• "such information as may be presented to it by the administering authority as to the nature of the subsidy (particularly as to whether the countervailable subsidy is a subsidy described in Article 3 or 6.1 of the Subsidies Agreement), and whether imports of the subject merchandise are likely to increase." 19 U.S.C. Section 1677(7)(F)(i)(I) ("Nature of the subsidy" threat factor);
   
• "any existing unused production capacity or imminent, substantial increase in production capacity in the exporting country indicating the likelihood of substantially increased imports of the subject merchandise into the United States, taking into account the availability of other export markets to absorb any additional exports." 19 U.S.C. Section 1677(7)(F)(i)(II) ("Capacity" threat factor);
   
• "a significant rate of increase of the volume or market penetration of imports of the subject merchandise ind icating the likelihood of substantially increased imports." 19 U.S.C. Section 1677(7)(F)(i)(III) ("Volume" threat factor);
   
• "whether imports of the subject merchandise are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices, and are likely to increase demand for further imports." 19 U.S.C. Section 1677(7)(F)(i)(IV) ("Price" threat factor);
   
• "inventories of the subject merchandise." 19 U.S.C. Section 1677(7)(F)(i)(V) ("Inventory" threat factor); and
   
• "the actual and potential negative effects on the existing development and production efforts of the domestic industry, including efforts to develop a derivative or more advanced version of the domestic like production." 19 U.S.C. Section 1677(7)(F)(i)(VIII) ("Development and production" threat factor).

In addition, in predicting that imports from Canada were likely to increase substantially – a finding central to its affirmative threat determination -- the Commission evaluated the following factors¹²³:

• export orientation of Canadian producers to the U.S;
   
• effects of the expiration of the Softwood Lumber Agreement ("SLA");
   
• subject import trends during periods when there were no import restraints; and
   
• forecasts of strong and improving demand in the U.S. market.

All of these factors are analyzed below to determine whether the Commission's affirmative threat determination is supported by substantial evidence. Further, we also consider whether the Commission ensured that the threatened injury is "by reason of" subject imports, and that it did not attribute to subject imports threatened injury from other sources in finding that subject imports threaten to cause material injury. See 19 U.S.C. Section 1677(7)(F)(ii).

In undertaking this analysis, this Panel notes that it must be "especially vigilant" in reviewing the Commission's affirmative threat determination because "the Commission's inquiry by its very nature endeavors to predict events that have not yet occurred." Suramerica de Aleaciones Laminadas, C.A. v. United States, 818 F. Supp. 348, 353 (Ct. Int’l Trade 1993), aff'd, 44 F.3d 978 (Fed. Cir. 1994) We are also guided in this endeavor by the holding in Dastech International, Inc. v. United States, 963 F. Supp. 1220 (Ct. Int’l Trade 1997) where the court stated:

 Despite the deference that this court must give the ITC's determination the court's review is neither passive nor powerless. . . . A court does not depart from its proper function when it undertakes a study of the record, hopefully perceptive, even as to the evidence on technical and specialized matters, for this enables the court to penetrate to the underlying decisions of the agency, to satisfy itself that the agency has exercised a reasoned discretion, with reasons that do not deviate from or ignore the ascertainable legislative intent. The deference owed to an expert tribunal cannot be allowed to slip into a judicial inertia.

Dastech, 963 F. Supp. at 1222-1223 (citations omitted).

3. Analysis

a) Threat Factors Mandated By Statute

i. Nature of The Subsidy Threat Factor

The statutory threat factor regarding the nature of the subsidy requires that the Commission assess (a) “such information as may be presented to it by the administering authority as to the nature of the subsidy (particularly as to whether the countervailable subsidy is a subsidy described in Article 3 or 6.1 of the Subsidies Agreement) and (b) whether the imports of the subject merchandise are likely to increase”. See 19 U.S.C. Section 1677(7)(F)(i)(I) (emphasis added).

In this instance the “administering authority” is Commerce. As acknowledged by the Commission, “Commerce provided the Commission with two sources of information regarding the nature and effects of the countervailable subsidies: (1) its final countervailing duty determination; and (2) the Issues and Decision Memorandum supporting its countervailing duty determination”¹²⁴. In the Issues and Decisions Memorandum, Commerce specifically made no finding regarding the “effects” of the countervailable subsidies. Commerce stated,

[w]hile we agree with the respondents that the statute does not prohibit the Department from considering whether a subsidy has market-distorting effects, we are also mindful of the need to balance administrative burdens, the effective enforcement of the law, and the ability to complete our investigations within strict statutory time limits. In light of the complexity of the respondents’ proposal, the burden that it would place on the Department, and the need to complete this investigation in a timely manner, we have determined that it would not be justified for the Department to depart from its well- settled practice of not considering the effects of the subsidy in question.”¹²⁵

Commerce further explained in its Issues and Decisions Memorandum that the governing statute did not require Commerce to make a finding regarding the effects of countervailable subsidies.¹²⁶.

The information that Commerce did provide regarding the nature of the subsidies as stated in the Final Determination is as follows:

“In its final countervailing duty determination, Commerce determined that there were 11 programs that conferred countervailable subsidies to Canadian producers and exporters of softwood lumber, including: the Provincial Stumpage programs in the Provinces of Quebec, British Columbia, Ontario, Alberta, Manitoba and Saskatchewan; two programs administered by the Government of Canada; two programs administered by the Province of British Columbia, and one program administered by the Province of Quebec. Final Determination at 39.

The Commission acknowledged that Commerce did not find any of the countervailing subsidies that were subsidies described in Article 3 or Article 6.1 of the WTO Subsidies Agreement. Final Determination at 39.

We have discussed and approved as adequate, supra, the Commission’s consideration of the arguments put forth by Complainants concerning the nature of the subsidy. The Panel therefore upholds the Commission’s treatment of this statutory threat factor. However, since the Commission failed to reach a conclusion, this factor does not support any conclusion in the threat of injury determination. The Coalition acknowledges that this becomes a neutral point in the threat of injury determination.¹²⁷

Consequently, the Panel confirms that with respect to the statutory nature of the subsidy threat factor, there is no finding requiring the support of substantial evidence.

ii. Capacity Threat Factor

The statutory threat factor regarding capacity requires the Commission to assess whether either (a) "any existing unused production capacity" or (b) "imminent, substantial increase in production capacity" in Canada, indicates "the likelihood of substantially increased imports of the subject merchandise into the United States, taking into account the availability of other export markets to absorb any additional exports." See 19 U.S.C. Section 1677(7)(F)(i)(II) (emphasis added).

As to the issue of whether "any existing unused production capacity" in Canada indicates "the likelihood of substantially increased imports of the subject merchandise into the United States, taking into account the availability of other export markets to absorb any additional exports," the Commission never found that this was the case. The Commission cited to Table VII-1 of the Staff Report which indicated that the unused Canadian production capacity in 2001 was 16.3 percent. Final Determination at 40. The Commission also cited to Table VII-2 of the Staff Report which indicated that unused production capacity was forecasted to fall to 11.5 percent in 2002 and to 9.6 percent in 2003. Final Determination at 40. However, the Commission failed to tie this existing unused production capacity to "the likelihood of substantially increased imports of the subject merchandise into the United States, taking into account the availability of other export markets to absorb any additional exports." All the Commission said on this point is that "despite the excess capacity already available in 2001 as capacity utilization declined to 83.7 percent, Canadian producers expect to further increase their ability to supply the U.S. softwood lumber markets." Final Determination at 40 (emphasis added) (citing Table VII-2 of the Staff Report). That "Canadian producers expect to further increase their ability to supply the U.S. softwood lumber markets" falls far short, in our opinion, of the conclusion that the existing unused production capacity indicates "the likelihood of substantially increased imports." Moreover, the Commission's finding that "Canadian producers expect to further increase their ability to supply the U.S. softwood lumber markets," is undermined by its own staff's findings in Table VII-2 which shows Canadian exports to the United States falling from 60.9 percent in 2001 to 58.8 percent in 2002 and to 58.5 percent in 2003. Tellingly, Table VII-2 also shows Canadian exports to other export markets concomitantly increasing from 7.8 percent in 2001 to 8.4 percent in 2002, and then to 8.8 percent in 2003.

