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Report of the Panel

TABLE OF CASES CITED IN THIS REPORT

Short TitleFull Case Title and Citation
Argentina – Ceramic Tiles Panel Report, Argentina – Definitive Anti-Dumping Measures on Imports of Ceramic Floor Tiles from Italy, WT/DS189/R, adopted 5 November 2001
Brazil – Aircraft (Article 21.5 – Canada II) Panel Report, Brazil – Export Financing Programme for Aircraft – Second Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW/2, adopted 23 August 2001
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377
EC – Bed Linen Panel Report, European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India, WT/DS141/R, adopted 12 March 2001, as modified by the Appellate Body Report, WT/DS141/AB/R
EC – Hormones Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, 135
EC – Tube and Pipe Fittings Panel Report, European Communities – Anti-Dumping Duties on Malleable Cast Iron Tube or Pipe Fittings from Brazil, WT/DS219/R, 7 March 2003 [appealed]
Egypt – Steel Rebar Panel Report, Egypt – Definitive Anti-Dumping Measures on Steel Rebar from Turkey, WT/DS211/R, adopted 1 October 2002
Guatemala – Cement II Panel Report, Guatemala – Definitive Anti-Dumping Measures on Grey Portland Cement from Mexico, WT/DS156/R, adopted 17 November 2000, DSR 2000:XI, 5295
India – Patents (US) Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9
India – Quantitative Restrictions Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/AB/R, adopted 22 September 1999, DSR 1999:IV, 1763
Japan – Alcoholic Beverages II Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97
Mexico – Corn Syrup Panel Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States, WT/DS132/R and Corr.1, adopted 24 February 2000, DSR 2000:III, 1345
Thailand – H-Beams Appellate Body Report, Thailand – Anti-Dumping Duties on Angles, Shapes and Sections of Iron or Non-Alloy Steel and H-Beams from Poland, WT/DS122/AB/R, adopted 5 April 2001
US – Canadian Pork Panel Report, United States – Countervailing Duties on Fresh, Chilled and Frozen Pork from Canada, adopted 11 July 1991, BISD 38S/30.
US – Countervailing Measures on Certain EC Products Panel Report, United States – Countervailing Measures Concerning Certain Products from the European Communities, WT/DS212/R, adopted 8 January 2003, as modified by the Appellate Body Report, WT/DS212/AB/R
US – Export Restraints Panel Report, United States – Measures Treating Exports Restraints as Subsidies, WT/DS194/R and Corr.2, adopted 23 August 2001
US – Hot-Rolled Steel Appellate Body Report, United States – Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan, WT/DS184/AB/R, adopted 23 August 2001
US – Lamb Appellate Body Report, United States – Safeguard Measures on Imports of Fresh, Chilled or Frozen Lamb Meat from New Zealand and Australia, WT/DS177/AB/R, WT/DS178/AB/R, adopted 16 May 2001
US – Lead and Bismuth II Appellate Body Report, United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the United Kingdom, WT/DS138/AB/R, adopted 7 June 2000, DSR 2000:V, 2601
US – Offset Act (Byrd Amendment) Appellate Body Report, United States – Continued Dumping and Subsidy Offset Act of 2000, WT/DS217/AB/R, WT/DS234/AB/R, adopted 27 January 2003
US – Shrimp Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755
US – Softwood Lumber III Panel Report, United States – Preliminary Determinations with Respect to Certain Softwood Lumber from Canada, WT/DS236/R, adopted 1 November 2002

I. INTRODUCTION

A. COMPLAINT OF CANADA

1.1.
On 3 May 2002, Canada requested consultations with the United States pursuant to Article 4 of the Dispute Settlement Understanding ("the DSU"), Article XXII of the General Agreement on Tariffs and Trade 1994 ("GATT 1994"), and Article 30 of the Agreement on Subsidies and Countervailing Measures ("the SCM Agreement"), concerning the final affirmative countervailing duty determination by the US Department of Commerce ("USDOC") (File No. C-122839) issued on 25 March 2002, with respect to certain softwood lumber from Canada.1
1.2.
On 18 June 2002, Canada and the United States ("the US") held the requested consultations, but failed to reach a mutually satisfactory resolution of the matter.
1.3.
On 18 July 2002, Canada requested the establishment of a panel to examine the matter.2 Canada subsequently withdrew that request, and on 19 August 2002 made a new request for establishment of a panel to examine the matter.3

