19 February 1993

55. In response to Canada's argument that it was only on 16 October 1991 that the United States had for the first time indicated to Canada that it considered the MOU to be an undertaking within the meaning of Article 4:5 of the Agreement, the United States observed that the record of this proceeding demonstrated that Canada had not implicitly or explicitly informed the United States that it considered the MOU to be outside the scope of Canada's obligations under the Agreement. During the pre-initiation consultations held between Canada and the United States in October 1991 under Article 3:1 of the Agreement the United States had mentioned, in response to a question from Canada and almost in passing, that the interim measures derived from the rights of the United States under Article 4:6 of the Agreement. The United States was at that time and remained surprised that Canada would challenge that basic fact. Thus it was not until these pre-initiation consultations that the United States realized that Canada questioned that the United States and Canada both had rights and obligations under the Agreement with respect to the MOU. Accordingly, prior to that time, the United States had not deliberately employed language identical to that found in the Agreement, since the Agreement did not require particular language to be used in taking actions under its provisions. Nonetheless, the United States had clarified this matter, including by notifying the action taken following Canada's withdrawal from the MOU to the Committee on Subsidies and Countervailing Measures in its semi-annual report covering countervailing duty actions taken in the second half of 1991. ²²

56. The Panel asked the United States to explain its views on how the fact that the United States had informed Canada that it considered the MOU to be a trade agreement for purposes of its domestic trade laws indicated that the United States had treated the MOU as an undertaking under Article 4:5 of the Agreement. In response, the United States observed that the Agreement expressly suggested that the proper form for an undertaking was a trade agreement because Article 4:5 provided that an essential condition of an undertaking was that "the government of the exporting country agrees to eliminate or limit the subsidy ...". In addition, at the time of the entry into force of the MOU the United States had indicated that it would enforce its rights under the MOU. It had been understood that the designation of the MOU as a trade agreement was intended to have that effect. It should be presumed, absent strong evidence to the contrary, that the United States had planned enforcement actions consistent with the Agreement. The United States also noted in this context that, immediately after the MOU had come into effect, it had exercized its right to enforce the MOU as an agreement. Until the proceeding before this Panel, Canada had not complained that this enforcement action by the United States was improper on the ground that the United States had not notified the provisions of section 301 of the Trade Act of 1974 to the Committee on Subsidies and Countervailing Measures. Canada's silence with respect to this enforcement action therefor undercut the position taken by Canada in the proceedings before this Panel.

57. In response to Canada's argument that the Agreement did not distinguish between substantive and non-substantive requirements for undertakings, the United States observed that the MOU had been notified in accordance with the requirements of the Agreement. In addition, the fact was that the MOU was a termination undertaking by definition (under Article 4:5 of the Agreement). Even if the MOU had not been properly notified (a contention of Canada with which the United States did not agree), this fact would not defeat nor in any way detract from the substantive essence of the MOU as an undertaking. Finally, the Agreement in fact did make a distinction between procedural and substantive requirements. The substantive requirements for undertakings were laid down in Article 4:5 whereas the procedural requirements relating, inter alia, to notification, were contained in a separate provision, Article 4:8.

58. The United States denied that the fact that the bonding requirements were imposed under the authority of the USTR was probative of the question of whether the MOU constituted an undertaking within the meaning of Article 4:5 of the Agreement. Canada incorrectly asserted that the USTR was conducting the countervailing duty investigation. In fact, the investigation was conducted by the Department of Commerce and the USITC. The USTR had imposed the suspension of liquidation and the bonding requirements because, under US law, the Department of Commerce did not have the authority to do so. Nothing in the US notifications to the Committee did or could limit the USTR's authority to take this limited action and similar action had been taken in 1987 without protest. The case of the MOU was unique in that, prior to the termination of the MOU, the United States had never had to act in the context of a country violating a termination undertaking under Article 4:6. As soon as it had become evident that the United States would take action, it had promptly notified the Committee on Subsidies and Countervailing Measures. In any event, even if (assuming arguendo) the United States had been unaware of its rights under the Agreement to act as it did, and even if it had not properly notified the Committee of a specific manner of implementation of those rights prior to taking such action, the failure to meet a procedural requirement could no more defeat rights of the United States than the failure to notify a subsidy could be taken as congruent with a violation of the Agreement based on providing that subsidy.

