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UNITED STATES - PRELIMINARY DETERMINATIONS
Report of the Panel
4.252 In its second written submission, the United States made the following arguments.
4.253 Over the course of this proceeding, the issues have been focused and the facts clarified. If there was ever a doubt, the United States has now demonstrated that the Canadian provincial governments provide timber to lumber producers - that is a financial contribution under the WTO Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). 4.254 The United States and the European Communities ("EC") also share the view that, in appropriate circumstances, the benefit from the government's provision of a good may be measured by comparison to commercially available world market prices, consistent with Article 14(d) of the SCM Agreement. Even Canada agrees that the use of import prices may be appropriate in certain circumstances. Therefore Article 14(d) does not prohibit the use of world market prices in appropriate circumstances. 4.255 There has, however, been much debate over whether the USDOC's recourse to such prices in this case was appropriate. In the end, as discussed below, the evidence demonstrates that the USDOC's use of US stumpage prices commercially available to Canadian lumber producers was entirely consistent with the SCM Agreement. 4.256 The United States has also amply rebutted Canada's claim that the USDOC inflated the amount of the subsidy benefit by failing to take into account so-called "independent loggers." The USDOC's preliminary determination that the Canadian provincial stumpage systems provide a subsidy to lumber producers was therefore entirely consistent with US obligations under the SCM Agreement. 4.257 Thus, we come full circle to where we began. "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."13 When one Member causes injury to the domestic industry of another Member through the use of any "specific" subsidy, the injured Member has the right to take countervailing measures. The US right to impose provisional measures to counteract the injurious effects of billions of dollars of imports of subsidized Canadian lumber should therefore not be denied.
4.258 It should be beyond dispute that the provincial governments are providing a good - timber - to lumber producers, within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. This conclusion is inescapable under any definition of "good" in any language. It should also be beyond dispute that when a government gives a company the right to take a good, whether it is the right to take widgets from a government warehouse or timber from government land, the government is "providing" that good within the meaning of Article 1.1(a)(1)(iii). The Canadian provincial governments give tenure holders the right to take timber off Crown land and, thus, give them the timber itself. The only logical conclusion is that, in doing so, the provincial governments are providing a good within the meaning of Article 1.1(a)(1)(iii). 4.259 Canada's attempts to obfuscate this simple fact rely on logically flawed arguments, and ignore the basic principles of treaty interpretation reflected in Article 31 of the Vienna Convention on the Law of Treaties. For example, Canada asks the Panel to infer from the use of the phrase "imported goods" in Article 3.1(b) of the SCM Agreement and the word "products" in Parts III and V of the SCM Agreement, that "goods" can only mean traded goods that fall within the GATT 1994 Article II schedules. The fact that "products" are goods and "imported goods" are goods does not, however, logically give rise to the inference that nothing else can come within the meaning of "goods." 4.260 To sustain its strained interpretation, Canada simply ignores the most relevant aspect of the ordinary definition of "goods" in the source it relies upon, which is the inclusion of "growing crops, and other identified things to be severed from real property." Moreover, Canada's attempt to narrow the ordinary meaning of "goods" would render superfluous the only express limitation in the text itself, i.e., the exclusion for "general infrastructure." If "goods" were intended to be read as narrowly as Canada suggests, it could never encompass any infrastructure (e.g., a building, road, etc.), let alone general infrastructure. "Goods" must include some infrastructure, otherwise the specific exclusion in Article 1.1(a)(1)(iii) is superfluous. Thus, the very existence of that express limitation demonstrates that the Members intended "goods" to be read in accordance with its ordinary meaning and therefore to include things other than those listed in the GATT 1994 tariff schedule. 4.261 In addition, Canada's arguments are premised on the notion that the only thing at issue here is an intangible "right" granted by the provincial governments, which Canada then proceeds to totally divorce, analytically, from the object of the right granted. Under Canada's theory, form is everything: what something is called (e.g., an "exploitation right") is more important than what it actually is. In Canada's truncated analysis, if the government has granted a right, the inquiry stops, regardless of what the "right" entitles the holder of the right to do. By ignoring substance, Canada concludes that, while granting a right may constitute a financial contribution, it can never constitute the provision of a good. However, as the Export Restraints panel stated:
4.262 Thus, it is in fact the "right," i.e., the terms under which the provinces transfer timber to lumber producers, that is irrelevant. To determine whether there is a financial contribution, the treaty interpreter should look at the reality of what actually occurs. In the case of provincial tenures, what actually occurs is that the provincial governments grant tenure holders the right "to take" a tangible good - timber - off the land. The right "to take" is, in fact, the mechanism (or terms) by which the government "provides" the timber, i.e., places the timber at the disposal of the lumber producer. The provincial governments are therefore providing goods within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. 4.263 Canada concedes that offering steel producers the opportunity to load and haul (i.e., "to take") iron ore from a government stockpile would constitute the provision of goods. In reality, there is no meaningful difference between giving lumber producers the right to take trees off Crown land and giving steel producers the right to take iron ore from a government stockpile. While Canada may disagree, the United States is confident that the steel producers and the lumber producers would not. 4.264 The reality of the provincial tenure systems is readily apparent. The evidence demonstrates that companies obtain tenures for the sole purpose of obtaining timber, not to manage the forest. Tenure holders acquire nothing under the tenure but timber, and pay stumpage fees only on the amount of timber actually harvested. These facts leave no doubt that through the tenure systems the provincial governments are "providing" a "good" - timber.
