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UNITED STATES - PRELIMINARY DETERMINATIONS
Report of the Panel
4.151 In its first oral statement, the United States made the following arguments. 4.152 Although some of the facts of this case are technically complex and can be confusing, in the end the issues are simple. The preliminary record indicates that the Canadian provincial governments provide timber to lumber producers at less than market prices. Under Article 1 of the WTO Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), that is a subsidy. 4.153 Article 5 of the SCM Agreement states that "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 . . ." 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. The United States' preliminary decision to exercise that right was fully warranted in this case. 4.154 Article 1.1 of the SCM Agreement defines a subsidy as a financial contribution by the government that confers a benefit. Thus, there are two elements to a subsidy: financial contribution and benefit.
4.155 The USDOC preliminarily determined that the system of timber contracts administered by the Canadian provincial governments constitutes a financial contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement. Although Canada focuses on the complexities of these arrangements, none of those complexities alters the fundamental fact that these provincial programmes provide timber to lumber producers. 4.156 Over 90 per cent of the forested land in Canada is held by the provincial governments ("Crown timber"). Each province administers a system of contracts called tenures or licenses ("timber contracts") that allow the tenure holder or licensee to harvest the Crown timber. 4.157 There is no dispute that lumber producers participate in provincial timber contracts for one reason - to obtain timber. The definitions discussed in the US first submission leave no doubt that timber is a good within the ordinary meaning of Article 1.1(a)(1)(iii). Nevertheless, Canada argues that when the provinces issue these contracts they are not providing a good - timber - to lumber producers, but the right to take timber off the land. Neither the SCM Agreement nor the facts of this case support Canada's claim. 4.158 Although there are some variations across the provinces, the core elements of all timber contracts are the same, that is, the lumber producer obtains the right to cut timber in a specified area in exchange for an administratively set fee, the "stumpage" fee, and the assumption of certain forest management obligations. The lumber producer knows the specific area in which it will be able to harvest and knows the timber, that is, the species and quality of the trees. The producer pays stumpage fees only for the volume of timber actually harvested. The lumber producer is therefore obtaining a specifically identified good - timber. 4.159 Moreover, the ordinary meaning of "provide" includes "make available." Thus, the fact that a lumber producer has to get the timber off the stump is irrelevant. The economic consequences of providing a good or a right to a good are the same. To treat them as distinct would invite circumvention of the subsidy disciplines and seriously undermine their purpose. 4.160 Given the ample evidence that the provinces are providing lumber producers with timber, Canada's only hope is that the Panel will read into the SCM Agreement an exemption for all extraction and harvesting rights. There is no support in the text for such an exemption, and a treaty interpreter may not read into the SCM Agreement what is not there.
4.161 The USDOC preliminarily determined that the provincial governments provide timber for less than adequate remuneration, within the meaning of Article 14(d) of the SCM Agreement, thereby conferring a benefit.
4.162 As the Appellate Body has confirmed, a benefit is conferred when the government's financial contribution places the recipient in a more advantageous position than would have been the case absent the financial contribution. Moreover, the Appellate Body has recognized that the marketplace provides an appropriate basis for comparison. In the underlying investigation, the USDOC preliminarily determined that no market benchmarks existed in Canada, and therefore used stumpage prices in US states with comparable forests, adjusted to reflect prevailing market conditions in Canada. 4.163 Article 14(d) states that: "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 or purchase (including price, quality, availability, marketability, transportation and other conditions of purchase or sale)." Canada ignores most of that language and argues, in effect, that Article 14(d) says: "The adequacy of remuneration shall be determined in the country of provision or purchase." The treaty interpreter, however, must give meaning to all the words in the Agreement. 4.164 World market prices can constitute part of the "market conditions in the country of provision." As the European Communities ("EC") points out, the relevance of world market prices is recognized in item (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement. 4.165 Therefore, the question is not whether Article 14(d) permits a Member to use something other than a domestic benchmark price, but when it is appropriate to do so. The facts more than adequately support the USDOC's preliminary decision to do so in this case. 4.166 As noted previously, 90 per cent of the forested land in Canada is held by the Crown. The market for timber is therefore dominated by the provincial governments. The impact of the governments' administratively set prices on the very small residual market is virtually inescapable. Nevertheless, the USDOC did request information on private prices in each of the provinces. Only three of the provinces responded, and the USDOC determined that the prices provided were not market-based. For example, the record contained statements by a Quebec official and a Canadian forestry expert acknowledging that private timber prices in Quebec are suppressed by the overwhelming market power of low-cost Crown timber. 4.167 It is evident why Canada would insist that the United States use prices in Canada despite the evidence of a market dominated by the provincial governments. Canada would require the United States to measure the governments' prices against prices that reflect the very distortion that we are attempting to measure. Article 14(d) does not require such an obviously flawed and circular methodology.
