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WT/DS257/AB/R
19 January 2004

(04-0145)

  Original: English

UNITED STATES - FINAL COUNTERVAILING DUTY
 DETERMINATION WITH RESPECT TO CERTAIN
 SOFTWOOD LUMBER FROM CANADA

AB-2003-6

Report of the Appellate Body

(Continued)


C. When May Investigating Authorities Use a Benchmark Other Than Private Prices in the Country of Provision?

97. Having established that prices in the market of the country of provision are the primary, but not the exclusive, benchmark for calculating benefit, we come to the next question that arises in our analysis, namely, when an investigating authority may use a benchmark other than private prices in the country of provision for purposes of calculating the benefit under Article 14(d).

98. Despite the Panel's finding that Article 14(d) requires the use of private prices in the country of provision as the benchmark whenever they exist, the Panel nevertheless acknowledged that "it will in certain situations not be possible to use in-country prices" as a benchmark, and gave two examples of such situations, neither of which it found to be present in the underlying countervailing duty investigation: (i) where the government is the only supplier of the particular goods in the country; and, (ii) where the government administratively controls all of the prices for those goods in the country.122 In these situations, the Panel reasoned that the "only remaining possibility would appear to be the construction of some sort of a proxy for, or estimate of, the market price for the good in that country".123

99. The United States claims, on appeal, that the Panel erred in not recognizing that Article 14(d) also allows investigating authorities to use a benchmark other than private prices in a third situation: where private prices are "substantially influenced" or "effectively determined" by the government's financial contribution.124 We understand that by "substantially influenced" or "effectively determined", the United States refers to a situation where the government has such a predominant role in the market, as a provider of certain goods, that private suppliers will align their prices with those of the government-provided goods; in other words, a situation where the government effectively acts as a "price-setter" and private suppliers are "price-takers". Considering that the situation of government predominance in the market, as a provider of certain goods, is the only one raised on appeal by the United States, we will limit our examination to whether an investigating authority may use a benchmark other than private prices in the country of provision in that particular situation.

100. In analyzing this question, we have some difficulty with the Panel's approach of treating a situation in which the government is the sole supplier of certain goods differently from a situation in which the government is the predominant supplier of those goods. In terms of market distortion and effect on prices, there may be little difference between situations where the government is the sole provider of certain goods and situations where the government has a predominant role in the market as a provider of those goods. Whenever the government is the predominant provider of certain goods, even if not the sole provider, it is likely that it can affect through its own pricing strategy the prices of private providers for those goods, inducing the latter to align their prices to the point where there may be little difference, if any, between the government price and the private prices. This would be so even if the government price does not represent adequate remuneration. The resulting comparison of prices carried out under the Panel's approach to interpreting Article 14(d) would indicate a "benefit" that is artificially low, or even zero, such that the full extent of the subsidy would not be captured, as the Panel itself acknowledged.125 As a result, the subsidy disciplines in the SCM Agreement and the right of Members to countervail subsidies could be undermined or circumvented when the government is a predominant provider of certain goods.

101. It appears to us that the language found in Article 14(d) ensures that the provision's purposes are not frustrated in such situations. Thus, while requiring investigating authorities to calculate benefit "in relation to" prevailing conditions in the market of the country of provision, Article 14(d) permits investigating authorities to use a benchmark other than private prices in that market. When private prices are distorted because the government's participation in the market as a provider of the same or similar goods is so predominant that private suppliers will align their prices with those of the government-provided goods, it will not be possible to calculate benefit having regard exclusively to such prices.

102. We emphasize once again that the possibility under Article 14(d) for investigating authorities to consider a benchmark other than private prices in the country of provision is very limited. We agree with the United States that "[t]he fact that the government is a significant supplier of goods does not, in itself, establish that all prices for the goods are distorted".126 Thus, an allegation that a government is a significant supplier would not, on its own, prove distortion and allow an investigating authority to choose a benchmark other than private prices in the country of provision. The determination of whether private prices are distorted because of the government's predominant role in the market, as a provider of certain goods, must be made on a case-by-case basis, according to the particular facts underlying each countervailing duty investigation.

103. For these reasons, we reverse the Panel's finding, in paragraph 7.64 of the Panel Report, with respect to the interpretation of Article 14(d) of the SCM Agreement. We find, instead, that an investigating authority may use a benchmark other than private prices of the goods in question in the country of provision, when it has been established that those private prices are distorted, because of the predominant role of the government in the market as a provider of the same or similar goods. When an investigating authority resorts, in such a situation, to a benchmark other than private prices in the country of provision, the benchmark chosen must, nevertheless, relate or refer to, or be connected with, the prevailing market conditions in that country, and must reflect price, quality, availability, marketability, transportation and other conditions of purchase or sale, as required by Article 14(d).

D. Alternative Benchmarks

104. Having reached this conclusion, the question thus arises what alternative benchmark, consistent with Article 14(d), could be available in such situations, for purposes of determining whether the goods have been provided by the government for less than adequate remuneration.

105. During the Panel proceedings, Canada suggested that an alternative benchmark that investigating authorities could possibly use for these purposes was "import prices for the same good, which may or may not be 'world market prices', if available to purchasers in the country of provision".127 At the oral hearing, Canada referred to three possible alternative benchmarks: (i) a benchmark constructed using a methodology similar to that provided in Article 2.2 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (the "Anti-Dumping Agreement "); (ii) a proxy estimated on the basis of costs of production128; and (iii) a methodology that examines whether government prices are consistent with market principles. The United States submitted that, in certain situations, world market prices available in the country of provision, on the one hand, and an examination of the consistency with market principles, on the other, may be alternative benchmarks that could be used to determine the adequacy of remuneration.129

106. We agree with the submissions of the participants and third participants that alternative methods for determining the adequacy of remuneration could include proxies that take into account prices for similar goods quoted on world markets, or proxies constructed on the basis of production costs. We emphasize, however, that where an investigating authority proceeds in this manner, it is under an obligation to ensure that the resulting benchmark relates or refers to, or is connected with, prevailing market conditions in the country of provision, and must reflect price, quality, availability, marketability, transportation and other conditions of purchase or sale, as required by Article 14(d). At any rate, we are not called upon, in this appeal, to suggest alternative methods that would be available to investigating authorities upon a determination that private prices in the country of provision are distorted due to the government's predominant role in the market as provider of the same or similar goods. Nor are we required to determine the consistency with Article 14(d) of all the alternative methods mentioned by the participants and third participants; such assessment will depend on how any such method is applied in a particular case. We, therefore, make no findings on the WTO-consistency of any of these methods in the abstract.

107. Rather, it is only the specific alternative method used by USDOC in the underlying countervailing duty investigation for determining the adequacy of remuneration that is at issue in this appeal. The benchmark used by USDOC consisted of prices of stumpage in bordering states of the northern United States.130 The United States explained before the Panel that cross-border stumpage prices were duly adjusted to take into account market conditions prevailing in Canada.131 We turn to this method used by USDOC next.

E. The Consistency of the Alternative Benchmark Used by USDOC with Article 14(d)

108. Before reviewing the Panel's finding with respect to the particular benchmark used by USDOC, we observe that, when choosing an alternative method for determining the adequacy of remuneration, it has to be kept in mind that prices in the market of a WTO Member would be expected to reflect prevailing market conditions in that Member; they are unlikely to reflect conditions prevailing in another Member. Therefore, it cannot be presumed that market conditions prevailing in one Member, for instance the United States, relate or refer to, or are connected with, market conditions prevailing in another Member, such as Canada for example. Indeed, it seems to us that it would be difficult, from a practical point of view, for investigating authorities to replicate reliably market conditions prevailing in one country on the basis of market conditions prevailing in another country. First, there are numerous factors to be taken into account in making adjustments to market conditions prevailing in one country so as to replicate those prevailing in another country; secondly, it would be difficult to ensure that all necessary adjustments are made to prices in one country in order to develop a benchmark that relates or refers to, or is connected with, prevailing market conditions in another country, so as to reflect price, quality, availability, marketability, transportation and other conditions of purchase or sale in that other country.132

109. It is clear, in the abstract, that different factors can result in one country having a comparative advantage over another with respect to the production of certain goods. In any event, any comparative advantage would be reflected in the market conditions prevailing in the country of provision and, therefore, would have to be taken into account and reflected in the adjustments made to any method used for the determination of adequacy of remuneration, if it is to relate or refer to, or be connected with, prevailing market conditions in the market of provision. This is because countervailing measures may be used only for the purpose of offsetting a subsidy bestowed upon a product, provided that it causes injury to the domestic industry producing the like product. They must not be used to offset differences in comparative advantages between countries.

