26 April 1989

1.1 On 8-9 October 1987 and 4-5 March 1988, Canada and Japan held consultations pursuant to Article XXIII:1 on Japan's tariff treatment of SPF dimension lumber imported from Canada. In a communication, circulated on 11 March 1988, Canada requested the GATT Council to establish a Panel under GATT Article XXIII:2 to examine the conformity with Article I:1 of the application of a tariff of 8 per cent on imports of spruce-pine-fir (SPF) dimension lumber by the Government of Japan. The Council, on 22 March 1988, agreed to establish a panel (C/M/218).

1.2 The Panel's terms of reference and composition were announced on 16 June 1988 by the Chairman of the Council as follows:

Chairman: Mr. Pierre Pescatore,

Members:

Mr. Alejandro de la Peña,

Prof. Richard Senti,

1.3 The Chairman of the Council also stated that the two parties were in agreement that the agreed terms of reference did not preclude the Panel from addressing either the question of the definition of "dimension lumber", referred to in the Canadian complaint, or the question of the relevance of the Japanese tariff classification to the issue (C/M/222).

1.4 The Panel met with the parties on 22 July and on 22 November 1988. The Panel also heard representatives of the EEC and of New Zealand, both of which had expressed, in Council, their interest in this case (C/M/218). Finland, which had likewise spoken in Council on this issue, has informed the Panel of its continuing interest.

1.5 For the conduct of its work, the Panel was supplied by Canada, Japan, the EEC and New Zealand with written submissions, replying inter alia to written questions by the Panel. At the Panel's request, Canada and Japan arranged for their delegations to the second meeting to be accompanied by technical experts.

1.6 The Panel submitted the Panel Report to the parties to the dispute on 5 April 1989.

2.1 Canada explained that while lumber was generally thought of as a raw material, or a semi-finished product, that is further manufactured to produce a wide range of goods, dimension lumber is different. It is a highly standardized, finished product that leaves the manufacturing plant in its final form. It is not further manufactured before being used in its intended end-use of platform-frame construction. Dimension lumber is a building product. As such, it is more akin to a steel girder used in construction than it is to other forms of lumber.

2.2 Dimension lumber is produced from a number of species of trees, the two most common groupings for this use being the SPF and Hemlock-Fir (Hem-Fir), although other species can be and are used. Trees of different species tend to grow in stands of mixed species, many of which have similar properties. It is usually not practical, nor necessary, to separate logs by individual species before manufacture, so species groups were developed to accommodate these mixed growths. All the species within a group are harvested, processed, graded and marketed together. An individual species cannot be classified in more than one species group.

2.3 The lumber industry in North America comprises thousands of sawmills. The most common product of virtually all of these mills is dimension lumber. In fact many of these mills are designed with the sole objective of producing the single product of dimension lumber which is completely interchangeable in construction and competes freely in the marketplace. The manufacturing and lumber grading systems are designed to ensure that the lumber is produced to the same sizes and grades, regardless of mill or species of lumber. It is not uncommon, nor is it a problem, to find dimension lumber of different species, from different mills, being used on the same job-site in North America and in Japan.

2.4 The definition of dimension lumber has been highly standardized in North America. The basic requirements are established by the Canadian Standards Association (Standard 0141-1970) and the US Department of Commerce National Bureau of Standards (Voluntary Product Standard PS 20-70). These standards are exactly the same in both countries in their application to dimension lumber.

2.5 There exist a number of rule-writing agencies for general lumber standards in North America. These sometimes overlap and establish slightly different rules for grading the same type of lumber. However, this is not true for dimension lumber. The National Grading Rule is mandatory, and applies without exception to all dimension lumber produced in North America.

2.6 The NLGA defines dimension lumber as follows:

2.7 Following from this definition, according to Canada, dimension lumber can be identified, and distinguished from all other forms of lumber through a combination of three elements: size, surfacing and appearance, and lumber grade. The assignment of a "dimension lumber"-type grade automatically defines the product as dimension lumber and distinguishes it from all other types. Dimension lumber that enters Japan is normally regraded, regardless of the North American grade that has been applied, to ensure conformity with the standards established by the Japanese Agricultural Standard for Structural Lumber for Wood Frame Construction, hereafter referred to as the JAS 600. A JAS stamp must be applied before the lumber can be used generally in Japan for platform-frame construction. The JAS 600 grades are unique to dimension lumber in Japan and distinguish it from all other types of imported and domestic lumber.