59. In response to a question by the Panel as to how the United States had informed the Committee on Subsidies and Countervailing Measures of the interim measures taken on 4 October 1991 with respect to imports of softwood lumber from Canada, the United States indicated that these measures had been notified to the Committee in the semi-annual report of the United States on countervailing duty actions taken in the second half of 1991. ²³

60. Responding to a question by the Panel as to how the nature of the US measures taken on 4 October 1991 as a form of "expeditious action" within the meaning of Article 4:5 of the Agreement was reflected in the text of the Federal Register Notice announcing these measures, the United States argued that under Article 4:6 "expeditious actions" could include "immediate application of provisional measures using the best information available". Provisional measures were defined in the Agreement as "provisional countervailing duties guaranteed by cash deposits or bonds equal to the amount of the provisionally calculated amount of subsidization". The Federal Register Notice of 8 October 1991 had established a bonding requirement in the amount of the export charge established by the MOU less an amount reflecting replacement measures agreed to and implemented as of that date. Accordingly, the Federal Register Notice expressly described actions explicitly authorized by Article 4:6 of the Agreement. Significantly, in the case of a suspension agreement, the provisional measures would not have reflected the replacement measures introduced by some Canadian Provinces.

61. Canada also argued that the fact that the MOU was outside the framework of the countervailing duty legislation of the United States supported the view that the MOU had not constituted an undertaking within the meaning of Article 4:5(a)(i) of the Agreement. The Agreement required in Article 2:2 that the relevant authorities and procedures be notified to the Committee on Subsidies and Countervailing Measures. In the case of the United States, the legislative procedures notified to the Committee were those of the Tariff Act of 1930, as amended. The United States had concluded the MOU outside these procedures and could therefore not claim any rights under Articles 4:5 and 4:6 of the Agreement in relation to the MOU. In addition, the status of the MOU under US domestic law was relevant insofar as it provided an indication of the intention of the parties at the time they had negotiated the MOU. It was quite clear that Canada could assume that the United States would act in accordance with its own law when conducting its affairs. At the time the MOU had been negotiated, the United States had not acted in accordance with its own internal law regarding undertakings. This indicated that the intention of the United States was not to create an "undertaking" but, rather, to enter into an independent bilateral agreement with Canada.

62. In light of Canada's statement that the United States had concluded the MOU outside the procedures of the Tariff Act of 1930 and therefore could not claim rights under Articles 4:5 and 4:6 of the Agreement in relation to the MOU, the Panel asked Canada to explain whether it considered that the procedure for the termination of a countervailing duty investigation upon withdrawal of a petition was outside the procedures notified by the United States to the Committee on Subsidies and Countervailing Measures. Canada responded that the termination of a countervailing duty investigation upon withdrawal of a petition was provided for in section 704(a) of the Tariff Act of 1930 and, as such, within the procedures notified to the Committee by the United States. However, provisions for undertakings based on agreements to eliminate or offset completely a subsidy fell under section 704(b) of the Tariff Act of 1930, as amended, which were not the procedures followed in this case. What was outside of the procedures notified by the United States to the Committee was the reinstitution of a previously terminated countervailing duty investigation, or the imposition of interim measures following the termination of a countervailing duty investigation. Neither of these procedures was found in the Tariff Act of 1930, as amended.

63. In characterizing the MOU as being outside the framework of the domestic countervailing duty legislation of the United States, Canada made the following points.

64. First, the countervailing duty legislation of the United States distinguished between the procedures for termination of investigations and the procedures for suspension of investigations. Termination of a countervailing duty investigation could be the result of the withdrawal of the petition which had caused the initiation of an investigation or of negative determinations by the Department of Commerce or the USITC. Termination of an investigation could also result from an agreement between the United States and the foreign government concerned regarding quantitative export restrictions and the withdrawal of the petition. Once terminated, neither investigations nor proceedings could be resumed. There was no provision in the countervailing duty law of the United States for the imposition of any measures subsequent to termination of an investigation upon the withdrawal of the petition. In contrast, investigations could be suspended under the countervailing duty law of the United States when an agreement was reached between the United States and a foreign government, under which such government agreed to offset the subsidy in question, cease the export of the product in question or eliminate the injurious effects of the subsidized import. Investigations and proceedings continued in existence even following suspension agreements, subject to annual review. The investigation was required to be resumed if the suspension agreement was violated, or if the exporting party withdrew from the agreement. Enforcement of suspension agreements was provided for under Section 704 of the Tariff Act of 1930, as amended. The undertakings notified by the United States to the Committee on Subsidies and Countervailing Measures had been of this type. In the case of the MOU, Canada had not wanted to conclude a suspension agreement under the US countervailing duty law. Such an agreement would have had no termination clause and could have left countervailing duties in place for an indefinite and lengthy period, while subjecting Provinces and industry to annual reviews.

65. Second, Article 3(a) of the MOU had stipulated that its terms would be implemented when the petition in the countervailing duty investigation initiated in June 1986 had been withdrawn and the notice of termination of the investigation signed. As the United States had been required to declare that the preliminary determination issued in October 1986 no longer had legal force of effect under US domestic law, the MOU had stood by itself.