110. Turning to the examination of the specific alternative method used by USDOC in the underlying countervailing duty investigation, we note that the Panel examined Canada's claims against USDOC's benefit determination in the light of the Panel's interpretation of Article 14(d) of the SCM Agreement. According to that interpretation, "as long as there are prices determined by independent operators following the principle of supply and demand, even if supply or demand are affected by the government's presence in the market, there is a 'market' in the sense of Article 14(d) [of the] SCM Agreement."133 The Panel found further "that the USDOC acknowledged the existence of a private market for stumpage in Canada"134 and concluded that:

In light of the fact that the USDOC acknowledged the existence of a private stumpage market in Canada, we find that the resort to US prices as the benchmark for the determination of benefit on grounds that private prices in Canada were distorted is inconsistent with Article 14 (d) [of the] SCM Agreement.135

111. The Panel further stated that it did not need to "address the issue whether the USDOC had sufficient evidence of price suppression or conducted a proper analysis of the alleged distortive effect of the dominant government presence in the market."136 Thus, the Panel did not establish whether private prices of the goods in question in the country of provision were distorted because of the predominant role of the government in that market as a provider of the same or similar goods.

112. Therefore, the Panel's ultimate finding that USDOC failed to determine benefit consistently with Articles 10, 14, 14(d) and 32.1 of the SCM Agreement is predicated exclusively on its interpretation of Article 14(d), which we have already reversed above. Thus, we must also reverse the Panel's consequential finding, in paragraph 7.65 of the Panel Report, that USDOC failed to determine benefit consistently with Articles 14 and 14(d) of the SCM Agreement and that the imposition of countervailing duties based on that determination was inconsistent with Articles 10 and 32.1 of that Agreement.137 It does not necessarily follow, however, that we find that USDOC's determination of benefit in the underlying countervailing duty investigation is consistent with Article 14(d), as we have interpreted this provision in the preceding paragraphs.

113. In order to determine the WTO-consistency of USDOC's benefit determination, we would have to complete the legal analysis. Thus, as a preliminary step, we must consider whether it is possible for us to do so in order to facilitate the prompt settlement of the dispute, in accordance with Article 3.3 of the DSU, by examining Canada's claim ourselves. The Appellate Body has stated in previous cases that it is possible and appropriate to complete the legal analysis provided there are sufficient findings of fact by the Panel or undisputed facts in the Panel record to enable it to do so.138

114. Both participants acknowledged during the oral hearing that, if we were to modify or reverse the Panel's interpretation of Article 14(d), there would be insufficient findings of fact by the Panel or undisputed facts in the Panel record to enable us to complete the legal analysis of this issue. We agree. In concluding that the United States acted inconsistently with Article 14(d), the Panel made only the following two findings of fact: (i) that "the USDOC acknowledged the existence of a private market for stumpage in Canada"; and (ii) that "the USDOC had before it private stumpage prices for four of the most important [Canadian] provinces".139 The Panel abstained from making additional findings and said:

... we need not address the issue whether the USDOC had sufficient evidence of price suppression or conducted a proper analysis of the alleged distortive effect of the dominant government presence in the market. Nor need we address whether the proxy used by the United States for the prevailing market conditions in Canada was appropriate, i.e. whether the USDOC made proper adjustments to the US stumpage prices to reflect market conditions in Canada. Neither do we consider it relevant to rule on the argument made by Canada that any benefit analysis should include a determination of the potential trade advantage for the recipient of the subsidy.140

115. We have already found that Article 14(d) permits investigating authorities to use a benchmark other than private prices in the country of provision, if it is established that those private prices are distorted because the government's participation in the market, as a provider of the same or similar goods, is so predominant that private suppliers will align their prices with those of the government-provided goods. As stated above, the Panel, however, made no findings of fact relating to the alleged distortive effect on prices of the provincial governments' participation in the market for standing timber.141 The Panel record indicates that the facts surrounding this question are not undisputed, and that Canada challenged the evidence relied on by USDOC to conclude that private prices for stumpage in Canada were distorted.142 Therefore, there are insufficient Panel findings or undisputed facts in the record to enable us to determine whether USDOC was justified, under Article 14(d), in using a benchmark other than private prices in Canada, on the basis that prices of private stumpage in Canada were distorted by the Canadian provinces' predominant participation in the market as providers of standing timber.

116. Even if we were to assume that USDOC was justified in rejecting private prices in Canada, we would then have to determine whether the particular benchmark used by USDOC in the underlying countervailing duty investigation complies with the requirements of Article 14(d). This would require an examination of whether the prices of private stumpage in the bordering states in the northern United States that USDOC selected as a benchmark, following the adjustments performed by USDOC, related or referred to, or were connected with, prevailing market conditions in Canada, (including price, quality, availability, marketability, transportation and other conditions of purchase or sale). In other words, an examination would be required whether USDOC correctly determined that standing timber was provided by the provincial governments for less than adequate remuneration and whether the benefit received by the recipients was correctly calculated. The Panel, however, made no findings of fact relating to whether prices of private stumpage in the bordering states of the northern United States used by USDOC as a benchmark were adequately adjusted so as to be consistent with Article 14(d).

117. Moreover, the Panel record indicates that Canada disputed most aspects of the USDOC's decision to use cross-border prices, including the adjustment factors. For instance, Canada questioned USDOC's assertion that United States standing timber is "available" in Canada so as to reflect world market prices available in Canada.143 Canada also alleged that "[United States] state agencies recognize that a range of differences affect stumpage values even within a single state".144 Canada, moreover, disputed the United States' contention that USDOC "made adjustments that took into account the prevailing market conditions 'to ensure a proper comparison between the government price and the market benchmark price'".145 It also pointed out before the Panel and reiterated on appeal a number of factors that undermine the cross-border comparability of forestry resources.146 Canada emphasized that cross-border comparisons do not account for comparative advantages arising from differences in natural resource endowments between countries. It is also clear from the participants' submissions during the oral hearing that the factual information is not undisputed.

118. Accordingly, there are insufficient factual findings by the Panel and undisputed facts in the Panel record to enable us to examine whether the benchmark used by USDOC in the underlying investigation related or referred to, or was connected with, prevailing market conditions in Canada, as required by Article 14(d), so as to adequately reflect price, quality, availability, marketability, transportation and other conditions of purchase or sale. Consequently, we are unable to complete the legal analysis of Canada's claim that the United States acted inconsistently with Article 14(d) of the SCM Agreement. We observe, in this regard, that panels sometimes make alternative factual findings that serve to assist the Appellate Body in completing the legal analysis should it disagree with legal interpretations developed by the panel, but this is not the case in the Panel Report before us.

119. In conclusion, for the reasons stated above, we reverse the Panel's finding, in paragraph 7.64 of the Panel Report, with respect to the interpretation of Article 14(d) of the SCM Agreement and find, instead, that an investigating authority may use a benchmark other than private prices in the country of provision, when it has been established that private prices of the goods in question in that country are distorted, because of the predominant role of the government in the market as a provider of the same or similar goods.

120. We emphasize, however, that when an investigating authority proceeds in this manner, it is obliged, pursuant to Article 14(d), to ensure that the alternative benchmark it uses relates or refers to, or is connected with, prevailing market conditions in the country of provision, (including price, quality, availability, marketability, transportation and other conditions of purchase or sale), with a view to determining, ultimately, whether the goods at issue were provided by the government for less than adequate remuneration.