2.8 The dimension lumber used in construction is almost exclusively 2 inches nominally in thickness (1.5 inches or 38mm actual) by five standard widths: 4, 6, 8, 10, 12 inches nominally (respectively 89, 140, 184, 235, 286mm actual). (The lumber is thus commonly referred to as a "2 by 4" (2 x 4) or a "2 by 6" etc.; in the Japanese regulations these correspond to the size codes of 204, 206, etc.) These North American standards were adopted without change in the JAS 600 lumber grading rules in Japan.

2.9 Canada explained in this respect that the laws and regulations established by the Government of Japan to regulate the grading of dimension lumber and its use in platform-frame construction treat dimension lumber as a single, manufactured product with no limitations on the use of any particular species.

2.10 The Building Standard Law is the national building code of Japan and is complemented by technical elaborations in the Enforcement Order of the Law. These set the overall framework of laws and regulations for construction in Japan, but with respect to wooden buildings they deal only with the traditional post-and-beam method of construction. When the 2 x 4 building system was introduced to Japan, new and separate regulations had to be established. These are the Technical Standards for Ensuring Safety of Wood Frame Construction.

2.11 The JAS 600 establishes the standards for grading of dimension lumber in Japan. The grades are based on natural characteristics such as the size of the knots, holes, discoloration, wane, fissures, growth rings, etc... The grading system is based entirely on the physical properties of an individual piece of lumber, with no discrimination whatsoever on a species basis. Lumber of any species can be graded to any particular level. The lumber-grading decision is made solely on the physical characteristics of the piece at hand, totally independent of species. This reflected perfectly the system used in North America, where the National Grading Rule applies equally to all species. The principle, in fact, was not new to Japan as the grading of the various forms of lumber used in the traditional post-and-beam method of construction is also based on physical properties, not species.

2.12 The fact that the grading of dimension lumber in Japan, as in North America, was neutral with respect to species is the basis for the interchangeability of species of dimension lumber in construction. Since the rules on lumber grading form an integral part of the building code of Japan, the clear, practical effect of this species-neutrality was that a 2 x 4 house in Japan could be made entirely from the SPF species, or entirely from Hemlock-Fir, or any combination of these and other species groups. This, in fact, is the case in Japan where, for instance, virtually all 2 x 4 houses in Hokkaido are being built exclusively with SPF dimension lumber.

2.13 Japan explained that up until June 1961 the relevant tariff position for processed, planed lumber in its tariff schedule had been 1709-2-C, providing for a duty of 15 per cent. In June 1961 Japan started to apply the (Brussels/CCCN) Customs Cooperation Council Nomenclature. The CCCN description for "planed and other processed lumber (processed wood)" was 4413, or 4413-2 in the Japanese tariff, the "-2" standing for coniferous lumber, dutiable at 15 per cent.

2.14 Effective 1 April 1962, Japan's CCCN based tariff for processed coniferous wood under position 4413 was redefined on a species basis and divided into two sub-headings, one of which, "4413-3", devoted to specifically listed, and dimension-wise defined, coniferous woods, namely those of:

Another sub-heading covered "other" woods, namely those of other coniferous species.

2.15 During the Kennedy Round (1964-67) and the Tokyo Round (1973-79) Japan did not grant tariff concessions on any of these tariff positions and Japan, consequently, had no obligation under Article II with regard to the absolute level of these tariffs. As a signatory of the Harmonized Commodity Description and Coding System (HS) Convention, Japan applied, as of 1 January 1988, a HS-based tariff schedule. The HS tariff heading of relevance in the context of the case brought by Canada was 4407, defined under the HS as "Wood sawn or chipped lengthwise, sliced or peeled, whether or not planed, sanded or finger-jointed, of a thickness exceeding 6 mm." In accordance with the HS rules and prescriptions, heading 4407 was divided into seven six-digit sub-headings; one of the seven sub-headings, 4407.10, being specifically dedicated to coniferous woods.

2.16 Position 4407.10 in the Japanese Tariff comprised, in addition to the main sub-heading position, seven separate tariff lines (nineteen statistical codes) distinguishing tariff treatment by (i) degree of processing, as follows: (a) planed or sanded; (b) not planed or sanded; by (ii) lumber size, as follows: (a) more than 6mm, up to and including 160mm in thickness, and (b) thickness more than 160mm (considered to be mainly a raw material, for resplitting), and (iii) by genera and/or species.

