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WT/DS236/R
27 September 2002

(02-4958)

  Original: English

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


Report of the Panel


(Continued) 


B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES

4.64 The following are the arguments of the United States in its first written submission.

1. Introduction

4.65 "No Member should cause, through the use of any subsidy . . . , adverse effects to the interests of other Members, i.e. . . . injury to the domestic industry of another Member . . . ."6 That obligation is the core of the dispute now before the Panel. When one Member causes injury to the domestic industry of another Member through the use of any subsidy, the injured Member has the right to take countervailing measures.

4.66 The United States has acted entirely within its rights under the SCM Agreement in this case by taking provisional countervailing measures to offset the injurious subsidies that Canada provides to its lumber mills. Canada's claims to the contrary are without merit. Canada is asking this Panel to ignore the text of the SCM Agreement and create exceptions to the subsidy disciplines for Canada's decades-old system of subsidies to its lumber industry. In addition, Canada's claims of WTO-inconsistent US laws are, in reality, an effort to resolve a future dispute that may never occur. Therefore, consistent with the SCM Agreement and the DSU, the United States asks the Panel to reject Canada's claims.

2. Statement of Facts

4.67 On 17 August 2001, the USDOC published its preliminary determination, which contained a preliminary affirmative countervailing duty determination and a preliminary affirmative finding of critical circumstances. In the preliminary determination, the USDOC preliminarily found that provincial stumpage programmes in Canada provided a countervailable subsidy to Canadian lumber producers. In addition, the USDOC found reasonable cause to believe or suspect that critical circumstances existed based on evidence that lumber producers received prohibited export subsidies and that there were massive imports of the subject merchandise over a relatively short period of time.

4.68 Accordingly, the USDOC imposed provisional measures (i.e., suspension of liquidation and posting of security in the form of cash deposits or bonds), effective on the date of publication of the preliminary determination, i.e., 17 August 2001. In light of the affirmative finding of critical circumstances, the USDOC ordered provisional measures applied to entries of the subject merchandise made during the period 90 days prior to the date of the publication of the preliminary determination.

3. Standard of Review

4.69 Article 11 of the DSU requires a panel to make an objective assessment of the matter before it and determine whether the identified measure is consistent with the provisions of the SCM Agreement upon which the claim is based. Panels cannot add to or diminish the rights and obligations provided in the SCM Agreement.

4.70 A panel does not conduct a de novo review of the evidence nor substitute its judgment for that of the competent authority. Moreover, the sufficiency of the evidence in this case should be judged in relation to the particular measure that Canada has challenged. It is important to bear in mind the preliminary nature of the determination at issue. The consistency of a preliminary determination with the obligations imposed on Members should be based on the record evidence before the authority at the time the determination was made.

4. Argument

(a) Canada Bears the Burden of Proving Its Claim

4.71 Canada, as the complainant, bears the burden of coming forward with evidence and argument that establish a prima facie case of a violation. If the balance of evidence is inconclusive with respect to a particular claim, Canada must be held to have failed to establish that claim.

(b) The Preliminary Countervailing Determination Is Consistent With the SCM Agreement

(i) Provincial Stumpage Programmes Constitute a "Financial Contribution"

4.72 The Canadian provincial governments own approximately 90 per cent of the forested land in Canada ("Crown land"), and the provincial governments control access to the timber on Crown land. The provinces enter into contractual arrangements that allow companies to harvest the timber on Crown land in exchange for an administratively set stumpage fee and the assumption of certain forest management obligations associated with harvesting operations. To be awarded such a contract, normally the company must either have a Canadian lumber mill, or have an agreement with a Canadian lumber mill to process all of the harvested timber. The vast majority of the Crown timber is awarded under long-term contracts that are not subject to competition (these contracts are usually referred to as tenures), with the fees set administratively by the provincial government.

4.73 In the preliminary determination, the USDOC concluded that these Canadian provincial "stumpage programmes" constitute a financial contribution because they provide a good to lumber producers within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. That good is timber.

4.74 Article 31 of the Vienna Convention on the Law of Treaties , which reflects customary rules of interpretation of public international law, states that a treaty shall be interpreted "in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose." Article 1.1 of the SCM Agreement defines a subsidy as a "financial contribution" by a government that confers a benefit. Article 1.1(a)(1)(iii) states that a financial contribution shall be deemed to exist where, inter alia , the government "provides goods or services other than general infrastructure." The SCM Agreement does not specifically define the meaning of "provides" or "goods." The Panel should look to the ordinary meaning of these terms.

4.75 The New Shorter Oxford English Dictionary defines "provides" as meaning, among other things, to "supply or furnish for use." Black's Law Dictionary defines "goods" as specifically including "growing crops, and other identified things to be severed from real property." Provincial stumpage programmes therefore constitute a "financial contribution" because they "supply or furnish" an "identified thing to be severed from real property," i.e., timber.

