � Canadian Pork. In that dispute, Canada claimed that the USDOC's failure to conduct a pass-through analysis to determine the extent to which subsidies on live swine benefited production and exportation of pork products violated Article VI:3 of GATT 1947.¹⁶⁹ That panel found, as we do, that investigating authorities had the affirmative obligation to make a determination of subsidization in respect of a product, and could not simply assume such subsidization where the subsidies were bestowed in respect of a product (the input product) that was different from the product subject to countervailing duty, and where the input producers were unrelated to the producers of that subject merchandise.

(b) Pass-through analysis in the present dispute

7.93 We recall that in the present dispute, the US has not contended that it did conduct a pass-through analysis in respect of any of the upstream transactions at issue. Thus, the factual question of whether a pass-through analysis was conducted is not in dispute before us. Rather, the US argues that no such analysis was necessary given the particular circumstances of, and methodology used in, USDOC�s softwood lumber investigation. We next consider these arguments by the US.

(i) Sales of logs by tenured timber harvesters to unrelated lumber producers

7.94 In respect of the first type of arms�-length transaction at issue before us, i.e., log sales to lumber producers by timber harvesters that do not produce lumber, the US acknowledges that any such sales could overstate the aggregate amount of subsidization of softwood lumber, but argues that in fact such sales accounted for only a �comparatively small� portion of the total, that they "may not be" at arms'-length, that in any event the US has no obligation to examine individual transactions in an aggregate case, and finally, that legally the provisions cited by Canada are inapposite. According to the US, the record evidence on these points is that the vast majority of Crown timber enters harvesters' own sawmills, and that the tenures are more than sufficient to meet the tenure holders' needs, that there were few if any such sales, and that in the investigation, Canada never attempted to submit information pertaining to such sales.

7.95 The US does not cite to any specific quantitative information from the record that establishes the volume of the possible arms'-length log sales at issue, nor does it argue that the USDOC made efforts to collect such information. The US instead seems to suggest that the burden was on Canada to present such evidence. We disagree. The obligation under Article 10 SCM Agreement and Article VI:3 of GATT 1994 to conduct a pass-through analysis in respect of production of softwood lumber from Crown logs purchased from unrelated harvesters falls on the US as the Member taking countervailing action. The US did not do so, and points to no factual basis in the record for its conclusion that such an analysis was not necessary. We thus find that in respect of the upstream log sales at issue, the US acted inconsistently with Article 10 SCM and Article VI:3 of GATT 1994.

(ii) Sales of logs or lumber by tenured harvester-sawmills to sawmills or re-manufacturers - Conduct of the investigation on an aggregate basis

7.96 We similarly disagree with the US reasoning in respect of the second category of transactions at issue, i.e., where logs are sold by a tenure-holding harvester-sawmill to another unrelated sawmill, or where lumber is sold by a tenure-holding harvester-sawmill to an unrelated lumber re-manufacturer. In its aggregate investigation, the USDOC deemed that a pass-through analysis in these types of transactions was not necessary because both the sellers and the purchasers of the inputs were themselves producers of softwood lumber, the subject merchandise. That is, according to the US reasoning, the issue of pass-through, which is about the subsidy amount numerator in a subsidization calculation, does not arise in an aggregate investigation where all of the producers selling the upstream inputs also are producers of subject merchandise, as any subsidy amounts from the stumpage programmes, if not passed through to the downstream log or lumber purchasers (who are lumber producers), will remain with the upstream log or lumber sellers (who likewise are lumber producers), thus benefitting their own production of softwood lumber, rather than that of their customers.

7.97 We are not convinced by this argument, however, which unjustifiably assumes in both situations that 100 per cent of any subsidy received by the tenure-holding harvester/sawmill is attributable to the softwood lumber products subject to investigation, when in fact the harvester/sawmill may produce and sell other products as well. Where logs rather than lumber are sold by a harvester/sawmill, then some portion of any subsidy that it receives under a stumpage programme is attributable to its production of logs (i.e., not all of the subsidy can be attributed to the other lumber products that it produces). If the subsidies attributable to the production of logs are not passed through to the lumber producer that purchases them, then those subsidies should not be included in the numerator of the subsidization calculation for lumber, as they can be said to have benefited production of the logs, but not production of the lumber produced from the logs by their purchaser. The same holds true where lumber is sold by a harvester/sawmill to a re-manufacturer whose products are exported to the US: some portion of any subsidy from stumpage is attributable to the harvester/sawmill�s production of the lumber for re-manufacturing and some is attributable to the other products (including lumber) that the harvester/sawmill produces. Here, if the subsidies attributable to the lumber for re-manufacturing are not passed through to the re-manufacturer that purchases it, then those subsidies should not be included in the numerator of the subsidization equation, as in this situation it is the re-manufactured product, not the upstream lumber product, that is the subject merchandise under investigation. Thus, where the recipient of a stumpage subsidy sells inputs (logs or lumber) to unrelated downstream lumber producers producing subject merchandise, a pass-through analysis is the only way to determine whether the subsidies on the production of the inputs also are subsidies on the products produced from those inputs. Only if so can any subsidy amounts attributable to the production of those inputs be included in the numerator of the subsidization calculation for the subject lumber products.

7.98 Thus, contrary to the US argument, the question of pass-through has to do with correctly identifying the subsidy amount attributable to the subject merchandise entering the US (the numerator). The fact that the US conducted the lumber investigation on an aggregate basis does not prevent and cannot cure the overall numerator (the aggregate subsidy amount from the stumpage programmes) from being overstated where upstream transactions for inputs between unrelated entities are present and subsidies have not been passed through. Moreover, the fact that the Agreement may, as a general matter, permit the conduct of countervail investigations on an aggregate basis cannot absolve the US from its legal obligation to conduct a pass-through analysis in a particular investigation to establish the subsidization in respect of the manufacture, production or export of the product being imported into the United States, where that product is produced from logs or lumber purchased from tenure holders by unrelated lumber producers. Furthermore, we are not convinced that the need to conduct a pass-through analysis for these transactions would necessarily or inevitably convert every aggregate case into a company-specific case.¹⁷⁰ Even if, in a particular case, it was not possible to conduct a pass-through analysis except by conducting the investigation on a company-specific basis, the basic requirement to determine subsidization in respect of the subject product where, in a particular investigation, upstream transactions between unrelated entities are present, must prevail. Finally, the fact that the USDOC is now conducting reviews of uninvestigated companies in response to individual requests fails adequately to address the problem, as it is post hoc, while the obligation to determine subsidization in respect of the product is a precondition for being allowed to apply a countervailing measure. Nor does the US argue that individual reviews in this case are being conducted for all producers potentially affected by the pass-through issue, meaning that the reviews by definition will not be able fully to address this problem, even after the fact.