2.17 "Dimension Lumber", as defined by Canada, in terms of (i) size, (ii) surface treatment (e.g. "planed") and (iii) genera and species (e.g. coniferous) would, generally, be subject to an unbound zero rate unless it fell into one of the tariff numbers and descriptions that follow:

HS 4407.10-110 Pine (Pinus), Spruce (Picea), or Fir (Abies)

HS 4407.10-210 Larch (Larix)

Planed or sanded lumber of these genera were subject to the general rate of 10 per cent, reduced to a temporary rate of 8 per cent.

2.18 Genera and species of planed or sanded lumber, 160 mm or less in thickness, covered by sub-positions HS 4407.10-310 (incense cedar, a position bound at "0" for this species, mainly used for pencil making) and 4407.10-320 of "other coniferous trees" would be duty free. Among the "other coniferous trees" category were: hemlock and other genus Tsuga, Douglas-fir and other genus Pseudotsuga, white cedar, yellow cedar, and other genus chamaecyparis, western red cedar, redwood and agathis and, out of the Picea genus; Sitka spruce, and, out of the genus Abies, California red fir, grand fir, noble fir, Pacific silver/Amabilis fir.

2.19 Japan explained that pine was distributed naturally throughout much of the Northern Hemisphere and was also artificially cultivated in a number of countries in the Southern Hemisphere. Fir was likewise widely distributed in the Northern Hemisphere, north of Central America and North Africa, which constituted the southern distribution boundary. The spruce genus existed most plentifully in East Asia, north of the Southern Himalayas, and was also distributed in Central Asia, Europe and North America. Other kinds of softwoods imported in large quantities into Japan were those of the genus Tsuga (such as hemlock), genus Pseudotsuga (such as Douglas fir), and genus Chamaecyparis (such as yellow cedar), which were distributed in both North America and East Asia.

2.20 Japan provided in this respect some geographic charts, showing that genera and species referred to in the Japanese Tariff are grown in the whole of the Northwestern part of the American Continent. However, two species, i.e. California Red fir and noble fir, appear to have their natural stand almost exclusively on the territory of the United States. Grand firs appear to have their natural stand mainly in the United States and some in Canada. On the other hand, Pacific silver fir and Sitka spruce appear to have their natural stand mainly in Canada. Hemlocks appears to have its natural stand both in Canada and in the United States. Japan also provided statistical trade data, it being understood that the trade figures shown on pages 10 and 11 relate to planed lumber generally and not specifically to dimension lumber.

Sources cited by Japan: Bonnor, G.M., Canada's Forest Inventory, 1981; Canadian Forestry Service, 1982; and US Forest Service; Forest Statistics of the United States, 1982

Sources cited: Canadian Forestry Service Statistics, published in 1985; United States - International Trade Commission, 1986

Country Name abbreviations:

DEU = FR Germany; ALA = Australia; CAN = Canada; CHN = China; CGO = Congo; FIN = Finland; HKG = Hong Kong; KRR = Korea, Rep. ; PTW = Taiwan; SWD = Sweden; NZL = New Zealand; DK = Denmark; CHL = Chile; IND = India; IDN = Indonesia; PNG = Papua New Guinea; PHL = Philippines; SAF = South Africa

Source: Japan Ministry of Finance.

Source: Japan Ministry of Finance

2.21 On the basis of indications provided by Japan, the Panel was able to establish an analytical tabulation of the Japanese Tariff, showing separately types of lumber, including dimension lumber, submitted, on import, respectively, to a duty of 10 per cent (temporary 8 per cent) and types of lumber imported free-of-duty.

Note: The species marked * have their natural stand exclusively, or mainly, on the territory of the United States of America. The species marked ** have their natural stand mainly on the territory of Canada. All other genera and species mentioned are grown on the whole western part of the North American Continent, including Canada, and also in other areas of the World.

2.22 Canada provided the following statistical data regarding recent imports of dimension lumber into Japan.

Source cited: British Columbia Council of Forest Industries

3.1 Canada, in requesting Council to establish a Panel, explained, in document L/6315, (extract):

3.2 Canada stated that Article I:1 of the GATT imposes an obligation on contracting parties to provide equal tariff treatment, immediately and unconditionally, to "like-products", regardless of national origin. The Japanese duty treatment of SPF dimension lumber has had, and continued to have, a negative impact on Canadian exports. Canada had helped to create in Japan the platform-frame construction method, which is based on dimension lumber. However, Canada has become increasingly concerned with the discriminatory effect of the tariff on SPF dimension lumber which inhibits the ability of Canadian SFP suppliers to reap full benefit from the market which they have been largely responsible for creating.