4.265 Canada has made several claims with respect to the USDOC's measurement of the benefit from provincial stumpage systems. In this section, the United States will address Canada's claims concerning the USDOC's selection of a market benchmark for stumpage.
4.266 As discussed in the US prior submissions, Article 14 of the SCM Agreement sets forth guidelines for determining the benefit conferred by a financial contribution. Prior panel and Appellate Body reports have defined a benefit as some form of advantage that would not otherwise be available in the marketplace, absent the financial contribution. The guidelines in Article 14(d) should therefore be interpreted to achieve an appropriate comparison of the financial contribution to the marketplace, i.e., a comparison that would identify the artificial advantage resulting from the government's financial contribution. 4.267 Article 14 does not purport to address every conceivable scenario in which a benefit must be determined. For instance, some types of financial contributions are not addressed at all in Article 14 (e.g., grants and debt forgiveness). Thus, authorities have the discretion to develop appropriate methodologies. It is the view of the United States that an appropriate methodology is one that is consistent with the guidelines in Article 14, considered in light of the object and purpose of Article 14 to compare the financial contribution to what would be available to the recipient in the market absent the financial contribution. 4.268 With respect to the provision of a good, Article 14(d) of the SCM Agreement states that the comparison should be made "in relation to prevailing market conditions for the good [] in question in the country of provision . . . .". There is no dispute that the basis for the comparison described in Article 14(d) is the prevailing market conditions in the country under investigation. What constitutes prevailing market conditions is also described in Article 14(d), i.e., "price, quality, availability, marketability, transportation and other conditions of purchase or sale." Where the United States and Canada disagree is in defining what constitutes the universe of permissible market benchmarks that could be used to measure the adequacy of remuneration "in relation to prevailing market conditions" in the country under investigation, consistent with Article 14(d). 4.269 As the EC stated: "[t]he expression 'market conditions in the country of provision' in Article 14(d) of the SCM Agreement is sufficiently broad to allow the consideration of world market prices." In particular, as noted above, the concept of commercial "availability" is expressly incorporated in Article 14(d). The use of "commercially available" world market prices is also expressly sanctioned in item (d) of the Illustrative List of Export Subsidies, and has been endorsed by the Appellate Body. Prevailing market conditions in the country of provision may therefore encompass prices commercially available on the world market to purchasers in the country under investigation. Commercially available world market prices can therefore be used as a market benchmark, in appropriate circumstances, consistent with Article 14(d). 4.270 As the EC points out, the issue therefore is not whether Article 14(d) permits the use of commercially available world market prices (such as US stumpage prices) per se, but rather whether it was appropriate to do so in this case. The facts discussed below demonstrate that the USDOC's use of commercially available US stumpage prices was appropriate in this case and therefore consistent with Article 14(d) of the SCM Agreement.
4.271 When considering the entire universe of potential market benchmarks, the United States agrees that prices within the country under investigation should be used whenever possible. Use of prices within the country under investigation is, however, not always possible. The obvious example, which the EC noted, is the case of a government monopoly for the good in question. In such a case there is no "market" benchmark price. That example is no different in principle from the circumstances of this case. The provincial governments control 85 to 95 per cent of the market for timber. There is extremely limited information on non-government prices and the evidence indicates that non-government prices are suppressed by government prices. There is therefore no "market" benchmark price in Canada that could measure the benefit. That conclusion is not based on theory, it is based on the record evidence. 4.272 First, only three provinces provided any private price data in response to the USDOC's questionnaire. Canada's claim that there was "extensive evidence" related to private markets in those provinces is simply not supported by the record. The limited data provided by the provinces was inadequate for purposes of establishing a market benchmark. For example, as the United States explained in its response to the Panel's questions, Alberta stated that it does not have any data on private timber used in sawmills. The so-called "extensive" data provided by Alberta was a two-page excerpt from a KPMG survey, which contained a single estimated stumpage value derived from some price data for log sales. Moreover, Alberta acknowledged that the estimated value was based on information that did not distinguish between private and Crown timber. 4.273 Ontario and Quebec submitted market surveys. However, the Ontario survey was flawed in several respects (e.g., it provided no information on quality or grade). Moreover, there was substantial evidence on the record, including statements by an official in Quebec's Ministry of Natural Resources, that government prices suppressed private prices in the provinces. In fact, one Canadian group said that "downward pressure on the price of private wood is built into the system." The influence of a dominant owner has been recognized in other markets as well. A study of stumpage trends in South Australia notes:
4.274 The remainder of the evidence that Canada cites consists of evidence that does not actually pertain to private prices. That evidence instead largely pertains to whether the provinces recover their costs and earn a profit when they sell timber. The government's profitability is, however, not the issue. It is now well settled that the cost to the government is irrelevant in measuring benefit. Moreover, the purported fact that the provincial governments made a profit does not establish that they sold Crown timber at market prices. The information provided therefore does not address the relevant inquiry, i.e., whether provincial prices for timber are more advantageous than those that would have been available to lumber producers on the market absent the provincial governments' financial contribution. 4.275 As the above analysis of the record demonstrates, there was insufficient evidence of "market" prices in Canada to form a benchmark. As the EC asked, "which other benchmark should be used in [such a case]?" The United States agrees with the EC that, in the absence of market prices in Canada, the use of other prices commercially available to Canadian lumber producers on world markets is a reasonable alternative. As demonstrated below, stumpage prices for comparable timber in the United States are commercially available to lumber producers in Canada.