4.76 The text of Article 1.1(a)(1)(iii) does not contain any exclusions for natural resources, nor can such an exclusion be read into the text. To the contrary, the Members evidently considered exceptions, and the sole exclusion from the phrase "goods and services" that they agreed on is reflected in Article 1.1(a)(1)(iii) itself, i.e., general infrastructure. It would be extraordinary if the Members intended sub silentio to provide a safe harbour for a broad group of government subsidies. Rather, this sole, express exclusion demonstrates that the Members intended to include all other goods and services.

4.77 Canada argues that provincial governments are not providing timber to lumber producers, but rather are merely granting the right to harvest the timber. There is, however, no meaningful distinction between providing the right to harvest timber and providing the timber itself. The provincial stumpage systems are designed for one purpose: to provide timber to Canadian mills that make lumber or wood pulp. Participation in these programmes is restricted to Canadian sawmills or pulpmills, or companies that have contracts with Canadian mills to process the harvested timber. Furthermore, each of the provincial stumpage programmes charges the tenure holder on a "volumetric" basis. Tenure holders do not pay stumpage fees for timber that they do not harvest. In light of these facts, it is obvious that the provincial governments are providing timber through these stumpage systems.

4.78 Moreover, the New Shorter Oxford English Dictionary defines "provides" as meaning to "make available" in addition to "supply or furnish for use." Thus, even if provincial tenures are viewed as simply providing the right to take timber off the land rather than providing the timber itself, such a provision would still constitute the "provision of a good" within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement because the government is making the timber available. Therefore, the USDOC's preliminary determination that provincial stumpage programmes constitute the provision of a good is entirely consistent with the text of Article 1.1(a)(1)(iii) of the SCM Agreement.

4.79 The USDOC's Preliminary Determination is also consistent with the context, object and purpose of Article 1.1(a)(1)(iii). The object and purpose of the SCM is to impose multilateral disciplines on subsidies because of the "the trade-distorting potential" of government largesse. It is evident from Article 1.1 that the Members recognized that governments have a variety of mechanisms at their disposal to confer an advantage on specific domestic enterprises or industries and that they intended to bring those mechanisms within the disciplines of the Agreement. Article 1.1(a)(1)(iii) should be interpreted in that context.

4.80 If the major input for a product is a natural resource - timber, bauxite, iron ore - a government that provides the natural resource to producers has the ability, depending upon the price charged, to provide an advantage that would not otherwise be available in the market. Canada's attempt to exempt such potentially market-distorting government practices from the disciplines of the SCM Agreement has no basis in the text of the Agreement and is entirely at odds with its object and purpose.

(ii) Provincial Stumpage Programmes Provide a "Benefit"

4.81 The Canada Aircraft panel stated that authorities must "determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution."7 In this case, the USDOC used market stumpage prices from comparable regions of the United States, adjusted as appropriate, as the benchmark price to determine whether the stumpage programmes administered by the Canadian provincial governments provided timber to lumber producers on a more favorable basis than the marketplace would provide. The USDOC declined to use non-government prices between buyers and sellers within each province as the benchmark prices because provincial government sales constitute the overwhelming majority of timber sales in each of the provinces. As a result of the provincial governments' dominance of the timber market, the USDOC could not conclude that non-government prices within the provinces were unaffected by the very distortion a market benchmark price is intended to measure, i.e., that they reflected the market "but for" the government financial contribution.

4.82 The USDOC's decision to use a US benchmark is consistent with Article 14 of the SCM, which sets forth guidelines for measuring the amount of the benefit to the recipient of a government's financial contribution. Article 14(d) states that "the provision of goods . . . by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration . . . . The adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision . . . (including price, quality, availability, marketability, transportation and other conditions of purchase or sale)."8

4.83 The dictionary definition of "in relation to" is "with reference to." Thus, under Article 14(d), the prevailing conditions in the country of provision are a reference point, not necessarily an end point, for the market benchmark. The proper benchmark measures the market but for the financial contribution. Thus, the issue is finding a market benchmark with reference to what the "in country" market would be but for the subsidy. It would therefore be improper to look outside a country simply to determine what the market value of a good is elsewhere in the world. It is, however, entirely proper to do so if one can use such prices, properly adjusted, to determine the market value of the good in the country under investigation.

4.84 Moreover, Article 14(d) states that the "prevailing market conditions" to be taken into account are the conditions of purchase or sale. Therefore, when read in context, "in relation to prevailing market conditions" requires the authority to determine the adequacy of remuneration with reference to market prices for transactions that, while not necessarily between buyers and sellers within the country of provision, are (or could be adjusted to be) comparable to the government transactions at issue with respect to the conditions of purchase or sale in the market.