Because existing Canadian unused production capacity was predicted to decline, and Canadian exports to the United States were predicted to fall (with exports to other export markets predicted to increase) we find that there is no support on the record to show that "existing unused production capacity" in Canada indicates "the likelihood of substantially increased imports of the subject merchandise into the United States, taking into account the availability of other export markets to absorb any additional exports."

As to whether the existence of "imminent, substantial increase in production capacity" in Canada indicates "the likelihood of substantially increased imports of the subject merchandise into the United States, taking into account the availability of other export markets to absorb any additional exports," the Commission never found that there was, in fact, an "imminent, substantial increase in production capacity" in Canada." The Commission did note, in citing to Table VII-2 of the Staff Report, that "Canadian producers projected additional capacity increases." Final Determination at 40. However, an analysis of the "projected additional capacity increases" shows that such increase is less than 1 percent –an increase that may not, in our mind, be fairly characterized as "imminent" and "substantial," and which the Commission did not deem to be "imminent" or "substantial." Specifically, Canadian producers projected an increase in capacity from 2001 to 2002, according to Table VII-2 of the Staff Report, of 0.72 percent (from 25,804 mmbf to 25,990 mmbf). Likewise, Canadian producers' projected capacity increase from 2002 to 2003 comprised 0.83 percent (from 25,990 mmbf to 26,206 mmbf).¹²⁸

Other record evidence also fails to show an "imminent, substantial increase in production capacity" in Canada. A July 2001 RISI report entitled "North American Lumber Yearbook," showed that Canadian producers' capacity as a whole would decrease 180 million board feet from 2001 to 2002 – from 32.82 billion board feet to 32.64 billion board feet -- and then increase 40 million board feet from 2002 to 2003 – from 32.64 billion board feet to 32.68 billion board feet -- for a net loss over the two- year period of 140 million board feet.¹²⁹ Accordingly, the record does not support the finding that there was an "imminent, substantial increase in production capacity" in Canada.

In light of the above, considering that (a) there is no support on the record to show that "any existing unused production capacity" in Canada indicates "the likelihood of substantially increased imports of the subject merchandise into the United States, taking into account the availability of other export markets to absorb any additional exports," and (b) the record does not show that there was an "imminent, substantial increase in production capacity" in Canada, we hold that the Commission's finding that the capacity threat factor indicates a threat of material injury is not supported by substantial evidence.
 

iii. Volume Threat Factor

The threat factor regarding volume requires the Commission to assess whether there has been "a significant rate of increase of the volume or market penetration of imports of the subject merchandise indicating the likelihood of substantially increased imports." See 19 U.S.C. Section 1677(7)(F)(i)(III). In the Final Determination, the Commission's discussion of this threat factor was limited to the following two sentences:

The volume of subject imports from Canada increased by 2.8 percent from 1999 to 2001. As a share of apparent domestic consumption, subject imports from Canada increased from 33.2 percent in 1999 to 34.3 percent in 2001. Final Determination at 41. As set forth in the Staff Report, imports from Canada increased from 17,983 mmbfs in 1999 to 18,483 mmbfs in 2001, a 2.8 percent increase. See Staff Report at Tables IV-1 and C-1.

In addition, in its discussion of finding no present material injury, the Commission noted the "relatively stable market share maintained by subject imports over the period of investigation." Final Determination at 35.

We note that the Commission's findings that the volume increased 2.8 percent, and a "relatively stable market share [was] maintained by subject imports over the period of investigation," does not equate to the Commission finding– nor a claim that it found – "a significant rate of increase of the volume or market penetration" that 19 U.S.C. Section 1677(7)(F)(i)(III) requires to permit an inference of "the likelihood of substantially increased imports." Final Determination at 36.¹³⁰ The record evidence relied upon by the Commission that is before this Panel is simply devoid of any support for the proposition that there has been "a significant rate of increase of the volume or market penetration of imports of the subject merchandise." This is indicated by the Commission’s brief before this Panel wherein it asserts that "Complainants also ignore the fact that the Commission's finding of a likelihood of substantially increased imports was supported by six subsidiary findings and not only by the increase in imports during the period of investigation."¹³¹ We interpret this statement by the Commission as at least a tacit admission that its argument that a "significant rate of increase of the volume or market penetration of the imports" indicates "the likelihood of substantially increased imports" may not succeed. That being said, the Commission apparently invites the Panel to consider the other five subsidiary findings¹³² to find that the Commission's prediction that imports from Canada were likely to increase substantially – a finding central to its affirmative threat determination – is supported by substantial evidence.

Although no judicial precedent provides guidance to the Panel as to what constitutes "a significant rate of increase," a statutory provision does serve that purpose. Specifically, 19 U.S.C. Section 1677(24)(A)(i) states that "imports from a country of merchandise corresponding to a domestic like product identified by the Commission are 'negligible' if such imports account for less than 3 percent of the volume of all such merchandise imported into the United States." 19 U.S.C. Section 1677(24)(A)(iv), entitled Negligibility in threat analysis, states that the Commission must determine that imports will increase by more than 3 percent for such imports not to be negligible. ("The Commission shall not treat imports as negligible if it determines that there is a potential that imports from a country . . . will imminently account for more than 3 percent of the volume of all such merchandise imported into the United States."). In this regard, the Commission, in Hydraulic Magnetic Circuit Breakers from South Africa, recently acknowledged that imports that account for less than 3 percent of all such merchandise imported into the United States shall be deemed negligible. The Commission stated: "By statute, imports from a subject country corresponding to a domestic like product that account for less than three percent of all such merchandise imported into the United States during the most recent 12 months for which data are available . . . shall be deemed negligible." Hydraulic Magnetic Circuit Breakers from South Africa, Inv. No. 731-TA- 1033 (Preliminary), Pub. 3600 June 2003 at 8.

Notwithstanding that 19 U.S.C. Section 1677(24) is not directly on point, the Panel considers it to be a useful analogy to demonstrate that the 2.8 percent increase in volume in subject imports is neither significant nor substantial. Accordingly, we hold that the Commission's finding that the volume threat factor indicates threat of material injury is not, without further explanation, supported by substantial evidence.

iv. Price Threat Factor

The threat factor regarding price requires the Commission to assess "whether imports of the subject merchandise are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices." See 19 U.S.C. Section 1677(7)(F)(i)(IV) (emphasis added). Based on the "are entering at prices" language, the plain meaning of this statutory provision requires the Commission to assess the available record evidence regarding the current prices of the subject merchandise, and based on current prices, make a reasoned prediction about the likely future effect of imports on domestic prices, viz., whether the current prices of the imports that are entering will result in price depression and/or price suppression. Hence, the focus of this statutory provision is on actual current prices for predicting future price effects.

In this case, the Commission explicitly acknowledged that it lacked sufficient record evidence regarding the current prices at which subject imports "are entering" from which it could draw conclusions regarding any likely current effect on domestic prices, much less any likely future effect on domestic prices. Based on current prices, the Commission made the following statements in which it affirmatively asserted that it could not draw conclusions regarding the subject merchandise's likely current effect on domestic prices:

• "We cannot draw any conclusions regarding underselling from the questionnaire [pricing] data in these investigations." Final Determination at 33;
   
• "[D]espite our best efforts and those of parties to these investigations, we cannot determine based on this record, whether there has been significant underselling by subject imports." Final Determination at 33;
   
• "[T]he Commission was unable to confirm any of the nineteen lost sales or twenty-three lost revenue allegations contained in the petitions." Final Determination at 33, n.206; and
  
• "[W]e cannot conclude from this record that the subject imports had a significant price effect during the period of investigation." Final Determination at 33, n. 206, Final Determination at 35.

Conceding that, based on current prices, it could not draw conclusions regarding the subject merchandise's likely current effect on domestic prices, the Commission did not attempt to draw any conclusions, based on current prices, regarding the subject merchandise's likely future effect on domestic prices. Rather than arriving at its conclusion that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices" based on the current prices of the subject merchandise, the Commission reached this conclusion based on (a) "likely significant increases in subject import volumes," and (b) its finding of "at least moderate substitutability between subject imports and domestic product." Final Determination at 43-44. As the Commission stated:

[A]dditional subject imports will increase the excess supply in the market, putting further downward pressure on prices. Given our finding of likely significant increases in subject import volumes, and our finding of at least moderate substitutability between subject imports and domestic product, we conclude that subject imports are likely to have a significant price depressing effect in the future. Therefore, we find that subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices . . . . Final Determination at 43-44 (emphasis added)

Hence, the Commission reached its conclusion that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices," not based on current prices, but rather on its findings of significant increases in volumes and moderate substitutability. However, since the focus of this threat factor is on the prices at which imports are currently entering – and not volume and/or substitutability – we hold that the Commission's finding that the price threat factor indicates threat of material injury is not supported by substantial evidence.