3.3 Bilateral consultations between Canada and Japan had been held over a period of more than ten years, at all levels, but the Canadian demand for equal treatment of all species of dimension lumber had not been met. While Canada continued to remain open to a bilateral resolution of the matter, in a way which would result in the removal of the discrimination in the duty for dimension lumber, Canada had seen no other way than to turn to Article XXIII procedures.

3.4 Canada's lumber reserves, and consequently its greatest opportunities for increased production and sales of dimension lumber, were based on SPF, with limited possibilities for growth in production of dimension lumber from Hem-Fir and other species (cf. the tabulations on pages 8 and 9). Due to geographical growing patterns, and the long periods required to grow trees to harvestable size, there was little Canada could do to reorient dimension lumber production to duty-free species over the next fifty to one hundred years, if ever. Although dimension lumber imported into Japan from North America could come from any area of Canada, or the United States, cost considerations had led to most supplies originating in either the western States of the United States, or in the Province of British Columbia (B.C.), in Canada. SPF species were, overwhelmingly, the primary species of dimension lumber produced in B.C., while the production in the western USA tended to be concentrated in the "other" species' groups. Canadian exports to Japan of dimension lumber of SPF species accounted for 73 per cent of total dimension lumber exports to that country. United States' exports of dimension lumber to Japan were virtually all (kiln-dried) Hem-Fir, with minimal exports of SPF. Shipments of dimension lumber to Japan from other contracting parties were negligible. Canadian exports of SPF dimension lumber were in direct competition with United States exports.

3.5 Impairment to Canadian interests through tariff discrimination in Japan resulted both from lost market share (due to the price sensitivity of the market) and the additional duties attached to SPF lumber imports. The Canadian industry had estimated that, in the period 1974 to 1987 inclusive, lost sales, due to lost market share, amounted to some $90 million (Canadian), while the duty paid over the same period was approximately $26 million. The industry estimated that, if Japan were to continue to apply a discriminatory tariff to SPF dimension lumber, Canadian industry would suffer a further $335 million shortfall from lost sales, and would pay an additional $55 million in duties over the next five years.

3.6 Canada considered that, in law and in practice, dimension lumber of any species was treated in Japan as a single product. The only anomaly, the only deviation from the pattern, was the tariff discrimination that applied to certain species of dimension lumber. In Canada's view, this was treatment to like products and it represented a prima facie nullification and impairment of rights accruing to Canada under the General Agreement. Canada therefore requested that the Panel:

3.7 Canada pointed out that it was aware that the drafting history of Article I:1 of the General Agreement did not offer a definition, or adequate classification, of what should be considered "like products" within the sense of Article I. Canada was also aware that a number of GATT Panels had examined the like product concept in Article I and Article III. While each case had to be examined on its own merits, precedents of previous Panel cases would be useful in the appreciation of the present case. Among cases reviewed by Canada were: (a) the Chile-Australia Working Party on Subsidy on Ammonium Sulphate (BISD Vol.II); (b) the USA-EEC Panel on Measure on Animal Feed Proteins (BISD/25S); (c) The Canada-EEC Panel on Beef Imports (BISD/28S); (d) the Brazil-Spain Panel on Tariff Treatment of Unroasted Coffee (BISD/28S); and (e) the EEC-Japan Panel on Customs Duties, Taxes and Labelling Practices on Imported Wines and Beverages (L/6216).

3.8 Canada considered that there was, in particular, a direct parallel between the Coffee Panel case and the case at hand. Both cases involved products with natural origins, subject to unbound tariffs. In both cases the products in question were exported by the complaining contracting party, as well as by other contracting parties. In both the Coffee Panel and the present case the product attracting the higher tariff rate was the one which constituted the larger share of exports of the complaining party. Additionally, in both cases the tariff sub-divisions which created the discrimination had been unilaterally determined by the importing contracting party. More specifically, the Coffee Panel had examined a case where Spain applied a higher tariff rate to imports of unwashed Arabica and Robusta coffees than it did to other groups of coffee. Brazil had complained that this constituted discrimination between "like products", in contravention of Spain's obligations under Article I:1 of the GATT.