(iii) Conclusion

7.99 We therefore conclude that, for the reasons set forth above, the USDOC's failure to conduct a pass-through analysis in respect of logs sold by tenure-holding timber harvesters (whether or not also lumber producers) to unrelated sawmills producing subject softwood lumber; and in respect of lumber sold by tenure-holding harvester/sawmills to unrelated lumber re-manufacturers was inconsistent with Article 10 and thus Article 32.1 SCM Agreement, and with Article VI:3 of GATT 1994. In light of our finding, we do not find it necessary to address Canada's pass-through claims pursuant to Articles 19.1 and 19.4 SCM Agreement. That is, having determined that the USDOC subsidization determination is inconsistent with the cited Articles, including because of the failure to conduct a pass-through analysis, and exercising the discretion implicit in the principle of judicial economy, we do not deem it necessary to examine whether the failure to conduct a pass-through analysis gave rise to further substantive inconsistencies with Articles 19.1 and 19.4 SCM Agreement.

(c) Has Canada introduced a new claim, i.e., a violation of Article 1.1, which is outside the Panel's terms of reference?

7.100 We recall that in respect of its pass-through claim, Canada refers to a number of provisions of the SCM Agreement and one provision of the GATT 1994, all of which, according to Canada, require a pass-through analysis where the recipient of the alleged subsidy is not a producer of the subject merchandise, specifically, where the producer of the subject merchandise obtains its inputs at arms'-length from a recipient of the alleged subsidy. For Canada, the central issue is the existence of a subsidy in the sense of Article 1.1 SCM Agreement: Canada alleges that USDOC assumed rather than established the existence of a subsidy in respect of the arms-length transactions at issue, in violation of the cited provisions.

7.101 Canada's first reference to Article 1.1 SCM Agreement in the context of the pass-through issue appears in response to a question that we posed at our first substantive meeting with the parties. We asked Canada to summarize its legal argumentation in respect of each of the provisions that it cited in its request for establishment of a panel in respect of its pass-through claim, i.e., Articles 10, 19.1, 19.4 and 32.1 SCM Agreement, and Article VI:3 of GATT 1994. In response, Canada states, inter alia, that under these provisions, a countervailing duty may be imposed only where the investigating authority demonstrates that the producer of subject merchandise has received a "subsidy" in the sense of Article 1.1 SCM Agreement. Canada further states that where, in its view, the US presumed rather than demonstrated the existence of a subsidy, it "acted inconsistently with" Article 1.1 SCM, and "therefore violated" the cited provisions.¹⁷¹

7.102 The US counters, inter alia, by arguing that Canada is raising a claim outside the Panel's terms of reference by citing Article 1.1 SCM Agreement. The US argues that, by referring to Article 1.1 SCM Agreement in its answer to the Panel, Canada "seems to accept" that its claims under the above-cited provisions depend on a finding that the "calculation of the ad valorem subsidy rate" is inconsistent with Article 1.1 SCM Agreement. The US argues that while the US's actions were wholly consistent with that provision, the Panel need not reach this issue as this provision was not cited in the Request for Establishment in connection with the pass-through issue. In particular, the US argues that if a claim of a violation of one provision depends on a finding of violation of another provision, which latter was not cited by the complaining party in its request for establishment of a panel, the panel has no jurisdiction to resolve that claim.

7.103 We note here that Canada does not argue that it did cite Article 1.1 SCM in its Request for Establishment of the Panel in respect of the pass-through claim, so there is no disagreement between the parties on this point. Thus, if Canada's reference to this provision in its explanation of its pass-through claim does constitute a new "claim" of a "violation", as the US argues, then such a claim would clearly seem to be outside our terms of reference. The question before us therefore is whether this reference is or is not a new "claim".

7.104 The chapeau of Article 1.1 SCM Agreement explicitly states that the concept and definition of what constitutes a "subsidy", as set forth in that Article, applies to the entire Agreement.¹⁷² Thus, it is clear that this most basic definition of the Agreement informs every other reference to "subsidy" in the Agreement. We understand from its response to our question that Canada is claiming that the US has violated the provisions it cites in its pass-through claim (Articles 10, 19.1, 19.4 and 32.1 SCM Agreement, and Article VI:3 of GATT 1994) by virtue of USDOC's failure to establish the existence of the subsidies or subsidization to which those provisions refer, which references by definition can only be to "subsidies" or "subsidization" in the sense of Article 1.1. For example, we understand Canada to argue that Article 19.1 requires, inter alia, a determination of the existence of a subsidy, which by definition must be a subsidy in the sense of Article 1.1.

7.105 We thus do not consider that Canada's reference to Article 1.1 in its response to our question constitutes a new "claim" of a "violation" of Article 1.1. Rather, we understand Canada, by this reference, to have clarified its view that all references to "subsidy" or "subsidization" in the provisions that it cites must be understood in the same sense as in Article 1.1, and in particular, that the cited provisions, by referring to "subsidies" or "subsidization", require the "existence" of a subsidy in the sense of Article 1.1 before a countervailing duty can be applied.