Furthermore, even if the focus of this statutory threat factor was properly on volume and/or substitutability, we find that the Commission's conclusion that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices" would still not be supported by substantial evidence.

As to volume, as the CLTA correctly notes, the Commission made no finding, and based on the record evidence upon which the Commission relied, had no basis to find, that the increase in imports from Canada would outstrip the "strong and improving demand" that it found in the U.S. market.¹³³ As indicated by the Commission's present injury finding as to price effects, unless the increase in imports from Canada would outstrip the "strong and improving demand" in the U.S. market – viz., unless the market share held by imports from Canada was likely to increase significantly – the future "significant price depressing effect" predicted by the Commission, (Final Determination at 43-44), would not occur.

In its present injury finding as to price effects, the Commission stated that "we cannot conclude from this record that the subject imports had a significant price effect during the period of investigation," even though "subject imports maintained a significant share of the U.S. market, accounting for at least one-third of apparent consumption in each year during the period of investigation . . . [and] . . . this substantial volume of subject imports has had some effect on prices." Final Determination at 35, 43. The Commission also noted that the market share held by Canadian imports during the period of investigation was "relatively stable." Final Determination at 35. Therefore, just as no significant present price effect occurred during the period of investigation while Canadian market share remained "relatively stable," no future significant price effect would be likely if the Canadian share continued at the same level, even if imports were to increase in absolute terms. At most, we find that there would be a preservation of the status quo.

Accordingly, even if the focus of the price threat factor was on volume, the Commission's lack of any finding that the increase in imports from Canada would outstrip the "strong and improving demand" that it found in the U.S. market renders the Commission's conclusion that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices" to be unsupported by substantial evidence.

As to substitutability, the Commission failed to consider whether, and to what extent, its predicted increase in imports from Canada would likely serve segments of the U.S. market where purchasers do not consider Canadian and U.S. lumber to be close substitutes, thereby possibly minimizing the potential for imports to cause significant price depression. The Commission itself found only "at least a moderate degree of substitutability," (Final Determination at 43), and there is considerable record evidence indicating that many purchasers do not consider Canadian and U.S. lumber to be close substitutes. For example, record evidence shows that so-called "Big Boxes" – the large retail stores such as The Home Depot and Lowe's – do not consider Canadian and U.S. lumber to be close substitutes. Stephen P. Conwell, Global Product Merchant, Lumber, for The Home Depot, so testified as follows:

One type of lumber cannot be substituted for the other. Sales of Canadian lumber are not displacing sales of domestic lumber because the two types of lumber meet different needs. There is plenty of wood in the open market today. There is not plenty of our wood – the quality we need on a consistent basis. We require Canadian wood to provide that quality and consistent supply. (emphasis added).¹³⁴

Further, we find the Commission's finding that "prices of different species affect the prices of other species," (Final Determination at 43) to be contradicted by the record evidence before us. The Commission relied on public pricing information from public sources such as Random Lengths to support this finding. Final Determination at 43, n. 273. Tellingly, the Commission conceded that such public pricing information did not yield valid comparisons among species. Final Determination at 33. The Commission acknowledged that this was the case because "[p]rices change frequently, as often as on an hourly basis, based on the grade and dimension, seasonal demand, access to timber supplies, weather, expected future market conditions, and the strength of competition among various softwood species within a particular region." Final Determination at 33.

In light of the Commission's finding of only "at least a moderate degree of substitutability," and the record evidence indicating that purchasers do not consider Canadian and U.S. lumber to be close substitutes, even if the focus of the price threat factor was on substitutability, the Commission's failure to consider whether, and to what extent, its predicted increase in imports from Canada would likely serve segments of the U.S. market where purchasers do not consider Canadian and U.S. lumber to be close substitutes, also makes the Commission's conclusion that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices" unsupported by substantial evidence.

To the extent that the Commission, in fact, reached its conclusion that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices," based on factors other than current prices of the subject merchandise, we hold that this conclusion is unsupported by substantial evidence for another reason, to wit: the Commission failed to address the significance of its own acknowledgement that there has been "substantial and increasing integration in the North American lumber market." Final Determination at 27. If considered by the Commission, this "substantial and increasing integration in the North American lumber market" may be found to have an impact on any threat of future price effects, and therefore, any threat of material injury. This is particularly so, since the Commission also found that "U.S. producers import or purchase a sizable volume of subject imports." Final Determination at 27. We also note in this regard that the Commission did not explain the significance of its own acknowledgement that there has been "substantial and increasing integration in the North American lumber market." Final Determination at 27.

Finally, we reject the Commission's argument raised in its brief before this Panel that it relied on price trends in concluding that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices."¹³⁵ We find the Commission's argument here to be nothing more than a post-hoc rationalization. Nowhere in the Final Determination's discussion of the price threat factor is there any mention of price trends. The Commission simply did not rely on price trends in its discussion of the price threat factor. Rather, as stated above, the Commission reached its conclusion that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices" based on (a) "likely significant increases in subject import volumes," and (b) its finding of "at least moderate substitutability between subject imports and domestic product." Thus, volume and substitutability – not price trends – were the bases the Commission relied upon in reaching its conclusion that "subject imports from Canada are entering at prices that are likely to have a significant depressing or suppressing effect on domestic prices."

v. Inventories Threat Factor

The statutory threat factor regarding inventories requires that the Commission consider "inventories of the subject merchandise." See 19 U.S.C. Section 1677(F)(i)(V).

The Commission's consideration of this threat factor in its Final Determination amounted to the following statement:

While inventories generally are not substantial in the softwood lumber industry, Canadian producers' inventories as a share of production [a] increased and [b] were consistently higher than that reported by U.S. producers during the period of investigation. Final Determination at 44.¹³⁶

Thus, the Commission in its Final Determination made two findings with regard to inventories: (1) Canadian producers' inventories as a share of production increased during the period of investigation; and (2) Canadian producers' inventories as a share of production were consistently higher than that reported by U.S. producers during the period of investigation. For the reasons explained below, the Panel finds that neither of these findings support the Commission's finding that the inventories threat factor indicates threat of material injury.

In terms of the finding that Canadian producers' inventories as a share of production increased during the period of investigation, the record indicates that Canadian producers' inventories as a share of production increased from 9.6 percent in 1999 to 10.6 percent in 2000.¹³⁷ From 2000 to 2001, however, Canadian producers' inventories as a share of production decreased from 10.6 percent to 10.2 percent.¹³⁸ Moreover, Canadian producers’ inventories as a share of production were projected to decrease from 10.2 percent in 2001 to 9.3 percent in 2002, and again decrease from 9.3 percent in 2002 to 9.1 percent in 2003.¹³⁹ Thus, to the extent that the Commission did not find the increase in Canadian producers’ inventories as a share of production from 1999 to 2000 sufficient to establish present material injury, the Commission should have, at minimum, explained how the projected decreases in Canadian producers’ inventories as a share of production figure in its affirmative threat finding. Its failure to do so results in its consideration of the inventories threat factor being unsupported by substantial evidence.

In terms of the finding that Canadian producers' inventories as a share of production were consistently higher than that reported by U.S. producers during the period of investigation, the Commission does not explain the relevance of this comparison and why the slightly higher ratio of inventories to production in Canada visà- vis that in the United States during the period of investigation was rationally connected to its affirmative threat finding. This failure to do so again results in its consideration of the inventories threat factor as being unsupported by substantial evidence. While we do not understand the relevance of this comparison and why it matters to the threat analysis that Canadian producers' inventories as a share of production were higher than that reported by U.S. producers during the period of investigation, during which time there was no present material injury, it may well be that the comparison is in fact relevant. The Commission will have the opportunity to explain the relevance of the comparison, if any, upon remand.