4.85 The "in relation to" language in Article 14(d) demonstrates the Members' intent to provide more flexibility in the selection of market benchmarks for determining the adequacy of remuneration for the provision of goods and services. This flexibility is evident elsewhere in the Agreement. The "market," as generally referred to in the Agreement, is not restricted to the exporting country, but rather encompasses the entire market available to the subsidized producer or exporter. For example, Article 14(b) refers to comparable commercial loans available to the firm "on the market." In Canada Dairy, the Appellate Body recognized this flexibility, confirming that "[w]orld market prices do . . . provide one possible measure of value of milk to producers" in Canada.9

4.86 Limiting the benchmark to the exporting country's market would also seriously undermine the object and purpose of the SCM Agreement generally, and Articles 1.1(b) and 14(d) specifically. If the government were the sole provider of a good in the exporting country, for example, there would be no non-government benchmark prices in the exporting country to use as a point of reference and it therefore would be impossible to determine that the government had provided a benefit � even if it provided the good for a fraction of its value.

4.87 The trade-distorting potential of the government's provision of a good can be identified only by reference to an independent market price, i.e., a price that is unaffected by the very trade distortion the test is designed to identify. If the comparison price were entirely, or almost entirely, dependent upon the government price, as in the case where the government sales overwhelmingly dominate the market, the analysis would become circular because the benchmark price would reflect the very market distortion that the comparison is designed to detect. Using prices largely dictated by the government to measure the adequacy of government prices would therefore defeat the purpose of Article 14.

4.88 Whether a particular market benchmark price for the adequacy of remuneration is consistent with Article 14(d) must depend upon the facts of the particular case. Canada has failed to make a prima facie case that the USDOC's use of stumpage prices for comparable US forests, adjusted to take into account differences in the conditions of sale (i.e., in relation to prevailing market conditions) in the Canadian timber market, is per se inconsistent with Article 14(d) where the government sales dominate the Canadian market. To the contrary, the USDOC properly determined that US stumpage prices, as adjusted, represent prices under prevailing market conditions in Canada. The adjusted US prices represent an appropriate measure of what Canadian prices would be but for the subsidy.

(iii) The Calculation Did Not Overstate the Subsidy Found to Exist

Exclusion of Maritime Lumber

4.89 The investigation in this case initially covered softwood lumber products from all Canadian provinces. After receiving comments from Canada, however, the USDOC subsequently excluded from the investigation imports of softwood lumber products produced in the Canadian Provinces of New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland (the "Maritime Provinces") from timber harvested in the Maritime Provinces ("Maritime Lumber").

4.90 In accordance with its aggregate methodology, the USDOC then calculated a single, country-wide rate based on the ratio of the total subsidy provided to producers of the subject merchandise to the total sales of the subject merchandise. In this calculation, neither the numerator nor the denominator included the excluded Maritime Lumber because Maritime Lumber was not subject merchandise, i.e., it was not within the scope of the investigation. Canada's alternative methodology would require the USDOC to allocate some portion of the aggregate subsidy found for subject merchandise to non-subject merchandise. The result of such a calculation would be a rate that would require the United States to impose duties in an amount less than the subsidy found to exist with respect to the subject merchandise. Articles VI:3 and 19.4 do not require such a result.

Total Value of All Sales that Canada Provided

4.91 The Panel should review the WTO consistency of the USDOC's preliminary determination based on the record before the Department at the time the determination was made. The record at the time of the preliminary determination establishes that the USDOC used in the denominator of its subsidy calculations the amount that Canada reported in its questionnaire response as the total value of softwood lumber sales, including all sales of first-mill lumber products and remanufactured products.

4.92 After the publication of the preliminary determination, Canada asserted, for the first time, that the total amount reported in its questionnaire response as the total value of softwood lumber sales did not, as indicated in its questionnaire response, include the value of remanufactured lumber shipments. Whatever the merits of this late claim by Canada that the data it submitted did not include sales of "remanufactured" products, that question is not before this Panel. Factual determinations should be reviewed "as perceived by the [administering authority] at the time it made its determination based upon the record before it . . . ."10

(iv) Canada's "Pass-through" Argument Is Inapposite

4.93 The stumpage subsidies at issue in this case are direct subsidies. As noted above, the provincial governments enter into tenure contracts with producers of the subject merchandise. As a general matter, there is no "private body" intermediary between the government and the recipient, as that term is used in Article 1.1(a)(1)(iv). Therefore, the provisions of Article 1.1(a)(1)(iv) do not apply to this case.

4.94 Furthermore, nothing in the SCM Agreement precludes a Member from issuing a preliminary determination and imposing provisional measures based on data establishing the total amount of the subsidy that the government provides to the subject merchandise. Although company-specific subsidy calculations may be preferred, they are not required. Canada does not contest this point.

4.95 The SCM Agreement simply requires that the countervailing duty rate applied not exceed the subsidy found to exist. As explained above, the USDOC in this case properly determined that Canadian federal and provincial governments provided subsidies to producers and exporters of softwood lumber, and properly calculated a country-wide subsidy rate based on the total amount of the subsidy preliminarily found to exist for the subject merchandise.