D. CLAIM 4: CANADIAN STUMPAGE PROGRAMMES ARE NOT SPECIFIC TO CERTAIN ENTERPRISES

1. Arguments of the parties

(a) Canada

7.106 Canada submits that, even if the USDOC had correctly determined that provincial stumpage programmes were a subsidy, it failed in the Final Determination to correctly determine that the programmes are specific subsidies within the meaning of Article 2 SCM Agreement. Canada asserts that the USDOC found that the provincial stumpage programmes are specific in fact because they were used by only a limited number of certain enterprises. Canada argues that, even if the programmes were used by a limited number of users, this does not suffice for a finding of specificity. According to Canada, under Article 2 SCM Agreement, a Member may find that the alleged subsidy is specific in fact only where the total configuration of facts and evidence relating to these factors points to a deliberate limiting of access to a certain limited number of enterprises or industries engaged in the manufacture of similar products.¹⁷³

7.107 First, Canada asserts that provincial stumpage programmes are not used by a limited number of certain industries. Canada submits that the USDOC failed to accurately determine the actual users of the stumpage programmes and failed to address the record evidence that established that many enterprises and industries use stumpage programmes.¹⁷⁴ According to Canada, while some producers of the subject merchandise may use stumpage programmes, they are not the only users, and neither can the producers of the subject merchandise be considered as a single industry, as many producers produce multiple products, many of which are not subject to the investigation. Canada asserts that the USDOC Determination failed to address what the terms "industry" or "group of industries" mean. The USDOC applied a circular reasoning and simply grouped the users of the programme as one industry for the simple reason that they all use the programme. Canada asserts that an industry cannot be identified for purposes of specificity without reference to the end-products produced. Canada argues that the USDOC's circular reasoning effectively writes the specificity requirement out of the SCM Agreement, as all programmes are by definition used only by the users of the programme.

7.108 Second, Canada considers that, even if the programmes were used by a limited number of enterprises, this limited use is easily explained by the nature of forestry resources and the diversification of provincial economies. According to Canada, the inherent characteristics of the good provided limit the number of users of the programme, not any deliberate government favouritism, as is required under Article 2 SCM Agreement. Moreover, in Canada�s view, a determination of de facto specificity under Article 2.1 (c) SCM Agreement in this case would have required at a minimum an examination of all four factors listed in that provision as well as the consideration of the extent of diversification of the economic activities in Canada.¹⁷⁵ Canada submits that where these factors do not indicate that a Member is deliberately limiting access to a programme (that is, if the factors may be explained by other circumstances) then the programme is not specific.¹⁷⁶ In light of the nature of the forestry resource in question, Canada considers that it is untenable to base a specificity finding on the "limited-users" factor alone, as use of natural resources will always be limited in fact to those enterprises and industries that are capable of extracting the resource and processing it into a good. In sum, Canada considers that the legal standard established by Article 2 SCM Agreement is whether a government is limiting access to a programme, in law or in fact, to certain enterprises over other eligible enterprises. Canada is therefore of the view that the USDOC has rendered the specificity test and the limited-users factor redundant by using the entire Canadian economy as a benchmark and finding that the vast majority of companies and industries in Canada do not receive benefits under these programmes.¹⁷⁷

7.109 Canada therefore submits that the USDOC determination of specificity of the alleged subsidy programmes is inconsistent with Article 2.1 (c) SCM Agreement and, since under Article 1.2 SCM Agreement the United States may impose countervailing duties only against subsidies found to be specific, the countervailing duties at issue thus violate Article 1.2, 10, 19.1, 19.4, and 32.1 SCM Agreement.

(b) United States

7.110 The United States considers that the USDOC's conclusion that the provincial stumpage programmes are specific in fact is consistent with Article 2.1 (c) SCM Agreement as these programmes are used by a limited group of industries consisting of the lumber and pulp and paper industries, while the vast majority of companies within Canada do not receive stumpage.¹⁷⁸ The United States asserts that there is no basis in the text of Article 2 SCM Agreement for Canada's arguments that a product based industry analysis should have been performed and that the USDOC was required to determine that it was the government's intention to limit the users of the programme to certain eligible enterprises only.

7.111 According to the United States, the USDOC's definition of a group of industries is based on the common practice of referring to industries by the general type of products they produce. The United States argues that the plain language of Article 2 SCM Agreement ("specific to certain enterprises") indicates that the specificity test is concerned not with products, but with enterprises and industries. According to the United States, the USDOC found that the stumpage programmes were used by a limited number of wood product industries consisting of the lumber and pulp and paper industry, which constitutes a limited group of industries. The United States submits that Canada's argument that the USDOC undercounted the number of industries that used stumpage subsidies because it used an improper definition of the word "industry" should thus be rejected.

7.112 The United States further considers that the text of Article 2 SCM Agreement does not require the authority to make any findings as to the granting authority's intent to limit a subsidy to certain eligible producers only, as Canada is suggesting, since the very purpose of Article 2.1 (c) is to let the facts speak for themselves. In the United States view, the fact that, due to its "inherent characteristics", a subsidized input has economic utility for a limited number of potential recipients does not exempt the provision of this input from the subsidy disciplines of the SCM Agreement, nor does it mean that a further analysis is required to see whether actual use of that input is in fact restricted to some subset of the potential or eligible users.

7.113 The United States does not consider that all four factors mentioned in Article 2.1 (c) SCM Agreement need to be examined for a finding of de facto specificity. It suffices that the subsidy is used by a limited number of users for it to be considered specific under article 2.1 (c) SCM Agreement. The United States acknowledges that Article 2.1 (c) SCM Agreement provides that an investigating authority must take into account the extent of diversification of economic activities within the jurisdiction of the granting authority. According to the United States, this is so because a subsidy may be widely distributed within the economy, and yet appear specific, simply due to the limitations of the domestic economy where the subsidy was granted. The United States submits that the Canadian provinces are far from being un-diversified economies, and that the USDOC recognized this aspect of the specificity test in its finding that the majority of companies in Canada do not receive benefits under these programmes.