4.168 The USDOC determined the total amount of the subsidy provided to Canadian producers of the subject merchandise based on aggregate data from the provincial governments. The Department then divided the total subsidy by total sales of the subject merchandise to obtain the subsidy rate. Canada claims that this calculation improperly assumed that benefits to tenure holders passed through to lumber producers. The United States does not, as the EC suggests, concede that this is the case. Some clarification of the facts is necessary to better understand the basis for the USDOC's subsidy calculation and shed light on the flaws in Canada's claim. 4.169 First, an input subsidy under Article 1.1(a)(1)(iii) is a direct subsidy. Under Canada's interpretation, all financial contributions through the provision of a good are transformed into an indirect subsidy under Article 1.1(a)(1)(iv). Canada's submission suggests that there are three distinct industries in Canada: loggers, lumber producers and remanufacturers. This is not the case. The vast majority of the Crown softwood timber is harvested under timber contracts held by integrated producers. 4.170 The vast majority of the timber contracts in Canada are directly between the provincial governments and Canadian forest products producers, or wood processing facilities. In most instances, only wood processing facilities, such as sawmills that produce lumber, are eligible to obtain a timber contract. Thus, Canada's alleged middleman between the provincial governments and the lumber producers is largely a myth.
4.171 Canada also claims that the USDOC should have included non-subject merchandise in the calculation of the subsidy. The United States excluded certain Maritime lumber from the scope of the investigation, not producers. Canada nonetheless argues that the calculation of the benefit must exclude Maritime lumber, but the denominator must include Maritime lumber. Canada's reasoning would result in a rate less than the subsidy found to exist with respect to the subject merchandise. 4.172 Canada also argues that the USDOC calculated the subsidy on the basis of the total value of first milled lumber products, but then applied the subsidy rate to the entered value of subject merchandise. Canada's claim ignores the fact that the Department's calculation and application of the subsidy rate was entirely consistent with the preliminary record before the Department at the time of the preliminary determination. As previous panels have stated, the consistency of an authority's decisions must be assessed based on an objective assessment of the facts before the authority at the time the decision was made. 4.173 Canada's claims relating to the USDOC's imposition of retroactive provisional measures rest on an interpretation of Article 20.6 that would render the retroactive remedies provided for a nullity. It is beyond dispute that the general principles of treaty interpretation preclude such a reading of the Agreement. 4.174 The general rule in Article 21 that provisional measures and definitive duties are applied prospectively is expressly made "subject to the exceptions set out in [Article 20]." Nothing in Article 20.1 limits the applicability of those exceptions to definitive countervailing duties. 4.175 Article 20.6 defines a set of exceptional circumstances that warrant retroactive relief. Under the text of Article 20.1 those exceptional circumstances apply to provisional measures.
4.176 Finally, Canada claims that various provisions of US law are inconsistent with its obligations under the SCM Agreement because they preclude reviews in aggregate cases. Under established WTO jurisprudence, a Member's law breaches 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 breach a Member's WTO obligations. 4.177 US law provides the USDOC with discretion to conduct expedited and administrative reviews in all cases, including aggregate cases. Nothing in the regulations cited by Canada limits that discretion. Thus, US law does not mandate action that is inconsistent with US WTO obligations. The United States is entitled to the presumption that it will implement its obligations in good faith.
4.178 In its second written submission, Canada made the following arguments.
4.179 This submission responds to the incorrect factual assertions and legal arguments that the United States has continued to make in its Oral Statement and in its Answers ("Answers") to the Panel's 26 April 2002 questions. Canada will demonstrate that: the United States misunderstands the "financial contribution" requirement of Article 1.1(a); its cross-border analysis of "benefit" is not permitted by Article 14(d); its response to the "pass-through" question is flawed and exhibits lack of comprehension of the "benefit" analysis that is required; in respect of critical circumstances, it continues to make implausible arguments. As well, Canada seeks to clarify US admissions concerning expedited reviews and will demonstrate that the US position on administrative review misstates US law and SCM Agreement obligations.