66. Third, the notice published in the Federal Register in January 1987 of the termination of the investigation initiated in June 1986 had not mentioned the existence of a bilateral agreement between Canada and the United States concerning softwood lumber. This was at variance with the practice of the United States of publishing detailed texts of suspension notices for the purposes of undertakings. Three notices had been published in the Federal Register referring to the MOU. None of these notices had described the MOU as a suspension or termination agreement under the countervailing duty legislation of the United States.

67. The Panel asked Canada to comment on the following passage in the Presidential Memorandum of 30 December 1986 under Section 301 of the US Trade Act of 1974:

Canada observed that this statement indicated that the MOU had addressed issues sufficiently that the petitioning industry decided to withdraw its case under the US countervailing duty law. Upon withdrawal of the petition, the Department of Commerce was authorized to terminate the investigation and had done so. These facts, however, had not made the MOU an undertaking under Article 4:5 of the Agreement. Under the countervailing duty law of the United States, a suspension agreement resulting from a countervailing duty case fell under section 704 of the Tariff Act of 1930, as amended. The document referred to in the quotation was a notification under section 301 of the United States Trade Act of 1974; this Act had not been notified to the Committee on Subsidies and Countervailing Measures under Articles 2:2 or 19:5(b) of the Agreement. The three notices published in January 1987 in the Federal Register with respect to the MOU nowhere referred to section 704 of the Tariff Act of 1930, as amended.

68. The Panel asked Canada to explain whether it was of the view that in the case of the United States only "suspension agreements" could be considered as "undertakings" within the meaning of Article 4:5 of the Agreement. In response, Canada pointed out that the United States had implemented the Agreement only in the Tariff Act of 1930, as amended, and that this legislation did not contain p[rovisions for undertakings other than "suspension agreements". Thus, only suspension agreements could be considered to be "undertakings" within the meaning of the Agreement. The only type of agreement envisaged by the relevant provisions of the Tariff Act of 1930 in the context of the termination of an investigation was a quantitative restrain agreement (section 704 (a) (2), as amended). However, that statute addressed only the procedures and considerations to be used in determining whether to enter a quantitative restraint agreement, and neither that statute nor the general US countervailing duty scheme provided any mechanism for the enforcement of such a quantitative restraint agreement. In the only instance of which Canada was aware in which the United States had entered a quantitative restraint agreement in the context of the termination of a countervailing duty investigation, the United States had enacted specific statutory authority in order to provide enforcement authority, and that authority had not been connected in any way to the Agreement or to the US countervailing duty legislation. ²⁵

69. Canada further noted in this context that the Agreement did not require a signatory to impose a countervailing duty even where all the requirements for the imposition of such a duty had been met. This discretion available under the Agreement included the ability to withdraw or terminate a countervailing duty proceeding using procedures other than those set out in Article 4:5 of the Agreement. This was what the United States had done in this case. Article 4:5 was but one method to terminate a proceeding. Its express inclusion in the Agreement had been necessary because of the additional rights which flowed from the use of undertakings - the right to impose provisional measures under Article 4:6 when an undertaking was violated. The fact that the statement linking the MOU and the withdrawal of the petition occurred in the section 301 notice underscored Canada's point that the MOU was not an undertaking under the Agreement or under US countervailing duty law. Rather, it was a trade agreement over which the United States had asserted unilateral 'enforcement' rights under section 301 of the Trade Act of 1974.

70. In response to Canada's argument that the MOU had not constituted an undertaking under Article 4:5(a) of the Agreement because the domestic countervailing duty legislation of the United States did not specifically provide for the acceptance of undertakings as a basis for termination (as opposed to suspension) of investigations, the United States argued that Section 704 of the Tariff Act 1930, as amended, did contemplate termination of cases through agreements when in the public interest - i.e. a termination undertaking as in this case. Further, the scope of its domestic law could not circumscribe rights of the United States under an international agreement. Although the provisions of domestic law on which the United States had relied to maintain the status quo following Canada's withdrawal from the MOU were different from the provisions of US law relating to the reinstatement of a suspended countervailing duty investigation, the manner in which the United States chose to implement its rights and obligations under the Agreement in its domestic law did not implicate any other signatory's rights under the Agreement. The manner in which the United States had chosen to enter into this termination agreement (the MOU) did not implicate a substantive concern because the Agreement, unlike US law, did not distinguish between suspension and termination agreements.

71. In response to the argument of Canada that the affirmative preliminary determination of subsidization made by the Department of Commerce in October 1986 had been declared to be without legal force or effect under US law, the United States noted that this preliminary determination had been given no effect as res judicata or as binding precedent concerning natural resource subsidies. On the other hand, the decision had been consistently relied upon by the US courts, the Department of Commerce, and dispute panels established under the Canada-United States FTA Agreement as strong authority on matters involving analysis of preferentiality and specificity standards under US countervailing duty law.