The Panel holds that the Commission’s finding that the inventories threat factor indicates threat of material injury is not supported by substantial evidence. We reach this conclusion based upon the Commission’s failure to explain the relevance of projected decreases in Canadian producers’ inventories, as a share of production, as well as the lack of explanation as to why the slightly higher ratio of inventories to production in Canada, vis-à-vis the United States, during the period of investigation, was rationally connected to its affirmative threat finding.

vi. Development and Production Threat Factor

The threat factor regarding U.S. development and production requires that the Commission consider "the actual and potential negative effects on the existing development and production efforts of the domestic industry, including efforts to develop a derivative or more advanced version of the domestic like product." See 19 U.S.C. Section 1677(7)(F)(i)(VIII) (emphasis added).

The Commission's consideration of this threat factor in its Final Determination was set forth in the following statement:

Finally, a number of domestic producers reported actual and potential adverse effects on their development and production efforts, growth, investment, and ability to raise capital due to subject imports of softwood lumber from Canada. Final Determination at 44.

The Commission cites, in support for this statement, to Appendix G of the Staff Report which contains anecdotal comments of U.S. producers.

In terms of "actual" negative effects on the existing development and production efforts of the domestic industry, the Commission asked the following question in its questionnaire: "Since January 1, 1998, has your firm experienced any actual negative effects on its return on investment or its growth, investment, ability to raise capital, existing development and production efforts (including efforts to develop a derivative or more advanced version of the product), or the scale of capital investments as a result of imports of softwood lumber from Canada? "¹⁴⁰

APO INFORMATION DELETED

To the extent that the Commission did not find the responses to this question sufficient to establish present material injury, we question how the very same claims by the very same U.S. producers alleging the very same effects of subject imports are sufficient to support an affirmative threat finding.

In terms of "potential" negative effects on the existing development and production efforts of the domestic industry, the Commission asked the following question: "Does your firm anticipate any negative impact of imports of softwood lumber from Canada?"¹⁴¹

APO INFORMATION DELETED

Accordingly, based on the foregoing, and the fact that the Commission stated in its brief before this Panel that it "chose not to rest its threat determination on this factor,"¹⁴² we find that the Commission's observation regarding this threat factor is entitled to little weight.

b) Other Threat Factors

A finding central to the Commission's affirmative threat determination was that "subject imports are likely to increase substantially." Final Determination at 40. The Commission based this finding on six factors. Two of the six factors (those related to capacity and volume) were considered above. See discussion of statutory capacity threat factor at Section IV(E)(3)(a)(ii) of this opinion and discussion of volume threat factor at Section IV(E)(3)(a)(iii) of this opinion. The remaining four factors (export orientation of Canadian producers to the U.S., effects of the expiration of the SLA, subject import trends during periods when there were no import restraints, and forecasts of strong and improving demand in the U.S. market) are considered below.

i. Export Orientation of Canadian Producers To The U.S.

A factor that the Commission cited in support of its finding that "subject imports are likely to increase substantially," was "the export orientation of Canadian producers to the U.S. market." Final Determination at 40. However, the Commission's finding as to the export orientation of Canadian producers to the U.S. market was limited to a single sentence in the body of the Final Determination. This sentence reads:

Canadian producers are predominantly export-oriented toward the U.S. market, with exports to the United States accounting for 68 percent of their production in 2001. Final Determination at 41.

The footnote accompanying this sentence cites Tables VII-2 and VII-7 of the Staff Report, and notes that "exports to the United States increased from 13,021 mmbf in 1999 to 13,041 mmbf in 2000, and to 13,546 mmbf in 2001, and are projected to increase to 13,660 mmbf in 2002, and 13,954 mmbf in 2003." Final Determination at 41, n. 258. Based on these figures, exports to the United States were projected to increase 0.84 percent from 2001 to 2002 (from 13,546 mmbf to 13,660 mmbf), and increase 2.15 percent from 2002 to 2003 (from 13,660 mmbf to 13,954 mmbf).¹⁴³ In addition, the footnote accompanying this sentence notes that as a share of total Canadian shipments, Canadian exports to the United States were projected to decrease from 60.9 percent in 2001 to 58.8 percent in 2002, and decrease from 58.8 percent in 2002 to 58.5 percent in 2003. Final Determination at 41, n. 258.

While the record reflects the historical export orientation of the Canadian producers to the U.S. market, clearly, the export data do not indicate any "substantial" increase in the export orientation of Canadian producers to the U.S. market. At most, the record indicates a minimal increase in absolute Canadian exports to the United States. The Commission, however, failed to explain how projected minimal increases in absolute Canadian exports to the United States, combined with projected decreases in the percentage of total Canadian shipments that were exported to United States, taking into account "the export orientation of Canadian producers to the U.S. market," provides support for its finding that "subject imports are likely to increase substantially." As a result, we conclude that the Commission's observation regarding "the export orientation of Canadian producers to the U.S. market" fails to advance its finding that "subject imports are likely to increase substantially."

ii. Effects of the Expiration of the Softwood Lumber Agreement

Another factor that the Commission cited in support of its finding that "subject imports are likely to increase substantially," was "the effects of expiration of the SLA." Final Determination at 40. As to the effects of expiration of the SLA, the Commission stated:

Each year during the pendency of the SLA, Canadian producers used all of their fee-free quota, all of their $50 fee quota, and imported some softwood lumber with $100 fees, suggesting that in the absence of the SLA they would have shipped more, given the near prohibitive level of the $100 fee. Even as demand leveled off during the period of investigation and prices declined substantially, subject imports continued to enter the U.S. market in quantities above the fee- free quota, incurring additional fees of $50 to $100 per mbf. But the SLA appears to have restrained the volume of subject imports from Canada at least to some extent as subject imports only increased by 8.8 percent and market share remained relatively constant while apparent consumption increased by 13.1 percent from 1995 to 2001. Moreover, during the pendency of the SLA, shipments from non-covered provinces to the United States more than doubled. Finally, anecdotal information reported to the Commission by importers of subject merchandise and Canadian producers regarding the effects of the SLA also supports a conclusion that it had some restraining effect on the volume of subject imports. Final Determination at 41 (emphasis added).

We conclude that the Commission's finding that "the effects of expiration of the SLA" advanced its ultimate finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence for the following reasons: (a) the Commission offered no explanation how the removal of a restraint that only "appears" to have restrained the volume of subject imports from Canada would be likely to result in a substantial increase in subject imports from Canada; (b) the Commission conceded that it incorrectly found that Canadian producers used "all of their $50 fee quota"; (c) the Commission failed to explain the consequences of its finding that "during the pendency of the SLA, shipments from non-covered provinces to the United States more than doubled" ; and (d) the Commission failed to consider anecdotal information on the record that "the effects of the expiration of the SLA" was a redistribution of imports from Canada as between covered and exempt provinces, and not a substantial increase in imports from Canada.

Each of these reasons is examined below.

a) The Commission Offered No Explanation As To How The Removal of a Restraint That Only "Appears" To Have Restrained The Volume Of Subject Imports From Canada Would Be Likely To Result In A Substantial Increase In Subject Imports From Canada

The Commission did not find that the SLA, in fact, restrained subject imports from Canada, so that the removal of the SLA would be likely to result in a substantial increase in subject imports from Canada. Rather, the Commission found that the SLA "appears" to have restrained the subject imports from Canada. Specifically, the Commission found that the SLA "appears to have restrained the subject imports from Canada at least to some extent as subject imports only increased by 8.8 percent and market share remained relatively constant while apparent consumption increased by 13.1 percent from 1995 to 2001." Final Determination at 41. ¹⁴⁴ The Commission never explains how the removal of a restraint that only "appears" to have restrained the volume of subject imports from Canada would be likely to result in a substantial increase in subject imports from Canada.¹⁴⁵ Without such an explanation, we find that the Commission's finding that "the effects of expiration of the SLA" advanced its finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence.

b) The Commission Conceded That It Incorrectly Found That Canadian Producers Used "All of Their $50 Fee Quota"

In its Final Determination, the Commission found that Canadian producers used "all of their $50 fee quota." Final Determination at 41. The Commission used this finding to support its conclusion that "in the absence of the SLA they [Canadian producers] would have shipped more [to the United States]." Final Determination at 41.

However, in its brief before this Panel, the Commission conceded that it erred in finding that the Canadian producers used "all of their $50 fee."¹⁴⁶ Nevertheless, the Commission argues in its brief before this Panel that this error does not negate its conclusion that "in the absence of the SLA they [Canadian producers] would have shipped more [to the United States].

