UNITED STATES - PRELIMINARY DETERMINATIONS
WITH RESPECT TO CERTAIN SOFTWOOD LUMBER
FROM CANADA

Report of the Panel

(Continued) 

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

A. CANADA

3.1 Canada requests the Panel to:

• find that the Preliminary Countervailing Duty Determination of the United States in the softwood lumber case violates Articles 10, 14, 17.1, 17.2, 17.5, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994;

• find that the Preliminary Critical Circumstances Determination of the United States in the softwood lumber case violates Article 17.1(b), 17.3, 17.4, 17.5, 19.4 and 20.6 of the SCM Agreement and Article VI:3 of GATT 1994;

• find that US countervailing duty law regarding expedited and administrative reviews and the application of that law in the Lumber IV investigation violate Articles 10, 19.3, 19.4, 21.2 and 32.1 of the SCM Agreement and that as a result, the United States has failed to ensure that its laws, regulations and administrative procedures are in conformity with its WTO obligations as required by Article XVI:4 of the WTO Agreement and Article 32.5 of the SCM Agreement; and

• recommend that the United States bring its measures into conformity with the SCM Agreement and the WTO Agreement, including by lifting the suspension of liquidation for the period of 19 May through 16 August 2001, and making company-specific expedited and administrative reviews available to exporters and producers subject to any countervailing duty order that may be issued as a result of the Lumber IV investigation.

B. UNITED STATES

3.2 The United States requests that the Panel reject Canada's claims in their entirety.

IV. ARGUMENTS OF THE PARTIES

4.1 The arguments of the parties are set forth in their written and oral submissions to the Panel, and in their answers to questions. The parties' arguments as presented in their submissions are summarized in this section. Summaries of the parties' written answers to questions are set forth in the Annexes to this report (see list of annexes at page ).

A. FIRST WRITTEN SUBMISSION OF CANADA

4.2 The following are Canada's arguments in its first written submission.

4.3 At issue in this dispute are the preliminary countervailing duty determination (the "preliminary determination") and the preliminary critical circumstances determination made by the USDOC on 9 August 2001, with respect to certain softwood lumber from Canada, which violate US obligations under the SCM Agreement and GATT 1994. Also at issue is the denial of company-specific expedited reviews and administrative reviews under US countervailing duty law, which violates US obligations under the SCM Agreement and the WTO Agreement.

1. The Preliminary Countervailing Duty Determination

4.4 In the preliminary countervailing duty determination, the USDOC concluded that "provincial stumpage programmes" in Quebec, British Columbia, Ontario, Alberta, Manitoba and Saskatchewan are countervailable subsidies. It determined (a) that stumpage is the "provision of a good or service", (b) based on a "cross-border" analysis of "benefit", that the stumpage programmes were subsidies to softwood lumber producers, and (c) that the alleged subsidies were specific. It assumed that the benefit was passed through to certain producers. Of the 19.31 per cent country-wide subsidy rate calculated by the USDOC, a full 19.21 per cent is attributed to these "stumpage programmes".

4.5 The USDOC's findings and determinations and the provisional measures imposed as a result are inconsistent with US obligations under the SCM Agreement and GATT 1994. Specifically: (a) the Canadian practices in question are not "subsidies" as defined in Article 1 of the SCM Agreement, (b) the USDOC impermissibly inflated the alleged subsidy rate by calculating a country-wide rate based on only a portion of Canadian production and exports of softwood lumber; and (c) the USDOC impermissibly inflated the provisional measures imposed by applying them on an entered value after having calculated the subsidy rate using a first mill value. Although Canada is not making submissions regarding the USDOC's preliminary finding of specificity, Canada does not accept that finding as correct⁵.

4.6 The Canadian practices are not "subsidies" because: (a) "stumpage" is not a "financial contribution" within the meaning of Article 1.1(a) of the SCM Agreement; (b) the USDOC's determination and measurement of a "benefit" is based on a "cross-border" methodology that is not permitted by the SCM Agreement; and (c) the USDOC's determination assumes holders of harvesting rights pass through an alleged benefit to softwood lumber producers, without any basis for the assumption.

4.7 "Stumpage" is not a "financial contribution". Most forest land in Canada is publicly owned "Crown" land. As stewards of this land, Federal and provincial governments manage forestry resources not for the benefit of specific users, but for the country as a whole, and with a view to conservation and preservation of Canada's natural heritage for future generations. Forest resource management is, therefore, concerned with a range of economic and public interests and activities associated with forest lands. These include timber, trapping, fishing, recreation, water quantity and quality, wildlife habitat, wilderness and aesthetics and erosion control. The management of forestry resources related to timber harvesting is characterized by a system of interlocking rights and obligations between provincial and federal governments, and timber harvesters. This system of resource management is based most frequently on tenure and licensing agreements.