121. We also reverse the Panel's consequential finding, in paragraph 7.65 of the Panel Report, that the United States acted inconsistently with Articles 10, 14, 14(d) and 32.1 of the SCM Agreement, because it is predicated exclusively on the Panel's finding, which we reversed, with respect to the interpretation of Article 14(d) of the SCM Agreement.

122. We also find that we are unable to complete the legal analysis of whether USDOC's determination of benefit is consistent with Article 14(d) of the SCM Agreement. Having found that there is an insufficient factual basis to complete the legal analysis, we do not make findings on whether USDOC's determination of the existence and amount of benefit in the underlying countervailing duty investigation is consistent or inconsistent with Articles 14 and 14(d) of the SCM Agreement and whether the imposition of countervailing duties based on that determination is consistent or inconsistent with Articles 10 and 32.1 of that Agreement.

VI. Pass-Through

A. Introduction

123. The third issue raised in this appeal is whether the Panel erred in finding that USDOC's failure to conduct a "pass-through" analysis, in respect of arm's length sales of logs and lumber by tenure-holding timber harvesters owning sawmills and producing lumber, to unrelated sawmills or lumber remanufacturers, is inconsistent with Article 10 and thus Article 32.1 of the SCM Agreement and Article VI:3 of the GATT 1994.147

124. We found above that the stumpage programs of Canadian provinces at the heart of this case provide standing timber to timber harvesters, allegedly conferring a benefit.148 The standing timber eventually becomes felled trees or logs, which are processed into softwood lumber as well as remanufactured lumber products. USDOC defined the product subject to the investigation at issue as "certain softwood lumber", which includes "primary" lumber and "remanufactured" lumber.149 The United States imposed countervailing duties on imports of these softwood lumber products from Canada. The pass-through issues in this appeal concern situations where the activities of harvesting standing timber, processing logs into softwood lumber, and further processing lumber into remanufactured lumber products, are not carried out by vertically integrated enterprises. This appeal, therefore, concerns only arm's length sales of logs and lumber by tenured timber harvesters/sawmills150 to sawmills151 and lumber remanufacturers152, none of which is related through common ownership or in any other way. Thus, we must examine whether a Member is required to analyze whether the subsidy conferred on products of certain enterprises in the production chain was "passed through", in arm's length transactions, to other enterprises producing the countervailed product.

125. The Panel found that:

... USDOC's failure to conduct a pass-through analysis in respect of logs sold by tenure-holding timber harvesters (whether or not also lumber producers) to unrelated sawmills producing subject softwood lumber; and in respect of lumber sold by tenure-holding harvester/sawmills to unrelated lumber re-manufacturers was inconsistent with Article 10 and thus Article 32.1 [of the] SCM Agreement, and with Article VI:3 of GATT 1994.153

126. The United States appeals this finding in part, as we explain in the next section.

B. Scope of the Issue Appealed

127. The United States notes that it "does not appeal the Panel's finding that, where the subsidy is received by independent harvesters, i.e., entities that do not produce [softwood lumber] product[s] under investigation and operate at arm's length, a pass through analysis would be required to determine if the subsidy received by the independent harvesters was indirectly bestowed on production of softwood lumber".154 Thus, the situation where tenured timber harvesters do not process logs into softwood lumber and sell at arm's length all the logs they harvest to unrelated sawmills is not before us in this appeal. We also note that Canada does not argue that a pass-through analysis is required in the absence of arm's length transactions between tenured timber harvesters, sawmills and remanufacturers.155 Hence, the situation where vertically integrated enterprises, not operating at arm's length, harvest timber under stumpage contracts, produce softwood lumber and remanufacture lumber, is also not before us.

128. The United States requests us to reverse the Panel's finding, in paragraph 7.99 of the Panel Report, that a pass-through analysis is required with respect to sales of logs or lumber by tenured harvester/sawmills to sawmills or re-manufacturers.156 This appeal thus concerns the situations where: (i) a tenured timber harvester owns a sawmill and processes some of the logs it harvests into softwood lumber, but at the same time sells at arm's length some of the logs it harvests to unrelated sawmills for processing into lumber; and (ii) a tenured timber harvester processes logs it harvests into lumber, and sells at arm's length some, or all, of the lumber it produces to lumber remanufacturers for further processing.157 Having defined the scope of the pass-through issues raised in this appeal, we start our analysis with a brief account of the arguments submitted by the participants.

C. General Interpretative Analysis of the Pass-Through Issue

129. On appeal, the United States accepts that a pass-through analysis is required where a subsidy is bestowed indirectly on producers of products subject to the investigation ("subject products"). Thus, if a subsidy is received directly by an entity other than a producer of subject products, and that entity subsequently sells inputs to producers of subject products, the investigating authority is required to determine whether at least some of that subsidy is passed through in the sale to the producers of such products.158 In other words, in such a situation, it cannot be assumed that some or all of the indirect subsidy has passed through. This situation is contrasted with that of stumpage subsidies received directly by a tenured timber harvester that owns a sawmill, and thus is also a producer of softwood lumber. According to the United States, a pass-through analysis is not required in respect of arm's length sales of logs, by such tenured timber harvesters who own sawmills, to unrelated sawmills.159 For the United States, in such a situation, where both entities involved in the transaction produce products subject to the investigation, pass-through of the subsidy can be presumed.

130. The United States further argues that both primary lumber and remanufactured lumber are products subject to the investigation, and, therefore, primary lumber is not upstream to subject products; accordingly, a pass-through analysis is not required in respect of arm's length sales of lumber by tenured timber harvesters who own sawmills, to unrelated remanufacturers, because both produce products subject to the investigation. According to the United States, in this situation, pass-through can also be presumed.

131. The United States finds support in Article 19.3 of the SCM Agreement, which permits conducting investigations on an aggregate, as opposed to company-specific, basis. According to the United States, investigations could not be conducted on an aggregate basis if pass-through analyses were required for every arm's length transaction between different producers of products subject to the investigation.160 The United States submits further that Article VI:3 of the GATT 1994, and footnote 36 to Article 10 of the SCM Agreement, contain no obligation regarding the methodology that a Member is to use in calculating the country-wide countervailing duty rate in an aggregate investigation.161 Indeed, the United States submits that no obligation can be found anywhere in the SCM Agreement requiring adjustment of a subsidy found to exist to account for the fact that certain producers of softwood lumber may not have received the subsidy, because they purchased logs and lumber inputs at arm's length from other lumber producers.162

132. Canada submits that, by not appealing the Panel's finding that a pass-through analysis is required where stumpage subsidies are received by "independent harvesters" of logs who do not own a sawmill and thus do not produce softwood lumber, the United States has accepted that a pass-through analysis is required in instances of indirect subsidization. Canada contends that the requirement for a pass-through analysis applies equally for arm's length sales of both log inputs and lumber inputs by tenured timber harvesters owning sawmills, to unrelated sawmills or lumber remanufacturers. In Canada's view, by failing to conduct a pass-through analysis with respect to these categories of transactions, the United States countervailed subsidies, the existence and amount of which it presumed, instead of determined.163

133. Canada argues that Article 1.1 of the SCM Agreement requires, also in the case of indirect subsidization, that investigating authorities establish the existence of both a financial contribution by a government (albeit indirect), and the conferral of a benefit, in relation to the product on which countervailing duties are imposed.164 Canada notes that Article VI:3 of the GATT 1994, and Articles 10 and 32.1 of the SCM Agreement, do not permit subsidization to be presumed in respect of products. Nor do they permit imposing countervailing duties in excess of the subsidy found to exist for a particular product, even if an investigation is conducted on an aggregate (country-wide) basis, as contemplated by Article 19.3 of the SCM Agreement.165 Thus the requirement to conduct a pass-through analysis is not avoided simply because there is a right to conduct an investigation on an aggregate basis. For these reasons, Canada requests us to uphold the Panel's finding that, by failing to establish that the benefit of the financial contribution was passed through, at least in part, from the upstream producers of log and lumber inputs, to the downstream producers of the lumber products subject to the investigation, the United States imposed countervailing duties contravening Articles 10 and 32.1 of the SCM Agreement, and Article VI:3 of the GATT 1994.166

134. We now examine the pass-through issue before us. At the outset, we observe that provisions in both the GATT 1994 and the SCM Agreement are relevant to this dispute. We note the Appellate Body's earlier ruling that a provision of an agreement included in Annex 1A of the WTO Agreement (including the SCM Agreement), and a provision of the GATT 1994, that have identical coverage, both apply, but that the provision of the agreement that "deals specifically, and in detail" with a question should be examined first.167 The Appellate Body has also ruled that "countervailing duties may only be imposed in accordance with the provisions of Part V of the SCM Agreement and Article VI of the GATT 1994, taken together"168, and that "[i]f there is a conflict between the provisions of the SCM Agreement and Article VI of the GATT 1994 ... the provisions of the SCM Agreement would prevail as a result of the general interpretative note to Annex 1A."169 No conflict between Articles 10 and 32.1 of the SCM Agreement on the one hand, and Article VI:3 of the GATT 1994 on the other hand, is alleged in this appeal, nor do we see any such conflict. Therefore, the requirements of these provisions of the SCM Agreement and the GATT 1994 apply on a cumulative basis.