" We reject the Commission's argument. The Commission's conclusion that "in the absence of the SLA they [Canadian producers] would have shipped more [to the United States]" is based, at least in part, on its finding that the Canadian producers used "all of their $50 fee quota." Since the finding that Canadian producers used "all of their $50 fee quota" is incorrect, the Commission, based on the correct facts, must explain whether its conclusion that "in the absence of the SLA they [Canadian producers] would have shipped more [to the United States]" is valid.  This is particularly so, since the record evidence indicates that Canadian producers in 2000-2001 used only 31.4 percent of their $50 fee quota, a far cry from the 100 percent that the Commission found in its Final Determination.¹⁴⁷ Since the Commission's conclusion that "in the absence of the SLA they [Canadian producers] would have shipped more [to the United States]," is based on an incorrect finding, we hold that the Commission's finding that "the effects of the expiration of the SLA" advanced its ultimate finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence.

c) The Commission Failed To Explain The Consequences Of Its Finding That "During The Pendency of the SLA, Shipments From Non-covered Provinces To The United States More Than Doubled"

In its Final Determination, the Commission found that "during the pendency of the SLA, shipments from non-covered provinces to the United States more than doubled." Final Determination at 41. As support for this proposition, the Commission notes in a footnote that "imports from the Maritime Provinces increased from 931 mmbf in 1996 to 2,130 mmbf in 2000, before declining to 1,841 mmbf in 2001. Thus, the subject imports from the Maritime Provinces increased by 129 percent from 1996 to 2000, and by 98 percent from 1996 to 2001." Final Determination at 41, n. 262 (citing Staff Report at Table IV-3).

The Commission, however, failed to explain how this dramatic increase in imports during the period of the SLA had some restraining effect on the overall volume of imports from Canada, so that the expiration of the SLA would result in a substantial increase in subject imports. We find that the Commission was required to tender such an explanation in light of record evidence indicating that the effect of the SLA was to redistribute imports from Canada from provinces covered by the SLA to provinces exempt from the SLA, without affecting the overall level of imports.¹⁴⁸

Without such an explanation, we find that the Commission's finding that "the effects of expiration of the SLA" advanced its ultimate finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence.

d) The Commission Failed To Consider Anecdotal Information On The Record That "The Effects Of The Expiration Of The SLA" Was a Redistribution of Imports From Canada Between The Covered And Exempted Provinces, And Not A Substantial Increase In Imports From Canada

In its Final Determination, the Commission concluded that "anecdotal information reported to the Commission by importers of subject merchandise and Canadian producers regarding the effects of the SLA also supports a conclusion that it had some restraining effect on the volume of subject imports." Final Determination at 41. The anecdotal information that the Commission relied upon for support of this conclusion is contained in Appendix E to the Staff Report. Final Determination at 41, n. 263. An examination of this anecdotal information reveals that much of it supports the proposition that the SLA did lead to a redistribution of imports among Canadian provinces, and that its expiration was returning provincial trade patterns to their pre-SLA state, while having no effect on overall import volumes from Canada. For example, APO INFORMATION DELETED asserted:

APO INFORMATION DELETED

See Confidential Staff Report at E-31.

Likewise, APO INFORMATION DELETED asserted:

APO INFORMATION DELETED

Id. at E-25-26.

Moreover, APO INFORMATION DELETED asserted:

APO INFORMATION DELETED

Id. at E-32.

Furthermore, APO INFORMATION DELETED asserted:

APO INFORMATION DELETED

Id. at E-28.

From the record before us, it is apparent that the Commission failed to address this anecdotal information supporting the proposition that the SLA led to a redistribution of imports among Canadian provinces, and that its expiration was returning provincial trade patterns to their pre-SLA state, while having no effect on overall import volumes from Canada. By failing to do so, we hold that the Commission's finding that "the effects of the expiration of the SLA" advanced its ultimate finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence.

Based on the foregoing reasons, we conclude that the Commission's finding that "the effects of expiration of the SLA" advanced its ultimate finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence.

iii. Subject Import Trends During Periods When There Were No Import Restraints

Another factor that the Commission cited in support of its finding that "subject imports are likely to increase substantially," was "subject import trends during periods when there were no import restraints." Final Determination at 40. As to this factor, the Commission stated in the body of its determination:

The evidence further demonstrates that imports of softwood lumber from Canada have increased during periods in which there were no restraints on their entry into the U.S. market, i.e., prior to the SLA between 1994 and 1996, and the period immediately after the SLA expired and before suspension of liquidation in these investigations. Subject imports from Canada held a 27.5 percent share of the U.S. softwood lumber market in 1991 when the Memorandum of Understanding (MOU) regarding softwood lumber from Canada that had been in effect since December 30, 1986 expired. During the ensuing CVD investigation before the Commission and the appeals of the affirmative determination before the U.S.-Canada Free Trade Agreement ("CFTA") panels, subject imports market share continued to increase. In August 1994, the appeals were terminated and imports of softwood lumber from Canada were not subject to any trade restraining measure until the SLA took effect in April 1996. The evidence shows that the subject import market share increased from 27.5 percent in 1991 to 35.9 percent in 1996. With the SLA in effect, the market share for softwood lumber from Canada declined to 34.3 percent in 1997 and remained fairly stable within a range of 2.7 percentage points. Finally, subject import increased during the period immediately after the SLA expired (April 2001) and before suspension of liquidation (August 2001). Subject imports of softwood lumber by volume for the period of April to August 2001 were higher than the comparable April-August period in each of the preceding three years (1998-2000) by a range of 9.2 percent to 12.3 percent. Final Determination at 42.

As the Commission notes, there were two periods of no import restraints. One period was "prior to the SLA between 1994 and 1996" (August 1994 to April 1996). The other period was "immediately after the SLA expired and before suspension of liquidation in these investigations" (April 2001 to August 2001). Final Determination at 42.

We conclude for the following reason that the Commission's finding that "subject import trends during periods when there were no import restraints" advanced its ultimate finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence: (a) the Commission failed to undertake an analysis of market conditions for the August 1994 to April 1996 period in using such import data to draw inferences about the likely future import trends after the period of investigation; (b) the August 1994 to April 1996 import data fail to support the inference that imports from Canada increased at a greater rate during the August 1994 to April 1996 "no restraint" period, than in periods with import restraints in place; and (c) the Commission failed to undertake an analysis to determine whether the increase in imports from April 2001 to August 2001 represents (1) a fair measure of the allegedly higher level of imports that would occur absent any restraint, or (2) a shift in timing of imports that otherwise would have been shipped to the United States.

Each of these reasons is examined below.

a) The Commission's Analysis of the August 1994 to April 1996 Time Period

In its Final Determination, the Commission relied on import data from the period August 1994 to April 1996 stating, "the evidence also shows that during the seven quarters between August 1994 and April 1996, subject imports market share increased from 32.6 percent in 3^rd quarter 1994 to 37.4 percent in 1^st quarter 1996." Final Determination at 42, n. 268. This Panel notes that the CLTA is correct in stating that the Commission cited no legal authority for the propriety of its reliance on 6-8 year old data well beyond the period of investigation to project the likely level of imports in the future.¹⁴⁹ Indeed, this flies in the face of decisions that have held that threat determinations must be based on current trends. See, e.g., Fresh, Chilled or Frozen Pork from Canada, USA-89-1904-11 at 18 (January 22, 1991) (noting that threat determinations must be based on "'identifiable and current trends' . . . to avoid a finding of threat based on 'conjecture and speculation.'"). In any event, the Commission failed to examine market conditions in the August 1994-April 1996 period. Without this examination, this Panel simply cannot accept the notion that just because there were no import restraints in the August 1994-April 1996 period, and imports increased from 32.6 percent to 37.4 percent during this period, it necessarily follows that imports are likely to increase substantially after the period of investigation.

In light of the above, the Panel finds the Commission's reliance on import data during the August 1994-April 1996 period to draw inferences about the likely future import trends after the period of investigation is unsupported by substantial evidence.

We note that even if the August 1994-April 1996 import data could be used to draw inferences about the likely future import trends after the period of investigation, we find that such data fail to support the inference that imports from Canada increased at a greater rate during the August 1994 to April 1996 "no restraint period," than in periods with import restraints in place. Indeed, the inferences in the record before the Commission point to the contrary inasmuch as such data show that the increase in imports during the August 1994-April 1996 period is merely a continuation of a growth trend observed over the 1991-1994 period, during which imports from Canada were restrained first by the Memorandum of Understanding and subsequently by the bonding and cash deposit requirements imposed in the prior Canadian lumber countervailing duty proceeding.