4.180 In its Answers, the United States asserts that, "Canada claims that the benefit is received when the timber is harvested." From this faulty premise, the United States wrongly attributes to Canada the argument that, "the act of harvesting (which is not performed by the government) is the financial contribution." It then argues that, "[t]he provincial governments provide the timber by placing it at the lumber producer's disposal under the tenure contract." 4.181 The US argument distorts Canada's submission and conflates a series of distinct relationships into one transaction. A right to cut a tree is not the same thing as a log; nor are timber harvesters the same as lumber producers. 4.182 Under tenure agreements, timber harvesters have the right to harvest standing timber and undertake a number of forest management obligations. These obligations, such as fire protection and pest control, constitute their share of a fiduciary duty for the public good. Indeed, tenure holders must undertake such costly obligations regardless of whether they harvest any trees. The bundle of rights and obligations that a tenure represents does not admit of simplification into "provision of goods". 4.183 The right to harvest trees is, in law and in fact, distinct from trees themselves (standing timber), which is a physical thing attached to the land. Standing timber is, in turn, different from logs. The cutting down of timber is the point at which "goods" - logs - are produced from natural resources; this is similar to when fish are caught, or water is bottled. Logs are input goods into the production of lumber, which is the subject matter at issue. The right to harvest a tree is, therefore, different from the end results of harvesting (the cutting down of standing timber to produce logs) and processing (turning logs into lumber); this right does not amount to "goods" or "services" within the meaning of Article 1.1(a)(1)(iii). In fact, even the thing in which provincial governments convey an interest - standing timber - is not "goods" or "services". 4.184 The United States attempts to rebut this reading by relying on two arguments, neither of which has merit. 4.185 First, it states that "from the reference in Article 1.1(a)(1)(iii) to goods and services other than 'general infrastructure,' it follows a contrario that any specific immovable object may be a covered good." The conclusion in no way follows the premise. The converse of "general infrastructure" is not "any specific immovable object". In any event, "general infrastructure" is an exception to "services". 4.186 Second, the United States argues that "the economic consequence of providing a good and providing a right to a good are exactly the same." This argument follows the same faulty logic of the US argument in Export Restraints that, "an export restraint is 'functionally equivalent' to an entrustment of or direction to a private body to provide goods domestically." The panel in that case rejected the "functional equivalence" argument on the grounds that the verbs "entrust" and "direct" implied "an explicit and affirmative action of delegation or command." The panel also held that the "financial contribution" element of Article 1 was concerned with actions of governments and not the effects of those actions. The term "provides goods" implies a positive action on the part of the government in respect of the goods themselves. 4.187 The United States then relies on one of several definitions of "provide" set out in one dictionary, to try to persuade the Panel that the term "provide" should be interpreted to mean "make available" in the broadest sense of the phrase. 4.188 The US position is untenable as the more common meaning of "provide" is "supply". As well, the proposed US interpretation encompasses a range of government action that goes far beyond those actions contemplated under Article 1.1(a). To "make available services", for example, would include any circumstance in which a government action makes possible the receipt of services. 4.189 Finally, throughout the WTO Agreement, the word "provide" is used to indicate the giving of something rather than the more generally enabling someone to obtain or produce something. For example, the word "provide" in Articles 3.2 and 8 of the Agreement on Agriculture refers not to the availability of subsidies or support to potential recipients, but rather the giving of such support or of subsidies. This is also the case in respect of Article XV:1 of the GATS. 4.190 The US argument also ignores the distinction: between timber harvesters and lumber producers. Timber harvesters produce logs from trees; and logs are not subject to the investigation. Timber harvesters "provide" these logs to their own mills or to other mills for the production of lumber or other products. This equation of timber harvesting and production of lumber has serious consequences in two respects. 4.191 First, the repeated and erroneous reference to "lumber producers" diverts attention from the issue before the Panel: the provision of a right to harvest to timber harvesters. Second, it ignores the nature of the rights and obligations contained in tenure agreements. The US assertion is based on its contention that the laws of each province "require the tenure holders be sawmills." This is simply incorrect. 4.192 In B.C. a tenure holder is not required to build a sawmill. The major forms of tenure may require an applicant to maintain a "timber processing facility," but that facility can be any of a wide variety of facilities, such as pulp mills, waferboard plants, etc. Moreover, the relevant provisions in the Forest Act are more discretionary. Section 13(3)(c) has provisions regarding timber processing facilities, but only if they are required in the invitation for application. 