B. ESTABLISHMENT AND COMPOSITION OF THE PANEL

1.4.
At its meeting of 1 October 2002, the DSB established a panel in accordance with Article 6 of the DSU and pursuant to the request made by Canada in document WT/DS257/3.4
1.5.
At that meeting, the parties to the dispute also agreed that the Panel should have standard terms of reference. The terms of reference are, therefore, the following:

"To examine, in the light of the relevant provisions of the covered agreements cited by Canada in document WT/DS257/3, the matter referred by Canada to the DSB in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements".

1.6.
On 4 November 2002, Canada requested the Director-General to determine the composition of the Panel, pursuant to paragraph 7 of Article 8 of the DSU. This paragraph provides:

"If there is no agreement on the panelists within 20 days after the date of the establishment of a Panel, at the request of either party, the Director-General, in consultation with the Chairman of the DSB and the Chairman of the relevant Council or Committee, shall determine the composition of the panel by appointing the panelists whom the Director-General considers most appropriate in accordance with any relevant special or additional rules or procedures of the covered agreement or covered agreements which are at issue in the dispute, after consulting with the parties to the dispute. The Chairman of the DSB shall inform the Members of the composition of the panel thus formed no later than 10 days after the date the Chairman receives such a request".

1.7.
On 8 November 2002, the Director-General accordingly composed the Panel as follows:

Chairman: Mr. Elbio O. Rosselli

Members: Mr. Wieslaw Karsz

Mr. Remo Moretta

1.8.
The European Communities, India and Japan reserved their third-party rights.

C. PANEL PROCEEDINGS

1.9.
The Panel met with the parties on 11-12 February 2003 and 25 March 2003. The Panel met with third parties on 12 February 2003.

II. FACTUAL ASPECTS

A. THE USDOC INVESTIGATION

2.1.
This dispute concerns the final countervailing duty determination made by USDOC on 21 March 2002 in respect of certain softwood lumber imports from Canada, classified under headings 4407.1000, 4409.1010, 4409.1090, and 4409.1020.
2.2.
The investigation was initiated by USDOC on 30 April 2001, pursuant to an application filed with USDOC on 2 April 2001 (amended 20 April 2001 to add certain applicants). The applicants were the Coalition for Fair Lumber Imports Executive Committee; the United Brotherhood of Carpenters and Joiners; the Paper, Allied-Industrial, Chemical and Energy Workers International Union; Moose River Lumber Co., Inc.; Shearer Lumber Products; Shuqualak Lumber Co.; and Tolleson Lumber Co., Inc.
2.3.
On 17 August 2001, USDOC published in the Federal Register a notice of preliminary affirmative countervailing duty determination, preliminary affirmative critical circumstances determination, and alignment of final countervailing duty determination with final antidumping duty determination. Provisional measures were imposed on the basis of a preliminary subsidy rate of 19.31 per cent.
2.4.
On 2 April 2002, USDOC published in the Federal Register a notice of final affirmative countervailing duty determination. Definitive measures were imposed on the basis of a final subsidy rate of 19.34 per cent, with 19.25 per cent being the amount attributable to stumpage programmes. On 22 May 2002, USDOC published in the Federal Register a notice of amended final affirmative countervailing determination and notice of countervailing duty order, which decreased the final subsidy rate to 18.79 per cent as a result of corrections for ministerial errors. Of this amount, 18.70 per cent was attributable to stumpage programmes.

B. RELATED WTO PROCEEDINGS

2.5.
At its meeting of 5 December 2001, the DSB established a panel, pursuant to a request by Canada, in respect of USDOC's preliminary determinations in the investigation at issue in this dispute. On 27 September 2002, that panel's report, United States – Preliminary Determinations with Respect to Certain Softwood Lumber from Canada (WT/DS236/R), was circulated to all WTO Members.5

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

A. REQUEST OF CANADA

3.1.
Canada requests the Panel to:

· find that the initiation of USDOC's investigation and the definitive countervailing duties imposed as a result violate Articles 10, 11.4, and 32.1 of SCM Agreement;

· find that USDOC'sinvestigation and the Final Determination, and the definitive countervailing duties imposed as a result violate Articles 1.2, 10, 12.1, 12.3, 12.8, 14, 14(d), 19.1, 19.4 and 32.1 of SCM Agreement and Article VI:3 of GATT 1994; and

· recommend that the US bring its measures into conformity with its WTO obligations, including by revoking the countervailing duty order, ceasing to impose countervailing duties and refunding the countervailing duties imposed as a result of the Lumber IV investigation and the Final Determination.