4.96 The Panel should reject Canada's argument that the USDOC should have conducted a "pass-through" analysis. While such an analysis might be relevant for purposes of determining the level of subsidy received by a specific producer or exporter, no producer or exporter-specific subsidy rates are calculated in an aggregate investigation. The USDOC did not collect company-specific information, and Canada neither objected to the aggregate approach taken in this case nor recommended a company-specific approach. Nor did Canada supply any company-specific data to support is claim of the necessity of a "pass-through" analysis.

(c) The Preliminary Critical Circumstances Finding Is Consistent with the SCM Agreement

(i) Judicial Economy

4.97 As an initial matter, the United States notes that the USDOC issued a final negative critical circumstances finding in this case. The USDOC's preliminary critical circumstances finding is no longer of any practical consequence; retroactive provisional measures have been terminated and no retroactive assessment will be imposed. The Panel therefore should not address Canada's critical circumstances claim because it is not "necessary to resolve the particular matter."11 In this case, the normal course of the investigative process has resolved Canada's critical circumstances claim and has provided Canada with the relief it seeks.

4.98 If the Panel decides to resolve this issue on the merits, it should conclude that Canada has failed to make a prima facie case that the USDOC's preliminary critical circumstances finding was inconsistent with the SCM Agreement.

(ii) Authority to Impose Provisional Measures Retroactively

4.99 The USDOC's imposition of provisional measures on merchandise entered during the 90-day period prior to the publication of the preliminary determination is consistent with the text of Article 20 of the SCM Agreement, as well as with its object and purpose. Article 20.1 generally provides that provisional measures and final countervailing duties shall only be applied prospectively, i.e., to products that enter for consumption after the date of the preliminary determination under Article 17.1 or the final determination under Article 19.1, respectively. This rule, however, is not absolute. Article 20.1 expressly provides that the prospective application of provisional measures and final duties is "subject to the exceptions set out in this Article."

4.100 Article 20.6 of the SCM Agreement provides that a Member may assess final, definitive duties retroactively for a period "not more than 90 days prior to the date of application of provisional measures," if critical circumstances are present. Article 20.6 is intended specifically to provide retroactive relief in a "critical" situation. At the time of the preliminary determination, there may be a reasonable basis to believe or suspect that such a situation exists. However, retroactive assessment of definitive duties cannot be ordered until a final determination has been made many months later, following a full investigation. Absent suspension of liquidation, entries made 90 days prior to the preliminary determination might be liquidated during the intervening period. If the entries are liquidated, the possibility of retroactive relief, even though fully warranted, no longer exists.

4.101 Articles 17 and 20 of the SCM Agreement do not intend such an outcome. Article 17 of the SCM Agreement provides for the imposition of provisional measures to preserve a Member's right to relief once there is sufficient evidence to determine preliminarily that such relief is warranted. Retroactive provisional measures are essential to enable a Member to avail itself of the special remedy provided under Article 20.6. Therefore, Article 20.1 should be interpreted as providing for retroactive provisional measures where there is preliminary evidence of critical circumstances. A contrary interpretation would render Article 20.6 a nullity.

(iii) Basis for Critical Circumstances Findings

4.102 In order to find critical circumstances pursuant to Article 20.6 of the SCM Agreement, the authority must determine that there have been "massive imports" within a relatively short period, and that the imported product benefitted from "subsidies paid or bestowed inconsistently" with the SCM Agreement. The USDOC's preliminary finding of critical circumstances satisfied each of these requirements. An objective review of the facts in this case demonstrates that the USDOC had a reasonable factual basis to preliminarily determine that a Canadian province provided an export subsidy, which is prohibited under Article 3.1 of the SCM Agreement, and that imports of softwood lumber from Canada had increased more than 23 per cent over the base period. Moreover, the ITC preliminarily found that imports of softwood lumber from Canada were injuring the US industry before the USDOC made its preliminary critical circumstances determination. This preliminary injury determination, together with the evidence concerning prohibited subsidies and massive imports described above, constituted sufficient evidence to take the limited step of imposing provisional measures retroactively, pending the outcome of the full investigation.

(d) Expedited and Administrative Reviews

4.103 Under established WTO jurisprudence, a Member's law violates that Member's WTO obligations only if the law mandates action that is inconsistent with those obligations. If the law provides discretion to authorities to act in a WTO-consistent manner, the law, as such, does not violate a Member's WTO obligations.

4.104 None of the US laws that Canada challenges mandates that the United States take action inconsistent with its obligations under the SCM Agreement. US law gives the USDOC broad discretion to conduct reviews. Until the USDOC exercises that discretion in a particular case, any exploration of the issues raised by Canada would be hypothetical. That is particularly true in this case because aggregate cases are extremely rare.

(i) Section 777A(e)(2)(A) and (B) of the Tariff Act of 1930

4.105 Section 777A of the Tariff Act of 1930, as amended (the "Act") implemented several changes to US law to meet obligations under the SCM Agreement by eliminating the presumption in favor of country-wide rates and establishing a general rule in favor of company-specific rates. Section 777A(e)(2) contains two exceptions to the general rule to address cases, such as the lumber case, where there is such a large number of exporters and producers that it is not practicable to investigate each company individually.