135. Article 10 of the SCM Agreement provides that:

Members shall take all necessary steps to ensure that the imposition of a countervailing duty36 on any product of the territory of any Member imported into the territory of another Member is in accordance with the provisions of Article VI of GATT 1994 and the terms of this Agreement. Countervailing duties may only be imposed pursuant to investigations initiated and conducted in accordance with the provisions of this Agreement and the Agreement on Agriculture. (footnotes omitted in part)
 


36 The term "countervailing duty" shall be understood to mean a special duty levied for the purpose of offsetting any subsidy bestowed directly or indirectly upon the manufacture, production or export of any merchandise, as provided for in paragraph 3 of Article VI of GATT 1994.170

According to Article 32.1 of the SCM Agreement:

[n]o specific action against a subsidy of another Member can be taken except in accordance with the provisions of GATT 1994, as interpreted by this Agreement. (footnote omitted)

Article VI:3 of the GATT 1994 reads:

[n]o countervailing duty shall be levied on any product of the territory of a Member imported into the territory of another Member in excess of an amount equal to the estimated bounty or subsidy determined to have been granted, directly or indirectly, on the manufacture, production or export of such product in the country of origin or exportation… The term "countervailing duty" shall be understood to mean a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly, upon the manufacture, production or export or any merchandise.

136. According to Canada, the United States acted inconsistently with: (i) Article 10 of the SCM Agreement, by failing to "take all necessary steps" to determine subsidization in accordance with the provisions of the SCM Agreement and Article VI:3 of the GATT 1994; (ii) Article 32.1 of that Agreement, by taking action against a subsidy not in accordance with the provisions of the GATT 1994, as interpreted by the SCM Agreement; and (iii) Article VI:3 of the GATT 1994, by imposing duties without establishing the existence of indirect subsidization and failing to ensure that countervailing measures are not in excess of the subsidy found to exist.

137. We observe that, in this case, Canada's claims under Article 10 and footnote 36 thereto171, and Article 32.1 of the SCM Agreement, are largely derivative of its claim under Article VI:3 of the GATT 1994; Canada alleges that a violation by the United States of the requirements in Article VI:3 of the GATT 1994 would necessarily result also in violations of its obligations under Article 10 and footnote 36 thereto, and Article 32.1 of the SCM Agreement. Therefore, our discussion focuses first on whether Article VI:3 of the GATT 1994 requires a pass-through analysis, and if so, under what circumstances.

138. We note that, if we were to find that USDOC's final determination and the imposition of countervailing duties on Canadian imports of softwood lumber products contravene the requirements of Article VI:3 of the GATT 1994, the United States necessarily would not have "take[n] all necessary steps to ensure that the imposition of a countervailing duty … is in accordance with the provisions of Article VI of GATT 1994", as required by Article 10 of the SCM Agreement. The "specific action against a subsidy" taken by the United States would also not, as required by Article 32.1 of the SCM Agreement, be "in accordance with the provisions of GATT 1994, as interpreted by the [SCM] Agreement". Consequently, any inconsistency of the United States' imposition of countervailing duties on Canadian imports of softwood lumber products with Article VI:3 of the GATT 1994, would necessarily render this measure inconsistent also with Articles 10 and 32.1 of the SCM Agreement.

139. The Panel described the pass-through problem as follows: "[w]here the subsidies at issue are received by someone other than the producer of the investigated product, the question arises whether there is subsidization in respect of that product."172 In addressing this question, we note that Article VI:3 prohibits levying countervailing duties on an imported product "in excess of an amount equal to the estimated … subsidy determined to have been granted, directly or indirectly, on the manufacture, production or export of such product". (emphasis added) According to Article VI:3, countervailing duties are "levied for the purpose of offsetting … subsid[ies] bestowed, directly or indirectly, upon the manufacture, production or export of any merchandise". (emphasis added) The definition of the term "countervailing duties" in footnote 36 to Article 10 of the SCM Agreement is along the same lines.

140. The phrase "subsid[ies] bestowed ... indirectly", as used in Article VI:3, implies that financial contributions by the government to the production of inputs used in manufacturing products subject to an investigation are not, in principle, excluded from the amount of subsidies that may be offset through the imposition of countervailing duties on the processed product. Where the producer of the input is not the same entity as the producer of the processed product, it cannot be presumed, however, that the subsidy bestowed on the input passes through to the processed product. In such case, it is necessary to analyze to what extent subsidies on inputs may be included in the determination of the total amount of subsidies bestowed upon processed products. For it is only the subsidies determined to have been granted upon the processed products that may be offset by levying countervailing duties on those products.

141. In our view, it would not be possible to determine whether countervailing duties levied on the processed product are in excess of the amount of the total subsidy accruing to that product, without establishing whether, and in what amount, subsidies bestowed on the producer of the input flowed through, downstream, to the producer of the product processed from that input. Because Article VI:3 permits offsetting, through countervailing duties, no more than the "subsidy determined to have been granted ... directly or indirectly, on the manufacture [or] production ... of such product", it follows that Members must not impose duties to offset an amount of the input subsidy that has not passed through to the countervailed processed products. It is only the amount by which an indirect subsidy granted to producers of inputs flows through to the processed product, together with the amount of subsidy bestowed directly on producers of the processed product, that may be offset through the imposition of countervailing duties. The definition of "countervailing duties" in footnote 36 to Article 10 of the SCM Agreement supports this interpretation of the requirements of Article VI:3 of the GATT 1994.

142. This interpretation is also borne out by the general definition of a "subsidy" in Article 1 of the SCM Agreement. According to that definition, a subsidy shall be deemed to exist only if there is both a financial contribution by a government within the meaning of Article 1.1(a)(1)173, and a benefit is thereby conferred within the meaning of Article 1.1(b).174 If countervailing duties are intended to offset a subsidy granted to the producer of an input product, but the duties are to be imposed on the processed product (and not the input product), it is not sufficient for an investigating authority to establish only for the input product the existence of a financial contribution and the conferral of a benefit to the input producer. In such a case, the cumulative conditions set out in Article 1 must be established with respect to the processed product, especially when the producers of the input and the processed product are not the same entity. The investigating authority must establish that a financial contribution exists; and it must also establish that the benefit resulting from the subsidy has passed through, at least in part, from the input downstream, so as to benefit indirectly the processed product to be countervailed.

