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