3.9 Canada recalled that Spain had argued that the imposition of different tariffs to the various types of coffee was fully compatible with Spain's GATT obligations, since the tariff classification was applied according to the nature of the products and was independent of the country of origin. A very similar situation was found in the present case. Japan claimed that, since exports of a specific type of dimension lumber were treated the same for tariff purposes, regardless of country of origin, Article I:1 was not relevant. Canada noted in this connection that the Coffee Panel had ruled on products being exported from Brazil only, and had made no direct reference to the exports of third countries and, further, that the Panel's judgement was made on a product-, not on a country-basis. In Canada's view the results of the Coffee Panel confirmed that there is in GATT Article I:1 an obligation to provide equal tariff treatment to like products. Canada considered therefore that the conclusions of the Coffee Panel applied equally to the present case and that the same obligations apply to Japan, namely that Japan must not discriminate between "like products" in the application of duties. In Canada's view the focus of the SPF Dimension Lumber Panel should be on whether the products in question are like products within the meaning of Article I:1.

3.10 Canada pointed out that "dimension lumber" was in use in the United States, Canada, Japan, the United Kingdom, the Netherlands, France and the Republic of Korea. Out of these countries, Japan was the only country which had a tariff system that effectively discriminated among species of dimension lumber. While the cited countries treated dimension lumber as part of a larger category of sawn lumber which, in turn, might be further categorized by species and/or degree of processing, unlike in Japan, there existed no species-based tariff discrimination. If the survey of tariff treatment were to be broadened to still other countries, like Norway, Sweden, Finland, Switzerland, Australia and New Zealand, it could be shown that in these markets as well, dimension lumber would face no discrimination on a species basis, but would have a single tariff applied to it. Even in the Japanese tariff, SPF and all other species of dimension lumber were classified in the same general tariff sub-heading (HS 4407.10) and had the same unbound status.

3.11 Japan explained that in the Japanese Tariff "dimension lumber" is not separately identified, or referred to, as a customs- or statistical code-entity. While Japan saw no particular difficulty in recognizing that "dimension lumber", whether it be of SPF, hemlock, or any other coniferous species, might be a product manufactured by reliance on highly sophisticated technology, in its view, it remained a half-finished wood product, in no way different from planed lumber. Product attributes such as size, nominal measurements, strength evaluation, planing on four sides and stamps notwithstanding, Japan considered that "dimension lumber" was not truly distinguishable from planed lumber generally. While, admittedly, in North America "dimension lumber" might be produced to some extent without separating logs by individual tree species, this practice could not be considered to constitute a sufficient basis for giving all dimension lumber a universal status, or to qualify it for coverage under a single tariff line in the, not infrequent, cases where tariffs were sub-categorized by species.

3.12 As Japan saw it, dimension lumber was a categorization defined with an emphasis on end-use. In Japan's view, tariff classifications could, in general, not be made according to end-uses. Canada had proposed that "dimension lumber" could be a possible tariff classification, defined by (i) reference to rating certificates, based on North American standards and (ii) identification on the basis of JAS 600. Utilizing rating certificates based on the North American standards as a tariff classification criterion raised the danger of country- or area discrimination and would thus not be appropriate. As "dimension lumber" was used in Japan not only for platform-frame construction, it would not be possible for Customs, even with reference to JAS 600, to distinguish between "dimension lumber" and imports of lumber for end-uses other than 2 x 4 construction.

3.13 Japan explained that, "dimension lumber" was not a universal, clearly defined product and, as of now, there was not a single country, or market, which had established in its import tariff classification, or schedule, a specific item for dimension lumber; nor did the Harmonized System recognize, or identify, 'dimension lumber' as an independent item. In its written submission Japan had demonstrated that the range of sizes considered by Canada to be 'dimension lumber' had changed over time in North America, that the term was not understood in the same way in the trade-literature, that it was interpreted differently in North America, New Zealand and in Australia, that the interpretation in Japan was not the same and was, moreover, in evolution, even with reference to the JAS 600.

3.14 Japan pointed out that different lumber species were marketed separately, one from the other, and not in mixtures, not only in Japan but in North America as well, where Douglas-fir, hemlock, ponderosa pine, Engelman spruce (included in SPF), etc. were all traded separately. While the use of dimension lumber was spreading in Japan, the consumers' general perception remained that dimension lumber was only a particular form of planed lumber.