2. Analysis

7.114 Article 1.2 SCM Agreement provides that a subsidy is only countervailable if "such a subsidy is specific in accordance with the provisions of Article 2". Article 2 provides as follows:

7.115 In essence, we understand Canada to argue that for a subsidy to be specific under Article 2.1 (c ) SCM Agreement, the granting authority must have deliberately limited access to the subsidy to a group of enterprises producing similar products. In particular, Canada argues that a subsidy which consists of the provision of a good which can only be used as an input by a particular industry should not be considered to be specific unless the granting authority has deliberately limited its use to a certain subgroup of enterprises in that industry. Under the facts of this case, Canada moreover argues that the USDOC finding that there were only a limited number of users of the stumpage programmes was flawed. In addition, Canada considers that the USDOC should have analysed the end-products of the industries it alleged were the users of the programme in order to determine whether they constituted a group of industries producing similar products.

7.116 We first address Canada's argument that a subsidy is specific only when the authority deliberately limits access of this subsidy to certain enterprises within the group of enterprises eligible or naturally apt to use the subsidy. In our view, Article 2 SCM Agreement is concerned with the distortion that is created by a subsidy which either in law or in fact is not broadly available.¹⁷⁹ While deliberate action by a government to restrict access to a subsidy that is in principle broadly available, through the use of discretion, could well be the basis for a finding of de facto specificity, we see no basis in the text of Article 2, and 2.1 (c) SCM Agreement in particular, for Canada's argument that if the inherent characteristics of the good provided limit the possible use of the subsidy to a certain industry, the subsidy will not be specific unless access to this subsidy is limited to a sub-set of this industry, i.e. to certain enterprises within the potential users of the subsidy engaged in the manufacture of similar products. Article 2 speaks of the use by a limited number of certain enterprises or the predominant use by certain enterprises, not of the use by a limited number of certain eligible enterprises. In the case of a good that is provided by the government - and not just money, which is fungible � and that has utility only for certain enterprises (because of its inherent characteristics), it is all the more likely that a subsidy conferred via the provision of that good is specifically provided to certain enterprises only. We do not consider that this would imply that any provision of a good in the form of a natural resource automatically would be specific, precisely because in some cases, the goods provided (such as for example oil, gas, water, etc.) may be used by an indefinite number of industries. This is not the situation before us. As Canada acknowledges, the inherent characteristics of the good provided, standing timber, limit its possible use to "certain enterprises" only.

7.117 We now turn to Canada's argument that the USDOC failed to properly determine that the stumpage programmes were used by only a limited number of industries. On the basis of the facts of this case, Canada argues that specificity should have been analyzed based on the end-products sold by the industry or industries using the programme. Canada argues that more than 200 separate products are manufactured by companies holding harvesting rights, together forming about 23 separate industries.¹⁸⁰ This, according to Canada, is hardly a "limited number of industries".

7.118 We note that the USDOC determined that

"Benefits under these Provincial stumpage [programmes] are limited to those companies and individuals specifically authorized to cut timber on Crown lands. These companies are pulp and paper mills and the saw mills and remanufacturers which are producing the subject merchandise. This limited group of wood product industries is specific under section 771 (5A)(D)(iii)(I) of the Act" "¹⁸¹

7.119 We recall that a subsidy is specific under Article 2 SCM Agreement, if it is specific to an enterprise or industry or group of enterprises or industries (referred to in the SCM Agreement as "certain enterprises"). The SCM Agreement does not define an "industry" nor does it provide for any other rules concerning which enterprises could be considered to form an industry for the purposes of Article 2 SCM Agreement or whether a group of industries have to produce certain similar products in order to be considered a "group".

7.120 The New Shorter Oxford Dictionary defines an industry as "a particular form or branch of productive labour; a trade, a manufacture".¹⁸² Both parties seem to agree that the common practice is to refer to industries by the type of products they produce.¹⁸³ It seems therefore that the term "industry" in Article 2 SCM Agreement is not used to refer to enterprises producing specific goods or end-products. Indeed, even Canada agrees that a single industry may make a broad range of end products and still remain a "industry" within the meaning of Article 2 SCM Agreement.¹⁸⁴ We note in this respect that Canada considers that "it may be completely appropriate to find that producers of a wide variety of steel products (or automobile products or textile products, etc) are a group of "steel industries" ( or "automobile industries", "textile industries", etc.) because of the similarity and the relatedness of their output products".¹⁸⁵ Canada also does not dispute that a subsidy limited to a single large industry (such as "steel", "autos", "textiles", "telecommunications", or the like) could be found specific, even though the producers make a diversity of products.¹⁸⁶

7.121 The USDOC Determination considered that only a group of wood product industries, consisting of the pulp and paper mills and the sawmills and re-manufacturers which are producing the subject merchandise used the stumpage programmes. It does not seem that USDOC simply labelled an aggregation of producers as a group of industries merely because they use a particular programme. In our view, the opposite was the case. As Canada recognized, the stumpage programme can clearly only benefit certain enterprises in the wood product industries which can harvest and / or process the good provided, standing timber. In sum, the text of Article 2 SCM Agreement does not require a detailed analysis of the end-products produced by the enterprises involved, nor does Article 2.1 (c) SCM Agreement provide that only a limited number of products should benefit from the subsidy. In our view, it was reasonable of the USDOC to reach the conclusion that the use of the alleged subsidy was limited to an industry or a group of industries. We consider that the "wood products industries" constitutes at most only a limited group of industries - the pulp industry, the paper industry, the lumber industry and the lumber remanufacturing industry - under any definition of the term "limited".¹⁸⁷ We do not consider determinative in this respect the fact that these industries may be producing many different end-products. As we discussed above, specificity under Article 2 SCM is to be determined at the enterprise or industry level, not at the product level.¹⁸⁸

7.122 Canada argues that there were other users of the programmes than the ones identified by the USDOC. We understand Canada to be arguing that not only "the pulp and paper mills and the saw mills and remanufacturers which are producing the subject merchandise" are using the stumpage programmes, but also the pulp and paper mills and the sawmills and remanufacturers which are not producing the subject merchandise. In our view, all these producers can reasonably be found to form part of the same industries, which produce both the subject merchandise and other merchandise. It is evident that in order to countervail a specific subsidy it is necessary that the subsidy benefits the producers of the subject merchandise, but that does not mean that the subsidies should be specific to these producers only, nor is it required under Article 2 SCM Agreement that the subsidy be specifically targeted at subsidizing only the subject merchandise of producers who produce both subject merchandise and non-subject merchandise.