B. REQUEST OF THE UNITED STATES

3.2.
The United States requests that the Panel reject Canada's claims in their entirety.

IV. ARGUMENTS OF THE PARTIES

4.1.
The arguments of the parties are set out in their written and oral submissions to the Panel, and in their answers to questions. The parties' arguments as presented in their submissions are summarized in this section. The parties' written answers to questions are set out in full as Annexes to this report. (See, List of Annexes, page v).

A. FIRST WRITTEN SUBMISSION OF CANADA

4.2.
The following summarizes Canada's arguments in its first written submission.
4.3.
At issue in this dispute are countervailing duties on certain softwood lumber products from Canada imposed on 21 March 2002, by USDOC pursuant to a final affirmative countervailing duty determination

1. The US Imposed Countervailing Duties On Practices That Are Not Countervailable Subsidies

4.4.
Article 1.1 sets out the exclusive definition for what constitutes a subsidy for the purposes of the SCM Agreement. A subsidy has two discrete elements: (i) a financial contribution that (ii) confers a benefit. The US has not established the existence of a subsidy for the following reasons.
4.5.
USDOC erred in determining that provincial stumpage programmes "provide goods". The US has imposed countervailing duties on practices that do not constitute a "financial contribution" within the meaning of Article 1.1(a)(1)(iii). In Canada, natural resources are, for the most part, the property of provincial governments. Many of these resources have traditionally been managed through the transfer of real property interests and exploitation rights. Forests are one among many of these resources; harvesting trees is but one aspect of the overall management of forestry resources. At issue in this dispute is the legal characterization of these forestry resources management systems.
4.6.
Forestry management regimes in Canada reflect three critical considerations: (1) the land is publicly owned; (2) forestry resources such as air, water, wildlife, plants, trees and parkland may be put to a variety of uses; and (3) forestry resources must be carefully managed in the best interests of the public. Forestry resources are managed through a system of interlocking rights and obligations between the Crown and timber harvesters. This system of resource management is based most frequently on tenure and licensing agreements. The details of such tenure and licensing agreements vary, but they are all similar in that they are a complex bundle of rights and obligations, containing at a minimum: the right to harvest standing timber on Crown land or "stumpage"; service and maintenance obligations (e.g., road-building, protection against fire, disease, and insects); implementation of forestry management and conservation measures, including silviculture; and payment of a volumetric "stumpage charge" that is levied upon the exercise of the harvesting right.
4.7.
Stumpage takes two different forms in Canada: a real property right (generally referred to as a profit à prendre)or a licence to harvest standing timber. A profit à prendre is a form of real property right that conveys a non-possessory interest in the land to the recipient. A licence is a revocable right to do something on, or to the detriment of, the land of another that would otherwise not be permitted – in this case, the right to harvest standing timber.
4.8.
A "financial contribution" exists where "a government provides goods or services other than general infrastructure". Interpreted in accordance with the principles of treaty interpretation in customary international law, "goods" refers to tradable items that are capable of bearing a tariff heading.
4.9.
The ordinary meaning of "goods" is "tangible or movable personal property other than money; [especially] articles of trade or items of merchandise ‹goods and services›". The term "goods" excludes resources such as intangible property, i.e., property rights, and real property. A profit à prendre, for example,is a real property right. The panel in US – Softwood Lumber III agreed that the ordinary meaning of "goods" is "tangible or movable personal property, other than money." Despite this, the panel adopted an interpretation of "goods" that was broader than the ordinary meaning of the term. Article 1.1(a)(1) (financial contribution) is drafted in precise terms. Article 1.1 (a)(1)(iii) does not refer to provision of "economic resources" or "property", but rather to "goods or services". As well, "goods or services" are not examples or species belonging to a bigger genus "economic resources". Real property and other resources or instruments of value do not fall under subparagraph (iii) unless they fit within the terms, "goods" or "services other than general infrastructure".
4.10.