143. In this respect, the Appellate Body's interpretation of the term "benefit" in Canada - Aircraft is useful:

A "benefit" does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a "benefit" can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term "benefit", therefore, implies that there must be a recipient.175

Thus, for a potentially countervailable subsidy to exist, there must be a financial contribution by the government that confers a benefit to a recipient. Where a subsidy is conferred on input products, and the countervailing duty is imposed on processed products, the initial recipient of the subsidy and the producer of the eventually countervailed product, may not be the same. In such a case, there is a direct recipient of the benefit-the producer of the input product. When the input is subsequently processed, the producer of the processed product is an indirect recipient of the benefit-provided it can be established that the benefit flowing from the input subsidy is passed through, at least in part, to the processed product. Where the input producers and producers of the processed products operate at arm's length, the pass-through of input subsidy benefits from the direct recipients to the indirect recipients downstream cannot simply be presumed; it must be established by the investigating authority. In the absence of such analysis, it cannot be shown that the essential elements of the subsidy definition in Article 1 are present in respect of the processed product. In turn, the right to impose a countervailing duty on the processed product for the purpose of offsetting an input subsidy, would not have been established in accordance with Article VI:3 of the GATT 1994, and, consequently, would also not have been in accordance with Articles 10 and 32.1 of the SCM Agreement.

144. The panel report, adopted under GATT 1947, in US - Canadian Pork reasoned along the same lines under Article VI:3. That panel dealt with a situation where Canada had granted subsidies to swine producers, while the United States imposed countervailing duties on imports of pork products.176 The panel noted that:

Article VI:3 stipulates that a countervailing duty levied on any product shall not exceed an amount equal to the subsidy granted directly or indirectly on the production of "such product". According to this clear wording, the United States may impose a countervailing duty on pork only if a subsidy has been determined to have been bestowed on the production of pork; the mere fact that trade in pork is affected by the subsidies granted to producers of swine is not sufficient.177 (emphasis added)

145. It is also useful to refer to US - Countervailing Measures on Certain EC Products, where the Appellate Body stated that:

… under Article VI:3 of the GATT 1994, investigating authorities, before imposing countervailing duties, must ascertain the precise amount of a subsidy attributed to the imported products under investigation. In furtherance of this obligation, Article 10 of the SCM Agreement provides that Members must "ensure" that duties levied for the purpose of offsetting a subsidy are imposed only "in accordance with" the provisions of Article VI:3 of the GATT 1994 and the SCM Agreement. Moreover, Article 19.4 of the SCM Agreement, consistent with the language of Article VI:3 of the GATT 1994, requires that "[n]o countervailing duty shall be levied on any imported product in excess of the amount of the subsidy found to exist". ... In sum, these provisions set out the obligation of Members to limit countervailing duties to the amount and duration of the subsidy found to exist by the investigating authority.178 (original italics; underlining added; footnotes omitted)

146. In the light of the above, GATT/WTO dispute settlement practice is consistent with and confirms our interpretation that, where countervailing duties are used to offset subsidies granted to producers of input products, while the duties are to be imposed on processed products, and where input producers and downstream processors operate at arm's length, the investigating authority must establish that the benefit conferred by a financial contribution directly on input producers is passed through, at least in part, to producers of the processed product subject to the investigation. Therefore, we agree with the Panel that:

If it is not demonstrated that there has been such a pass-through of subsidies from the subsidy recipient to the producer or exporter of the product, then it cannot be said that subsidization in respect of that product, in the sense of Article 10, footnote 36, and Article VI:3 of GATT 1994, has been found.179

147. This would mean that a financial contribution conferring a benefit on tenure-holding harvesters of timber could be offset by imposing countervailing duties on exports of timber-or, in other words, logs-without carrying out a pass-through analysis.180 However, if countervailing duties on softwood lumber products are meant to offset a financial contribution received by and conferring a benefit directly on producers of timber/logs, the investigating authority must establish that those benefits have been passed through, at least in part, from producers of logs to producers of softwood lumber (and remanufactured lumber), which are the products subject to the investigation.

D. Conduct of the Investigation on an Aggregate Basis

148. Before proceeding further, we address the argument of the United States that Article 19.3 of the SCM Agreement contemplates the conduct of an investigation on an aggregate basis and that, therefore, the approach it took in this investigation in calculating the total subsidy and the country-wide countervailing duty rate is consistent with the SCM Agreement and the GATT 1994. The United States argues that no pass-through analysis was required with respect to arm's length sales of logs and lumber by tenured timber harvesters owning sawmills, to unrelated sawmills and remanufacturers, because Article 19.3 recognizes that exporters who are not investigated individually may nevertheless be subject to countervailing duties; accordingly, it is not necessary, in an aggregate investigation, to determine whether individual producers or exporters actually received subsidies.181

149. The United States submits that no pass-through analysis was required in this aggregate investigation because the total subsidy from the sawmills' stumpage inputs (that is, the total subsidy bestowed on logs entering sawmills) is known, and can be used in its entirety as the appropriate numerator in the calculation of a country-wide ad valorem countervailing duty rate. This numerator is then spread equally over a denominator, consisting of the total amount of sales of the softwood lumber products subject to this investigation, produced by both "first" sawmills and remanufacturers. According to the United States, therefore, Canada's pass-through claims relate, in fact, to the calculation of the countervailing duty rate on an aggregate basis, rather than to the existence of the subsidy.182 For the United States, an expedited review under Article 19.3 is the appropriate avenue for exporters that have not been investigated individually to establish that they did not receive countervailable benefits and thus that the country-wide countervailing duty rate is not appropriate for that exporter.183

150. Canada contends that the fact that the investigation at issue was conducted on an aggregate basis does not excuse USDOC from establishing the existence and amount of the alleged subsidy to producers of the investigated products, consistently with Article VI:3 of the GATT 1994 and Articles 10 and 32.1 of the SCM Agreement.184 Canada acknowledges that Article 19.3 permits aggregate investigations, but, in Canada's view, the fact that the investigation at issue was conducted on an aggregate basis cannot absolve the United States of the requirement to establish the existence of a subsidy in respect of the products of sawmills and lumber remanufacturers that purchased log and lumber inputs at arm's length. Finally, Canada points to substantial record evidence demonstrating the existence of arm's length sales of logs and lumber by tenured timber harvesters/sawmills to unrelated sawmills not holding stumpage rights and to remanufacturers.185

151. In discussing these arguments, we note, at the outset, that information about how USDOC calculated the total amount of subsidy and the country-wide countervailing duty rate on an aggregate basis in the investigation at issue may be relevant in deciding the pass-through issues before us. However, we are mindful that the Panel declined to rule on Canada's claims against certain aspects of the method applied by USDOC in these calculations, and that these claims are not before us in this appeal.186

152. We agree with the United States that Article 19 of the SCM Agreement authorizes Members to perform an investigation on an aggregate basis.187 Article 19.3 requires that countervailing duties "shall be levied, in the appropriate amounts in each case, on a non-discriminatory basis on imports of such product from all sources found to be subsidized and causing injury".188 (emphasis added) Article 19.3 further provides that "[a]ny exporter whose exports are subject to a definitive countervailing duty but who was not actually investigated ... shall be entitled to an expedited review in order that the investigating authorities promptly establish an individual countervailing duty rate for that exporter." (emphasis added) Accordingly, countervailing duties shall be imposed, on a non-discriminatory basis, on all sources found to be subsidized, although no prior investigation of all individual exporters or producers is required by Article 19. This implies that countervailing duties may be imposed on imports of products subject to the investigation, even though specific shipments from exporters or producers that were not investigated individually might not at all be subsidized, or not subsidized to an extent equal to a countervailing duty rate calculated on an aggregate (country-wide) basis.189

153. We also observe that Article 19.4 requires the calculation of countervailing duties in terms of "subsidization per unit of the subsidized and exported product".190 (emphasis added) In our view, the reference to calculation of countervailing duty rates on a per unit basis under Article 19.4 supports the interpretation that an investigating authority is permitted to calculate the total amount and the rate of subsidization on an aggregate basis.