72. Canada considered that the argument of the United States that the scope of its domestic law could not circumscribe rights of the United States under an international agreement would, if sustained by the Panel, mean that the United States could impose actions under any trade law and still be in conformity with the Agreement. This would mean that the obligations of Article 2:2 of the Agreement were without any meaning and that signatories had no way of knowing when they were entering into a bilateral agreement with the United States whether it would be considered by the United States as an "undertaking" for the purposes of the Agreement.

73. The United States considered that the argument of Canada that the termination by Canada of the MOU in accordance with the termination clause of the MOU could not be considered to be a violation within the meaning of Article 4:5 of the Agreement would effectively nullify the remedy provided in Article 4:6. Canada's proffered distinction between withdrawal from an undertaking and its violation was illogical on its face. Canada argued in essence that provisional measures could not be applied under Article 4:6 if an exporting country decided to take an action inconsistent with the terms of an undertaking, so long as the exporting country notified the importing signatory of its intention to do so. Under such an interpretation, no country would ever choose to violate the terms of an undertaking; it would simply withdraw one day before taking such action and thereby escape the reach of the remedy provided for in Article 4:6. Canada's argument would also undermine the Agreement's support for the conclusion of termination or suspension agreements. The considerable detail provided in Article 4:5, 4:6 and 4:7 of the Agreement concerning the conclusion and treatment of such agreements indicted a policy in favour of permitting, if not promoting such agreements in lieu of the imposition of definitive countervailing duties. To permit a signatory to such an agreement to defeat the remedy provided at Article 4:6 simply on the basis that it had "withdrawn" from an undertaking prior to violating the undertaking would undermine that policy. Thus, both US and EEC cases had consistently found "violation" to include unilateral termination of undertakings.

74. Canada, responding to the argument of the United States that Canada's "withdrawal" from the MOU provided grounds for claiming a "violation" of the MOU, rejected the characterization of the termination of the MOU as a "withdrawal". The term "termination" was specifically used in the MOU and Canada's action was a termination fully consistent with its negotiated rights under the MOU. An action specifically provided for in a bilateral agreement could not be construed as a violation of that agreement. Were the position of the United States to be accepted, the lawful termination of any agreement which settled a trade dispute could be considered grounds for an expedited self-initiation of an anti-dumping or countervailing duty investigation.

75. The United States pointed out that it did not contest that Canada had acted within its rights under the MOU by terminating the MOU on 4 October 1991. However, the United States too was acting within its rights under Article 4:6 of the Agreement to respond to Canada's action. The termination clause of the MOU could not be used to defeat rights of the United States under Article 4:6 of the Agreement. The termination clause in the MOU had served the same function as a termination clause in other types of bilateral agreement: providing an explicit right for either country to withdraw from the agreement. The consequence of invoking a termination clause was that a country could cease abiding by the terms of that agreement and not be in violation of an international treaty obligation on the basis of the bilateral agreement. Thus, it was not the position of the United States that Canada had violated the MOU by exercizing its right of termination. However, there was no support for Canada's argument that the termination clause in a bilateral agreement concluded in accordance with the provisions of a multilateral agreement also served to defeat the rights of the United States under that multilateral agreement. Canada's argument was contradicted by the terms of Article 4:6 which, inter alia, expressly reserved to the importing country the right to determine whether the terms of an undertaking were being fulfilled and related the concept of "violation" to the fulfilment of the objectives of the undertaking. Since the agreement of the importing country was necessary in order for a countervailing duty investigation to be suspended or terminated, the continued acquiescence of the importing country was required to maintain the undertaking. Certainly, either party had the right to withdraw from the undertaking; however, each must bear the consequences of doing so. In sum, Canada's right to withdraw from the MOU and the right of the United States to the remedy under Article 4:6 stood side by side; neither did (nor should be construed to) defeat the other. To do otherwise would discourage settlement of countervailing duty cases by making inclusion of a termination clause (a common clause in undertaking) unacceptable to the importing country.

76. The United States pointed out that the language in Article 4:6, which required that a "violation" of an undertaking occur prior to provisional action, was immediately preceded by the following language:

Thus, the Agreement directly linked the ability of the importing country to respond expeditiously to the failure to fulfil the substantive terms of the undertaking. The term "violation" had to be interpreted in this light. Moreover, the Agreement expressly left a determination of the continued need for an undertaking to the importing country:

In this respect, the right of an importing country to review the continued need for an undertaking parallelled the right of the importing country to review the continued need for a countervailing duty order. Although Canada could have requested a formal review pursuant to Article 4:7, it had chosen to act unilaterally. While this was Canada's right, it carried certain potential consequences under the Agreement which Canada sought in this proceeding to avoid. Canada's ability to have requested a review of the undertaking under Article 4 was certainly relevant in determining whether a unilateral withdrawal from the undertaking should be dealt with under Article 4:6.