4.8 Tenure and licensing agreements vary from province to province, but they are all similar in that they are a complex bundle of rights and obligations, containing at a minimum: (a) the right to harvest standing timber on Crown land or "stumpage"; (b) service and maintenance obligations on the part of the concern, such as road-building and maintenance, and protection against fire; (c) implementation of forestry management and conservation measures, including silviculture and reforestation; and (d) payment of a volumetric "stumpage charge ", levied upon the exercise of the harvesting right.

4.9 "Stumpage", as a right to exploit an in situ natural resource, takes two forms in Canada: a servitude referred to as a profit � prendre and a licence to harvest standing timber. Both rights are in respect of specified provincial Crown lands. A profit � prendre is a form of property right that conveys a non-possessory interest in the land to the recipient. Similarly, a licence is a revocable right to do something on, or to the detriment of, the land of another that would otherwise not be permitted - in this case, the right to harvest standing timber. Other related forms of rights include: mineral servitudes, mineral entry, timber easements, licensing quotas to harvest fish, and rights of access to exploit inland water currents for use in irrigation or electrical power generation.

4.10 By the terms of Articles 10 and 32.1 of the SCM Agreement, to be countervailable a practice must satisfy the definition of "subsidy" in Article 1.1. Where an investigating authority determines the existence of a subsidy in respect of a measure that does not fit within the terms of Article 1, that determination is not in accordance with the terms of the SCM Agreement and is, accordingly, in violation of Articles 10 and 32.1 of the Agreement. Article 17.1(b) specifically provides that provisional measures may be imposed only if "a preliminary affirmative determination has been made that a subsidy exists". (emphasis added).

4.11 Article 1 of the SCM Agreement sets out an exclusive definition for what constitutes a subsidy for the purposes of the SCM Agreement. The Appellate Body recognized in Brazil - Export Financing Programme for Aircraft that a subsidy as defined by Article 1 has two discrete elements: (i) a financial contribution that (ii) confers a benefit. The panel in Export Restraints noted that the definition of "subsidy" in Article 1 reflects the Members' agreement not only as to the types of government action subject to the SCM Agreement, but also that not all government actions that may affect the market come within the ambit of the SCM Agreement.

4.12 Under Article 1.1(a)(1)(iii) of the SCM Agreement, a financial contribution exists where a government provides goods. The ordinary meaning of "goods" is "tangible or movable personal property other than money; [especially] articles of trade or items of merchandise �goods or services�". Nothing in the context of the SCM Agreement in any way detracts from or expands this ordinary meaning. A good is a good, a product, something on the cross-border trade of which tariffs may be imposed.

4.13 This is confirmed by the negotiating history related to the measurement of a benefit. On 4 September 1990, the Chairman of the Negotiating Group on Subsidies and Countervailing Measures circulated seven "informal discussion papers" in preparation for issuing a revised version of the Chairman's text. Discussion Paper No. 6 dealt with the measurement of the amount of a subsidy and offered draft language for the current Article 14. Draft Article 14.4(a), as set out in Discussion Paper No. 6, reflects an understanding at the time of the negotiations on the SCM Agreement of the fundamental difference between tangible commercial inputs and intangible real property rights. This draft provided in relevant part that "the amount of subsidy arising from government provision of goods, services, or extraction/harvesting rights �" (emphasis added). The terms "or extraction/harvesting rights" are nowhere found either in the final text of Article 1.1(a)(1)(iii) or in the final text of Article 14(d) of the SCM Agreement. This confirms that rights, such as profits � prendre, are not included within the scope of the Agreement.

4.14 The USDOC simply asserted that stumpage is a financial contribution in the form of a provision of goods or services. It did not declare itself as to whether, in its view, stumpage is the provision of "goods" or "services". The petitioner in Lumber IV , however, has argued that stumpage is the provision of goods ("wood fiber") in the form of timber or logs. Canada therefore understands the USDOC to have determined that stumpage is "the provision of goods".

4.15 The USDOC also made no attempt to examine the evidence on the record and did not analyse how property rights, such as profits � prendre and timber harvesting licenses, are a "financial contribution" under Article 1.1. Properly understood, profit � prendre and the license to harvest standing timber is not the provision of "goods" within the meaning of Article 1. These rights are not in themselves goods or services. As a simple factual matter, "stumpage" - the right to harvest standing timber - is not a log. "Stumpage" is instead the right to exploit an in situ natural resource, akin to the right to extract oil and minerals from public lands, quotas to harvest fish from a country's territorial waters, or the right of access to exploit inland water and water currents for use in irrigation or electrical power generation. To determine otherwise is to expand the scope of "provides goods" and, therefore, the SCM Agreement beyond all recognition.