4.193 The United States also argues that in B.C. most loggers operate as employees or contractors for tenure holders rather than as independent entities. There are thousands of Crown tenure holders, unaffiliated with any sawmill, that independently harvest standing timber, produce logs, and either use or sell the logs at arm's-length to sawmills and other kinds of processors. The record prior to the preliminary determination (PD) documented that of 5,932 Crown tenure holders in B.C. during the POI, only 105, or 1.8 per cent, owned sawmills. 4.194 In Quebec, there are two common forms of tenure. The dominant form of tenure, the TSFMA, can be and is held by any primary processing mill (for example, pulp mill, panel mill, veneer mill, etc.) and is not limited to sawmills. The second common form, the forest management contract ("FMC"), is rarely held by sawmills or even primary processing mills. 4.195 The United States further confuses the issues by leaving out two central facts in its discussion of Ontario tenures. Ontario, like other provinces, routinely grants export licenses for the export of logs. Indeed, Ontario granted export licenses pursuant to all requests. 4.196 Alberta also does not "generally require the tenure holders be sawmills." The United States misrepresents Alberta's questionnaire response that "[a]ll forms of commercial tenure own and operate sawmills". There, Alberta was indicating that when all sawmills are considered together, one will find among them all the types of tenures that exist in the province. Alberta at no point suggested that all tenures were held only by sawmills, or that only sawmills could get a tenure.
4.197 A benefit analysis under Articles 1.1(b) and 14(d) of the SCM Agreement must use benchmarks "in the country of provision". Canada's submissions in this regard are based on three complementary points: first, that the text of Article 14(d) did not permit "cross-border" comparisons; second, that the injunction in Article 14(d) is based on sound economic principles; and third, that, in any event, there were ample benchmarks inside Canada that the United States could have used to determine "adequacy of remuneration". 4.198 The United States argues that the concept of "commercial availability" is incorporated in Article 14(d). Article 14(d) does not refer to "commercial" availability of goods, much less "prices commercially available" for those goods. The term "availability", read in context, refers not to the price of a good, or commerciality of that price, but whether the goods are available in the country in question. Article 14(d) reflects a simple economic reality: the availability of a product�its "supply" �- has an impact on its price. 4.199 In any event, even if the United States were correct in its interpretation, its conclusions do not follow. The existence of imported goods in a market does not make the price of those goods the "prevailing market condition". Imported goods may, and often do, command premium prices on domestic markets. 4.200 The United States rejects the use of benchmarks reflecting market conditions prevailing in Canada and justifies the use of US benchmarks on grounds of subsidization and price suppression. The United States then proceeds to "prove" such subsidization and suppression solely on the basis of the US benchmark. Under this standard, any country enjoying a natural comparative or competitive advantage over the United States in anything would automatically be found to be giving countervailable subsidies. 4.201 The United States is also not correct in citing item (d) of Annex I as support for its proposition that "in the country of provision" means outside the country of provision. Item (d) identifies the elements of a specific practice that is considered in itself to constitute a prohibited export subsidy. It in no sense suggests that world prices can be used as a measure of benefit to domestic producers. Item (d) is framed in a way consistent with other items in Annex I, and it has the same relationship to Article 1 of the SCM Agreement as those other items. For example, the first paragraph of item (k) refers to lending at rates below the government's cost of borrowing. However, that does not mean that a "financial contribution" analysis must always find a cost to government. 4.202 The United States argues that it can do what the specific text of Article 14(d) does not allow, because forestry resources are for the most part owned by the Crown. It asserts that the only way it can determine "benefit" independently of the alleged distortion is to look beyond the borders of the "country of provision". The arguments of the United States must not prevail, for two reasons. 4.203 First, a "benefit" analysis seeks to identify whether a government practice has had "trade-distorting effects" but only in the sense of Article 1.1(b). The question is whether as a result of the financial contribution by the government, the recipient has got something it could not otherwise have got on its own in the market. Article 14(d), in turn, sets out the benchmark that can be used to determine the existence of "benefit" when the financial contribution in question is in the form of provision of goods. Neither Article 1 nor Article 14 presumes the existence of "distortion" because there is a financial contribution by the government. Furthermore, neither of these provisions permits dismissing benchmarks because of a presumption that these benchmarks might be "distorted" by a financial contribution. 4.204 The US argument is circular: market prices can be "suppressed" � driven below "normal" levels � by dominant government prices only if those government prices are below that "normal" level. However, that is the very point a benefit analysis must demonstrate. 