7.123 Canada also argues that an authority is required to examine all four factors mentioned in Article 2.1 (c) SCM Agreement in order to determine de facto specificity. We note in this respect that Article 2.1 (c) SCM Agreement provides that if there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. The use of the verb "may" rather than "shall", in our view, indicates that if there are reasons to believe that the subsidy may in fact be specific, an authority may want to look at any of the four factors or indicators of specificity. We note the difference in language between Article 2.1 (c) SCM Agreement and, for example, Article 15.4 SCM Agreement concerning injury which provides that "the examination of the impact of the subsidized imports on the domestic industry shall include an evaluation of all relevant economic factors and indices having a bearing on the state of the industry including �", and then lists the factors which have to be included in the evaluation. Article 15.4 SCM Agreement is almost identical in language to Article 3.4 Anti-Dumping Agreement, which it is well established, contains an obligation on the part of the investigating authority to at a minimum examine and evaluate all factors listed in the provision.¹⁸⁹ In our view, if the drafters had wanted to impose a formalistic requirement to examine and evaluate all four factors mentioned in Article 2.1 (c) SCM Agreement in all cases, they would have equally explicitly provided so as they have done elsewhere in the SCM Agreement.¹⁹⁰ They did not do so. We conclude therefore that there was no obligation on the USDOC to examine whether disproportionately large amounts of the subsidy were granted to certain enterprises or the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy, the two factors mentioned in Article 2.1 (c) SCM Agreement which the USDOC did not explicitly examine.

7.124 We finally note that Article 2.1 (c) SCM Agreement provides that "[I]n applying this subparagraph, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority, as well as of the length of time during which the subsidy programme has been in operation". While it is clear that the USDOC did not explicitly and as such address the extent of economic diversification in its Final Determination, we consider that in noting that "the vast majority of companies and industries in Canada does not receive benefits under these programmes"¹⁹¹, the USDOC showed that it had taken account of the extent of economic diversification in Canada and its provinces, i.e. the publicly known fact that the Canadian economy and the Canadian provincial economies in particular are diversified economies. Although we understand the wood product industry to be an important industry for Canada, it is clear that the Canadian economy is more than just wood products alone. In light of the fact that, in our view, all that is required under the last sentence of Article 2.1 (c) SCM Agreement is that "account be taken of " the extent of economic diversification, we find that USDOC Determination complied with this obligation.

7.125 We find therefore that the USDOC determination that the stumpage programmes which are used only by a limited group of wood product industries are in fact specific, is not inconsistent with Article 2.1 (c ) SCM Agreement and reject all of Canada's claims in this respect.

E. CLAIM 5: INCONSISTENT CALCULATION OF THE AMOUNT OF SUBSIDIZATION

1. Claims and arguments of the parties

(a) Alleged improper conversion from US to Canadian log volume measurement system

(i) Canada

7.126 Canada claims that the USDOC inflated the subsidy amount (the numerator of the subsidization rate equation), and hence the rate of subsidization and the countervailing duties applied, by impermissibly using a "manifestly incorrect" conversion factor to compare US stumpage rates that it used as benchmarks with the Canadian Provincial stumpage rates. In particular, Canada claims that by using an inaccurate factor to convert the US log measurements to cubic meters, the amount of the alleged subsidy on lumber was inflated. As a result, Canada alleges, the countervailing duties imposed are in excess of any alleged subsidy on softwood lumber, in violation of Article 19.4 SCM Agreement and Article VI:3 of GATT 1994. Canada also alleges violations of Articles 10 and 32.1 SCM Agreement, on the basis of the alleged violations of Articles 19.4 SCM Agreement and VI:3 of GATT 1994.¹⁹²

7.127 Stumpage volumes and prices in the United States are recorded in thousand board feet, while those in Canada are recorded in cubic meters. Because the United States used US stumpage prices as the benchmark against which to compare Canadian stumpage rates in order to determine the existence and amount of the alleged subsidies, the USDOC needed to apply a conversion factor to restate the US prices in cubic meters.

7.128 According to Canada, the USDOC erred by applying a single national average conversion factor to all provinces.¹⁹³ Canada argues that because log scales vary widely, depending on the diameter, taper, and length of the logs in question, no one average conversion factor can be applied. According to Canada, moreover, the conversion factor used by the USDOC is outdated, does not reflect the current harvest in any of the jurisdictions, or does not account for differences in scaling or utilization practices, and is not empirically verifiable.

7.129 In response to a question from the Panel concerning the basis for Canada's assertion that the data used by the USDOC were "manifestly incorrect", Canada submits a document of record, the "Minnesota Public Stumpage and Price Review", which Canada argues uses a much higher conversion rate than that used by USDOC in converting prices per thousand board feet to prices per wood volume.¹⁹⁴ According to Canada, the USDOC used the prices in the Minnesota Review but ignored its conversion factor, using instead the one that Canada believes to be "manifestly incorrect".

(ii) United States

7.130 The United States argues in the first place that the cited provisions do not contain substantive obligations in respect of subsidy calculations. Further, and in more specific response to this claim, the US argues that the question raised is purely one of fact, and that the USDOC considered the record evidence in respect of conversion factors in selecting the ones used in its investigation, and provided a reasoned explanation for this selection in its Final Determination. For the US, this fulfilled its obligations under the Agreement.¹⁹⁵ In this connection, the United States recalls, citing the Appellate Body in the US � Lamb  dispute¹⁹⁶, the standard of review under Article 11 of the DSU that in the US view, panels should apply in considering issues of fact in countervailing duty disputes. This standard of review is that panels should limit their consideration, in respect of questions of fact, to whether competent authorities have considered all of the relevant factors, and have provided a reasoned and adequate explanation of how the facts support their determination. In other words, panels should not conduct de novo examinations of the facts.