4.16 Timber harvesters have the right to harvest timber from Crown lands by virtue of their tenures or licenses; they do not pay stumpage charges as remuneration to acquire this right. Rather, a "stumpage charge" is a levy on the exercise of an existing right to harvest timber. It is properly viewed as a form of revenue collection by the government and is the economic equivalent of a tax.

4.17 The USDOC erred in determining that "stumpage" is a "financial contribution". On a plain reading of Article 1.1(a)(1)(iii), the term "provides goods" cannot be interpreted to include the granting of rights such as "stumpage". Since stumpage is not a "financial contribution" and, therefore, not a subsidy as defined in Article 1.1, the determination by the USDOC that it is a subsidy and the imposition of provisional countervailing measures as a result, violates Articles 10, 17.1(b), 17.5, 19.4 and 32.1 of the SCM Agreement and Article V1:3 of GATT 1994.

4.18 The USDOC's use of "cross-border" benchmarks to find and measure "benefit" violates the SCM Agreement. Nothing in the SCM Agreement permits the USDOC to do so; indeed, the text, context, and Appellate Body interpretations of Articles 1 and 14 indicate that such an analysis violates the SCM Agreement.

4.19 The USDOC purported to establish that Canadian stumpage practices conferred a benefit by comparing: stumpage charges levied by Canadian provinces with stumpage prices on selected state lands in the United States, on the basis that such prices are "commercially available world market prices�" to softwood lumber producers in Canada. The USDOC found US stumpage prices to be higher than the charges levied by Canadian provinces. the USDOC then multiplied this difference by what it considered the portion of the provinces' harvest consumed in sawmills to arrive at the calculated amount of the "stumpage subsidy". The "stumpage subsidy" was wholly derived from the comparisons of stumpage charges in Canada and cross-border prices for stumpage in the United States.

4.20 Article 1.1 of the SCM Agreement provides that a subsidy exists where there is a financial contribution by a government and "a benefit is thereby conferred". In Canada - Aircraft , the Appellate Body stated that "the word 'benefit', as used in Article 1.1(b), implies some kind of comparison� [since] there can be no "benefit" to the recipient unless the "financial contribution" makes the recipient "better off" than it would otherwise have been, absent that contribution." In the case of a government provision of goods, the question is therefore whether the purchaser of a good from the government is "better off" than other purchasers who buy the same good from other sellers in the country subject to the investigation.

4.21 This is confirmed by Article 14(d), which sets out guidelines to calculate the amount of a subsidy based on a "benefit to the recipient" test in cases of an alleged government provision of goods. It provides in particular that, "[t]he adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase" (emphasis added). The words of Article 14(d) are unambiguous. "In the country of provision or purchase" means "in the country of provision or purchase." It does not mean adequacy can be determined as against prevailing market conditions in some other country or internationally. Nothing in the context, object and purpose or the negotiating history of Article 14 permits reading "in" as anything other than "in"; "in the country" does not admit of "cross-border" analysis. A cross-border analysis using transactions in another country to determine the existence of and measure a "benefit" is thus inconsistent with Article 1 and Article 14 as interpreted by the Appellate Body, and viewed in context and in the light of the object and purpose of the SCM Agreement.

4.22 The USDOC's cross-border analysis is illogical even in the context of its own previous determinations. In each of the prior lumber cases �- Lumber I, Lumber II and Lumber III � the USDOC rejected the use of cross-border comparisons for a number of reasons, including the USDOC's view that they are "arbitrary and capricious".

4.23 By using a benchmark in the United States, outside the country of the alleged provision of goods, the United States breached its obligations under Article 14 of the SCM Agreement. The USDOC's finding of a subsidy based on criteria not permitted by the SCM Agreement is also inconsistent with US obligations under Articles 10, 17.5, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994. Furthermore, the United States violated Article 17.1 of the SCM Agreement by imposing provisional measures with respect to a practice that is not a subsidy.

4.24 The USDOC also impermissibly assumed a pass-through of an alleged benefit. In the preliminary determination, the USDOC found that the alleged "financial contribution" to timber harvesters conferred a benefit on softwood lumber producers. This presumption that the alleged benefit to timber harvesters passes through to lumber producers, without a determination that this did, in fact, occur, is inconsistent with the SCM Agreement.

4.25 In Canada, standing timber is harvested and processed into logs. Logs are then usually processed in sawmills and pulp mills to produce a wide variety of products including softwood lumber. Lumber may be sold as an end product or sold to remanufacturing industries that make a vast array of products. Both softwood lumber and remanufactured products, but not logs, are subject to the US investigation. A significant portion of harvesting is done by entities operating at arm's-length from lumber producers; in these instances, logs are sold to lumber producers and other industries in arm's-length transactions.