Specifically, the Commission relies on two documents to support its proposition that "[t]he evidence further demonstrates that imports of softwood lumber from Canada have increased during . . . [the period] . . . prior to the SLA between 1994 and 1996." Final Determination at 42, n. 264. One of these documents depicts the quarterly Canadian share of the U.S. market from the first quarter of 1994 through the second quarter of 2001,¹⁵⁰ and the second depicts Canadian share of the U.S. market on an annual basis from 1985 to 2001.¹⁵¹ When the document depicting the quarterly Canadian share of the U.S. market from the first quarter of 1994 through the second quarter of 2001 is extended back to 1991, however, and the vertical axis is rescaled to start at zero (instead of at 30 percent), it is apparent that the Canadian market share increase over the 1994-1996 period was a continuation of a trend observed over the 1991-1994 period.¹⁵² As pointed out by the CLTA, the document depicting the Canadian share of the U.S. market on an annual basis from 1985 to 2001 also shows that the Canadian market share increase over the 1994-1996 period was a continuation of a trend observed over the 1991- 1994 period.¹⁵³

Accordingly, the record evidence reflects that the continuing growth in import market share during the August 1994-April 1996 "no restraint period" was a continuation of growth from the 1991-1994 period, a period with import restraints in place. We, therefore, find that the August 1994-August 1996 import data fail to support the inference that imports from Canada increased at a greater rate during the August 1994 to April 1996 "no restraint period," than in periods with import restraints in place. Consequently, for this reason, too, the Panel also finds the Commission's reliance on import data during the August 1994-April 1996 period to draw inferences about the likely future import trends after the period of investigation is unsupported by substantial evidence.

b) The Commission's Analysis of the April 2001 to August 2001 Time Period

In its Final Determination, the Commission found that "[s]ubject imports of softwood lumber by volume for the period of April to August 2001 were higher than the comparable April-August period in each of the preceding three years (1998-2000) by a range of 9.2 percent to 12.3 percent." Final Determination at 42. However, the Commission did not explain whether the increase in imports from April 2001 to August 2001 represents (1) a fair measure of the allegedly higher level of imports that would arrive absent any import restraint, or (2) a shift in the timing of imports that otherwise would have been shipped to the United States because importers knew well in advance when the SLA would expire and when suspension of liquidation would begin, and had every incentive to delay or accelerate imports to avoid both SLA export fees and bonding requirements.¹⁵⁴ Without this analysis, this Panel cannot conclude that the increase in imports from April 2001 to August 2001 does, in fact, represent a fair measure of the allegedly higher level of imports that would occur absent any import restraint. This is particularly so, since record evidence does suggest that the increase in imports from April 2001 to August 2002 represents a shift in the timing of imports that otherwise would have been shipped to the United States because importers knew well in advance when the SLA would expire and when suspension of liquidation would begin, and had every incentive to delay or accelerate imports to avoid both SLA export fees and bonding requirement.¹⁵⁵

Accordingly, absent the Commission's analysis to determine the cause of the increase in imports from April 2001 to August 2001, the Panel finds the Commission's reliance on import data during the April 2001-August 2001 period to draw inferences about the likely future import trends after the period of investigation is unsupported by substantial evidence.

Based on the foregoing reasons, we conclude that the Commission's finding that "subject import trends during periods when there were no import restraints" advanced its ultimate finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence.

iv. Forecasts of Strong and Improving Demand in the U.S. market

Another factor that the Commission cited in support of its finding that "subject imports are likely to increase substantially," was "forecasts of strong and improving demand." Final Determination at 40. As to this factor, the Commission's discussion was limited to the following statement:

Demand for softwood lumber is forecast to remain relatively unchanged or increase slightly in 2002, followed by increases in 2003 as the U.S. economy rebounds from recession. Industry forecasts suggest slight growth in U.S. housing starts in 2002 and further increases in 2003. Thus, the United States will continue to be an important market for Canadian producers. Final Determination at 42-43.

The Commission fails to explain how strong and improving demand advances its finding that "subject imports are likely to increase substantially." Final Determination at 40. (emphasis added). This Panel cannot conclude, without further explanation from the Commission, how the Commission's finding that "the United States will continue to be an important market for Canadian producers" leads to its finding that "subject imports are likely to increase substantially." Final Determination at 40, 43 (emphasis added). Accordingly, we conclude that the Commission's finding that "forecasts of strong and improving demand" establishes its finding that "subject imports are likely to increase substantially," to be unsupported by substantial evidence.

F. Whether The Commission Ensured That The Threatened Injury Is "By Reason Of" Subject Imports, And That It Did Not Attribute To Subject Imports Threatened Injury From Other Sources In Finding That Subject Imports Threaten To Cause Material Injury

The Commission's evaluation of the mandatory threat factors set forth above is only the first step in its analysis in determining whether there exists a threat of material injury. The second step requires that the Commission ensure that, pursuant to 19 U.S.C. Section 1677(7)(F)(ii), the threatened injury is "by reason of" subject imports. As the Court of International Trade acknowledged in NEC Corp. v. Department of Commerce, 36 F.Supp.2d 380, 392 (Ct. Int’l Trade 1998), "after considering all relevant economic factors in making a determination of whether further dumped imports are imminent, the Commission must make an analytically distinct determination to comply with the 'by reason of' standard.'" See also SAA, reprinted in H.R. Doc. No. 103-316, at 851-52 (1994) ("[T]he Commission must examine other factors to ensure that it is not attributing injury from other sources to the subject imports."). As set forth below, we find that the Commission, in this case, failed to make this statutorily mandated "analytically distinct determination." We, therefore, remand this case for the Commission to make this determination, and ensure that the threatened injury is, in fact, "by reason of" subject imports.

In this case the record indicates that there were five factors that were identified which may have had a negative impact on the domestic industry that were entirely unrelated to the subject imports. Such potential factors were (1) the domestic industry itself; (2) third-country imports; (3) the growth of engineered wood products ("EWPs"); (4) constraints on domestic production/insufficient timber supplies in the U.S.; and (5) the cyclical nature of the softwood lumber industry. As we discuss below, for none of these potential factors did the Commission undertake an analysis to distinguish between the contribution to threat of injury caused by the dumped and subsidized goods and these potential factors unrelated to the subject imports.

1. The Commission's Lack Of Consideration of the Domestic Industry Itself

The Commission failed to undertake an analysis to distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat caused by the domestic industry itself. In its negative present injury analysis, the Commission noted that the price declines during the period of investigation were the result of a supply/demand imbalance, and "that both subject imports and the domestic producers contributed to the excess supply, and thus the declining prices." Final Determination at 34-35 (emphasis added). However, the Commission failed to analyze the domestic producers' contribution to the alleged threat of injury in reaching its affirmative threat finding. Indeed, in reaching its affirmative threat finding, the Commission ignored entirely the role of the domestic industry in its evaluation of future market conditions.¹⁵⁶ The Commission attempts to relieve itself of the obligation to analyze the role of the domestic industry in its threat of material injury discussion by asserting in its negative present material injury discussion that it found that the oversupply by domestic producers generally was curbed after 2000, but continued to be a problem for Canadian producers into 2001.¹⁵⁷ In footnote 217 of its Final Determination, the Commission quotes a Bank of America publication, "Wood and Building Products," at 11 (November 2001), stating:

The U.S. industry was widely criticized in years passed for lumber overproduction . . . . This behavior has been curbed considerably here, but remains a problem in Canada, where Provincial forestry officials must also protect pulp mill employment, which is the lifeblood of many small towns. However, as the Canadian softwood lumber industry ships 65% of its output to the U.S., its general failure to manage production to new order volumes and its capacity growth in its eastern provinces have both undermined prices in recent years. (emphasis added).

An analysis of the source document that the Commission quotes, however, discloses that what the Commission omitted by way of ellipses undermines its position that "oversupply by domestic producers generally was curbed after 2002." Without the ellipses, the relevant portion of the quoted material from "Wood and Building Products," states:

The U.S. industry was widely criticized in years passed for lumber overproduction in order to secure wood chips for pulp and paper manufacturing. This behavior has been curbed considerably here, but remains a problem in Canada, where Provincial forestry officials must also protect pulp mill employment, which is the lifeblood of many small towns.¹⁵⁸

In reviewing the complete language in this part of the administrative record, what was "curbed considerably" by domestic producers was overproduction in order to secure wood chips for pulp and paper manufacturing, and not the oversupply of softwood lumber for uses other than pulp and paper manufacturing.