7.131 The United States describes the record evidence that was before the USDOC in respect of conversion factors. In particular, the parties submitted a range of proposed factors, from 3.48 to 8.51 cubic meters per thousand board feet, which had been developed specifically for the purpose of the investigation. According to the US, the USDOC decided, in view of the conflicting suggestions received from parties, to rely exclusively on published information prepared in the ordinary course of business by public agencies, as this would be the surest way to avoid using a biased conversion factor. There were two such sources in the record, and the US argues that USDOC found the older one to be more reliable, because it contained a detailed explanation of how the numbers in it were derived, whereas the newer one contained no such explanation. According to the US, the USDOC thus weighed the evidence and made a well-reasoned choice, which it fully explained in the Final Determination, and whether the Panel or Canada would have reached a different conclusion based on the same evidence is irrelevant.¹⁹⁷

7.132 In specific response to Canada's arguments concerning the Minnesota Review, the US argues that the conversion factors referred to by Canada were only necessary to convert the price data in Table 1 of the Review, which are presented in dollars per thousand board feet, to those shown in Table 2, which are presented in dollars per cord (a measure of wood volume, not directly convertible to cubic meters).¹⁹⁸ The US argues that Canada failed to establish that the conversion factors used by the USDOC were flawed, and states that the existence of alternative sources does not mean that the USDOC's selection was manifestly incorrect. The US argues that were the Panel to reach such a conclusion, this would amount to an impermissible de novo review.¹⁹⁹

(b) Alleged failure to account for the multiple uses of softwood logs produced from Crown timber

(i) Canada

7.133 This claim of Canada pertains primarily to the alleged overstatement of the numerator (subsidy amount) of the subsidization rate calculation. Canada claims that by failing to limit the numerator amount only to the amount of the alleged subsidy that could be said to have benefited logs used to produce softwood lumber, the USDOC overstated the numerator and thus the rate of subsidization. Canada notes that the standing timber, the alleged financial contribution in this case, is provided to producers of multiple downstream products, only one of which is the subject merchandise. According to Canada, the USDOC calculated the benefit amount at the point at which logs were sawn into lumber, when it had not yet apportioned the volume of logs between the subject and non-subject merchandise produced therefrom, and then allocated that (total benefit) amount over the sales value of softwood lumber. Canada argues that this impermissibly inflated the subsidization rate, and thus the countervailing duty rate, because it treated alleged subsidies in respect of inputs used to produce poles, posts, ties and a variety of other non-subject products as subsidies to the subject merchandise.

7.134 In other words, Canada asserts, the USDOC put in the numerator the alleged subsidy to the whole log, then attributed that entire subsidy to only some of the products produced from that log, thereby mismatching the numerator and the denominator in such a way as to artificially inflate the rate of subsidization. For Canada, this alleged overstatement violated Articles 10, 19.4, and 32.1 SCM Agreement, and Article VI:3 of GATT 1994. Canada clarified in its arguments that it sees Article 19.4 SCM Agreement as the provision containing the substantive obligations in respect of calculation of the rate subsidization.²⁰⁰

(ii) United States

7.135 The United States argues again that, in the first place, and contrary to what Canada implies, Article 19.4 SCM Agreement does not contain any obligation to use a specific methodology to calculate the "subsidy found to exist". In addition, according to the US, the methodology proposed by Canada would in fact understate the amount of the subsidy, especially when combined with Canada's proposed methodology for the denominator. The US argues that when a sawmill receives a certain amount of subsidy by paying too low a price for the timber that it uses as its input, that subsidy benefits all of the products produced by that sawmill from the timber, not just the subject merchandise. Therefore, the US argues, the USDOC took the total subsidy amount received by sawmills through the allegedly subsidized timber and allocated it to all products (subject and non-subject) resulting from the processing of the timber. Thus, according to the US, the numerator and denominator are calculated on the same basis. The US asserts that Canada's claim amounts to an argument that the US was required to allocate subsidies on a volume rather than value basis. As such an obligation cannot be found in any of the provisions cited by Canada, the US argues, Canada has failed to make its prima facie case of a violation in respect of how the USDOC calculated the numerator.²⁰¹

(c) Alleged understatement of the value of "final mill" sales

(i) Canada

7.136 Canada claims that the denominator used by the USDOC as the value of sales of subject merchandise by "final mills" is understated, leading to an impermissible inflation of the rate of subsidization, once again violating Articles 10, 19.4, 32.1 of the SCM Agreement and Article VI:3 of GATT 1994. Canada notes that in all past US softwood lumber cases, the USDOC calculated the rate of subsidization and assessed the countervailing duties, on a "first mill" rather than "final mill" basis.

7.137 The United States imposed the countervailing duty on the "final mill" value of the subject softwood lumber products, which includes the value of lumber shipped to end-users by "first mills" (i.e., those that process logs into lumber), plus the value added by lumber remanufacturers (those that purchase lumber products for further processing into other lumber products). Canada's claim concerns the USDOC's calculation of the amount of value added by the remanufacturers. On this point, Canada argues that the USDOC based its estimate of this value added on outdated and incomplete statistics provided by Statistics Canada at the request of the USDOC (in "GOC Exhibit 36" from the CVD investigation), in spite of having in the record what Canada views as verified, complete and up-to-date information derived by Canada from another source (a study by the Pacific Forestry Centre, or "PFC"). Canada asserts that the PFC information was the most accurate on the record concerning the factual point at issue, and that by ignoring this information, and relying instead on the much less reliable data provided by Statistics Canada, the US overstated the subsidization rate, in violation of the cited provisions.²⁰²

(ii) United States

7.138 The United States argues that Canada is simply disagreeing with the USDOC's choice of which record data to rely on in estimating the value added by lumber remanufacturers. In the view of the US, the USDOC properly and thoroughly considered all of the relevant record evidence, and made a reasonable choice as to which data to use, and then provided in its Final Determination a reasoned explanation of that choice.