4.276 Canada agrees that some prices commercially available on the world market, specifically import prices, can provide a benchmark consistent with Article 14(d). Canada argues, however, that it is impossible for there to be import prices in this case. Canada does not claim that Canadian producers cannot or do not harvest timber in the United States, or that US timber cannot be imported into Canada. Canada simply reverts to its argument that the provincial governments are providing a "right," not timber, and that a "right" cannot be imported. Once again, in Canada's view, form is all that matters. As the United States has amply demonstrated above, the provincial governments are not merely providing rights, they are providing timber. US timber can be, and in fact is, imported into Canada. 4.277 More importantly, Canadian lumber producers can and do purchase US timber on the stump for harvesting and import into Canada. The SCM Agreement states that "commercially available means that the choice between domestic and imported products is unrestricted and depends only on commercial considerations." Canadian lumber producers have virtually unrestricted access to US stumpage for import into Canada. US stumpage is therefore commercially available to Canadian lumber producers. Because US stumpage prices are commercially available to Canadian lumber producers, they fall within the universe of benchmarks that can be considered for purposes of measuring the benefit from provincial stumpage, consistent with Article 14(d) of the SCM Agreement. 4.278 In fact, based on commercial considerations, US stumpage prices are the most reasonable world market prices to use because the terrain, topography and species mix for US timber in border states are most comparable to those in Canada, and because the record shows that Canadian companies do in fact purchase US timber. In fact, virtually all of Canada's timber imports come from the United States. 4.279 Furthermore, it is reasonable to conclude that US stumpage prices represent appropriate market-based benchmark prices to measure whether provincial prices confer an artificial advantage. The observed price difference for Canadian and US stumpage does not reflect differences in inherent market characteristics in Canada versus the United States. Rather, it reflects the fact that the Canadian system precludes price arbitrage for timber. There is a fully integrated North American lumber market that coexists with a largely segregated North American timber market. Canada exports over half of its total lumber production to the United States, but only three per cent of its timber production. The United States exports little lumber to Canada, but exports nearly six times as much timber. The low volume of timber trade between the two countries is the result of domestic processing requirements in Canada that limit the flow of Canadian logs southward, and the advantageous stumpage prices in Canada inhibit the flow of US logs northward. The segregated timber market in North America allows for virtually no price arbitrage in timber markets across the border. 4.280 The unusual nature of the situation in the North American market is evident when compared to the substantial amounts of lumber and timber exports from other countries with major timber and lumber industries. More importantly, the data indicates that US stumpage prices are comparable to prices in Australia, New Zealand, Finland and Chile. 4.281 The USDOC's use of prices for comparable US timber that is commercially available to lumber producers in Canada was therefore appropriate in this case. Moreover, in establishing the market benchmark, the USDOC took into account other market conditions prevailing in Canada for timber, such as species, quality and tenure obligations. The market benchmark that the USDOC used in the preliminary determination was therefore consistent with Article 14(d).