3.15 Canada did not agree with Japan's contention that the tariff classification system limited Japan's ability to treat dimension lumber as a "like product". Dimension lumber was not a raw material, nor a semi-finished product, but a highly standardized, finished product that left the manufacturing plant in its final form. Apart from eventual length-cutting, it was not further manufactured before being used in its intended end-use, platform-frame construction. Dimension lumber was graded in accordance with mandatory rules and definitions, which were standardized and the same throughout North America, and which, in essence, had also been adopted by Japan. The production and grading of dimension lumber was intentionally designed to produce a unique product of standard sizes and grades, regardless of the sawmill or the tree species involved. This standardization was the basis of the interchangeability of all forms of dimension lumber in construction. Through a combination of sizing, surfacing and appearance, and lumber grades, dimension lumber could easily be distinguished from all other types of lumber. The issue before the Panel should not be confused by broadening the scope of the Panel's examination beyond 'dimension lumber' to planed lumber generally. Canada's complaint was limited to the specific product known in North America, and also in Japan, as "dimension lumber". Canada did not contend that different lumber species per se should be considered "like products", regardless of the product-form they might take.

3.16 Canada stated that references by Japan to the difficulties they expected in regard to identifying dimension lumber as a separate product were not supported by actual practice in the Japanese housing industry and lumber trade. Thus, since twelve years there existed a "Japan 2 x 4 Association" (with some 740 members, throughout Japan) dedicated to the promotion of the 2 x 4 platform-frame construction method. Further examples that the Japanese industry and government recognize dimension lumber as a distinct product are the existence of the JAS 600 (issued by the Ministry of Agriculture, Forestry and Fisheries) and the booklet entitled "Dimension lumber and JAS", issued by the "2 x 4 Lumber JAS Council". As regards past changes in the definition of "dimension lumber", the facts of the case were that in Canada and in the United States, the actual sizes, as opposed to the nominal sizes, did change in 1970, but sizes had not changed since. The Japanese size standards for dimension lumber were established by the JAS in 1974, based on the Canadian and US sizes. In any event, it would be the Japanese standards, as defined by JAS 600, that exporters would have to meet if they wished to have their product used in Japan for platform-frame construction.

3.17 In Canada's opinion, the fact that dimension lumber was a fully manufactured product was of fundamental importance in examining the question of "likeness" of dimension lumber of different species. No tariff classification system could ever provide separate identification and separate listings for every single product that could be traded or imported. Nor would it be expected that all products within a single tariff line were, necessarily, "like products". This, however, could not be taken as a proof that a particular product could not be so identified, nor that its treatment could not be judged in the light of GATT obligations. The fact that a particular product was not specifically mentioned in the HS nomenclature did not mean that it did not exist, nor that it could not be defined or identified. The question of whether a product could be singled out, and discussed, as an independent item, had to be addressed on the basis of the characteristics of the product itself.

3.18 Canada also could not accept the contention that a distinction in the tariff for dimension lumber would be unworkable in terms of customs enforcement. In many cases customs officers already had to rely on documentation, not visual inspection, when classifying goods for tariff purposes. To some extent this was already the case for imports of dimension lumber. For example, a customs officer had to know what species of lumber he was dealing with, to determine whether, or not, the 8 per cent tariff was to be applied. To do so, the officer had to rely on the statements in the accompanying documentation, because in many cases even experienced lumber experts had difficulty in distinguishing between species of lumber. If Japan were to introduce a size-code-definition for dimension lumber, based on the JAS 600, compliance with that code could be certified in accompanying documents for purposes of tariff classification.

3.19 Japan reasoned that the argument, that Customs could determine compliance by reference to JAS 600 and by certification, was an indication that compliance might be difficult. In this context it was relevant to bear in mind that the JAS 600 had been changed several times in the past, and might be changed again in future. The JAS 600 rules had in no way been designed with the purpose of setting customs-enforcement criteria, but had been designed to ensure the safety of platform-frame constructions. Moreover, planing, one of the definitional elements of dimension lumber, was not a mandatory JAS 600 requirement. Even if Japan were to assume, for the purpose of the examination, that 'dimension lumber' could be clearly defined, dimension lumber of SPF and dimension lumber of other species would, in its view, still be different products, in practical terms, physical origins, -characteristics, end-uses, consumer perception, etc. and would, hence, not be 'like products' in the sense of Article I:1.

3.20 Furthermore, Japan feared that if sub-classifications of the type envisaged by Canada were to be generally accepted, sub-classifications could be used to undermine negotiated tariff concessions. For example, if an interested contracting party had negotiated a tariff concession on planed lumber of Douglas-fir, but there had been no concession on SPF planed lumber, a potential complainant could try to "sub-classify" planed lumber, claiming that, while different species of planed lumber were not claimed to be "like", different species of the sub-category "dimension lumber", were like, in order to gain an unbargained-for-concession on SPF "dimension lumber", or, in other words, part of SPF planed lumber. In the next phase, the same country, or a third country, could claim that different pieces of SPF planed lumber, "dimension" and "non-dimension", are "like". Thus, the concession would be totally undermined, and the claimant would get, in effect, the concession without negotiations for SPF planed lumber as a whole. Tariff concessions, however, should be, and had been negotiated, and concessions, distinguished by species, had been exchanged, and upheld, in successive GATT tariff negotiations.