7.139 Concerning the USDOC's assessment of the evidence that was before it, the US argues that, contrary to Canada's characterization, the USDOC at verification found various flaws and shortcomings in the PFC study, leading it to conclude that the data in GOC Exhibit 36 were more accurate. In particular, at verification, the USDOC learned that the PFC data included products outside the scope of the investigation, as well as a value for kiln-drying (a service, not a good). By contrast, the derivation of the data in GOC Exhibit 36 was clear, according to the US, and the figures were able to be used to derive a ratio of remanufactured shipments from independent remanufacturers for the two provinces covered by GOC Exhibit 36, which ratio was then applied to the total Canadian lumber shipment values to estimate the value of remanufactured products.²⁰³

2. Analysis

7.140 In the light of our findings pursuant to Articles 10, 14, 14(d) and 32.1 SCM Agreement and Article VI:3 of GATT 1994 in respect of the USDOC's subsidy determination, we do not find it necessary to address Canada's calculation-related claims described above. That is, having determined that the USDOC determination in respect of subsidization is inconsistent with the cited Articles, and exercising the discretion implicit in the principle of judicial economy, we do not deem it necessary to examine whether certain methodological issues gave rise to further inconsistencies in respect of that determination.

F. CLAIM 6: FAILURE TO CONDUCT THE INVESTIGATION IN ACCORDANCE WITH ARTICLE 12 SCM AGREEMENT

1. Arguments of the parties

7.141 Canada argues that the USDOC imposed countervailing duties based on an investigation that violated Articles 12.1, 12.3 and 12.8 SCM Agreement. In particular, Canada argues that the United states did not comply with its obligations under Article 12 SCM Agreement in regard to two aspects of the investigation concerning the change in the choice of benchmark state from the preliminary to the final determination and the use of information based on a letter of the Maine Forest Products Council.

7.142 First, Canada argues that the USDOC changed the US state used as the comparative basis for Alberta and Saskatchewan from the preliminary determination to the final determination without any prior notice to the interested parties in violation of Article 12.8 SCM Agreement.²⁰⁴ Canada argues that the choice of the state which is used for the comparison with the stumpage prices of certain Canadian provinces, is clearly an essential fact which will form the basis for the determination that should have been disclosed to the interested parties in sufficient time for the parties to defend their interests and in any case before the final determination as required by Article 12.8 SCM Agreement. In addition, Canada argues, the interested parties were not given an opportunity to present evidence or prepare presentations regarding the appropriateness of the choice of Minnesota as the new benchmark state, and the USDOC therefore acted in a manner inconsistent with Articles 12.1 and 12.3 SCM Agreement.

7.143 Second, Canada argues that the USDOC failed to give interested parties the opportunity to present evidence and arguments concerning a letter from the Maine Forest Products Council (the "MFPC") that was relevant to the calculation of the US benchmark price applied to Quebec.²⁰⁵ Canada asserts that this letter was not put on the record until two months after it had been received by the USDOC, and only after Quebec had requested the inclusion in the record of this information. Canada submits that because of the delay in putting the letter on the record, and the deadlines set by the USDOC for commenting on the MFPC information, USDOC deprived the province of Quebec of any meaningful opportunity to rebut new factual information contained in two reports filed by the petitioners concerning this letter, in violation of Article 12.3 SCM Agreement. Canada asserts that the petitioners' new information based on the MFPC letter was used by the USDOC, in spite of the fact that interested Canadian parties were denied the opportunity to present comments on this new evidence. Thus, Canada argues, the USDOC denied interested parties the timely opportunity to see the relevant information as required by Article 12.3 SCM Agreement and to prepare presentations on the basis of the relevant information. Canada submits that the USDOC therefore failed to conduct the investigation in a manner consistent with Article 12.3 SCM Agreement.

(b) United States

7.144 The United States submits that the investigation was conducted in full compliance with Article 12 SCM Agreement as all parties were given notice of the information required for the investigation, had ample opportunity to submit all relevant information, had access to all information submitted during the investigation and were informed of the essential facts under consideration.

7.145 First, with regard to the change of benchmark state, the United States argues that the selection of the benchmark for the stumpage programmes of Alberta and Saskatchewan was consistent with the requirements of Article 12 SCM Agreement. The United States asserts that both Canadian provinces challenged the use of data from the US state of Montana as the basis for the benchmark calculation in the preliminary determination, and notes that the USDOC ultimately agreed with these provinces' arguments and rejected data from Montana, using data from Minnesota instead.²⁰⁶ The United States is of the view that USDOC was not obliged under Article 12 SCM to provide notice of the new benchmark state chosen and to allow for parties to, once again, comment on the choice of the benchmark state. According to the United States, nothing in Article 12 SCM Agreement imposes on the investigating authority an obligation to engage in an endless cycle of notice and comment. The United States considers that Article 12.3 SCM Agreement explicitly recognizes that information be provided "whenever practicable" reflecting the time constraints imposed on the completion of the investigation.

7.146 According to the United States, the USDOC preliminary determination announced that the United States was using US northern border states as the benchmarks for the Canadian stumpage programmes and set forth the criteria used in selecting such benchmarks. The USDOC identified Minnesota as a possible alternative, and all of the information regarding Minnesota was provided to all of the interested parties. For all these reasons, the United States submits that the interested parties were informed of the "essential facts under consideration" in accordance with Article 12.8 SCM Agreement.²⁰⁷ The United States argues that Canada is really challenging the change in the basis for the legal determination between the Preliminary and the Final determination, and submits that there is no obligation under Article 12.8 SCM Agreement to inform interested parties of this change in the legal determination before the final determination.

7.147 Second, concerning the MFPC letter, the United States submits that the interested parties had access to the information contained in the letter in sufficient time to use it in the preparation of their legal arguments and the USDOC thus acted in accordance with Article 12.3 SCM Agreement.²⁰⁸ The United States considers that interested parties were provided an opportunity to comment, and in the case of Quebec did comment, on information relevant to the benchmark for Quebec submitted by the Maine Forest Products Council. According to the United States there is no basis in the text of the SCM Agreement that interested parties should have been given additional time to respond to information submitted by petitioners to rebut the information in the MFPC letter²⁰⁹, and Article 12.3 SCM Agreement does not require the United States to engage in an endless cycle of allowing each interested party to reply to every submission made by every other interested party.