4.106 Canada has not cited a single provision in the SCM Agreement that prohibits the investigative procedures set out in Section 777A(e)(2), and nothing in Section 777A(e)(2) limits the USDOC's broad authority to conduct reviews. Canada has therefore failed to establish a prima facie case of a violation because it has utterly failed to establish that Section 777A(e)(2) is inconsistent with any provision of the SCM Agreement.

(ii) Expedited Reviews

4.107 The USDOC's regulations governing expedited reviews do not cover aggregate cases. As noted above, aggregate cases are rare and, because they have only been used in cases involving industries with an extremely large number of producers and exporters, they present unique issues with respect to expedited reviews. Because these cases are so rare, the USDOC has not yet addressed these issues, by regulation or in practice.

4.108 Section 751 of the Act gives the USDOC broad authority to conduct reviews. The fact that the USDOC has not elected to promulgate specific regulations for handling what could potentially be an extremely large number of expedited reviews in an aggregate case does not in any way diminish the Department's statutory authority to conduct such reviews. Statutory authority is sufficient; regulations are not essential. Therefore, the fact that 19 C.F.R. � 351.214(k)(1) does not cover expedited reviews in aggregate cases does not in any way prohibit such reviews. The Panel therefore should reject Canada's claim that 19 C.F.R. � 351.214(k)(1) mandates that the United States violate its obligation to provide expedited reviews.

(iii) Administrative Reviews

4.109 Section 751 of the Act also provides broad authority for the USDOC to conduct administrative reviews. Again, Canada erroneously concludes that the USDOC's regulations limit that authority and require the Department to deny administrative reviews in aggregate cases.

C. FIRST ORAL STATEMENT OF CANADA

4.110 In its first oral statement, Canada made the following arguments.

4.111 The complaint of Canada before this Panel involves three distinct sets of claims:

  • first, the preliminary countervailing duty determination made by the US USDOC is inconsistent with US obligations;
     
  • second, there is no basis in the SCM Agreement for retroactive application of provisional measures under a preliminary critical circumstances determination, and
     
  • third, the denial of expedited reviews and company-specific administrative reviews where the USDOC conducts a country-wide investigation violates US obligations.

4.112 These actions stem primarily from two US interpretations of the SCM Agreement that Canada believes are fundamentally wrong, and that have immense implications for Members' rights to manage their natural resources. The first is an unwarranted reading by the USDOC of the agreed definition of "financial contribution". The second is the US determination that Canadian provincial stumpage programmes confer a "benefit".

4.113 The repeated US assertion that the appropriate comparison for determining "benefit" is between provincial and selected US jurisdictions demonstrates that the US measures are a demand that Canadian forest management practices mimic their own. The United States assumes that any public ownership of forestry resources is subsidised and argues that only by auction is there any assurance that this will not occur. The WTO Agreement does not direct Members to abandon public ownership of their natural resources.

4.114 The repeated references to the alleged "market distorting" effects of "stumpage" also indicate that the United States is arguing that any government action that might have the potential to distort trade is a subsidy under the SCM Agreement. This interpretation, however, was expressly rejected by the panel in Export Restraints.

4.115 The panel in Export Restraints also found that the definition of "subsidy" in Article 1.1 reflects the Members' agreement not only as to the types of government action subject to the SCM Agreement, but also that not all government action that may affect the market comes within its ambit.

1. The Preliminary Countervailing Duty Determination

(a) Stumpage is not a "financial contribution"

4.116 As noted in the first written submission "stumpage" is a right to harvest standing timber. Provinces grant these rights through tenures or through licences. Tenures and licences both carry with them a broad range of forest management responsibilities and significant in-kind costs.

4.117 Timber harvesters have the right to harvest timber from Crown lands by virtue of their tenures or licences; 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. Stumpage charges are properly viewed as a form of revenue collection that is the economic equivalent of a tax.

4.118 Tenures and licences both confer real property rights - the right to exploit a natural resource on public land. They are comparable in this respect to the licensing of quotas to harvest fish or the leasing of the right to extract oil or minerals from public lands. The United States nevertheless treats these rights to harvest standing timber as a financial contribution in the form of a "provision of goods". In so doing, the United States makes two fundamental errors.

4.119 First, the ordinary meaning of the term "goods" refers to "articles of trade or items of merchandise <goods or services>" or "saleable commodities." The United States misinterprets the term "goods" by confusing it with the term "property". The United States found that property in its widest sense, includes all a person's legal rights of whatever description. The issue, however, is not what property means � and certainly not what the term property might be construed to include in its widest meaning � but rather what "goods" means in the context of the SCM Agreement. The right to exploit an in situ natural resource - the right to harvest standing timber � is not a saleable commodity. It is not an article of trade or an item of merchandise and therefore it does not come within the meaning of "goods". The right to harvest standing timber is not "wood fibre" or logs, any more than a lease to develop petroleum resources is gas at the pump or the right to catch fish is tuna in a can.