3.21 Japan explained that tariff rates had been set for each item reflecting the item's special characteristics, including import-needs and the protection of related domestic industries. Thus, in 1962, when Japan was entering a phase of rapid economic growth, domestic resources of Japanese cedars (sugi) and cypresses (hinoki) had largely been depleted as sources of building materials in the wake of postwar economic recovery. Since there existed a huge domestic demand for such lumber, lumber prices had soared. In that situation, Japan liberalized its forest-products-trade (which had been regulated since the end of World War II for foreign exchange control purposes) with the intention of promoting imports of lumber so as to meet domestic demand not satisfied by domestic resources. Japan decided to reduce import duties depending on the particular situation of each species and, consequently, introduced species distinctions, in its tariff schedule. Lumber of species in high demand, and for which no protection was felt to be required, mainly Douglas fir and hemlock (as substitutes, respectively, for "sugi" and "hinoki"), benefited from the introduction of a zero duty. Likewise, red cedar, considered to be a substitute for Japanese cedar as appearance lumber, was made duty-free. The previously generally applicable import duty rate of 15 per cent was reduced to 10 per cent for pine-, fir-, spruce-and larch-species lumber. A duty of 10 per cent for these species' lumber was retained because the relevant domestic industries were in need of protection and limited domestic demand reduced the need for imports. The duty reductions effected at that time were not the result of any negotiations, but constituted unilateral action by Japan, reflecting the domestic lumber supply and demand situation.

3.22 Japan explained that, as regards species distinctions in the tariff, Japan had proposed, at the time of the HS elaboration, that the relevant HS sub-headings for coniferous woods, namely 4403.2 and 4407.1, be sub-divided, at the two-dash description level, into the following sub-divisions: - - of white cedar and other wood of the genus Chamaecyparis; - - of hemlock and other wood of the genus Tsuga; - - of Douglas fir and other wood of the genus Pseudotsuga; - - of Radiata Pine and other wood of the genus Pinus; - - of spruces and other wood of the genus Picea or of wood of the genus Abies.

3.23 Also at that stage of the HS elaboration, Canada had suggested the creation of certain two-dash level sub-positions for coniferous woods, based on species distinctions. The United States Administration, on the other hand, had been of the view that two-dash level distinctions in headings 4403 and 4407 should not be introduced since, the United States pointed out, the composition of the trade would vary significantly among countries and geographic areas, as "shipments of certain species often are mixed, as in Hem-Fir (hemlock-fir) shipments". Consequently, the United States, (quote): "felt that each country can create the necessary detail at the national level" (Reference: Customs Cooperation Council document 24.199, of 26 April 1978).

3.24 As Japan saw it, pine-fir-spruce, when compared with other species, were inferior in terms of lumber quality. The fir and spruce genera had insufficient decay resistance and pine lumber usually had large knots and its grain was not straight. When these lumber species were to be employed in building and other purposes their uses were limited.

3.25 Spruce-pine-fir (SPF) grow naturally, or are planted, in the northern parts of Japan, or in the long mountain range areas with low soil productivity. Due to the fact that these tree species are inferior in timber quality, and are moreover inconveniently located, the related forestry and wood- industries experienced low profitability and were in need of protection. Fostering other tree species, or implanting alternative industries, in the areas where SPF species were growing, was difficult. Compared to pine-fir-spruce, the situation and prospects for other coniferous species were markedly different. Among other coniferous trees the major species growing in Japan were "hinoki" (Japanese cypress, Chamaecyparis obtusa) and "sugi" (Cryptomeria japonica). Both of these were strongly in demand for house construction purposes. Major imported species of other coniferous trees were hemlock and Douglas-fir. These species had superior strength and other physical characteristics and were used as building-components requiring strength. Imports of such species were regarded as substitutes for sugi and hinoki. Domestic resources of sugi and hinoki were insufficient to meet a sustained high level of demand, with the result that the price level for such lumber was high and that the forestry and wood-industry activities related to sugi and hinoki enjoyed high profitability. To meet market-demand it was necessary to promote the importation of hemlock and Douglas-fir.