77. In response to a question by the Panel on whether a legal procedure had existed in the case of the MOU to ensure that, as an undertaking, the MOU would "not remain in force any longer than countervailing duties could remain force under this Agreement" (Article 4:7), the United States pointed out that the MOU had included explicit consultation provisions which would have permitted Canada to seek a review of any provisions or of the Understanding as a whole. Since Canada had not fully replaced the export tax on over one-third of Canadian lumber production, this opportunity had never seriously materialized. It was worth noting, however, that Canada had refused to engage in the required quarterly consultations in the second quarter of 1991.

78. In response to a question by the Panel on whether a legal procedure had been available to the Government of Canada and to interested exporters or importers to request a review of the need for the continuation of the MOU, the United States stated that a petition to that effect could have been filed at any time with either the Department of Commerce or the USTR. Such a request would have been given due consideration.

79. The United States further argued in this context that in the practice of both the EEC and the United States a withdrawal from an undertaking was treated in the same manner as a violation of an undertaking. This practice made sense because the effect of a violation and a withdrawal was identical: the exporting country signalled its intention not to abide by the terms of the undertaking, on the basis of which the underlying countervailing duty proceeding had been suspended or terminated. Thus, the United States had included termination clauses in a number of suspension agreements concluded in countervailing duty proceedings. Thereafter, if the agreement was terminated or the exporting country withdrew from the agreement, the Department of Commerce acted to reinstate the suspended investigation and imposed provisional measures pending the outcome of the completed investigation. Similarly, in the EEC, if it appeared that a price undertaking had been violated, or if such an undertaking was withdrawn, the EEC Commission gave the exporter an opportunity to comment and could then immediately, upon consultation with the advisory committee, impose a provisional duty.

80. Canada noted that the suspension agreements referred to by the United States had specifically allowed the United States to reopen the countervailing duty investigation. The underlying determinations for these agreements had not been expressly declared "of no legal force or effect", as had been the case with the MOU. The MOU had come into effect only after the investigation had been terminated. Thus, in the Certain Red Raspberries from Canada case, cited by the United States, Section IV.b of the suspension agreement had provided that:

Such a provision had not existed in the MOU, which in Article 9 had only provided for the right to terminate the agreement. This confirmed that the MOU had not been an undertaking within the meaning of Article 4:5 of the Agreement.

81. In response to a question by the Panel on whether Canada made a distinction between a "withdrawal" from an undertaking and a "violation" of an undertaking, Canada argued that there were important distinctions between a withdrawal from, violation of, and termination of an agreement. To say that a country had withdrawn from an agreement implied that the agreement continued to have some viability, either because it actually continued to exist or because the withdrawing country had continuing obligations thereunder. This also was true in the case of a violation of an agreement since the agreement continued to exist and there were continuing obligations thereunder. However, when a country terminated an agreement, in accord with the express terms of that agreement, there was no further obligation to comply with the terms of the agreement. The agreement no longer existed and, accordingly, the non-terminating party had no right to take action based on the act of termination, unless provided for in the agreement. N° such rights existed in the case of the MOU, since the only condition of termination of the MOU was the provision of 30 days notice. Both Canada and the United States agreed that Canada had complied with this condition.

82. The United States observed that if Canada's interpretation was accepted, Canada could have terminated the agreement 30 days after it was signed with no effects - obviously a ridiculous result. Further, the United States pointed out that the distinction Canada was showing - between suspension and a termination agreement - was valid as a matter of US law, but irrelevant under the Agreement.

83. The United States considered that Canada's argument that the application of the interim measures was unwarranted because there had been no prior determination of the amount of a subsidy was based on a misstatement of fact and ignored the plain language of Article 4:6. An affirmative preliminary determination of subsidization had been made by the United States in October 1986 and the rate established in that determination had been the basis for the level of the export tax established under the MOU. In addition, Article 4:6 of the Agreement explicitly authorized the importing country to use "the best information available" ("BIA") in establishing the amount of provisional measures. In providing for the use of BIA, the drafters had clearly understood that it might not be possible in the immediate wake of a country's withdrawal from an undertaking, to obtain and apply new information on the rate of subsidization. The bonding requirements imposed by the United States explicitly limited the amount of potential liability of an importer to the rate established in the prior preliminary determination of subsidization: 15 per cent. Moreover, the Agreement in no way limited action under Article 4:6 to instances in which there had been a final subsidy finding. Such an interpretation contradicted the express permission to exporters to seek final subsidy and injury determinations if they chose and would undercut the purposes of encouraging undertakings in settlement of actions. At the same time, read together, Article 4:6 and Articles 5:1 and 5:2 clearly contemplated that the preliminary findings necessary before imposition of provisional measures could, in the case of enforcement of an undertaking, occur prior to the adoption of the undertaking. Any other reading would essentially make Article 4:6 superfluous.