Article 3.1 provides relevant context. It defines "prohibited" subsidies as "subsidies within the meaning of Article 1". Article 3.1(b) includes the phrase "subsidies contingent … upon the use of domestic over imported goods" (emphasis added) in defining a particular prohibited subsidy. The use of the adjective "imported" to modify "goods" implies that the "goods" so modified may only be items that are capable of being "imported" – that is, traded across international borders or tradable items with an actual or potential customs classification. The proper conclusion is that the meaning of "goods" in both provisions is identical: tradable items with an actual or potential customs classification. Further, Parts III and V of the SCM Agreement refer to "products" or "imports". Given that Article 1.2 ties Article 1.1 to Parts III and V, the "products" or "imports" referred to in these Parts may not be interpreted to be different from the "goods" referred to in Articles 1 or 3 of the SCM Agreement.
4.11.
The WTO Agreement also provides instructive context. Countervailing measures are provided for in Article VI of GATT 1994, as an exception to Article II. Therefore, the coverage of Part V of the SCM Agreement which imposes disciplines on countervailing duties and that of Article II of GATT 1994 must be the same. The SCM Agreement is one of the agreements set out in Annex 1A to the WTO Agreement. Annex 1A sets out "multilateral agreements on trade in goods". More important, the interpretative note to that Annex provides a rule of conflict between GATT 1994 and the covered agreements. A rule of conflict suggests a possibility of conflict and implies that the subjects or scope of coverage of the agreements are the same. Thus coverage of GATT 1994 and the agreements on trade in goods, including the SCM Agreement, must have the same scope. The panel in US – Softwood Lumber III used only one contextual element to support its view that "goods" has an "unqualified meaning". The panel believed that the only exception in Article 1.1(a)(1)(iii) is general infrastructure and this reinforced its view "concerning the unqualified meaning of the term goods." The panel rejected the contextual guidance offered by the use of "goods" and "products" in the SCM Agreement and the WTO Agreements as a whole.
4.12.
The term "goods" in Article 1.1(a)(1)(iii) is equivalent to "products", and these terms are used throughout GATT 1994, the SCM Agreement and the other covered agreements to mean items on which tariff concessions may be given under Article II of GATT 1994. This is confirmed by the object and purpose of the SCM Agreement. The class of activity defined in Article 1.1(a)(1)(iii) to constitute a financial contribution within Article 1.1(a)(1) is discrete and carefully delineated. This demonstrates that the scope of Article 1.1(a)(1)(iii) is limited; the object of this provision is not to capture all potential in-kind transfers of economic resources that a government may provide. Furthermore, Article 1.1 provides a definition of a subsidy for the purposes of the SCM Agreement, and Article 1.1(a)(1) provides that a "financial contribution" is a constituent element of a subsidy. Subparagraphs (i) to (iv) of Article 1.1(a)(1) set out categories of activity that constitute a financial contribution for the purposes of the subsidy definition. Subparagraphs (i) to (iv) are carefully crafted and use precise terminology. If the object and purpose of Article 1.1(a)(1) were to bring all transfers of economic resources within the ambit of "financial contribution", there would have been no need to delineate specific categories of activity.
4.13.
USDOC erroneously found that Canadian stumpage programmes constituted a financial contribution. Specifically, USDOC held that provincial tenure systems provide lumber producers with standing timber and that standing timber is a "good". According to USDOC even a license or right to harvest timber would constitute the provision of a good, because "goods" encompasses "all a person’s legal rights of whatever description."
4.14.
First, stumpage programmes involve the granting of rights to harvest standing timber pursuant to tenure and license agreements. "Goods" refers to tradable items with an actual or potential customs classification. Rights to harvest, the only thing provided by governments through stumpage programmes, are not "goods". Even assuming that stumpage programmes provide standing timber, stumpage programmes do not involve a financial contribution. Standing timber – i.e., trees firmly rooted in the ground – is not a "good" within the meaning of Article 1.1(a)(1)(iii). Properly understood, a profit à prendre and a license to harvest standing timber are economic resources that are not "goods" within the meaning of Article 1. "Stumpage" – the right to exploit an in situ natural resource – is akin to the right to extract oil from public lands, quotas to harvest fish, or the right to exploit inland water and water currents. Second, standing timber is not a "good" within the meaning of Article 1.1(a)(1)(iii). Standing timber is an in situ natural resource that is not capable of being traded across borders.