4.26 A countervailing duty may be imposed only where all the elements of a subsidy have been established. A subsidy is exhaustively defined in Article 1 of the SCM Agreement. A direct subsidy exists where a financial contribution confers a benefit to the recipient of that contribution. The criteria for an indirect subsidy are found in Article 1.1(a)(1)(iv) of that Agreement. In the context of Article 1.1(a)(1)(iii), i.e. where the alleged financial contribution is the government provision of goods, an indirect subsidy may be found only where a private entity is entrusted or directed by government to provide these goods in a manner that confers a benefit. Thus, where the recipient of a subsidy (whose products are not subject to the investigation) enters into transactions with other entities, an investigating authority may not assume that the subsidy has been passed on, or if so, that the recipient was entrusted or directed by government to pass it on. Rather, the authority must establish the existence of a subsidy in respect of the entity being investigated. This is especially the case where the transaction is at arm's-length.

4.27 The findings of the Appellate Body in British Steel are particularly relevant in this instance. There, the Appellate Body agreed with the Panel that "in order to determine whether any subsidy was bestowed on the production [of the subject merchandise], it is necessary to determine whether there was any "benefit" to [the recipient]." This included examining, on administrative review, the continued existence of any "benefit" already found to have been conferred by "financial contributions" pre-dating the privatization of the original recipient of those contributions. Moreover, this had to be done from the perspective of the producers of the imports subject to the review, not the producer that had been privatized prior to the review (i.e. whose imports were not subject to the review). Finally, in that case, the Appellate Body confirmed that where fair market value is paid on privatization, no previously conferred benefit could be passed through to the acquiring entity.

4.28 The Appellate Body's analysis in British Steel is even more apt in respect of original determinations where an investigating authority has the duty to establish each element of a subsidy. In such cases, the authority may find an "indirect" subsidy only where an indirect financial contribution has been found in the sense of Article 1.1(a)(1)(iv). The reason is simple. Where transactions take place in the market and at arm's-length, and where there has been no "direction" or "entrustment", the original recipient of a subsidy must be presumed to have retained the benefit. Conversely, to assume pass-through in such arm's-length transactions without establishing "direction" or "entrustment" in the sense of Article 1.1(a)(1)(iv) would nullify the clear meaning of that Article.

4.29 Since the USDOC did not do any indirect subsidy or pass-through analysis, its finding of "benefit" is, on its face, incorrect and illegal. In the current investigation there are no allegations of direct stumpage subsidies to the subject merchandise, softwood lumber. Softwood lumber is processed from logs, and logs from standing timber; neither logs nor timber are within the scope of the investigation. Logs result from the harvesting of timber - the subject matter of stumpage, which is the allegedly subsidized economic activity. The alleged subsidies therefore are on log production.

4.30 Lumber producers may not legally be deemed to be subsidized simply because of a finding of subsidization to upstream producers. Rather, to find that the downstream industries are subsidized, the USDOC must first establish an indirect financial contribution, and then demonstrate a benefit conferred upon the recipient by that contribution. The USDOC did not establish, as is required by the SCM Agreement, that any "financial contribution" by the government to timber harvesters had been "entrusted" or "directed" to be passed through to lumber producers or remanufacturers. It did not find that the alleged benefit of the financial contribution in question was also passed through to and conferred upon lumber producers or remanufacturers (the producers of the subject merchandise within the scope of the investigation). The USDOC did not provide any analysis of either requirement of Article 1 in respect of the merchandise on which it imposed a countervailing duty. A fortiori, remanufacturers who buy lumber from lumber producers may not legally be presumed to have benefited from an alleged stumpage subsidy two transactions away.

4.31 The USDOC has failed to establish the elements of a subsidy in respect of the subject merchandise by failing to demonstrate a pass-through of financial contribution and benefit. In imposing provisional measures on practices not properly found to be a subsidy, the United States has violated Articles 10, 17.1(b), 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994.

4.32 The USDOC also impermissibly inflated the subsidy rate by calculating a "weighted-average country-wide rate" based upon only a portion of Canadian production and exports. Having determined that various federal and provincial programmes were subsidies, the USDOC calculated the subsidy rate by 1) for each provincial stumpage programme, dividing the total calculated stumpage benefit by the total value of the province's production of softwood lumber and co-products by sawmills; and 2) for other provincial and federal programmes found to be countervailable, dividing the total calculated benefit by the value of sales (or exports, for an alleged export subsidy) of softwood lumber and co-products by sawmills for the relevant jurisdiction. In each case, the alleged benefit was the numerator, and the shipment value was the denominator of the calculation. The USDOC then weight-averaged the resulting provincial rates by the provinces' relative shares of exports to the United States to arrive at a "country-wide" rate. In these calculations, the USDOC impermissibly excluded Maritime shipments from the total Canadian shipments used as the denominator for calculating certain federal programme rates and excluded Maritime exports in weight averaging provincial rates to construct a country-wide rate.