84. Canada argued that Articles 4:2 and 5:1 of the Agreement provided that provisional measures "may only be taken after a preliminary finding has been made that a subsidy exists". The logic of Article 4:6 coupled with Article 5:1 restricted the immediate application of provisional measures under Article 4:6 to cases where a preliminary determination existed. In the case before the Panel, the preliminary determination made by the United States in October 1986 regarding imports of softwood lumber from Canada had been declared by the United States without legal force and effect, i.e., it did not exist in US law.

85. The United States argued that, whatever the status under US law of the preliminary determination made in October 1986, it did not have the ability to circumscribe the rights of the United States under the Agreement "to take expeditious actions using the best information available". Moreover, the MOU's limitation of the effects of the 1986 preliminary determination was terminated along with the MOU.

86. The United States considered that the measures taken on 4 October 1991 with respect to entries of softwood lumber from Canada fell well short of what the Agreement explicitly authorized. The Agreement expressly permitted the imposition of "provisional measures" in the event of a violation of an undertaking. Provisional measures in turn were defined in Article 5:2 as "cash deposits or bonds equal to the amount of the provisionally calculated amount of subsidization". Accordingly, under the Agreement, as soon as there was a violation of a suspension or termination agreement, authorities of an importing country were authorized to impose cash deposits in the amount of the estimated margin of subsidization. In the case of the interim action of the United States, there were two simple elements: a bonding requirement and a withholding or extension of liquidation. The result of these measures would be - at most - collection of a duty (contingent upon final affirmative determinations of subsidization and injury in the ongoing investigation) in the amount agreed between Canada and the United States in the termination agreement (15 per cent), less the amount of any replacement measures taken. These actions fell well within the scope of action permitted under the Agreement.

87. The Panel asked the United States to explain how in its view under the Agreement the termination by Canada of the MOU was a ground for the application of interim measures under Article 4:6 and at the same time constituted a "special circumstance" within the meaning of Article 2:1 justifying the self-initiation of a countervailing duty investigation. In response, the United States argued that Canada's abrupt withdrawal from the MOU had been based upon a unilateral claim that all subsidy practices in Canada had ceased to exist. The United States had asked Canada to maintain the status quo to allow the United States to investigate Canada's claim. Canada had refused this request, which had given rise to the need for the United States to protect itself in the short term by imposing the interim measures as well as to a "special circumstance" namely, the need to commence an investigation as quickly as possible to verify Canada's claim.

2. SELF-INITIATION BY THE United States OF A COUNTERVAILING DUTY INVESTIGATION ON 31 October 1991

88. Canada submitted that, in self-initiating a countervailing duty investigation on 31 October 1991 with respect to imports of softwood lumber products from Canada, the United States had acted inconsistently with its obligations under Article 2:1 of the Agreement. There had been no "special circumstances" to justify the self-initiation of this investigation. In addition, the United States had initiated this investigation absent sufficient evidence of the existence of a subsidy and sufficient evidence of injury and causality.

89. The United States submitted that Canada's withdrawal from the MOU had constituted "special circumstances" within the meaning of the Agreement, justifying self-initiation of the countervailing duty investigation. Furthermore, the United States had possessed sufficient evidence of the existence of Canadian provincial subsidies to softwood lumber producers, injury and a causal link between the subsidized imports and the alleged injury as required by Article 2:1 of the Agreement. Accordingly, the self-initiation by the United States of the investigation on softwood lumber products was consistent with the obligations of the United States under Article 2:1 of the Agreement.

90. Canada argued that, while in the Notice of Initiation of the countervailing duty investigation of imports of softwood lumber from Canada the United States had acknowledged that Article 2:1 of the Agreement required that there be "special circumstances" to allow for the self-initiation of a countervailing duty investigation, the factors identified in this Notice as a basis for the self-initiation of the investigation did not constitute "special circumstances" for purposes of Article 2:1. The Notice had made the following statements regarding the alleged special circumstances:

and:

In the view of Canada, the reasons advanced by the Department of Commerce in the Notice of Initiation did not constitute special circumstances justifying the self-initiation of an investigation. If the US softwood lumber industry could be injured by the termination of the MOU, there was ample provision within the Agreement for this well-organized industry (which had already submitted petitions in two previous cases) to request the initiation of a countervailing duty investigation. As well, the claimed lack of information and the hypothetical supposition that provincial legislation might change were not special circumstances.

91. Canada noted that in the Notice of Initiation mention had been made of "the special circumstances resulting from Canada's breach of the agreement between the two governments which had resulted in execution of the MOU and termination of the CVD investigation." ²⁸ However, the MOU had constituted the whole of the agreement and had not referred to any previous agreement. The MOU had been terminated by Canada in full compliance with its provisions.