4.205 Article 14(d) requires an investigating authority to use in-country benchmarks to determine and measure an alleged benefit. The finding of government dominance in the alleged supply of goods does not establish that the remuneration it receives is not adequate. And the United States did not make such a finding; it only asserted it. A Member also may not short-circuit the "in-country" requirement of Article 14(d) by a finding regarding the market share of the government. Market share does not equal market dominance; and neither may give rise to a presumption of price suppression. 4.206 Second, nothing in Article 1.1(a)(1) or in the jurisprudence of the WTO mentions alleged "price suppression" as a reason for dispensing with the market benchmarks set out in Article 14(d) in favour of US benchmarks. The benchmark under Article 1.1(b) is not the highest price the recipient might have liked to get, but rather the price prevailing in the market. 4.207 There are good reasons why Article 14(d) was written the way it was: cross border comparisons make no economic sense. The use of US stumpage prices as a benchmark rests on the wholly unsupported premise that "there should be no difference between the private prices in the country of exportation and world market prices, except for import taxes." In concluding this, the USDOC implicitly made an incorrect assumption that stumpage is a commodity product with negligible transportation and transactions costs. 4.208 In particular, borders affect prices and "thick border effects" are substantial and notoriously difficult to quantify. The border is highly relevant as political boundaries drive differences in government regulatory regimes, tax regimes, investment regimes, currency, banking and financial systems, business practices, and business climate. Government policies and other factors in different jurisdictions may affect economic conditions, including wage rates, taxes, capital costs, and exchange rates. 4.209 A wide variety of complex factors also affect stumpage rates. These factors include locational characteristics, timber characteristics, measurement systems, operating costs, government regulation, economic conditions, and tenure holders' obligations and responsibilities. Adjustments for these factors are difficult or even impossible to quantify for the following reasons:
4.210 While Canada believes that the Panel need not address the issue of adjustments, the United States advised the Panel that the USDOC made adjustments. It further asserted that the USDOC examined the obligations that Canadian tenure holders were legally obligated to assume, and calculated a per unit amount for each category, which it then added to the stumpage fee to arrive at a total "price" for stumpage in Canada. The USDOC did not make or even attempt any adjustments for almost all of these factors. Where it did, it did so incorrectly, including as follows:
4.211 One of the most significant errors made by the USDOC was the conversion factor it used to compare the stumpage rates in different jurisdictions. Comparing US and Canadian stumpage rates involves different measures of log volumes. Log volumes in several of the US comparison areas used by the USDOC are measured in thousand board feet (MBF) whereas stumpage in Canada is measured in cubic metres (m3) using a metric scale designed to measure the total volume of solid wood in logs.. 4.212 The issue of conversion rates arises because cubic log scales attempt to measure the total content of each log while the US log scales attempt to measure only that portion of total log volume that would be contained in the lumber produced from each log. This portion varies with the diameter, taper, and length of the log. Further, that portion will vary with which US log scale is being converted (and the United States has many different scales) the scale's log measurement conventions, and the scale's allowances for volume deductions for log defects. To accurately compare stumpage rates, the conversion factor must also account for differences in timber size and the utilization standards of the jurisdictions being compared. 4.213 Taken together this means that there is no such thing as a constant log scale conversion factor. Instead, the conversion factor must be specifically chosen to reflect differences in the log scales, the measurement conventions, the current timber profiles and the utilization standards of the jurisdictions being compared. The USDOC did not do this. Instead it took a "national" average factor and applied it across all provinces. The application of a proper conversion factor would have resulted in a rate substantially less than was calculated by the USDOC in the PD. 4.214 The United States continues to assert that "only the governments of Alberta, Quebec and Ontario provided any information" in response to the USDOC's request for in-country benchmarks, and that only "Quebec and Ontario actually provided private prices." 4.215 To the contrary, Alberta answered every US question and provided all documentation requested by the United States Alberta discussed and provided information on wood volumes. Further, Alberta responded fully to a series of follow up questions regarding Alberta's "private market stumpage figure." The USDOC's questions did not include any requests for further documentation of the stumpage value data. 4.216 Ontario provided the USDOC with a study entitled "Ontario's Private Timber Market" prior to the PD. The study was conducted by Resource Information Systems Inc. and explained that: The results of the survey suggest that the market for private timber in Ontario appears to be both competitive and efficient. Buyers and sellers have the same information about market conditions, sellers produce homogeneous products, they are price-takers and they can enter and exit the market easily. Hence the market meets the classic definition of a competitive market. The market can also be classified as efficient given its low transaction costs and low level of government involvement.