4.33 Articles 17.2 and 19 (through Article 17.5) of the SCM Agreement, and Article VI:3 of GATT 1994 require the USDOC to estimate "the amount of the subsidy found to exist" so as to ensure it is representative of the actual subsidization. Accordingly, a "country-wide" countervailing duty rate must approximate the average rate of subsidization of the subject merchandise. This means that shipments of subject merchandise by any company in the country under investigation (including those companies that have been excluded from the investigation or countervailing duty order) must be included in calculating a country-wide rate. Exclusion of the Maritime Provinces' shipments and exports from the calculation results in imposition of provisional measures "in excess of the amount of the subsidy found to exist."

4.34 The impropriety of the USDOC's country-wide subsidy rate calculation becomes all the more evident when it is considered that the USDOC relied on import statistics that included imports from the Maritimes to find evidence of causation of material injury or threat of material injury sufficient to initiate the investigation. The USDOC cannot now credibly exclude these Maritime shipments from the subsidy calculation. Likewise, the International Trade Commission based its preliminary determination of threat of material injury on its analysis of total imports of softwood lumber from Canada, including the Maritime Provinces. Article 17.1(b) of the SCM Agreement requires that provisional measures may be applied only if "a preliminary affirmative determination has been made that a subsidy exists and that there is injury to a domestic industry caused by subsidized imports." Here, the ITC made no finding of injury based solely on the subnational group of imports on which the USDOC calculated provisional duties.

4.35 Since the preliminary determination inflates the weighted average country-wide subsidy rate in violation of Article 19.4 of the SCM Agreement and Article VI:3 of GATT 1994, the United States is also in violation of Articles 10 and 32.1 of the SCM Agreement.

4.36 The USDOC also impermissibly applied provisional measures in excess of the subsidy preliminarily found to exist. In its preliminary determination, the USDOC found a net subsidy rate of 19.31 per cent ad valorem and stated that it was directing the US Customs Service ("Customs") to suspend liquidation of entries of subject merchandise and to require a cash deposit or bond in the amount of the subsidy found. It did not in fact do so, however. Instead, the USDOC calculated the subsidy rate on a first mill basis, but applied it on an entered value basis, with the effect of significantly increasing the provisional measures applied to a considerable portion of Canadian exports of softwood lumber to the United States.

4.37 In all of the USDOC subsidy calculations, described above, the denominator of the calculation was the value of sawmill shipments or exports, i.e., the "first mill" value. Sawmills ("first mills") produce lumber from logs. They ship lumber to end users, and also sell some quantity of lumber to downstream value-added remanufacturers ("final mills") that use lumber inputs, produce further processed lumber products (of which some are within the scope of the investigation).

4.38 A USDOC decision memorandum subsequently claimed that "[t]he record for the Preliminary Determination supports the collection of CVD deposits on an entered value basis" and the USDOC instructions to Customs referenced in the preliminary determination instructed Customs to require countervailing duty cash deposits or the posting of a bond without specifying that such provisional measures applied to the first mill value, thus ensuring application on an entered value basis. Thus, for example, where a 19 per cent duty calculated on first mill value is applied to the entered value (and, for illustration, assuming an import with first mill value of $100 and final mill or entered value of $125), the importer of the value-added product faces an actual duty not of 19 per cent but of 23.75 per cent of the first mill value.

4.39 Articles 17.2 and 19.4 (through 17.5) of the SCM Agreement and Article VI:3 of GATT 1994 establish the fundamental obligation that a duty may not exceed the subsidy found to exist. In applying the preliminary determination on an entered value basis, the United States significantly increased the provisional measures in violation of Articles 17.2 and 19.4 of the SCM Agreement and Article VI:3 of GATT 1994.

2. The Preliminary Critical Circumstances Determination

4.40 Commerce also made a preliminary critical circumstances determination as a result, the United States retroactively applied the provisional measures to entries occurring within 90 days prior to the date of publication of the preliminary determinations, i.e. entries from May 19 through 16 August 2001. The retroactive application of provisional measures is inconsistent with US obligations under the SCM Agreement. Even if such action were permitted under the Agreement, Commerce's preliminary critical circumstances determination is itself inconsistent with US obligations under the SCM Agreement and GATT 1994.

4.41 Under Article 20.6, "critical circumstances" exist only where four conditions are satisfied: (1) there is injury to the domestic industry that is difficult to repair; (2) such injury is caused by massive imports in a relatively short period; (3) such imports are of a product benefiting from subsidies paid or bestowed inconsistently with the provisions of GATT 1994 and of the SCM Agreement; and (4) retroactive assessment of definitive countervailing duties on those imports is necessary to preclude the recurrence of such injury.