When the record is correctly considered, footnote 217 of the Final Determination does not excuse the Commission from its obligation to analyze the role of the domestic industry in its discussion of threat of material injury.

2. The Commission's Lack Of Consideration of Third-Country Imports

Based upon the administrative record before us, this Panel finds that the Commission failed to undertake an analysis to determine whether third-country imports "may have such a predominant effect in producing the harm as to . . . prevent the [subject] imports from being a material factor" of threat of injury. Altx, Inc. v. United States, 2002 WL 1560884, at *18 (Ct. Int’l Trade July 12, 2002). In its negative present injury analysis, the Commission noted that although third-country imports were present in the U.S. market during the period of investigation, they never exceeded three percent of apparent domestic consumption during the period of review, and that they accounted for 6.9 percent of total U.S. imports of softwood lumber in 2001. Final Determination at 25, n. 152. However, the Commission failed to analyze the third-country imports contribution to threat of injury in reaching its affirmative threat finding. Instead, in reaching its affirmative threat finding, the Commission ignored entirely the likely future role of third-country imports and their potential contribution to threat of injury to the domestic industry.¹⁵⁹ The fact that third-country imports never exceeded three percent of apparent domestic consumption during the period of investigation, and the fact that they accounted for only 6.9 percent of the total U.S. imports of softwood lumber in 2001, did not excuse the Commission from analyzing the role of third-country imports in its threat of material injury discussion. This is particularly so since record evidence indicates that third-country imports have increased substantially in relation to U.S. production and to subject imports.¹⁶⁰ Table IV-2 of the Staff Report indicates that third-country imports rose dramatically through the 1990's, and more than doubled from 1998 to 2001 – rising from 647 million board feet in 1998 to 1,378 million board feet in 2001. Table IV-2 of the Staff Report indicates that the increase in third-country imports during the period of investigation – of 441 million board feet – approximately equaled the incremental increase in Canadian imports over the period of investigation, which increased 500 million board feet. Since, in the Commission's view set forth in its consideration of the threat factor regarding price, discussed above, it was the likely future incremental increase in imports from Canada that was likely to cause price depression, the Commission was required, in light of the record evidence, to analyze the role of thirdcountry imports in its threat of material injury discussion.

3. The Commission's Lack Of Consideration of The Growth of Engineered Wood Products ("EWPs")

Based upon the administrative record before us, this Panel also finds that the Commission failed to undertake an analysis to distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat caused by the growth of engineered wood products ("EWPs"). In its negative present injury analysis, the Commission noted that although EWPs may substitute for softwood lumber and have "increased in importance over the last few years," they still account "for a small share of the market traditionally utilizing softwood lumber." Final Determination at 23-24. Because the Commission concluded that EWPs account "for a small share of the market traditionally utilizing softwood lumber," the Commission failed to analyze the growth of EWP's contribution to threat of injury in reaching its affirmative threat finding. Instead, in reaching its affirmative threat finding, the Commission ignored entirely record evidence reflecting the likely growth of EWPs and their potential contribution to threat of injury to the domestic industry.¹⁶¹ The fact that the Commission found in its present injury analysis that EWPs account "for a small share of the market traditionally utilizing softwood lumber," does not excuse the Commission from analyzing the growth of EWPs in its threat of material injury discussion. This is especially so since record evidence indicates that EWPs have experienced substantial growth, and it is predicted that the growth in EWPs will continue into the future. For example, between 1992 and 2000, EWP production grew 150 percent, and this trend is predic ted to continue for the foreseeable future.¹⁶² The record indicates rapid growth in the use of EWPs such as wooden I-joists, glued laminated lumber, and laminated veneer lumber and that such growth will continue at least until 2005.¹⁶³

In light of this record evidence that indicates the recent growth in EWPs and the projected growth in EWPs in the future, the Commission should have analyzed the growth of EWPs in its threat of material injury discussion.

4. The Commission's Lack Of Consideration of Constraints On Domestic Production/Insufficient Timber Supplies in the U.S.

In reaching its negative present material injury finding, the Commission found that "[a]pparent domestic consumption exceeds domestic production capabilities." Final Determination at 24. However, in its threat analysis, we find, based upon the record before us, that the Commission failed to analyze the record evidence that insufficient domestic production capabilities – resulting from insufficient timber supplies in the United States – apparently constrain the U.S. producers' ability to supply the U.S. market. The Panel considers this to be an important factor inasmuch as the effect of continued insufficient timber supplies would appear to insulate the U.S. producers from a threat of future injury.

5. The Commission's Lack Of Consideration Of The Cyclical Nature of the Softwood Lumber

Finally, based upon the administrative record before this Panel, we find that the Commission failed to undertake an analysis to distinguish between the potential contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat caused by the cyclical nature of the softwood lumber industry, which is primarily a function of housing construction cycles. In its negative present injury analysis, the Commission alluded to the cyclical nature of the softwood lumber industry, stating:

Demand for softwood lumber is derived primarily from demand for construction uses, including new home construction, repairs and remodeling, and commercial construction . . . . These end use demands for softwood lumber are determined by such factors as the general strength of the overall U.S. economy (measured by the growth of GDP), with residential construction also affected by the level of long-term and home mortgage interest rates. During the period of investigation, domestic softwood lumber consumption remained relatively level, and housing starts declined overall but remained at historically high levels despite low mortgage rates and continued increases in real GDP. Final Determination at 23.

In its threat analysis, however, the Commission failed to analyze the cyclical nature of the softwood lumber industry. Although the Commission notes in its threat analysis that "[i]ndustry forecasts suggest slight growth in U.S. housing starts in 2002 and further increases in 2003," Final Determination at 42, as the Canadian Parties assert, the Commission does not distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the potential contribution to threat caused by the cyclical nature of the softwood lumber industry. ¹⁶⁴

6. Conclusion to Sections E & F

The Panel is particularly troubled by the extensive lack of analysis undertaken by the Commission of the factors applicable to a determination of whether there is a threat of material injury to the domestic softwood lumber industry. This has inexorably led us to the opinion that the Commission did not exercise "special care" in making its threat determination in this case. To the contrary, the Commission made its threat determination on the basis of considerable speculation and conjecture, the result of which conflicts not only with the agency's statutory mandate, but also with the rationale underlying its present material injury determination, as well as the record evidence. See 19 U.S.C. Section 1677(7)(F)(ii); SAA, reprinted in H.R. Doc. No. 103.

The Commission, both in its briefs to this Panel and its presentation at the hearing in this matter, frequently invoked Dastech Int'l, Inc. v. USITC, 963 F. Supp. 1220 (Ct. Int’l Trade 1997) for the proposition that "the ITC is presumed to have considered all the evidence in the record. " Id. at 1226. We take a dim view of the Commission's consistent reliance upon Dastech in the face of the challenges to the many aspects of its threat determination which did not acknowledge, much less discuss, evidence specifically brought to its attention by an interested party. The following excerpt from the Court of International Trade's opinion in Usinor et al. v. United States, 2002 WL 1998315 (Ct. Int’l Trade July 19, 2002); Slip Op. 2002-70 resonates with the Panel's view of the Commission's threat determination in this case:

Regardless of any presumption in its favor, the Commission is in no way absolved under Dastech of its responsibility to explain or counter salient evidence that militates against its conclusions. The court is troubled by the repeated generic invocation of Dastech as a shield against examination of the Commission's failure to present required analysis of the record evidence. Dastech prefaces its entire discussion of this presumption with the requirement that the ITC present a "reviewable, reasoned basis" for its determinations and added that "[e]xplanation is necessary, of course, for this court to perform it statutory review function." Dastech Int'l, 21 CIT at 475, 963 F. Supp. at 1226 (quoting Bando Chem Indus., Ltd. v. United States, 17 CIT 798, 799 (1993). Moreover, Dastech cited Granges Metallverken AB, 716 F. Supp. 17, 13 CIT at 478, which states that "it is an abuse of discretion for an agency to fail to consider an issue properly raised by the record evidence" though there is no statutory requirement that the Commission respond to each piece of evidence presented by the parties. Id. (emphasis added) (citing Timken Co., v. United States, 10 CIT 86, 97, 630 F. Supp. 1327, 1337-38 (1986), rev'd in part, Koyo Seiko Co. v. United States, 20 F. 3d 1156 (Fed. Cir. 1994)). Dastech also cites Roses, Inc. v. United States, 13 CIT 662, 720 F. Supp. 180 (1989), which indicates that the presumption the agency has considered all the evidence is rebuttable and that "the burden is on the plaintiff to make a contrary showing." Id. at 668 (citations omitted).