154. We note, however, that country-wide or company-specific countervailing duty rates may be imposed under Part V of the SCM Agreement only after the investigating authority has determined the existence of subsidization, injury to the domestic industry, and a causal link between them. In other words, the fact that Article 19 permits the imposition of countervailing duties on imports from producers or exporters not investigated individually, does not exonerate a Member from the obligation to determine the total amount of subsidy and the countervailing duty rate consistently with the provisions of the SCM Agreement and Article VI of the GATT 1994. In this respect, as the panel in US - Countervailing Measures on Certain EC Products correctly stated, the "determination of a benefit (as a component of subsidization) must be made before countervailing duties can be imposed."191 Therefore, turning to the issue in this case, before being entitled to impose countervailing duties on a processed product, for the purpose of offsetting an input subsidy, a Member must first determine, in accordance with Article 1.1, that a financial contribution exists, and that the benefit conferred directly on the input producer has been passed through, at least in part, to the producer of the processed product. We reject, therefore, the argument of the United States that the pass-through issues arising in this appeal relate merely to the method used by USDOC, in this aggregate investigation, in calculating the total amount of subsidy and the countervailing duty rate.

E. Sales of Logs at Arm's Length by Tenured Timber Harvesters/Sawmills to Unrelated Lumber Producers

155. Having thus dealt with the participants' arguments relating to Article 19 of the SCM Agreement, we turn to the question whether a pass-through analysis was required, in the light of our general interpretation above, with respect to the categories of arm's length transactions at issue in this appeal. As noted above, this appeal concerns, first, the situation where a tenured timber harvester owns a sawmill and processes some of the logs it harvests into softwood lumber, but, at the same time, sells at arm's length some of the logs it harvests to other, unrelated sawmills for processing into lumber; and, secondly, the situation where a tenured timber harvester owns a sawmill and processes some of the logs it harvests into softwood lumber, but, at the same time, sells at arm's length some or all of the lumber it produces to lumber remanufacturers for further processing. We also note that it is undisputed between the participants that the United States did not carry out any pass-through analyses in the investigation at issue.192

156. In the first situation, the question is whether a pass-through analysis is required with respect to arm's length sales of logs by harvesters who own sawmills to unrelated sawmills for further processing. For this category of arm's length transactions, the United States argues that no pass-through analysis is required, because the tenured harvester/sawmill processes some logs into softwood lumber in its own sawmill, and is thus a producer of the product subject to the investigation.193 We are not persuaded that the fact that the harvester/sawmill processes in-house some of the logs it harvests into softwood lumber is relevant in determining whether a pass-through analysis is necessary.

157. As we mentioned above, the United States acknowledges that a pass-through analysis is required where a tenured "independent" harvester, which does not own a sawmill and thus does not produce softwood lumber, sells logs at arm's length to unrelated sawmills. We do not see why the mere fact that a tenured harvesters owns-or does not own-a sawmill, should affect whether a pass-through analysis is necessary with respect to logs sold at arm's length. We understand the United States to argue that benefits, initially attached to logs, but retained by a harvester/sawmill when the logs are sold in arm's length transactions to unrelated buyers, may be used by such a vendor to "cross-subsidize" its own production of softwood lumber processed in-house from other logs. We agree, in the abstract, that a transfer of benefits from logs sold in arm's length transactions to lumber produced in-house from different logs is possible for a harvester that owns a sawmill. But whether, in fact, this occurs depends on the particular case under examination. In any event, these arm's length sales at issue concern logs, which are not products subject to the investigation. Accordingly, in cases where logs are sold by a harvester/sawmill in arm's length transactions to unrelated sawmills, it may not be assumed that benefits attaching to the logs (non-subject products) automatically pass through to the lumber (the subject product) produced by the harvester/sawmill. A pass-through analysis is thus required in such situations.

158. Indeed, we disagree with the proposition that, as long as an enterprise produces products subject to an investigation, any benefits accruing to the same enterprise from subsidies conferred on any different products it produces (which are not subject to that investigation), could be included, without need of a pass-through analysis, in the total amount of subsidization found to exist for the investigated product, and that may be offset by levying countervailing duties on that product.194 We conclude that the pass-through of the benefit cannot be presumed with respect to arm's length sales of logs by harvesters, who own sawmills, to unrelated sawmills, for further processing.

159. For these reasons, we uphold the Panel's finding, in paragraph 7.99 of the Panel Report, that USDOC's failure to conduct a pass-through analysis in respect of arm's length sales of logs by tenured harvesters/sawmills to unrelated sawmills is inconsistent with Articles 10 and 32.1 of the SCM Agreement, and Article VI:3 of the GATT 1994.<

F. Sales of Lumber at Arm's Length by Tenured Timber Harvesters/Sawmills to Unrelated Lumber Remanufacturers

160. We turn now to the second pass-through situation at issue, which concerns tenured timber harvesters that own or are related to sawmills, process the logs they harvest into softwood lumber, and sell lumber to unrelated remanufacturers for further processing. The question here is whether a pass-through analysis is required in respect of these arm's length sales of softwood lumber.

161. In this situation, the products of both the harvesters/sawmills and the remanufacturers are subject to the investigation. It is uncontested that "certain softwood lumber" includes "primary" lumber produced by sawmills and "remanufactured" lumber produced by remanufacturers. We also note that USDOC chose to conduct this investigation on an aggregate basis. Canada accepts that aggregate investigations are contemplated by Article 19 of the SCM Agreement, but takes issue with how USDOC calculated the total amount of the subsidy and the countervailing duty rate in the investigation at issue. We have confirmed above that performing investigations on an aggregate basis is permitted under the SCM Agreement and the GATT 1994, and we have observed that calculation issues are beyond the scope of this appeal.

162. The Panel reasoned in this respect:

… some portion of any subsidy from stumpage is attributable to the harvester/sawmill's production of the lumber for re-manufacturing and some is attributable to the other products (including lumber) that the harvester/sawmill produces. Here, if the subsidies attributable to the lumber for re-manufacturing are not passed through to the re-manufacturer that purchases it, then those subsidies should not be included in the numerator of the subsidization equation, as in this situation it is the re-manufactured product, not the upstream lumber product, that is the subject merchandise under investigation.195

163. In our view, the Panel's reasoning confuses pass-through questions that may arise when individual enterprises are investigated, with questions arising in the calculation of the total amount and the rate of subsidization on an aggregate basis. The question before us is whether it is necessary to analyze whether benefits have been passed through from one product subject to the investigation (primary softwood lumber) to another product subject to that investigation (remanufactured softwood lumber). Once it has been established that benefits from subsidies received by producers of
non-subject products (that is, inputs) have passed through to producers of subject products (primary and remanufactured softwood lumber), we do not see why a further pass-through analysis between producers of subject products should be required in an investigation conducted on an aggregate basis. In this situation, it is not necessary to calculate precisely how subsidy benefits are divided up between the producers of subject products in order to calculate, on an aggregate basis, the total amount of subsidy and the country-wide countervailing duty rate for those subject products.

164. It is true, as pointed out by the Panel, that a particular shipment of remanufactured softwood lumber entering the United States might not be subsidized at all, especially if the remanufacturer purchased the primary lumber it processed at arm's length. It is also far from certain that every single shipment of primary lumber will, in fact, be subsidized, or, even if it is, that it is subsidized at the average ad valorem country-wide rate determined in an aggregate investigation. Nevertheless, as we indicated above, Article 19 of the SCM Agreement contemplates the imposition of a country-wide countervailing duty rate, even when a specific exporter is not subsidized, or when that country-wide rate does not match the precise amount of subsidization benefiting a specific shipment. And as mentioned above, the possibility for an exporter not investigated individually to request, pursuant to Article 19.3, an expedited review to establish an individual countervailing duty rate for that exporter, also confirms that a country-wide duty rate may, in principle, be imposed. However, the pass-through question would not be the same when determining, through the review procedure provided for in Article 19.3, an individual countervailing duty rate for the exporter that requested the review. In such a review, it is likely that a pass-through analysis would be required to determine whether input subsidies on logs, having passed through to the production of softwood lumber inputs, have passed through also to remanufactured lumber produced from those inputs by the particular exporter.196

165. For these reasons, we reverse the Panel's finding, in paragraph 7.99 of the Panel Report, that USDOC's failure to conduct a pass-through analysis in respect of arm's length sales of lumber by tenured harvesters/sawmills to unrelated remanufacturers is inconsistent with Articles 10 and 32.1 of the SCM Agreement and Article VI:3 of the GATT 1994.