4.217 Quebec submitted to the USDOC the results of the private forest stumpage surveys conducted annually for the three years preceding the period of investigation and explained that these surveys are used to determine stumpage rates on public land under the Forest Act. Quebec reminded the USDOC that it had accepted earlier versions of the same private forest surveys in Lumber III as a benchmark. Quebec also submitted a lengthy study demonstrating that the private forest in Quebec, is an open, competitive, and functioning market. This study analysed the conditions and circumstances of the private forest and found that it exhibited all the indicia of a competitive market. 4.218 Finally, the United States states that B.C. did not provide private stumpage rates. However, B.C. explained on the record before the PD that most private timber transactions are for logs, and log price data was provided. 4.219 The four primary exporting provinces also provided the USDOC with information demonstrating that they were operating their stumpage systems consistently with market principles. This information established that each of these provinces earned substantial profits from timber harvesting rights. 4.220 Finally, B.C. put on the record extensive economic analysis that established that B.C.'s price setting practices were consistent with market principles. This was because provincial stumpage charges were equal to, or even higher, than the prices that would prevail in a competitive market and prices for logs were no lower and quantities no higher than what would prevail in a competitive market. As well, B.C. provided the USDOC with information on competitive sales of stumpage in B.C. through the Small Business Forest Enterprise Programme sales. 4.221 The USDOC rejected the above evidence on the basis that private stumpage prices in Canada were not valid benchmarks for determining and measuring benefit. It stated in the PD:
and later,
4.222 The USDOC cited the petition in support of its position. In particular, it relied on a letter of the Quebec Minister of Natural Resources to the President of the Wood Producer's Federation of Quebec (an association of private land owners). The United States now argues that this letter, and other outdated and anecdotal evidence, "[indicates] that private stumpage prices were depressed by the overwhelming majority of government-supplied timber in the market." 4.223 The letter is a Government response to the private land owners' association's criticisms of the cost adjustments used to make public and private timber comparable in Quebec's parity system, which itself is used for setting public land stumpage rates. The relevant portion of the letter relied upon by the USDOC states:
4.224 The verb "puisse," as used in the letter, translated means "could" or "might". It does not translate into "does". Therefore, the above sentence, translated, reads:
4.225 This in itself demonstrates the United States' gross mischaracterization of the value and import of the letter. However, the context of the above passage is equally revealing: the statement is simply the reason given by the Minister as to why the Government of Quebec continues to undertake meaningful dialogue with Quebec private landowners. 4.226 The United States also relies on a 1995 paper for its conclusion that Quebec private stumpage prices are distorted. The 1995 paper cites earlier studies (published between 1972 and 1985) that spoke to the Quebec stumpage regime that was replaced in 1989 as support for the relevant passage used by the United States In Lumber III, the Coalition made the same "distortion" argument regarding Quebec private stumpage prices. The USDOC addressed the argument and the evidence at that time as follows:
4.227 In Lumber III the USDOC, therefore, rejected evidence that was arguably more current, reliable and relevant than the material it is now relying on to arrive at the opposite conclusion.