4.120 Indeed, this meaning of the term "goods" as articles of trade or saleable commodities is the only meaning that could have been intended by the negotiators of the WTO Agreements. As evidenced by the "General interpretative note to Annex 1A" to the WTO Agreement "goods" subject to GATT 1994 are those things in respect of which a tariff binding may be negotiated: in other words, tradable things. It follows that things that are inherently incapable of being traded across borders are not "goods". Accordingly, standing timber cannot be considered "goods" as it cannot be traded across borders.

4.121 The second US error relates to the determination that a "financial contribution" occurs when a tenure holder exercises its right to harvest timber. This is confirmed by the USDOC's finding in the preliminary determination that benefits conferred by the provinces' administered stumpage programmes had been expensed in the year of receipt or when the timber was harvested. The USDOC has thus found that the "goods" were provided during the period of investigation when timber was harvested. The United States erred in its finding that a "financial contribution" under Article 1.1(a) occurred through the action of the alleged recipient, rather than in the action of a government as required.

4.122 In addition, the claim by the United States that Canada has requested the panel to read a "safe harbour" into subparagraph (iii) misses the entire point to having an agreed definition of "subsidy" to define the scope of Members' obligations under the SCM Agreement. The claim of the United States has no support in either the text of Article 1.1 or the negotiating history of Article 14. This confirms that real property rights were not intended to be included within the scope of the Agreement.

(b) The USDOC's use of "cross-border" benchmarks to find and measure "benefit" violates the SCM Agreement

4.123 There are three fundamental problems with the USDOC's use of cross-border price comparisons to determine whether a benefit has been conferred, and to calculate the alleged subsidy.

4.124 First, Article 14(d) of the SCM Agreement requires that the adequacy of remuneration be determined in relation to prevailing market conditions for the good or service in question in the country of provision. This direction is unambiguous and nothing in the context, object and purpose or the negotiating history of Article 14 permits reading "in the country" in any other manner. In addition, the ordinary meaning, in context, of "prevail" is "exist". The reference to "prevailing market conditions" is, therefore, to conditions that actually exist in the country of provision and not to conditions that would exist only under hypothetical circumstances.

4.125 The United States offers a number of interpretations of the term "in relation to" that would effectively read out the phrase "in the country", and would turn the mandatory "shall" into the discretionary "may". The United States also attempts to justify using prices in the United States as a benchmark by suggesting that US stumpage is available "in" Canada. It is clear that US stumpage is not available in Canada, because producers can harvest this timber only in the United States

4.126 Second, Article 14(d) was drafted in this manner because cross-border comparisons make no economic sense. The mere fact that the domestic price in one country is lower than the price in another does not mean that the first country is providing a subsidy, because a wide range of complex political and economic factors may account for differences in prices between countries. These border-related differences make valid international comparisons substantially more difficult than comparisons within a province or a country. As well, the USDOC itself has repeatedly recognised the vast differences in natural and timber conditions that exist. These differences are so great that the USDOC rejected this methodology in all three of the previous Lumber cases, finding in one instance that such an analysis would be "arbitrary and capricious". These determinations were factual and all of the factors that led the USDOC to reject the use of cross-border comparisons in the past still exist today.

4.127 Third, the USDOC's reliance on cross-border benchmarks was based on unsubstantiated assertions that no in-country benchmarks were available. The USDOC asserted this without bothering to demonstrate that no valid benchmark existed "in" Canada. It simply presumed that provincial stumpage charges are distorted because most standing timber is harvested on provincial lands.

4.128 In fact, the USDOC had compelling evidence before it related to private sales of timber harvesting rights, competitive tenures in certain provinces, and other evidence that provinces operate their stumpage systems on market terms. Instead of addressing this evidence, the USDOC simply asserted that stumpage fees on private lands are largely derivative of the public land prices. In the USDOC's opinion this meant that stumpage fees on private lands were distorted by that very fact. Moreover, the USDOC's purported rationale for moving to cross-border benchmarks, i.e., that there is distortion if the government does not auction timber harvesting rights, does not reflect its obligations under Article 14(d) - to determine if remuneration is "adequate".

4.129 If cross-border comparisons were permitted, then the only way Canada would ever know whether it was conferring a "benefit" would be to examine prices and market conditions in other countries. This interpretation is unreasonable and unduly onerous. It would also be impossible for Canada to be certain that the benchmark examined would be acceptable to the investigating authority. The SCM Agreement contemplates no such thing.

(c) The USDOC impermissibly presumed a pass-through of an alleged benefit

4.130 Under Article 1.1(a)(1)(iv), the USDOC must establish that any "financial contribution" by the government to timber harvesters had been "entrusted" or "directed" to be passed through to lumber producers. It also must establish that the alleged benefit of the alleged financial contribution was passed through to and conferred upon lumber producers and remanufacturers. It is not sufficient for the United States to simply assert, as it did here, that the subsidies at issue in this case are direct subsidies.