4.42 Even where these elements are present, Article 20.6 states that the type of duties that may be assessed are "definitive", not "provisional". The term "definitive" is defined as "having the function or character of finality" or "decisive", "conclusive" and "finally settled." Accordingly, the ordinary meaning of the provision prohibits any retroactive application of countervailing measures under the Article until after a final determination is made. This understanding of the meaning of the word "definitive" in Article 20.6 of the SCM Agreement is reinforced by the consistent distinction in the Agreement, for example in Articles 20.1 and 20.3, and 22.4 and 22.5, between "provisional measures" on the one hand and "countervailing duties" or "definitive duties" on the other hand. Despite the clear application of Article 20.6 to definitive countervailing duties and not provisional measures, Commerce acted otherwise.

4.43 In its preliminary critical circumstances determination and related analysis, Commerce preliminarily determined that there had been "massive imports" of a product benefiting from a prohibited export subsidy. For Commerce, this was a sufficient basis to apply countervailing measures retroactively. Commerce recognized that the ITC had not considered (even preliminarily) the injury factors required to be considered under Article 20.6 of the SCM Agreement, and that "[f]or purposes of a final determination whether retroactive relief is warranted, other factors are considered by the ITC in its final determination". Nonetheless, Commerce applied its preliminary critical circumstances determination on a provisional basis. Since Article 20.6 permits the retroactive application of only definitive countervailing duties, and not provisional measures, for the reasons set out above, the United States has violated this provision.

4.44 Moreover, since the investigation was initiated on 23 April 2001, Article 17.3 requires that provisional measures in this case not be applied sooner than 22 June 2001. However, the United States applied provisional measures as of 19 May 2001. Article 17.3 thus not only confirms that Article 20.6 does not permit the retroactive application of provisional measures, but to the extent the United States has applied such measures sooner than 22 June 2001, it has also violated Article 17.3 outright.

4.45 Similar inconsistencies result under Article 17.4. This provision states that "[t]he application of provisional measures shall be limited to as short a period as possible, not exceeding four months." Pursuant to the preliminary determination, the United States has applied provisional duties to imports of softwood lumber from Canada for a period of four months, beginning on the date of publication of the determination on 17 August 2001 and ending 14 December 2001. However, in also retroactively applying provisional measures for the period from 19 May 2001 to 17 August 2001, the United States has applied provisional measures for a total of nearly 7 months. Here again, not only does Article 17.4 confirm that Article 20.6 does not permit the retroactive application of provisional measures, but to the extent the United States has applied such measures from 19 May 2001 through 14 December 2001, the United States has also violated Article 17.4 on its face.

4.46 Even if provisional measures could be applied retroactively under Article 20.6, Commerce did not establish that "critical circumstances" exist in its preliminary critical circumstances determination. First, the IQ SMB Guarantee programme upon which the determination is based is not a prohibited export subsidy and even if it were, the amount of subsidy found for the programme was de minimis and thus did not provide the basis for a determination under Article 20.6. Assuming, arguendo, that the IQ SMB Guarantee loan guarantees programme conferred a "benefit", the programme itself is not contingent on exports from Canada. Record information demonstrated that the programme is contingent on developing markets outside Quebec, not outside Canada. Accordingly, for the purposes of Commerce's investigation, the IQ SMB Guarantee programme is not "contingent on export performance" under Article 3.1(a) and the determination that the "massive imports" in question have benefited from "subsidies paid or bestowed inconsistently with the provisions of GATT 1994 and of [the SCM] Agreement" is flawed.

4.47 Furthermore, a critical circumstances determination cannot be based on a prohibited subsidy of a negligible amount. Commerce found that the benefit from this programme was less than 0.005 per cent, i.e. a rate that is de minimis. A de minimis rate is insufficient to provide a basis for applying any countervailing measure (provisional or final). By its own terms, Article 11.9 of the SCM Agreement applies to any part of a countervailing duty investigation. Therefore, a determination under Article 20.6 is governed by the de minimis threshold under Article 11.9, since action under the former is based solely on a subsidy that is "paid or bestowed inconsistently with the provisions of GATT 1994 and of this Agreement" and not all alleged subsidy programmes under investigation. Since Commerce's preliminary critical circumstances determination is based solely on the SMB Guarantee programme, which was not an export subsidy and was found to be de minimis, the United States has taken action under Article 20.6 in the absence of "critical circumstances", i.e. in violation of that provision.