2. Analysis

7.148 In light of our findings on Articles 10, 14, 14 (d), and 32.1 SCM Agreement, as well as Article VI:3 of GATT 1994, we do not find it necessary to address, in this context, Canada's claims under Article 12 SCM Agreement. That is, having determined that the measure at issue is inconsistent with the cited Articles, and exercising the discretion implicit in the principle of judicial economy, we do not deem it necessary to examine whether the investigation which led to the inconsistent measure was consistent with the procedural rules on evidence set forth in Article 12 SCM Agreement.

G. CLAIM 7: INCONSISTENT INITIATION OF THE INVESTIGATION

1. Arguments of the parties

(a) Canada

7.149 Canada argues that the USDOC failed to make an objective and impartial examination and determination of the level of support among domestic producers for the petition as required by Article 11.4 SCM Agreement since support of the domestic producers was actively canvassed with the promise, and the prospect of payments under the United States Continued Dumping and Subsidy Offset Act of 2000 (the "Byrd amendment").²¹⁰ According to Canada, for the obligation in Article 11.4 SCM Agreement to have any meaning, a Member's determination that the petition was made "by or on behalf of" the domestic industry must be objective and impartial, which it cannot be where a Member induces the subjects of the examination, through payment of cash rewards or the imposition of penalties to act in one way or another, as is the case with the Byrd amendment. Canada argues that a Member's authorities may not simply rely on quantitative criteria for the establishment of the level of domestic support, as was confirmed by the Panel in the US � Offset Act (Byrd Amendment) case. Canada submits that the investigation was initiated on the basis of domestic producer support that was actively solicited by the promise and prospect of a direct payment by the United States and as a result the USDOC initiated the investigation and imposed definitive countervailing duties in violation of Articles 10, 11.4 and 32.1 SCM Agreement.

(b) United States

7.150 The United States argues that 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 and that the USDOC thus initiated the investigation based on adequate domestic industry support consistent with the requirement of Article 11.4 SCM Agreement. The United States asserts that Canada is injecting a requirement into the SCM Agreement that investigating authorities examine the motives of prospective petitioners. The United States points out that a recent Appellate Body report in the US � Offset Act (Byrd Amendment) case rejected that argument and overturned the Panel's ruling on which Canada is relying by concluding that Article 11.4 requires "no more than a formal examination of whether a sufficient number of domestic producers have expressed support for an application".²¹¹ As the determination of industry support is an issue of quantity and not of quality, and since even Canada agrees that 67 per cent of the industry supported the petition, the United States submits that the investigation was initiated in accordance with Articles 10, 11.4 and 32.1 SCM Agreement.

2. Analysis

7.151 In light of Canada's statement at the first substantive meeting of the Panel with the parties that it does not consider it appropriate to press its claims as set out in paragraph 1 of its request for the establishment of a panel, we will refrain from addressing this claim and from making any ruling on this claim.²¹²

VIII. CONCLUSIONS AND RECOMMENDATIONS

8.1 In light of our findings above, we conclude:

(a) that the USDOC's determination that provision of stumpage constituted a financial contribution in the form of the provision of a good or service was not inconsistent with Article 1.1 (a) (1) (iii) SCM Agreement, and we therefore reject Canada's claim that the United States' imposition of countervailing duties on the basis of that determination was inconsistent with Articles 10, 19.1, 19.4 and 32.1 SCM Agreement, and Article VI:3 of GATT 1994;

(b) that the USDOC's determination of the existence and amount of benefit to the producers of the subject merchandise was inconsistent with Articles 14 and 14(d) SCM Agreement, and we therefore uphold Canada's claim that the United States' imposition of countervailing duties on the basis of that determination was inconsistent with Articles 14, 14(d), 10 and 32.1 SCM Agreement; having reached this conclusion we apply judicial economy and therefore do not rule on Canada's allegations under this claim that the United States acted in a manner inconsistent with Articles 19.1 and 19.4 SCM Agreement and Article VI:3 of GATT 1994.

(c) that the USDOC's failure to conduct a pass-through analysis in respect of upstream transactions for log and lumber inputs between unrelated entities was inconsistent with Article 10 SCM Agreement and Article VI:3 of GATT 1994, and we therefore uphold Canada's claim that the United States' imposition of countervailing duties in respect of such transactions was inconsistent with Articles 10 and 32.1 SCM Agreement and Article VI:3 of GATT 1994; having reached this conclusion, we apply judicial economy and do not rule on Canada's allegations under this claim that the United States imposed countervailing duties in a manner inconsistent with Articles 19.1 and 19.4 SCM Agreement; and

(d) that the USDOC's determination that the provincial stumpage programmes are specific was not inconsistent with Art. 2.1(c) SCM Agreement, and we therefore reject Canada's claim that the United States' imposition of countervailing duties on the basis of that determination was inconsistent with Articles 1.2, 2.1, 2.4, 10, 19.1, 19.4 and 32.1 SCM Agreement;

8.2 Having reached the conclusions set forth above that the USDOC Final Countervailing Duty Determination is inconsistent with Articles 10, 14, 14(d) and 32.1 SCM Agreement, and Article VI:3 of GATT 1994, we apply judicial economy and do not rule on:

(a) Canada's claims under Article 19.4 SCM Agreement and Article VI:3 of GATT 1994 concerning the methodologies used to calculate the subsidy rate; and

(b) Canada's claims of violation of the procedural rules of evidence set forth in Article 12 SCM Agreement.

8.3 In the light of Canada's statement at the first substantive meeting of the Panel with the parties that it does not consider it appropriate to press its claims under Articles 10, 11.4 and 32.1 SCM Agreement concerning the initiation of the investigation, we refrain from addressing and making a ruling on this claim.

8.4 Under Article 3.8 of the DSU, in cases where there is infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment of benefits under that agreement. Accordingly, we conclude that, to the extent the United States has acted inconsistently with the provisions of the SCM Agreement and of GATT 1994, it has nullified or impaired benefits accruing to Canada under that Agreement. We recommend that the Dispute Settlement Body request the United States to bring its measure into conformity with its obligations under the SCM Agreement and GATT 1994.

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