4.131 In this case, there is no allegation of direct subsidisation in respect of the subject merchandise, which is softwood lumber. Softwood lumber is produced from logs, and logs are made from standing timber; neither logs nor standing timber are within the scope of the investigation. In fact, a significant amount of harvesting is done by independent entities operating at arm's-length from lumber producers.

4.132 The United States argues that it does not matter if some producers do not receive direct benefits because it is conducting a country-wide investigation. It is Canada's position that lumber producers legally may not be deemed to be subsidised simply because of a finding of subsidisation to producers of the input product.

(d) The USDOC impermissibly inflated the subsidy rate by calculating a "weighted-average country-wide rate" based upon only a portion of Canadian production and exports12

4.133 This issue concerns two problems with the USDOC's determination of the rate of subsidisation. The first is the effect of the exclusion of goods from Maritime Provinces in the preliminary determination on the calculation of a "country-wide" subsidy rate.

4.134 A "country-wide" rate is precisely that: the average rate of subsidisation of the exported product. It is the total amount of a subsidy in a country divided by all shipments or exports to the investigating Member. When the USDOC disregarded unsubsidised Maritime shipments in calculating the country-wide duty rate, it calculated a country-wide duty exceeding the average country-wide level of subsidisation. The SCM Agreement requires that a countervailing duty rate not exceed the amount of the subsidy.

4.135 The United States attempts to excuse its calculation by claiming, first, that its Maritime exclusion was a product exclusion for certain lumber produced in the Maritimes. In fact, the lumber is indistinguishable from other lumber and the exclusion was of the "Maritime provinces". More specifically, the exclusion is a partial exclusion of Maritime companies for lumber they produce from Maritime timber. This exclusion does not alter the proper method for calculating a country-wide weighted average subsidy rate.

4.136 The United States' second argument - that Canada simply misunderstood the US calculation methodology - is even further from the mark. This methodology is clearly flawed as it places the country-wide benefit in the numerator and only a portion of total shipments in the denominator.

(e) The USDOC impermissibly applied provisional measures in excess of the subsidy preliminarily found to exist

4.137 This is the second problem relating to the application of the effective rate of duty. The United States determined a subsidy rate of 19.31 per cent ad valorem, but it employed a different basis for calculating this rate than it later used in applying the duties. Accordingly, the provisional measures were effectively applied at a higher rate than 19.31 per cent.

4.138 As stated in the preliminary determination, the United States calculated the amount of subsidy on a "first mill" basis. This means that the denominator of the calculation was the value of sawmill shipments, that is, the "first mills" that produce lumber from logs. The denominator did not include the value of shipments by secondary value-added producers of merchandise, or "final mills", that are also covered by the investigation.

4.139 The United States now claims that, at the time of the preliminary determination, it did not know that the data that it used was first mill data. It further argues that statements by the USDOC indicating that it had used first mill data were "inadvertent" and that it was surprised to find out later that the data was first mill data. Finally, the United States asserts that that the panel must limit its analysis to evidence used by the importing Member in making its determination to impose the measure.

4.140 These arguments are factually incorrect and cannot relieve the United States of its obligation, not to apply a duty that exceeds the subsidy found to exist. The data reported in the investigation was the same sawmill ("first mill") data that were provided and relied upon in all previous lumber investigations. Furthermore, by the time the USDOC issued its instructions to impose duties, it had received substantial information from Canada confirming that the data used was first mill data. Indeed, the United States acknowledges that Canada made this clarification, but it did not act upon the information. The US application of duties was inconsistent with its preliminary determination, and resulted in application of provisional measures in excess of the subsidy found to exist. As such, it violated Articles 17.2 and 19.4 of the SCM Agreement and Article VI:3 of GATT 1994.

2. The Preliminary Critical Circumstances Determination

4.141 The preliminary critical circumstances determination imposed a retroactive duty liability going back 90 days that amounting to $300 million and violated the obligations of the United States under Article 20.6 of the SCM Agreement. This provision permits the retroactive application of "definitive duties" following a critical circumstances finding. Article 20 and the SCM Agreement both indicate that "definitive duties" are distinct from preliminary or provisional measures. In the proper context, the term "definitive duties" plainly refers to countervailing duties imposed following a final determination. Consequently, the United States may apply measures retroactively under a critical circumstances finding after it has made a final countervailing duty determination.

4.142 The United States argues that it is permitted to make a preliminary critical circumstances determination and impose provisional measures retroactively. In support of its position, it relies on the findings of the Hot Rolled Steel panel and the object and purpose of Articles 17 and 20.

4.143 The Hot Rolled Steel panel report concerned a preliminary determination of critical circumstances under Article 10.7 of the Antidumping Agreement. The panel confirmed the limited scope of its own findings by observing that measures taken under Article 10.7 were not based on the evaluation of the same criteria as final measures that may be imposed at the end of the investigation. As there is no provision that corresponds to Article 10.7 in the SCM Agreement; the Hot Rolled Steel panel report is not relevant.