92. Canada further argued that, while the Department of Commerce had explained in the Notice of Initiation that special circumstances warranting the self-initiation of a countervailing duty investigation did not exist with respect to the Maritime Provinces because these Provinces had not been subject to the export charge, under the MOU since 1987 British Columbia had also been exempted from the payment of the export charge on softwood lumber products. On that basis, the same logic should apply to British Columbia as to the Maritime Provinces for purposes of defining whether "special circumstances" warranting self-initiation of a countervailing duty investigation existed. Yet, the United States had capriciously decided that "special circumstances" existed for British Columbia but not for the Maritime Provinces.

93. Finally, Canada argued that the claim of the United States that "special circumstances" existed warranting the self-initiation of the entire countervailing duty investigation could not apply to measures affecting the export of logs. Such measures had not been subject to the MOU concluded in December 1986 and the alleged "violation" of this MOU therefore could not justify the invocation of "special circumstances" to allow for the self-initiation of a countervailing duty investigation with regard to these measures.

94. The United States argued that the unilateral termination by Canada of the MOU on softwood lumber had constituted "special circumstances" within the meaning of Article 2:1 of the Agreement. The Notice of Initiation of the countervailing duty investigation had specified that this termination would deny the US softwood lumber industry the offset against injurious subsidies and would deny both the United States Government and the US industry the ability to determine whether the timber fee increases instituted in some Canadian Provinces to replace or reduce the export charge would remain in place, because the exchange of information provided for under the Memorandum of Understanding would be terminated. In fact, the consultations had proven an important aspect of the MOU, particularly with respect to British Columbia, in the five years of the MOU. Canada's argument that the US industry itself could have filed a countervailing duty petition ignored the extremely short lead time that would have been available to the industry to prepare a petition in a situation where subsidised imports had already been preliminarily determined to be causing material injury. Also, unlike the typical countervailing duty case, in this case the Department of Commerce already had in its possession sufficient information concerning the subsidy and injury factors. Also, unlike in the typical situation, requiring the industry to present such information would have been unnecessary and would merely have delayed the initiation of the proceedings for no reason. Moreover, the industry already had presented a petition; imposing the burden of a new petition on the industry when the Department had possessed sufficient evidence to initiate an investigation would have been absurd. In short, in this special situation, the Department of Commerce had been in the best position to seek expeditious initiation of a countervailing duty investigation.

95. In response to Canada's argument that no "special circumstances" could have existed to warrant self-initiation of an investigation with respect to imports from British Columbia, the United States argued that Canada was incorrect in arguing that British Columbia and the Maritime Provinces should have been treated identically. The Maritime Provinces had never been subject to obligations under the MOU, while exports from British Columbia initially had been subject to export charges under the Memorandum and subsequently had been subject to replacement measures. These replacement measures were instituted under the terms of the MOU, were subject to the monitoring and enforcement provisions of the MOU and could be removed or offset following Canada's termination of the MOU. The United States also noted that it had not self-initiated a case against Canadian log export restrictions. The MOU explicitly treated the provinces differently.

96. Canada noted that, during the negotiations on the Agreement on Implementation of Article VI of the General Agreement (1967) the United States had taken the position that the "special circumstances" under which self-initiation of an anti-dumping duty investigation could take place existed when the domestic industry lacked sufficient knowledge or sufficient resources and organization to acquire the knowledge that dumping was the cause of its difficulties. ²⁹ In the proceedings before this Panel the United States had argued that "special circumstances" existed for self-initiation because termination of the MOU on softwood lumber would deny US producers the "offset against injurious subsidies" under the Memorandum, and would deny the US Government the information to determine whether British Columbia and Quebec would roll back their replacement measures under the Memorandum of Understanding. Additionally, the United States had provided several purported reasons why US domestic producers were not in a position to submit a petition for the initiation of a countervailing duty investigation. Canada considered that the first two stated reasons were not pertinent since they did not address why the US Government, rather than the US domestic producers, should be responsible for preparing the basis on which to initiate an investigation into any injurious subsidies which might exist. By the reasoning followed by the United States - that there must be immediate protection against any possible subsidies which might exist currently or in the future - the rule on "special circumstances" would completely overwhelm the normative rule under the General Agreement that countervailing duty investigations would be initiated only upon industry petition.

97. The United States observed that the rationale for self-initiation that an industry lacked resources was not a sole basis for 'special circumstances' and could not be such. In addition, the Agreement did not require 'special circumstances' which prevented effective filing of a petition by domestic producers, although such circumstances did exist in this case.