4.282 Canada alleges that the USDOC improperly assumed that the benefit from a financial contribution to one entity accrued to another entity. These allegations pertain to three distinct situations: (1) logs harvested by one sawmill and then sold in arm's-length transactions to other sawmills; (2) lumber sold in arm's-length transactions to companies that produce remanufactured lumber products; and (3) timber harvested by independent loggers who sell at arm's-length to lumber mills. In each case, the allegations do not withstand close scrutiny. 4.283 In the first two situations, all of the alleged recipients of the financial contribution and the benefit are producers of the subject merchandise. As discussed previously, in an aggregate case no further analysis of these situations is necessary to perform the aggregate calculation. The numerator (total benefit to the subject merchandise) is properly matched to the denominator (total sales of the subject merchandise). The precise amount of the benefit received by a specific producer would only be determined in a company-specific review. 4.284 Canada's claim with respect to the third situation rests on the assertion that the provincial governments provide a significant volume of Crown timber to independent loggers who then sell the timber at arm's-length to lumber mills. In response to the Panel's questions on this issue, the parties have provided record evidence concerning the operation of provincial tenures, and, in particular, the restrictions that the provinces impose on who may acquire a tenure and what the tenure holder may do with the harvested timber. While it is not the Panel's task to conduct a de novo review of those facts, a careful analysis of this evidence demonstrates that it does not support Canada's claim that lumber producers acquire a significant volume of timber from independent loggers. 4.285 First, as the United States has previously demonstrated, the potential volume of timber provided by so-called "independent" loggers is small. Canada's "evidence" to the contrary relies in large part on confusing or irrelevant statistical data. For example, Canada claims that "large numbers of harvesters" are independent loggers. The number of harvesters is, however, irrelevant. The issue is not how many independent loggers there are, but rather whether they provide a significant volume of Crown timber to lumber producers. Moreover, it is irrelevant if the harvester is "independent" if the mill owns the license (or is tied to the license contractually, as in Ontario). 4.286 The record demonstrates that the vast majority of the Crown softwood sawlog harvest is, in fact, under tenure to sawmills. This fact is obscured by Canada's province-specific data. For example, instead of estimating the volume of softwood sawlogs harvested by independent loggers in British Columbia, which is the relevant data, Canada estimates the volume of "timber" harvested by companies "not owning sawmills." "Timber" includes hardwood as well as softwood, and pulpwood as well as sawlogs. Moreover, it is completely irrelevant that some portion of the Crown timber was harvested by a tenure holder owning a pulpmill rather than a sawmill, if that timber was not used to make subject merchandise. The relevant fact is that more than 83 per cent of the British Columbia Crown softwood timber harvest is provided under tenures that require the tenure holder to own a sawmill. 4.287 Canada's statements with respect to the potential universe of "independent loggers" in Quebec are perhaps the most difficult to understand because they are almost entirely irrelevant. The issue is the percentage of the Crown harvest of softwood sawlogs that is provided to lumber mills by independent harvesters. In Quebec, 99 per cent of the Crown harvest is provided under Timber Supply and Forest Management Agreements ("TSFMA"). The Quebec Forest Act states that "[n]o one except a person authorized under Title IV to construct or operate a wood processing plant is qualified to enter into" a TSFMA. The harvest from Federal lands, which is minuscule (less than 1 per cent), and private lands is irrelevant to the benefit calculation, as is the fact that there are 40,000 registered woodlot owners. Given the TSFMA requirements, it is virtually impossible to have a significant percentage of independent loggers harvesting Crown timber in Quebec. 4.288 Similarly, in Saskatchewan, more than 86 per cent of softwood sawlogs were harvested by tenure holders that own sawmills and process their own timber, and in Manitoba, approximately 95 per cent of the softwood sawlogs were provided directly to sawmills. Alberta also stated that "[a]ll forms of commercial tenure own and operate sawmills." 4.289 Second, to the extent there may be a small portion of Crown timber harvested by entities that do not own processing facilities, transactions between those entities and the lumber mills are not at "arm's-length." A truly arm's-length negotiation is one where neither party is under any outside control or influence, either from the party with whom they are bargaining, or other parties. 4.290 Canada claims that tenure holders are free to sell their logs to unrelated mills. In fact, the record evidence demonstrates the contrary. For example, Quebec indicated that there were essentially no arm's-length transactions involving Crown timber sold by independent loggers to sawmills. Moreover, the record establishes that all of the provinces generally require that Crown timber be processed in a mill within the province. Each province also imposes other restrictions that impede a harvester's ability to negotiate freely and that compel the harvester to sell to particular customers. For example, in Ontario, as a condition of the license, tenure holders are required to sign "wood supply agreements," in which they agree to supply specific quantities of wood to specific mills. The licenses also provide that the Ministry of Natural Resources can direct excess log production to specific mills. In British Columbia, major licensees are required by law to process their logs or an "equivalent volume" of wood in their mills. Similarly, in Alberta, all licenses on the record specify a particular fixed volume that must be processed in a specific mill. Moreover, the evidence shows that the so-called independent loggers often operate as employees or contractors for tenure holders. In addition, Canada's claim of significant "sales" by independent harvesters includes transactions that are, in fact, "swaps." 4.291 In light of this evidence, the only reasonable conclusion is that there are no true arm's-length transactions for Crown timber between independent loggers and lumber mills. There is therefore no basis for Canada's claim.
4.292 As fully discussed in the US prior submissions, Canada has failed to make a prima facie case that the USDOC's preliminary critical circumstances finding was inconsistent with the SCM Agreement. The USDOC's imposition of provisional measures in this case on merchandise entered during the 90-day period prior to the publication of the preliminary determination was in fact fully consistent with the text of Article 20 of the SCM Agreement, as well as with its object and purpose. 4.293 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." Article 20.6 provides such an exception, stating 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. As discussed in the US prior submissions, retroactive provisional measures (including suspension of liquidation and cash deposits or bonds) are essential to enable a Member to avail itself of the special remedy provided under Article 20.6. It is therefore the view of the United States that a Member may impose retroactive provisional measures if there is a reasonable basis to believe or suspect at the time of the preliminary determination that critical circumstances exist. 4.294 With respect to Canada's remaining critical circumstances claims, the United States will, at this time, rely on its prior submissions.