4.48 Second, even if the SMB Guarantee programme had correctly been found to be a prohibited export subsidy, the rate applicable to the retroactive measures should have been the rate attributed to this programme - less than 0.005 per cent - and not the rate attributable to all other alleged subsidies taken together - 19.3 per cent. The text of Article 20.6 does not refer to "massive imports" of a product benefiting from "any or all of the subsidies under investigation". The provision specifically refers to "subsidies paid or bestowed inconsistently with the provisions of GATT 1994 and of this Agreement". The text of Article 20.6 of the SCM Agreement and the logic behind it allow the retroactive application of only the rate that is commensurate with the benefit bestowed by the alleged prohibited subsidy. Furthermore, any countervailing measures applied under Article 20.6 must conform to the basic requirement under Articles 17.5 and 19.4 of the SCM Agreement and Article VI:3 of GATT 1994 that they may not exceed the amount of the subsidy found to exist, i.e. such measures can be in an amount no greater than that needed to offset the benefit conferred by the alleged prohibited subsidies found to exist. To do so at a higher rate would countervail in an amount in excess of that required to "preclude the recurrence of [the] injury" caused by such subsidies in "critical circumstances", the object and purpose of Article 20.6. In the instant case, the applicable rate was less than 0.005 per cent as opposed to 19.31 per cent.

4.49 In applying provisional measures retroactively in the amount of 19.31 per cent, the United States has violated Article 20.6 of the SCM Agreement, as well as Articles 17.5 and 19.4 of the SCM Agreement and Article VI:3 of GATT 1994.

4.50 Third, no countervailing measure, whether provisional or final, can be applied retroactively under Article 20.6 without the requisite injury findings and no such findings were made by US authorities. There is no dispute that the USDOC's determination contains no finding on the two injury elements set out in Article 20.6 of the Agreement. First, neither the USDOC nor the ITC had found "injury which is difficult to repair" and neither the USDOC nor the ITC had determined that retroactive application of definitive countervailing duties was necessary "in order to preclude the recurrence of such injury". There can be no dispute on this point because the USDOC itself expressly stated that these determinations would be made by the ITC when the ITC made its final determination. Accordingly, in applying such countervailing measures retroactively under Article 20.6 without first making the requisite injury findings, the United States violated outright Article 20.6 of the Agreement.

4.51 Fourth, the USDOC's finding of "massive imports" (1) incorrectly attributed to all imports from Canada the alleged benefit conferred by the IQ SMB Guarantee programme, which applies only to shipments from Quebec and (2) attributed to an alleged export subsidy an increase in imports resulting from the impending and then actual expiration of the Canada-United States Softwood Lumber Agreement (SLA).

4.52 The USDOC determined that imports of softwood lumber from Canada had increased by 23.34 per cent in the three months following the filing of the petition compared to the previous three months and on this basis that the requirement of "massive imports" over a "relatively short period" of time had been satisfied. The SLA expired two days before the petition was filed, i.e. at the end of the first quarter of 2001. Its impending expiration sharply reduced exports in the first quarter of 2001 and its actual expiry led to an increase in the second quarter. These dramatic and well-documented trade trends were nonetheless attributed by the USDOC to the existence of a de minimis alleged export subsidy.

4.53 Even assuming that the SMB Guarantee programme were a prohibited export subsidy, it is patently impossible to attribute the "massive imports" finding in this case, an increase of 23.34 per cent, to a programme that did not benefit any exports during the period of investigation - and in any event could have benefited only a small fraction of exports and only in an amount of less than 0.005 per cent. Since the United States has applied provisional measures retroactively in the absence of a valid finding of "massive imports", it has violated Article 20.6.

4.54 Fifth, the USDOC's finding of "massive imports" improperly excludes imports from the Canadian Maritime Provinces. If it is permissible, as the USDOC did, to include shipments that have not benefited from the prohibited subsidy, then it should include all such shipments and not simply the portions of those shipments that suit its needs. In this respect, the USDOC's "massive imports" finding is defective also because it was "net of the Maritime Provinces", i.e. the USDOC excluded from any of its calculations imports from the Canadian Maritime provinces. Under various methods of calculating "massive imports", inclusion of exports from the entirety of Canada, including the exports from the Maritime Provinces, would have resulted in a negative "massive imports" finding under the SCM Agreement. There is no basis in Article 20.6 of the SCM Agreement for making a "massive imports" finding on the basis of only a segment of total imports.

3. US Law is Inconsistent with US Obligations on Expedited and Administrative Reviews

4.55 Article 19.3 of the SCM Agreement expressly requires Members to grant an expedited review to those exporters that were not individually investigated who have requested such a review, in order to establish an individual countervailing duty rate for that exporter. Article 21.2 requires the same for any interested party in cases of administrative review. The Agreement thus ensures that exporters and producers not individually investigated will nevertheless be able to obtain an individual countervailing duty rate if they so request. It also ensures that each exporter and producer is not subject to a duty rate higher than that called for in its individual circumstances. The United States has failed to implement these obligations in US law.