98. Canada further argued in this context that there had been no "special circumstances" which prevented US domestic producers from filing a countervailing duty petition. First, US lumber producers were very well organized, and had access to a wide array of information maintained in the ordinary course by numerous government agencies and trade associations. US producers had twice previously submitted petitions sufficient to launch countervailing duty investigations. The provision in the MOU requiring advance notice of termination had provided an opportunity for US domestic producers to prepare a petition, Second, while the United States had referred to the fact that there had been an affirmative preliminary determination of subsidisation in October 1986, following the conclusion of the MOU the United States had declared this determination to be without legal force and effect. To attempt to resuscitate this determination after the MOU had been executed and relied upon by the parties and then faithfully terminated according to its provisions, was to ignore common principles regarding the interpretation and application of treaties. Third, the argument that US domestic producers already had submitted a petition was unavailing. The domestic producers had withdrawn their petition on 30 December 1986. The letter in which this withdrawal had been announced was expressly without prejudice to the petitioner's right to file another petition in respect of the same Canadian acts and practices at any time. Finally, the United States' self-serving declaration that it already had in its possession information concerning the subsidy and injury factors presumed the answer to questions which Canada had requested the Panel to address and could not provide an independent basis for ignoring the petition requirements of the Agreement.

99. The United States submitted that the Agreement did not define the term "special circumstances". Furthermore, the position adopted by the United States during the negotiations in the Kennedy Round simply provided one example concerning 'special circumstances' in an anti-dumping proceeding. Because no universally accepted definition of the phrase 'special circumstances' existed, a signatory's interpretation of that term was necessarily subject to a case-by-case analysis based upon a standard of reasonableness. In this regard, Canada had failed to demonstrate that the interpretation espoused by the United States in this case somehow was unreasonable or otherwise conflicted with an express provision of the GATT texts. For these reasons, Canada's arguments necessarily failed.

100. Canada noted that the last sentence of Article 2:1 of the Agreement set out the conditions for the self-initiation of a countervailing duty investigation as follows:

While there was no definition in the Agreement of what constituted "sufficient evidence" in countervailing duty investigations undertaken in response to petitions from industry, logically a higher standard of "sufficient evidence" was required for self-initiated investigations. This was reflected in the exceptional nature of self-initiation, which could take place only "in special circumstances" and "only if" sufficient evidence was possessed. Article 2:1 required that a self-initiating government could proceed only if it had "sufficient evidence". The standard of "sufficient" was its plain language meaning of "that amount of proof which ordinarily satisfies an unprejudiced mind". ³⁰ Canada considered that "evidence" in the context of Article 2:1 must be relevant, i.e. bear a logical relationship to the existence of (a) subsidy, (b) injury and (c) causality according to the meanings found in the Agreement.

101. The United States considered that the plain language of Article 2:1 did not support the view that a higher standard of "sufficient evidence" applied to cases of self-initiation of countervailing duty investigations. This provision allowed for self-initiation of an investigation subject to two conditions: the existence of "sufficient evidence" of the existence of a subsidy, injury and causality and the existence of "special circumstances". While the terms "sufficient evidence" and "special circumstances" had not been defined and thus remained ambiguous, what was not ambiguous was that the first requirement for self-initiation was that there be "sufficient evidence". Elementary rules of legal construction indicated that the drafters of the Agreement would not have used the term "sufficient evidence" to mean one thing in the third sentence of Article 2:1 and something entirely different in the fourth sentence of that provision. There was no support for the proposition that the "special circumstances" referenced in Article 2:1 of the Agreement in fact established a higher "sufficient evidence" standard for self-initiation. The plain meaning of the "special circumstances" prong of the rule regarding self-initiation was that the self-initiation option was one that could be applied only in "abnormal" circumstances. Thus, this term related to the circumstances surrounding the initiation of an investigation, not to the standard of evidence. Once the "special circumstances" criteria were met, there was no reason for a higher standard of "sufficient evidence".

102. The United States noted that, while the term "sufficient evidence" had been left undefined in Article 2:1, the context of the term indicated that the drafters intended it to mean evidence sufficient to establish a basis for investigation: in other words, evidence which provided "a reason to believe" that subsidies were being provided which were causing threatening injury to a domestic industry. ³¹ This standard was also applied by Canada in initiations of countervailing duty cases. A similar standard had been applied around the world. In any case, the US initiation easily satisfied Canada's proposed higher standard.

TO CONTINUE WITH MEASURES AFFECTING IMPORTS OF SOFTWOOD LUMBER FROM CANADA

²² SCM/136/Add.4, 26 March 1992, p.4 and p.8.

²³ SCM/136/Add.4, 26 March 1992.

²⁴ 52 Fed.Reg., 5 January 1987, p.233.

²⁵ Steel Import Stabilisation Act of 1984, 19 U.S.C. S 2253 note.

²⁶ 56 Fed.Reg., 31 October 1991, p.56056.

²⁷ 56 Fed.Reg., 31 October 1991, p.56056.

²⁸ 56 Fed.Reg., 31 October 1991, p.56056.

²⁹ Anti-Dumping Checklist: Comments by the United States (Sub-Committee on Non-tariff Barriers Group on Anti-Dumping Policies) TN.64/NTB/10/Add.3 (28 April 1966) p.7.

³⁰ Black's Law Dictionary.

³¹ 19 US Code of Federal Regulations, Section 355.12.

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