Moreover, the Commission's responsibility to answer to evidence that undermines the Commission's findings and conclusions has recently been reiterated by the court in ALTX, Inc. v. United States, 167 F. Supp.2d 1353 (Ct. Int’l Trade 2001). In that case, the Commission was made aware of certain key evidence, but declined to discuss it, instead including only superficial mention of that evidence in its final determination. This court ultimately found the determination unsupported by substantial evidence:

The Final Determination merely cites to record evidence containing data on subject import indicators throughout the POI. This off-handed reference to annual data cannot, by itself, constitute an acknowledgement of Plaintiff's arguments, much less a reasoned explanation for discounting them, as the statute requires. Furthermore, whatever discretion the Commission may have to reject deliberately the conclusions found in the agency's Staff Report, it may not through its silence simply ignore a Staff Report analysis that contradicts the Commission's own conclusions where an interested party has specifically brought the possibly conflicting evidence to the agency's attention.

Id. at 1359 (emphasis added).

While the ITC need not address every argument and piece of evidence, it must address significant arguments and evidence which seriously undermines its reasoning and conclusions. When considered individually, every discrepancy discussed here might not rise to the level of requiring reconsideration of the overall disposition, but taken as a whole, the court finds that the ITC decision is not substantially supported and explained.

Id. at 1373 (emphasis added) (footnotes omitted).

Usinor at *14.

That being said, the Panel is especially mindful of the considerable deference that it must accord the Commission in its deliberations underlying the Final Determination. Nonetheless, we are not "powerless", nor will we be "passive" in our "study of the record" and evaluating whether the Commission "has exercised a reasoned discretion." See Dastech, 963 F. Supp. at 1222-1223.

Based on the foregoing, we conclude that the Commission's holding that the domestic softwood lumber industry is threatened with material injury by reason of allegedly subsidized imports and allegedly dumped imports from Canada is unsupported by substantial evidence and not in accordance with law.

Accordingly, the Commission is instructed to undertake the remand based on the evidence in the administrative record in accordance with this Panel’s holdings set forth above, and is further instructed as follows:

(1) The Commission should consider in its analysis of whether there is a threat of material injury to the domestic softwood lumber industry all of the information and data that it considered in its present material injury determination.

 (2) The Commission should consider in its threat analysis the potential negative effects on the existing development and production efforts of the domestic industry, including efforts to develop a derivative or more advanced version of the domestic like product.

(3) The Commission should undertake an analysis to distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat caused by the domestic industry itself.

(4) The Commission should undertake an analysis to determine whether third country imports "may have such a predominant effect in producing the harm as to . . . prevent the [subject] imports from being a material factor" of threat of injury.

(5) The Commission should undertake an analysis to distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat caused by engineered wood products.

(6) The Commission should undertake an analysis of the fact that there are constraints on domestic production of softwood lumber in order to distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat of injury caused by the fact that there are insufficient timber supplies in the United States.

(7) The Commission should undertake an analysis to distinguish between the threat of injury caused by the dumped and subsidized imports and the potential contribution to threat caused by the cyclical nature of the softwood lumber industry.
 

IV. CONCLUSION

Applying the standard of review as set forth in this opinion, the Panel’s conclusions are summarized in the following remands and affirmances. All remands shall be conducted based on the evidence in the administrative record.

A. REMANDS

(1) The Commission’s threat of material injury determination is hereby remanded and on remand the Commission should consider, in its analysis of whether there is a threat of material injury to the domestic softwood lumber industry, all of the information and data that it considered in its present material injury determination.

In the course of its analysis, the Commission is also directed to:

(a) Consider in its threat analysis the potential negative effects on the existing development and production efforts of the domestic industry, including efforts to develop a derivative or more advanced version of the domestic like product.

(b) Undertake an analysis to distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat caused by the domestic industry itself.

(c) Undertake an analysis to determine whether third country imports "may have such a predominant effect in producing the harm as to . . . prevent the [subject] imports from being a material factor" of threat of injury.

(d) Undertake an analysis to distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat caused by engineered wood products.

(e) Undertake an analysis of the fact that there are constraints on domestic production of softwood lumber in order to distinguish between the contribution to threat of injury caused by the dumped and subsidized imports and the contribution to threat of injury caused by the fact that there are insufficient timber supplies in the United States; and

(f) Undertake an analysis to distinguish between the threat of injury caused by the dumped and subsidized imports and the potential contribution to threat caused by the cyclical nature of the softwood lumber industry.

(2) The Panel remands the Commission's holdings that square-end bed frame components and flangestock are part of the single domestic like product for the continuum of species that comprise softwood lumber and instructs the Commission on remand to consider, based on the existing record evidence, all six like product factors to determine whether square-end bed frame components and flangestock are part of a continuum of softwood lumber products defined as a single domestic like product.

(3) The Panel remands the Commission’s decision to cross-cumulate in the context of a threat of material injury determination and instructs the Commission to reconsider its interpretation of the statute with respect to cross-cumulation in the context of a threat determination and, applying the fresh interpretation, reach an appropriate conclusion. In revisiting the questions of how to interpret and apply the statute, the Commission should consider the relevant arguments of the parties and should reach a reasoned conclusion.

B. AFFIRMANCES

1) In light of the fact that the Commission analyzed all six like product factors, in light of the record evidence, the Commission's considerable discretion to determine the domestic like product, and the fact that there is substantial evidence on the record to support the Commission's holdings that WRC and EWP are part of the single domestic like product for the continuum of species that comprise softwood lumber, the Panel affirms the Commission's holdings as to WRC and EWP.

2) The Panel finds that the Commission’s interpretation of the statute with respect to the Maritime Provinces is reasonable, supported by substantial evidence and otherwise in accordance with law, and affirms its finding that it did not have authority to treat the Maritime Provinces as a “country” entitled to a separate injury determination.

3) The Panel concludes that, as a matter of United States law, in finding threat of material injury, the Commission was not required to determine that the threat of material injury was caused through the effects of subsidies or of dumping.

4) The Panel concludes that the introductory language of Section 1677(F)(i), directing the Commission to consider “[the] relevant economic factors” in assessing a threat of material injury case, imposes on the Commission an obligation to consider any pertinent information concerning the nature of the subsidy and its likely effects that is presented to it, whether by Commerce or the parties. The Panel finds that the Commission did “consider” the nature of the subsidy and its likely trade effects and affirms that the Commission fulfilled its statutory burden in this regard.

The Commission is directed to report its Determination on Remand within one hundred (100) days from the date of this decision. Any participant thereafter wishing to challenge the Determination on Remand shall file such challenge within the time prescribed in Rule 73 of the Rules of Procedure for Article 1904 Binational Panel Reviews, and further proceedings, if necessary, shall be conducted in accordance with said Rule 73.
 

Dated: September 5, 2003

1 The panelists wish to express their appreciation for the excellent support received from Panelist Assistants Mark Leventhal, Esq., Nick Ranieri, Esq. and Ivan Krmpotic, Esq.

2 Softwood Lumber from Canada, Inv. Nos. 701-TA-414 and 731-TA-928 (Final), USITC Pub. 3509 (May 2002, 67 Fed. Reg. 36,022 (Int’l Trade Comm’n May 22, 2002) (“Final Determination”). This decision is published in both a public and confidential version. This is the public version of the opinion from which confidential information has been deleted as noted. In order to minimize lengthy citations, this opinion does not cite to the public or confidential record throughout but in instances where specific references to detailed information appears.

3 Softwood Lumber Agreement Between the United States of America and the Government of Canada, May 29,1996, 35 I.L.M. P.R. List 1 47 (Vol. 2, Ex. 3)(“SLA”).

4 Petitions for the Imposition of Antidumping and Countervailing Duties: Certain Softwood Lumber Products from Canada, Vol.1.IA (April 2, 2001) (“Petition”) The briefs filed by the parties to the Commis sion proceeding are identified as the Prehearing or Posthearing Briefs heretofore