3.26 Within the genera Abies and Picea, certain independent species were exempt from duty: namely,

(i) in the Abies group: California red fir (Abies magnifica), grand fir (Abies grandis), noble fir (Abies procela) and Pacific silver fir/amabilis fir (Abies amabilis).

These species grow, and were mixed, somewhat, with hemlock, in fellings and in lumber, constituting the "Hem-Fir alliance of species" in Canada and in the United States. In order to facilitate customs clearance for hemlock lumber, which had to be imported in large quantities, these species had been specified in the Tariff as exempted species overall. Japan explained that California red fir and noble fir species grew only on the territory of the United States. Grand fir grew mainly on US territory, but there were also stands in Canada; lumber production from these species was thought to be quite limited. For Pacific silver fir/Amabilis fir the largest stands were in Canada, but there were also stands in the United States. Neither of these four species was traded in significant volume as a separate species, but mainly jointly with hemlock. Japan stated that, without this exception, any small portion of mixed fir in hemlock would have to be reported separately for customs clearance, and thus would cause much difficulty for the importation of hemlock. In the lumber grading rules in Canada and the United States these four exempted species were treated collectively as "Hem-Fir"; trade in these species was minor, or negligible. There was thus no intent of discriminatory treatment nor, in Japan's view, was there any consequence to that effect.

(ii) in the Picea group: Sitka spruce (Picea sitchensis).

Japan explained that Sitka spruce was also called "Alaska Hinoki" and was used in Japan for general building purposes, as well as for musical instruments, as a high-grade lumber. Sitka spruce was clearly distinguished from lumber of other spruce-species for circulation and consumption, and, in Canada, it had separate rating-rules and separately prescribed stress ratings. It was also distinguished separately in Canadian trade statistics. Sitka spruce was significantly different from other spruce lumber. The lumber was specified in the Tariff as a duty-free item because (a) Japan had no substitute domestic resources and needed to import it, and (b) because there was no competing domestic industry. Sitka spruce stands were found in the Western coastal regions of North America, stretching all the way from Alaska through northern California, with most of the stands situated on Canadian territory. According to Japan, about 70 per cent of its Sitka spruce imports originated in Canada and, again, there was no discriminatory aspect in the import tariff treatment.

3.27 Japan stated that not only was Japan's tariff classification in accordance with internationally agreed rules, the distinction by species that was made in the Tariff was not at all unusual. Australia applied a 2 per cent tariff to lumber of redwood and red cedar, and a 5 per cent tariff to other coniferous species; Argentina presently applied a 28 per cent tariff on spruce and Douglas-fir and a 34 per cent tariff on other pines and larch. At the time when Japan first established the tariff differential based on species, softwood lumber tariffs in Finland, Canada and the United States had varied by species, including those on "planed" lumber. Many countries, for example Canada, New Zealand, the United States, Switzerland, the EEC and Finland, even though they did not currently apply different tariff rates, continued to sub-classify tariffs on 'softwood lumber' by species. Many countries did apply different rates, based on their own, unique classifications, to different species of hardwood lumber and other wood-products. For example, Canada applied different tariffs to oak and to other species of flooring. In Japan's view it seemed evident that contracting parties had always understood the GATT to permit species-specific tariffs.

3.28 Canada stated that it was not asking Japan to reclassify its Tariff, or to introduce into its tariff classification end-use criteria, but Canada could not accept that the Japanese Tariff might not be modified so as to accommodate "dimension lumber", if that were taken to be the solution. Japanese tariff classification practice in HS Chapter 44 showed considerable flexibility and precision in creating tariff definitions based on lumber sizes. Canada did not deny that a contracting party has the right to structure its tariff as it wishes (subject, however, to its international obligations), and to create as many sub-divisions as it wishes, whether it be for statistical or other valid reasons, but the "like product" obligation was paramount and superseded any classification structure. Similarly, contracting parties were free to protect domestic industries as they saw fit, but only in ways compatible with their GATT obligations, and tariff discrimination among like products was not consistent with the obligations of Article I.

TO CONTINUE WITH CANADA/JAPAN: TARIFF ON IMPORTS OF SPRUCE, PINE, FIR (SPF)
DIMENSION LUMBER

1Gross merchantable volume of stocked, productive, non-reserved forest

2Net volume of growing stock on commercial timberland

3e.g., fifteen thousand five hundred and seventy million cubic metres and twelve thousand nine hundred and six million cubic metres respectively

4For Canada: mill shipments; for US: production; data presented by Japan; all figures rounded.

5Data presented by Japan.

6Data presented by Japan.