4.295 No reviews have been requested, much less denied, in this case because the United States has not yet imposed definitive countervailing duties. Canada simply claims that the US laws governing such reviews are inconsistent with the SCM Agreement. Under established WTO jurisprudence, however, 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 matter, the law, as such, does not breach a Member's WTO obligations. 4.296 For the reasons fully discussed in the US prior submissions, the US laws that Canada challenges clearly do not mandate action inconsistent with US WTO obligations. US law instead gives the USDOC broad discretion to conduct reviews in a WTO-consistent manner.
4.297 For the reasons set forth above, the United States requests that the Panel reject Canada's claims in their entirety.14
4.298 In its second oral statement, Canada made the following arguments.
4.299 We are here because the United States, in violation of its WTO obligations, is imposing duties on Canadian softwood industries that are crippling our forest industries. This dispute is not just about trees or logs or lumber. It is, rather, about how the WTO Agreement applies to a Member's management of its natural resources. The United States claims a right to countervail the products of Members who manage their natural resources in a way that differs from the way chosen by the United States. Ignoring the SCM Agreement, the United States simply presumes that the difference between Canadian stumpage fees and US prices is a countervailing subsidy. In effect the US view is that where a government owns natural resources, it may exploit those resources only by auctioning them off in the US style. Of course this is not the way Canada manages its timber resources. And it is not the way the United States manages its natural resources, such as fisheries and mineral rights. 4.300 The US approach is also neither logical nor consistent with economic theory. For example, it is not at all evident that auctioning off stumpage in Canada would result in higher returns than those prevailing under Canada's current systems. However, where there is an abundance of resources and a small market, one would expect prices to be lower. And, the owner of those resources might well command a higher return by setting rates administratively. 4.301 The United States has imposed provisional countervailing measures against practices that are not subsidies within the meaning of the SCM Agreement. The United States has, also, impermissibly imposed retroactive provisional measures pursuant to a "preliminary" critical circumstances determination. Finally, in countrywide cases, the United States does not provide for expedited reviews as required by Article 19.3, and outright prohibits company-specific administrative reviews contrary to Article 21.2 of the SCM Agreement.
4.302 The distinction between the right to harvest trees, standing timber, and logs, and the distinction between timber harvesters and lumber producers, are at the heart of this dispute. They are as follows:
The second set of distinctions relate to the different players.
4.303 The United States assertion that provinces provide "timber" to lumber producers is, therefore, incorrect as a matter of fact, and its assertion that provinces "provide goods" when they enter into tenure agreements is incorrect as a matter of law. 4.304 The ordinary meaning of "provide" is to "supply", in the sense of to "give". 4.305 The United States proposes an alternative meaning, to "make available", in the sense of to "make it possible to obtain". The verb "provide", however, does not have such a wide scope:
4.306 If the negotiators had wanted to say, "make it possible to obtain", they would have said so in Article 1. In the light of its context, "provide" means to "give" or to "sell". 4.307 The term "goods" has the same meaning in Article 1 as elsewhere in the SCM Agreement and the WTO Agreement. "Goods" in Article 1 are the "goods" to which the modifier "imported" is applicable in Article 3; they are the same "goods" that are the subject of Article II of GATT 1994 and the Customs Valuation Agreement. "Goods" are tradable items � products �- that are capable of bearing a tariff, and exclude real property, intellectual property and other property interests. 4.308 Moreover, the terms "goods" and "products" are used interchangeably in the WTO Agreement. Article II of GATT 1994 refers to "products" in paragraph 1(b) and "goods" in paragraph 1(c) - and both refer to items that may be subject to tariff bindings. The term "goods" is translated into "biens" and "bienes" in Article 1 of the French and Spanish versions of the SCM Agreement, and "produits" and "productos" in Article 3. The term "goods" is also translated into "marchandises" and "mercanc�as" in the French and Spanish versions of the Customs Valuation Agreement. "Goods", "biens", "bienes", "produits", "productos", "marchandises", "mercanc�as" - all mean the same thing: tradable items, or products in the sense of Article II of GATT 1994. 4.309 The United States persists in its argument that providing the right to produce goods is in effect the same as providing goods. In this respect, the United States is rehashing its failed "functional equivalence" arguments from United States - Export Restraints. Subparagraph (iii) does not refer to the effects of a government action, but the action itself. This government action is entering into a tenure agreement, one element of which is a right to harvest trees. 4.310 The question before you is the scope of the phrase "provides goods" and not Article 1.1(a) of the SCM Agreement more generally. The United States tries to justify its stretching of "provides goods" by saying that Canada's objections elevate form over substance. On the contrary, it is evident that the drafters of the SCM Agreement made conscious and careful choices in defining "financial contribution" under the SCM Agreement, and we ask the Panel to give effect to those choices.