4.228 Evidence on the record at the PD demonstrated that some lumber producers had purchased log inputs at arm's-length from timber harvesters; the alleged recipients of the "stumpage" subsidy. The USDOC failed to consider or even acknowledge that evidence and proceeded to grossly overstate the alleged benefit to lumber producers. 4.229 The United States now attempts to argue that it had, in fact, made a finding of no arm's-length transactions in respect of such downstream producers; and that no such analysis was necessary. This attempt must fail, for two reasons. 4.230 First, the US position is internally illogical and contradictory. If it was not necessary to make a finding, then the USDOC presumably did not make such a finding; and if it did make such a finding, it was because it found that the analysis was necessary. Second, the US assertion is simply untrue. The determination does not contain a "pass-through" analysis. In fact, there is no mention of the issue anywhere in the determination. The USDOC undertook no factual enquiry into the question of pass-through; it simply presumed that all lumber producers benefited from alleged subsidies. 4.231 Given the evidence on the record of arm's-length transactions between downstream producers of lumber and timber harvesters, the United States was under an obligation to establish an indirect subsidy in the sense of Article 1.1(a)(1)(iv) for all those transactions. In the absence of any such findings, even recognition of the evidence, the United States must be found in violation of its obligations under the SCM Agreement not to impose countervailing measures without first establishing the existence of a subsidy. 4.232 If the United States had examined the evidence on the record, it would have - indeed, should have - determined that, first, there were arm's-length transactions in which the pass-through of a subsidy may not be presumed; and second, that no subsidy was in fact passed-through from timber harvesters to arm's-length lumber producers. The United States now concedes that, if there were in fact independent loggers who sell logs in arm's-length transactions, then those sales cannot be countervailed, or at the very least, that a pass-through analysis must be conducted. To counter this, the United States claims that it "preliminarily concluded that the overwhelming majority of Crown timber is provided directly to sawmills." 4.233 The following examples provide a sampling of the evidence on the record on this issue. In B.C., more than 30 per cent of the timber harvested on Crown lands is harvested by entities that do not own sawmills. Similarly, in Ontario "approximately 30 per cent of the softwood timber harvested from Crown land during the USDOC's period of investigation was sold by tenure holders to third parties who subsequently processed this timber into forest products." Further, forest management contracts ("FMCs") in Quebec are typically held by municipalities, communities, or non-profit organizations and rarely held by primary processing mills. 4.234 This evidence was not considered by the USDOC and it made no finding on "pass-through" at the PD. The United States has now proceeded, for the first time, to counter the evidence on the record. It claims that there were no "true" independent loggers and cites evidence regarding the harvesting of timber in each province. The attempt by the United States to justify its failure to analyse evidence on the record must fail, for four reasons. 4.235 First, the facts presented by the United States do not support its conclusions. For example, the United States expressly admits that approximately 17 per cent of B.C. Crown timber is "provided under licenses that are normally reserved to entities not owning timber processing facilities," and that, in Saskatchewan, approximately 14 per cent "of the harvest was provided to smaller licenses� some of whom have their own sawmills." The United States also does not claim that all stumpage benefits are direct benefits, only that an "overwhelming majority" of Crown timber is provided directly to sawmills. Thus, notwithstanding that the United States' belated factual conclusion is incorrect, there was uncontroverted evidence on the record demonstrating arm's-length transactions between independent loggers and lumber. 4.236 Second, contrary to the United States's claim, the presence of domestic processing requirements or other regulations in no way preclude arm's-length transactions. The United States rests on the existence of an additional element in determining what constitutes an "arm's-length" transaction: the concept of an absence of "outside control or influence" For there to be an arm's-length transaction, there is no requirement that the Parties must operate independently of all other external influences. 4.237 Third, the US attempt to dismiss the evidence on the record after the fact only further highlights the USDOC's unjustifiable failure to undertake an indirect subsidy analysis in the preliminary determination . For example, the United States argues that in B.C., most loggers operate as employees or contractors for tenure holders rather than as independent entities. However, as noted above, the evidence on the record indicates otherwise. 4.238 Finally, the United States is simply incorrect to suggest that no pass-through analysis is necessary with respect to arm's-length purchasers who produce some merchandise that is subject to the investigation. Unaffiliated remanufacturers purchase lumber in arm's-length transactions from lumber producers. In those arm's-length transactions, any alleged benefit to the lumber producers would not be passed through to the remanufacturers. 4.239 The United States insists that no analysis of pass-through was necessary in a country-wide investigation. According to the United States, in such cases, "[t]he precise amount of the benefit received by any specific producer would only be determined in a company-specific review." An investigation undertaken on a country-wide basis does not relieve the United States of its obligation to establish the existence and amount of a subsidy. The effect of the US' failure to analyse the pass-through of alleged benefits was to countervail in instances where no benefit was received and to sharply increase the countervailing duty rate.