4.144 The plain text of Article 20.6 also belies the arguments of the United States concerning the object and purpose of this provision. The term definitive means definitive; it does not mean preliminary. The United States concedes as much, as it too equates definitive with final determination. The United States also invokes the object and purpose of Article 17, but neglects consideration of the specific provisions of that Article. Article 17.3 requires that a Member may not impose provisional measures sooner than 60 days after the date of initiation of the investigation. The preliminary critical circumstances determination imposed measures soon after the date of initiation, immediately violating this provision. Similarly, within a month of the preliminary critical circumstances determination the measures had violated Article 17.4 that limits the application of provisional measures to four months.

4.145 A "critical circumstances" measure must satisfy several requirements under the provisions of Article 20.6; this measure violated all of these requirements.

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

4.146 The United States violates Articles 19.3 and 21.2 because it does not provide for company-specific reviews where it determines an "aggregate" subsidy level. It also violates Article 19.4, as exporters that would have benefited from these reviews pay more in countervailing duties. Finally, the United States proceeded with the investigation on an "aggregate" basis thereby denying exporters expedited and individual administrative reviews in violation of Articles 19.3 and 21.2.

4.147 Article 19.3 requires WTO Members to provide an expedited review when an exporter requests a review. The United States provides for expedited reviews only in non-country-wide cases. The United States argues that the regulations do not mandate a violation because the USDOC has broad discretion to conduct reviews and has only neglected to promulgate regulations. The United States position is untenable, for four reasons:

  • First, the United States has the burden of establishing that the measure at issue is "discretionary". It asserts that the USDOC may conduct reviews, but it failed to create regulations. This explanation is insufficient to discharge this burden.
  • Second, these regulations are procedural rules relating to every aspect of countervailing proceedings. The neglect of any right as fundamental as an individual review in aggregate cases would be deliberate. The preamble to the US regulations reinforces this conclusion, stating that the USDOC will not individually review firms when it uses a country-wide rate.
  • Third, it is a basic principle of statutory construction that if a right is provided for in certain circumstances, its deliberate exclusion in other circumstances must be given meaning: that is, that no such right exists in those other cases. In this respect, the practice of the USDOC and its analysis of its own discretion with respect to the regulations concerning voluntary respondents demonstrates that it also interprets US law in this manner.
  • Finally, the United States argues that it has broad authority under section 751 of the Tariff Act to conduct expedited reviews. This provision relates to annual administrative reviews and other forms of review, but is silent with respect to expedited reviews.

4.148 The United States argues that Article 21.2 does not create an obligation to conduct company-specific administrative reviews. In this instance, the US regulations also expressly prohibit company-specific administrative reviews in aggregate cases. In contrast, the text of Article 21.2 clearly requires company-specific administrative reviews. In British Steel the Appellate Body found that Article 21.2 required a Member to review the need for continued imposition of a countervailing duty when appropriate. The Appellate Body also indicated that this provision was designed to ensure that countervailing duties only remained in force long enough to counteract the injury caused by the subsidisation.

4.149 The administrative review provisions also violate Article 19.3 as the single country-wide rate arrived at in an administrative review supersedes all individual rates. Therefore, even if the United States had discretion to grant expedited reviews, in country-wide cases the benefits of those reviews vanish as soon as there is a country-wide rate on an administrative review. Finally, the regulations demonstrate that the discretion provided under s. 751 does not extend to individual administrative reviews. In fact, these regulations specifically deny the USDOC the discretion to grant individual administrative reviews.

4.150 The United States has argued that a violation of Articles 19.3 and 21.2 exists only where it has expressly refused to grant these reviews. This is not correct. Once the decision had been made to make an aggregate assessment, Canadian exporters could not secure a different form of assessment. Consequently, exporters were effectively denied these reviews as soon as the decision to make an aggregate assessment was made thereby breaching Articles 19.3 and 21.2.



6 Article 5 of the SCM Agreement.

7 Canada Aircraft - Measures Affecting the Export of Civilian Aircraft, WT/DS70/R, Report of the Panel, as affirmed by the Appellate Body, adopted 20 August 1999, para. 9.112.

8 Emphasis added.

9 Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products, WT/DS103/AB/RW, Report of the Appellate Body, adopted on 3 December 2001, para. 84.

10 United States - Antidumping Measures on Stainless Steel Plate in Coils and Stainless Steel Sheet and Strip from Korea, WT/DS179/R, Report of the Panel, adopted 2 February 2001, para. 6.29.

11 United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R, Report of the Appellate Body, adopted 23 May 1997, page 18; E.C. - Measures Concerning Meat and Meat Products (Hormones), WT/DS26,48/AB/R, Report of the Appellate Body, adopted 13 February 1998, para. 250.

12 In response to a question from the Panel, Canada indicated that it was no longer pursuing this claim. (Canada's response to Question 37 from the Panel following the second meeting, Annex B-1.)


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