4.311 The Parties agree: that there is a "benefit" where "the recipient has received a 'financial contribution' on terms more favourable than those available to the recipient in the market"; where the alleged financial contribution is a government provision of goods, Article 14(d) of the SCM Agreement is the relevant guideline; and that Article 14(d) requires an investigating authority to determine adequacy of remuneration in relation to prevailing market conditions in the country of provision of the goods. The United States now concedes that "[t]here is no dispute that the basis for the comparison described in Article 14(d) is the prevailing market conditions in the country under investigation." 4.312 This is a significant departure from the USDOC's position in the preliminary determination (PD) and from the position the United States took earlier in this case. In the PD, the USDOC found that in-country benchmarks were not required. In its First Written Submission, the United States argued that Article 14(d) "requires [an] 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 �". 4.313 The United States now argues that out-of-country benchmarks are "commercially available" in Canada. For the United States, it is no longer the case that "in" means "out" - rather, it is that "out" really means "in": that is to say the prevailing market conditions in the United States are somehow "available" in Canada, the appropriate benchmarks in Canada are those to be found in the United States 4.314 Moreover, Article 14(d) does not refer to "commercial" availability of the goods in question, much less "prices commercially available" for those goods. Rather, "availability", read in context, refers to whether the goods are available in the country of provision. 4.315 The United States argues that the US stumpage prices from selected lands it used as benchmarks in this case are "world market prices". This is untenable. Goods that are capable of having a "world market price" are essentially homogeneous commodities or ones whose characteristics can be defined so that they are interchangeable. Standing timber is not such a commodity. This is why the USDOC used six different US benchmarks 4.316 The United States also argues that US stumpage prices are comparable to stumpage prices in other parts of the world and are, therefore, "appropriate" and consistent with Article 14(d). It asserts that support for its position can be found in item (d) of the Illustrative List of Export Subsidies and case law � Canada � Dairy. 4.317 With respect to item (d), Canada has explained that its only possible relevance to this dispute is that it equates "goods" with "products". Further, Canada � Dairy is not relevant because the phrase "commercial availability" relates only to item (d) and there was no decision concerning this provision, as the Panel's findings were rendered moot and of no legal effect by the Appellate Body (AB). If anything, the significance of this decision is limited to the conclusion of the AB that world market prices did not provide a valid basis for determining whether there were "payments" under Article 9.1(c) of the Agreement on Agriculture. The AB found that a comparison between commercial export milk prices and world market prices gave no indication as to whether Canadian export production had been given an advantage. 4.318 Not only are US prices not "world market prices", they are also not "available" in Canada. According to the United States, US stumpage is commercially available "in" Canada for two reasons: (1) because Canadian producers can purchase US timber on the stump for harvesting, and (2) because logs produced from timber harvested in the United States can be exported to Canada. Neither reason is valid. 4.319 First, the fact that a Canadian can bid on timber in the United States does not make that standing timber available in Canada. Second, that some Canadian firms can use logs produced from US timber does not mean that they can use US timber harvesting rights in Canada. Rights to harvest timber in the United States are available only in the United States 4.320 Moreover, US law prohibits the export of logs from the public lands in the western US that the USDOC used as benchmarks for B.C. (Washington), Alberta (Montana) and Saskatchewan (Montana). Thus, the United States has used as benchmarks, stumpage from public lands where the export of logs is prohibited. 4.321 At the time of the PD the USDOC had before it ample evidence of benchmarks in Canada that it chose to ignore. The United States initially asserted that the in-country benchmarks were unusable because they were artificially suppressed by government involvement in the marketplace. However, the rejection of an in-country benchmark as "distorted" because of government involvement is not supported by the SCM agreement. 4.322 The United States now argues that the evidence was inadequate to establish a market benchmark. Yet the USDOC did no analysis of this evidence. Alberta, Ontario and Quebec all provided evidence on private sales of timber harvesting rights. B.C. provided private log price data. Alberta and B.C. also provided information on competitive tenures. 4.323 In addition, these four provinces, which represent 96 per cent of softwood lumber exports from Canada provided the USDOC with information demonstrating that they were operating their stumpage systems consistently with market principles. The United States attempts to dismiss this evidence on the basis that "cost to government" is irrelevant in determining benefit. But the point has nothing to do with "cost to government". Rather, the substantial profits show that the provinces are acting consistently with market behaviour. 4.324 Moreover, the US position cannot be reconciled with the USDOC's own regulations, which provide for analysing consistency with market principles as a way to evaluate adequacy of remuneration. The USDOC has consistently determined adequacy of remuneration using this benchmark where it has found that the government played a dominant role in the market. Finally, the USDOC ignored evidence that there is no benefit to lumber producers when the situation in Canada is compared with results that would be produced in a competitive market. Regardless of what the United States now says respecting the adequacy of this evidence, the USDOC had an obligation to analyse it. It did not do so.