4.56 Section 777A(e)(1) of the Tariff Act of 1930 establishes the general rule that the USDOC will determine an individual subsidy rate for each known exporter or producer of the subject merchandise. Where the application of the general rule is not practicable because of the large number of exporters or producers involved in the investigation, exception to this rule can be made under section 777A(e)(2)(A) and (B) of the Tariff Act of 1930 ("the Act"), as interpreted by the SAA. Under subparagraph (A), the USDOC can limit its examination to a statistically valid sample of exporters or producers or limit its examination to those exporters and producers accounting for the largest volume of exports of the subject merchandise that the USDOC determines can reasonably be examined. Under subparagraph (B), the USDOC can determine a single country-wide rate to be applied to all exporters and producers.

4.57 The regulations implementing US obligations under the SCM Agreement regarding individual expedited and administrative reviews limit the availability of such reviews to instances where the USDOC has undertaken its investigation according to subsection (A) of section 777A(e)(2). The regulations limit the availability of expedited reviews and company-specific administrative reviews in cases where the USDOC elects to conduct its investigation on an aggregate "country-wide" basis. In such cases, the USDOC must deny individual exporters the benefit of company-specific expedited reviews and administrative reviews.

4.58 In the case of individual expedited reviews, section 351.214(k)(l) provides for a request for individual expedited review only if "the Secretary limited the number of exporters or producers to be individually examined under section 777A(e)(2)(A) of the Act" (i.e. by sample or by taking account of those exporters and producers accounting for the largest volume of exports). Significantly, this is the case as soon as the initial decision is made as to how the investigation is to be conducted. In the case of administrative reviews, subparagraphs (1), (2) and (3) of section 351.213(b) each expressly bar the request by an foreign government, exporter, or importer of record for an individual administrative review where the "investigation or prior administrative review was conducted on an aggregate basis". Moreover, the only requests the USDOC will consider for an individual administrative review in cases where administrative reviews are conducted on a country-wide basis are those for individual assessment and cash deposit rates of zero under subparagraph (1) of section 351.213(k) and then, "only to the extent practicable." Section 351.213(k)(2) provides, however, that if, in the review, the USDOC calculated a country-wide rate, "that rate will supersede, for cash deposit purposes, all rates previously determined in the countervailing duty proceeding in question."

4.59 This result is inconsistent with the obligations of the United States under the SCM Agreement. Article 19.3 provides that exporters not "actually investigated" are entitled upon request in all cases to an expedited review "in order that the investigating authorities promptly establish an individual countervailing duty rate for that exporter". Article 21.2 entitles exporters and producers to a company-specific administrative review upon request in all cases. This ensures that exporters and producers not given an individual rate during the countervailing duty investigation will be given one in an administrative review. This also means that exporters and producers already given an individual rate during the investigation, may be given an individual rate again in an administrative review. Nothing in the context or object and purpose of these provisions or indeed the SCM Agreement in any way modifies the nature of these obligations. Accordingly, section 351.214(k)(l) of the regulations violates Article 19.3 of the Agreement and section 351.213(b) violates Article 21.2.

4.60 Section 351.213(b) on administrative reviews also violates US obligations regarding expedited reviews under Article 19.3. Under the US retrospective duty system, final liability for countervailing duties is not determined until the administrative review. Section 351.213(b) specifically denies exporters and producers an administrative review if the investigation was conducted on an aggregate basis. This means that an exporter or producer would still be denied the opportunity to obtain a final individual countervailing duty rate contrary to Article 19.3, even if it were given the right to an expedited review to establish an individual cash deposit rate.

4.61 Finally, since section 351.213(k)(2) mandates that the single country-wide countervailing duty rate calculated by the USDOC in an administrative review must supersede all individual rates previously determined, this provision violates both Article 19.3 and Article 21.2. First, mandating that a single country-wide rate supersedes all individual rates effectively undoes the benefit of any expedited review that an exporter or producer may have been granted by the USDOC pursuant to an investigation conducted under section 777A(e)(2)(A). Second, it prevents exporters and producers from obtaining an individual rate in an administrative review if that review is conducted on an aggregate basis.

4.62 The USDOC decided to conduct the Lumber IV investigation on a country-wide basis. Three consequences flow from this decision. First, by operation of the regulations, exporters and producers involved in the investigation are denied expedited reviews and company-specific administrative reviews, in violation of Articles 19.3 and 21.2 of the SCM Agreement. Second, in this case, the USDOC will, as a result, impose a countervailing duty in excess of the amount of the subsidy found. This is because a country-wide rate necessarily imposes a duty on some exporters and producers in excess of what would be their individual duty rate. The United States therefore also violates Article 19.4. Third, as a consequence, the United States also violates Articles 10 and 32.1 of the SCM Agreement.

4.63 The US failure to provide for expedited reviews and company-specific administrative reviews in all cases means that the United States has failed to ensure the conformity of its laws, regulations and administrative procedures with its obligations under the SCM Agreement. Thus the United States should also be found in violation of its obligations under Articles XVI:4 of the WTO Agreement and Article 32.5 of the SCM Agreement.