166. Finally, we note that the Panel's findings, in paragraph 7.99 of the Panel Report, are not appealed to the extent that they refer to the Panel's reasoning in paragraphs 7.94-7.95.197 Accordingly, we do not address the Panel's finding that USDOC's failure to conduct a pass-through analysis in respect of sales of logs to unrelated lumber producers by tenured timber harvesters not owning sawmills, and thus not producing softwood lumber products subject to the investigation, is inconsistent with Articles 10 and 32.1 of the SCM Agreement and Article VI:3 of the GATT 1994.

VII. Findings and Conclusions

167. For the reasons set out in this Report, the Appellate Body:

(a) upholds the Panel's finding, in paragraph 7.30 of the Panel Report, that USDOC's "[d]etermination that the Canadian provinces are providing a financial contribution in the form of the provision of a good by providing standing timber to the timber harvesters through the stumpage programmes" is not inconsistent with Article 1.1(a)(1)(iii) of the SCM Agreement;

(b) reverses the Panel's finding, in paragraph 7.64 of the Panel Report, with respect to the interpretation of Article 14(d) of the SCM Agreement, and finds, instead, that an investigating authority may use a benchmark other than private prices in the country of provision, provided that:

(i) the investigating authority has established that private prices of the goods in question in the country of provision are distorted, because of the predominant role of the government in the market as a provider of the same or similar goods; and

(ii) when the investigating authority proceeds in this manner, it ensures that the alternative benchmark relates or refers to, or is connected with, prevailing market conditions in the country of provision (including price, quality, availability, marketability, transportation and other conditions of purchase or sale);

(c) reverses the Panel's consequential finding, in paragraph 7.65 of the Panel Report, that the United States acted inconsistently with Articles 10, 14, 14(d) and 32.1 of the SCM Agreement with respect to USDOC's determination of the existence and amount of benefit in the underlying countervailing duty investigation;

(d) finds, however, that there is not a sufficient factual basis to complete the analysis as to whether, under Article 14(d) of the SCM Agreement, USDOC was justified in using a benchmark other than private prices in Canada, and as to whether such benchmark relates or refers to, or is connected with, prevailing market conditions in Canada, (including price, quality, availability, marketability, transportation and other conditions of purchase or sale), and, therefore, does not make findings on whether USDOC's determination of the existence and amount of benefit in the underlying countervailing duty investigation is consistent or inconsistent with Articles 14 and 14(d) of the SCM Agreement, or on whether the imposition of countervailing duties based on that determination is consistent or inconsistent with Articles 10 and 32. 1 of the SCM Agreement;

(e) upholds the Panel's finding, in paragraph 7.99 of the Panel Report, that USDOC's failure to conduct a pass-through analysis in respect of arm's length sales of logs by tenured harvesters/sawmills to unrelated sawmills is inconsistent with Articles 10
and 32.1 of the SCM Agreement and Article VI:3 of the GATT 1994;

(f) reverses the Panel's finding, in paragraph 7.99 of the Panel Report, that USDOC's failure to conduct a pass-through analysis in respect of arm's length sales of lumber by tenured harvesters/sawmills to unrelated remanufacturers is inconsistent with Articles 10 and 32.1 of the SCM Agreement and Article VI:3 of the GATT 1994.

168. The Appellate Body recommends that the DSB request the United States to bring its measure, which has been found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with the SCM Agreement and the GATT 1994, into conformity with its obligations under those Agreements.

Signed in the original at Geneva this 18th day of December 2003 by:

_________________________
Luiz Olavo Baptista
Presiding Member

_________________________
     John Lockhart
Member

_________________________
    Giorgio Sacerdoti
Member

                                                           


To continue with  ANNEX 1

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122 In both situations, the Panel assumed an absence of imports. (Panel Report, para. 7.57)

123 Ibid., para. 7.57. In footnote 136 to that paragraph, the Panel noted, moreover, that Canada itself agreed that, where a government is the sole supplier, "import prices for the same good, which may or may not be 'world market prices', if available to purchasers in the country of provision, could be used as a benchmark".

124 United States' appellant's submission, para. 8.

125 Panel Report, para. 7.58.

126 United States' appellant's submission, para. 28.

127 Canada suggested this alternative benchmark in the context of a situation where the government is the sole supplier of certain goods or services. The European Communities suggested that world market prices could be used in a similar context. (See Panel Report, footnote 136 to para. 7.57) As noted earlier, the Panel stated that, where the government is the sole supplier or administratively controls all of the prices, "[t]he only remaining possibility would appear to be the construction of some sort of a proxy for, or estimate of, the market price for the good in that country". (Ibid., para. 7.57) During the countervailing duty investigation, the respondents contended that USDOC should use prices in the Canadian provinces not subject to the investigation, namely the Maritime Provinces, as a benchmark. USDOC rejected the use of prices in other Canadian provinces, namely the Maritime Provinces, as a benchmark, due to lack of information in the record about prices in those provinces. (Decision Memorandum, supra, footnote 3, p. 39)

128 Canada, in this regard, referred to the Appellate Body Report, in Canada - Dairy (Article 21.5 - New Zealand and US).

129 United States' responses to questioning at oral hearing.

130 We note that, in the underlying countervailing duty investigation, USDOC considered that adjusted prices of stumpage in the bordering states of the northern United States represented world market prices available in Canada. (See supra, footnote 75 to para. 77)

131 During the oral hearing, the United States explained that, generally speaking, the adjustments made related to three areas: silviculture, roads construction and maintenance, and fire protection. Before the Panel, the United States also mentioned adjustments related to species mix. (United States' response to Question 8 posed by the Panel at the First Panel Meeting; Panel Report, pp. A-38-A-39) As noted previously, the Decision Memorandum discusses other adjustments considered specifically by province. (Decision Memorandum, supra, footnote 3, pp. 54 ff; see supra, footnote 76)

132 USDOC acknowledged that "it may be difficult to achieve perfect comparability", but rejected the contention that "the size and scope of the adjustments make comparability impossible". According to USDOC, prices of stumpage in the United States were not, in this case, "outside the spectrum of commercial reality and availability". (Decision Memorandum, supra, footnote 3, p. 41)

133 Panel Report, para. 7.60.

134 Ibid., para. 7.63.

135 Ibid., para. 7.64.

136 Ibid.

137 The Panel found in paragraph 7.65 of the Panel Report that:

… USDOC failed to determine benefit in a manner consistent with Articles 14 and 14(d) [of the] SCM Agreement and we therefore find that the USDOC's imposition of countervailing measures was inconsistent with the United States' obligations under Articles 14 and 14(d) [of the] SCM Agreement as well as Articles 10 and 32.1 of the SCM Agreement as these countervailing measures were imposed on the basis of an inconsistent determination of the existence and amount of a subsidy. (footnote omitted)

138 Appellate Body Report, US - Section 211 Appropriations Act, para. 343.

139 Panel Report, para. 7.63.

140 Ibid., para. 7.64.

141 For instance, the Panel made no findings regarding the level of market distortion in each Canadian province given the differences in government market share, which ranged from 83 to 99 percent. (See supra, footnote 103)

142 Canada's response to questions posed by the Panel at the First Panel Meeting, paras. 90-103 Panel Report, pp. A-19-A-21.

143 Canada argued before the Panel that "... even if in certain areas of the United States Canadian producers can legally bid on certain cutting rights in the United States, harvest US timber and import US logs for milling, US standing timber - the alleged good provided, not logs produced from the standing timber - is still not available 'in' Canada". (Panel Report, para. 7.35)

144 Canada's appellee's submission, footnote 52 to para. 52.

145 Canada's second written submission to the Panel, para. 29, referring to the United States' response to Question 8 posed by the Panel at the First Panel Meeting, para. 11; Panel Report, p. A-39.

146 These include: differences in timber characteristics and operating conditions such as the type, mix, quality and location of forest resources, as well as costs of harvesting and transporting timber; measurement systems; and the rights and obligations related to tenures, including the duration of harvesting rights and responsibilities including silviculture, road-building and forest management. (Canada's appellee's submission, para. 52) See also Panel Report, footnote 109 to para. 7.35.