4.325 The United States has not demonstrated that a subsidy exists in this case. Rather, it has improperly presumed the existence of a "subsidy" to producers of subject merchandise that buy their inputs at arm's-length. 4.326 The United States has admitted that at least 17 per cent of Crown timber harvest is done by independent harvesters in B.C., 14 per cent in Saskatchewan, and 5 per cent in Manitoba, and that a pass-through analysis is required at least in respect of companies that do not produce subject merchandise. Prior to the PD, the record evidence indicated even higher percentages. The requirement for a pass-through analysis, however, goes beyond this and includes instances of arm's-length transactions for inputs (logs or lumber) into the production of the subject merchandise. In all these cases, the United States has failed to demonstrate the existence of a subsidy because it has not undertaken the required pass-through analysis. 4.327 The United States now attempts to justify this violation by arguing that it does not need to undertake a pass-through analysis in countrywide cases. This argument is not relevant because it ignores the required elements of Article 1. More specifically, the United States has failed to establish that governments have made a financial contribution or that the financial contribution confers a benefit on a recipient. In arm's length transactions the profit maximizing recipient of an alleged subsidy must be presumed to have retained subsidies it received. Under the SCM Agreement, there are no exceptions to the obligation to establish the existence of a subsidy.
4.328 The USDOC calculated the subsidy rate on a first-mill basis, but applied it on an entered-value basis, with the effect of significantly increasing the countervailing measures applied. There is no dispute that the data used was first mill data. Therefore, there should be no dispute that the United States violated its obligations. The United States has attempted to excuse its violation, claiming that the USDOC did not know that the data it used was first mill data. This claim is not credible. The United States has acknowledged that the USDOC received clarification of the information provided to it before it made its decision to impose measures on a final mill basis. 4.329 The United States argues that the term "definitive duties" in Article 20.6 also refers to preliminary measures, because, first, Article 20.1 refers to both definitive duties and preliminary measures. And second, Article 20.3 prohibits the collection of preliminary duties in an amount greater than definitive duties. The United States then argues that it must be permitted to breach Article 20.6 in order to be able, under its domestic law, to exercise the right to collect retroactive duties. 4.330 Article 20.1 prohibits retroactive application of preliminary measures and countervailing duties subject to exceptions listed in the rest of the Article. Each of the exceptions is applicable only to the extent relevant; Article 20.6 refers to definitive duties and not preliminary measures; it does not, therefore, create an exception in respect of preliminary measures. 4.331 The USDOC has posted a notice indicating that it will accept requests for expedited reviews in the Lumber IV case. The notice contains no information on timelines or procedures for these reviews or whether the reviews will actually be conducted for all requesting companies. 4.332 In the light of these considerations, and to ensure that there is no doubt as to the substance of the obligations under Article 19.3, Canada requests the following findings:
4.333 Accordingly, Canada asks that the Panel recommend that the United States may conform to its obligations under Article 19.3 only where it grants expedited reviews upon request and establishes individual countervailing duty rates for requesting exporters in countrywide cases at least in accordance with the timetable and procedures applicable to other expedited review requests. 4.334 The United States continues to deny its obligations under Article 21.2 of the SCM Agreement and maintains that it has provided for some form of administrative review in countrywide cases. US arguments in respect of Article 21.2 ignore two critical points. 4.335 First, the first sentence of Article 21.2 refers to "the duty". This can only mean the "countervailing duty" mentioned in Article 21.1. Accordingly, Article 21.2 should be read in the light of the preceding paragraph, which reads, "A countervailing duty shall remain in force only as long as and to the extent necessary to counteract subsidization which is causing injury." This means that the review must also consider the level of the countervailing duties. Second, there are three elements in Article 21.2. Article 21.2 requires that a Member review, "the need for the continued imposition of the duty � upon request by any interested party which submits positive information substantiating the need for a review". It gives a right to an interested party to request such reviews in respect of "whether the continued imposition of the duty is necessary to offset subsidization" and whether injury would continue if the duty were removed or varied. And it requires that the authorities terminate the duty if it is no longer warranted. 4.336 Read together, in the light of Article 21.1, the obligation becomes clear: the United States must provide for, and conduct, administrative reviews upon request to determine not only whether countervailing duties are necessary at all, but also to establish company-specific rates. 4.337 The United States is in breach of Article 21.2 because it expressly denies administrative reviews in countrywide cases. The United States persists in arguing that it has the "discretion" to grant administrative reviews in certain limited circumstances and subject to certain qualifications. This is not enough. The "discretion" in question is to grant an administrative review only "where practicable" and then only when there is a request for a "zero rate". 4.338 Finally, if individual administrative reviews are not necessary in aggregate cases, any relief relating to expedited reviews becomes moot. This is because the aggregate rate determined at the first administrative review supersedes all other previously determined rates.