4.240 Although the calculation methodology in the survey makes clear that the data provided were from a survey of "sawmills" (also noted as "first mills"), the discussion of the methodology further intended to explain that the data also included a small portion of remanufactured products that were produced by the sawmills. Thus the statement -- " [b]ecause the MSM does not collect commodity data, it was not possible to exclude 'remanufacturers' from its results" -- intended to say that "it was not possible to exclude 're-manufactures' from its results." Canada explained this clearly in its August 21 and August 27 submissions, prior to the time at which the USDOC issued its Customs instructions implementing the decision. 4.241 The United States argues that it is not possible for the United States to apply definitive countervailing duties retroactively, if it were not permitted to suspend liquidation provisionally with respect to entries made before the PD that may later be subject to a definitive critical circumstances determination. This position is untenable for three reasons. 4.242 First, the essence of the US argument appears to have become this: the only way, under US law, the United States may exercise its right under Article 20.6 to make a definitive critical circumstances determination, is for it to breach that Article by imposing provisional measures not provided for by the Article, to preserve this right. At issue is not what the United States may or may not do under US law, but rather what are the United States's obligations under Article 20.6. If the United States is concerned about its ability to preserve retroactive imposition of definitive countervailing duties pursuant to a critical circumstances determination, it should ensure that its laws provide for this.. The United States does not lose its ability to impose duties retroactively by virtue of making a final determination of critical circumstances. 4.243 Second, the United States misinterprets Article 20.3 of the SCM Agreement. Article 20.3 in no way limits, or in fact speaks to, the right of Members under Article 20.6 to impose definitive duties retroactively pursuant to a critical circumstances determination. Rather Article 20.3 addresses the amount of countervailing duties that may be collected with respect to provisional measures imposed pursuant to a preliminary countervailing duty determination. 4.244 Third, Canada reiterates its position that the United States' reliance on Hot Rolled Steel from Japan is misplaced. Article 10.7 of the AD Agreement has no analogue in the SCM Agreement. Further, Article 20.6 does not permit a preliminary critical circumstances finding. 4.245 On the basis of the United States' replies, Canada understands US to have confirmed that:
4.246 In the light of these statements, Canada further understands that the United States does not propose to argue that its discretion to grant a review includes the discretion to reject such a review. Any such argument would directly contradict the US acceptance of its obligation under Article 19.3. 4.247 Canada is not convinced that US law provides the United States with the discretion to meet its obligations under Article 19.3. Nevertheless, its statements to the Panel represent declarations by the United States of both its understanding of its obligations under the WTO Agreement and also the operation of its laws. Therefore, Canada requests that the Panel find that the United States:
4.248 It is critical that the USDOC give exporters subject to the country-wide countervailing duty rate in Lumber IV expedited reviews "promptly," as Article 19.3 requires. Within a few days, these exporters will be required to pay cash deposits at a country-wide CVD rate of 18.8 per cent. Moreover, expedited reviews provided months or years from now cannot, by definition, constitute the "expedited" reviews that Article 19.3 requires. 4.249 With respect to administrative reviews, the United States's responses effectively concede that Canada's understanding that US law prohibits granting exporters individual rates in country-wide cases is correct. In paragraph 67 of its answers, for example, the United States confirms that Section 351.213(b) of the Regulations does not provide for individual reviews in country-wide cases. 4.250 By relying on this section of the regulations, the United States asserts that its obligations with respect to administrative reviews are not to determine individual rates so as to ensure that individual companies are not paying more than the extent of the subsidy they actually receive. Rather, the United States argues that it is required to provide for individual rates only if such a rate turns out to be zero. This interpretation turns Articles 19.3 and 21.2 on their head. If adopted, the US interpretation would result in these provisions being read in a manner that would reduce the scope of their application far beyond that intended by drafters of the SCM Agreement, something a treaty interpreter must not do. 4.251 Furthermore, if the Panel does not find that the United States must conduct individual administrative reviews in country-wide cases, any relief granted regarding expedited reviews is virtually moot. Exporters and producers would obtain individual cash deposit rates that would be in effect only until completion of the first administrative review, given that the regulations mandate that a single country-wide rate calculated in an administrative review supersedes any individual rate previously determined.
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