147 Panel Report, para. 7.99.

148 See supra, para. 76 of this Report.

149 "Primary" lumber is lumber that is produced when a log is processed for the first time. "Remanufactured" lumber is primary lumber that undergoes some additional processing, such as cutting to odd lengths and planing.

150 We use the term "tenured timber harvester/sawmill" to refer to an enterprise holding a stumpage contract that fells trees and produces logs, and also processes logs into softwood lumber.

151 We use the term "sawmill" to refer to an enterprise that processes logs into softwood lumber and does not hold a stumpage contract.

152 We use the term "remanufacturer" to refer to an enterprise that further processes softwood lumber into remanufactured lumber products.

153 Panel Report, para. 7.99. The Panel continued, stating that, in the light of its finding, it did "not find it necessary to address Canada's pass-through claims pursuant to Articles 19.1 and 19.4 [of the] SCM Agreement". (Ibid.)

154 United States' appellant's submission, footnote 7 to para. 5 (emphasis added), referring to Panel Report, paras. 7.94-7.95. Before the Panel, the United States had acknowledged that log sales at arm's length to sawmills by tenured timber harvesters not owning sawmills, could overstate the aggregate amount of subsidization of softwood lumber, but argued that the "vast majority of Crown timber enters harvesters' own sawmills". (Panel Report, para. 7.94) In the Panel's view, it was for the United States to submit information establishing the insignificance of arm's length transactions between tenured timber harvesters not processing logs into lumber, and unrelated sawmills. The Panel found that the United States "did not do so, and point[ed] to no factual basis in the record for its conclusion that such [pass-through] analysis was not necessary" and concluded that "in respect of the upstream log sales at issue, the US acted inconsistently with Article 10 [of the] SCM [Agreement] and Article VI:3 of GATT 1994". (Ibid., para. 7.95)

155 Canada's appellee's submission, paras. 8-12. Canada's responses to questioning at the oral hearing. See also, paras. 110-112 of Canada's response to Question 11 posed by the Panel at the First Panel Meeting; Panel Report, pp. A-22-A-23.

156 United States' appellant's submission, para. 31.

157 The United States' appeal does not include the situation where a tenured timber harvester not owning a sawmill sells logs at arm's length to sawmills producing softwood lumber. The Panel made findings on this situation in paragraph 7.99 of the Panel Report, together with findings on the situations that are at issue in this appeal.

158 United States' response to questioning at the oral hearing.

159 United States' appellant's submission, para. 39.

160 United States' response to questioning at the oral hearing.

161 United States' appellant's submission, para. 43.

162 Ibid., paras. 31 and 46-47.

163 Canada's appellee's submission, para. 65.

164 Canada's appellee's submission, para. 68, referring to Article 1.1 of the SCM Agreement.

165 Ibid., paras. 9-10 and 77-78.

166 Ibid., paras. 55 ff and 80.

167 Appellate Body Report, EC - Bananas III, para. 204.

168 Appellate Body Report, Brazil - Desiccated Coconut, DSR 1997:I, 167, at 181. (original italics; underling added)

169 Ibid.

170 We also take note of Article 19.4 of the SCM Agreement, which provides:

No countervailing duty shall be levied on any imported product in excess of the amount of the subsidy found to exist, calculated in terms of subsidization per unit of the subsidized and exported product. (footnote omitted)

171 The definition of "countervailing duties" in footnote 36 to Article 10 of the SCM Agreement echoes the definition of that term in Article VI:3 of the GATT 1994.

172 Panel Report, para. 7.85.

173 Or income or price support within the meaning of Article 1.1(a)(2).

174 Appellate Body Report, Brazil - Aircraft, para. 157.

175 Appellate Body Report, Canada - Aircraft, para. 154.

176 GATT Panel Report, US - Canadian Pork, para. 4.3. The panel noted that swine producers and pork producers were separate industries operating at arm's length and that the subsidies granted to swine producers could have only indirectly bestowed a subsidy on the production of pork.

177 GATT Panel Report, US - Canadian Pork, para. 4.6.

178 Appellate Body Report, US - Countervailing Measures on Certain EC Products, para. 139.

179 Panel Report, para. 7.91.

180 Provided that all the other conditions for using countervailing measures as set forth in Part V of the SCM Agreement are met.

181 United States' appellant's submission, paras. 31 and 45-47.

182 United States' response to questioning at the oral hearing.

183 United States' appellant's submission, footnote 60 to para. 46.

184 Canada's appellee's submission, paras. 11 and 78 ff.

185 Ibid., para. 61.

186 Canada's other appellant's submission, para. 7; United States' appellant's submission, paras. 1-6.

187 In response to questioning at the oral hearing, Canada did not contest that Article 19 contemplates conducting countervailing duty investigations on an aggregate basis. However, Canada maintained that the aggregate investigation leading to the final determination and imposition of countervailing duties in this case is inconsistent with the SCM Agreement.

188 Article 19.3 of the SCM Agreement reads:

When a countervailing duty is imposed in respect of any product, such countervailing duty shall be levied, in the appropriate amounts in each case, on a non-discriminatory basis on imports of such product from all sources found to be subsidized and causing injury, except as to imports from those sources which have renounced any subsidies in question or from which undertakings under the terms of this Agreement have been accepted. Any exporter whose exports are subject to a definitive countervailing duty but who was not actually investigated for reasons other than a refusal to cooperate, shall be entitled to an expedited review in order that the investigating authorities promptly establish an individual countervailing duty rate for that exporter.

189 We note, in this respect, as pointed out by the European Communities, that the first sentence of Article 6.10 of the Anti-Dumping Agreement requires, as a rule, a determination of an individual margin of dumping for each known producer or exporter of the product under investigation, unless this is rendered impracticable due to the high number of producers and exporters or of the types of products involved. If that is the case, the second sentence of Article 6.10 permits investigating authorities to limit the investigation to a statistically valid sample, or the largest percentage of the volume of exports that can reasonably be investigated. By contrast, the SCM Agreement does not contain a similar rule requiring Members, in principle, to determine an individual margin of subsidization for each known producer or exporter of the subsidized good. (European Communities' third participant's submission, paras. 45-47)

190 Article 19.4 of the SCM Agreement provides:

No countervailing duty shall be levied on any imported product in excess of the amount of the subsidy found to exist, calculated in terms of subsidization per unit of the subsidized and exported product. (footnote omitted)

191 Panel Report, US - Countervailing Measures on Certain EC Products, para. 7.44. (emphasis added) In the same vein, the Appellate Body held in EC - Bed Linen (Article 21.5 - India) that, under the Anti-Dumping Agreement:

Members have the right to impose and collect anti-dumping duties only after the completion of an investigation in which it has been established that the requirements of dumping, injury, and causation "have been fulfilled ". In other words, the right to impose anti-dumping duties under Article 9 is a consequence of the prior determination of the existence of dumping margins, injury, and a causal link. (original italics)

(Appellate Body Report, EC - Bed Linen (Article 21.5 - India), para. 123)

192 United States' and Canada's responses to questioning at the oral hearing; Panel Report, para. 7.93.

193 Canada does not argue that a pass-through analysis is required in respect of logs harvested by a tenured harvester/sawmill and subsequently processed in-house into softwood lumber.

194 United States' responses to questioning at the oral hearing.

195 Panel Report, para. 7.97.

196 In an aggregate investigation, by contrast, the correct calculation of the countervailing duty rate would depend on matching the elements taken into account in the numerator with the elements taken into account in the denominator. For example, assuming that the numerator would represent the total amount of subsidy determined on the basis of logs entering sawmills, this numerator would have to be spread over a denominator consisting of the total amount of products processed from those logs in order to accurately calculate a country-wide ad valorem countervailing duty rate to be imposed on lumber imports.

We note, however, that the Panel declined to rule on Canada's claims regarding USDOC's subsidy calculation in the investigation underlying this dispute and that these findings are not before us on appeal. (See supra, para. 151)

197 See supra, para. 127.