4.339 In its second oral statement, the United States made the following arguments. 4.340 The provincial governments identify specific stands of timber and enter into tenure agreements that allow companies to harvest that timber, that is, to take the timber off the land, in exchange for a fee based on the volume of timber harvested. The provincial governments are therefore providing a good within the meaning of Article 1.1(a)(1)(iii) of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). 4.341 Canada's attempts to argue to the contrary defy general principles of treaty interpretation, the rules of logic and common sense. The essence of Canada's argument is that when the provincial governments grant lumber producers the right to take timber from government land, the producers actually provide themselves with a good when they cut down a tree. To support this rather extraordinary proposition, Canada ignores the ordinary meaning of "goods," which includes things to be severed from the land, such as timber. In Canada's view, a government can identify a whole forest of trees and give a specific lumber company the right to take those trees for free. The violence such a theory does to the subsidy disciplines is obvious. 4.342 Canada's strained interpretation is not supported by the text of the SCM Agreement. Based on the ordinary meaning of the text, when the provincial governments grant companies the right to take an identified good � timber � from government land, the government makes a financial contribution within the meaning of Article 1.1(a)(1)(iii) of the Agreement.
4.343 A financial contribution confers a benefit if it provides some form of artificial advantage that would not otherwise be available in the marketplace absent the government's financial contribution. Under the guidelines in Article 14(d), the benefit from a government's provision of goods is to be determined in relation to the prevailing market conditions for the good in the country of provision. The United States shares the view of the European Communities that the concept of "prevailing market conditions in the country of provision" is sufficiently broad to permit consideration of prices for competitive goods commercially available on the world markets to purchasers in the country of provision. 4.344 That interpretation is firmly grounded in the text of the SCM Agreement and commercial reality. "Commercially available," as defined in the SCM Agreement, means that the choice between domestic and imported goods is unrestricted and depends solely on commercial considerations. Commercially available goods, both imported and domestic, compete in the domestic market and constitute the supply available to purchasers in the country of provision, that is, goods that the purchasers could obtain in the market absent the government's financial contribution. 4.345 Canada has acknowledged that "prevailing market conditions" in the country of provision include the available supply and that imports, which are part of the available supply, can, in appropriate circumstances, provide a market benchmark consistent with Article 14(d). Even under Canada's reading of Article 14(d), therefore, prices for competitive goods commercially available on world markets fall within the universe of potential market benchmarks in certain cases. Because prices for competitive goods commercially available on world markets fall within the ordinary meaning of the terms used in Article 14(d), there is no basis to interpret that provision as precluding the use of such prices, under any circumstances. 4.346 As the Canada Aircraft panel stated, the purpose of a benefit analysis is to determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution. Likewise, the Appellate Body stated that the analysis is to determine whether the recipient is better off than it would otherwise have been absent the financial contribution. Private prices for a good that are driven by government prices for that good do not represent prices that would otherwise have been available in the market absent the government financial contribution. The USDOC's preliminary investigation indicates that such is the case with respect to private stumpage prices in Canada. 4.347 The USDOC found that the provincial governments control approximately 90 per cent of the softwood timber supply. Moreover, tenure holders consistently harvest less than their annual allowable cut ("AAC") and, if necessary, a tenure holder may harvest in excess of its AAC. These undisputed facts indicate that Canadian lumber producers would have no incentive to purchase private stumpage unless the private seller was willing to meet, or better, the government's administratively set stumpage price. The record facts, when taken as a whole, support the USDOC's conclusion that private stumpage prices in Canada are integrally linked to the government prices and therefore could not logically serve as a benchmark. 4.348 Stumpage prices in contiguous US states were the most logical choice. US stumpage is commercially available to Canadian producers and the contiguous forests are generally comparable. The United States is the only country from which Canada obtains significant amounts of softwood timber. Canadian companies own timberland in the United States, bid on US stumpage and regularly import US timber. 4.349 In sum, the Panel should find that Article 14(d) permits the use of prices commercially available on world markets in appropriate circumstances. The Panel should also find that the use of such a benchmark was appropriate under the specific facts of this case. 4.350 Canada argues in its second submission that, if the United States wishes to preserve the possibility of retroactively imposing definitive countervailing duties pursuant to a critical circumstances determination, it should provide in its laws for retroactive assessment. That is, however, precisely what suspension of liquidation does. Furthermore, Canada's assertion that US Customs' practice resolves this issue is incorrect. Under US law, an entry that is not liquidated within one year from the date of entry is deemed liquidated by operation of law at the rate of duty in effect at the time of entry. Countervailing duty investigations frequently take more than a year to complete; the SCM Agreement permits the investigation to go as long as 18 months. Entries during the 90-day retroactivity period would, in such cases, be liquidated by operation of law and no retroactive countervailing duties could be imposed. 4.351 The United States also notes that Canada's flexible interpretation of Article 20.3 stands in stark contrast to its restrictive reading of Article 20.1. The United States therefore takes little comfort in Canada's assertion that Article 20.3, which on its face does not contain the limitations assumed by Canada, would not be interpreted as precluding the imposition of retroactive duties where the amount of the duties has not been guaranteed by cash deposit or bond.
13 Article 5, SCM Agreement.
14
Canada asserts violations of Articles 10 and 32.1 of the SCM
Agreement, which are dependent on the more specific claims addressed herein. The
dependent claims are therefore also without merit for the reasons stated above.
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