4.15.
The term "goods" in Article 1.1(a)(1)(iii) cannot be interpreted to include rights such as "stumpage", profits à prendre, and timber harvesting licenses. USDOC erred in determining that provincial governments provide goods to lumber producers and erred specifically in finding that standing timber is a "good". As stumpage does not involve a "financial contribution" USDOC’s subsidy determination and the imposition of countervailing duties violates Articles 10, 19.1, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994.
4.16.
USDOC’s Use of "Cross-Border" Benchmarks to Determine and Measure a "Benefit" Violates the SCM Agreement. Having concluded that the provinces provided goods, USDOC determined that this alleged financial contribution conferred a benefit by using selected short-term auction prices for the right to cut standing timber on specific tracts of public lands in the US or, in the case of Québec, private timber sales in Maine, as benchmarks for comparison to Canadian provincial stumpage charges. Articles 1.1(b) and 14(d) of the SCM Agreement require the US to use in-country benchmarks to determine the existence and measurement of any alleged benefit. The Agreement does not permit the investigating authority to use cross-border (out-of-country) benchmarks, nor to reject benchmarks from within the country under investigation.
4.17.
In the Preliminary Determination ("PD"), USDOC purported to establish that Canadian stumpage programmes conferred a benefit by comparing: (1) stumpage charges related tothe exercise of the right to harvest; with (2) alleged prices for short term rights to cut standing timber on selected US public lands and private timber sales in Maine. USDOC did not modify this cross-border methodology in any material respect for purposes of the Final Determination ("FD"). In the FD, USDOC determined that Article 14(d) does not restrict the market benchmark to the country of export, but was intended to require that adequacy of remuneration be determined with reference to "comparable" market-based transactions.
4.18.
USDOC sought to avoid the plain meaning of the Article 14(d) by focusing on the phrase "in relation to". It concluded that "in relation to" means "taking account of". USDOC also referred to the purported context provided by the illustrative list of conditions of purchase or sale set out in Article 14(d). After concluding that cross-border benchmarks were acceptable for determining "benefit", USDOC then rejected evidence of in-country benchmarks and asserted that US stumpage was a "reasonable benchmark". USDOC argued, erroneously: (1) Private prices in Canada are not market-based and cannot be used as benchmarks because a government-dominated market will distort the market; (2) US stumpage is an acceptable benchmark because it is commercially reasonable for Canadian producers to bid on US stumpage (that is, a natural resource not located within the political boundaries of Canada), and producers located within Canada "have access to US prices of stumpage"; and (3) US stumpage prices are world market prices that are available to Canadian producers. USDOC determined that the US benchmark prices were higher than the charges levied by Canadian provinces and concluded, as it had done in the PD, that Canadian stumpage charges conferred a benefit.
4.19.
Article 1.1 of the SCM Agreement provides that a subsidy exists where there is a financial contribution by a government and "a benefit is thereby conferred". The Appellate Body considered the meaning of "benefit" in Article 1 of the SCM Agreement in Canada – Aircraft and found that a benefit under Article 1.1(b) suggests some form of comparison. The Appellate Body indicated that there could be no "benefit" unless this comparison demonstrated that the recipient was made "better off" than it would have been absent that contribution. Article 14(d) sets out guidelines for determining whether a benefit exists and how the amount of the benefit should be measured in cases involving the provision of goods. The text of Article 14(d) is unambiguous: "In the country of provision or purchase" means "in the country of provision or purchase." Nothing in the context, object and purpose or the negotiating history of Article 14 permits reading "in" as anything other than "in".
4.20.
The recent panel report in US – Softwood Lumber III, confirms this interpretation. In that case, the panel found that the adequacy of remuneration in Article 14(d) must be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase. According to the panel, this means that Article 14(d) requires that the prevailing market conditions to be used as a benchmark are those "in the country of provision" of the goods. The panel concluded that no other meaning could be ascribed to the reference to market conditions "in the country of provision". Therefore, the only benchmarks that may be used in a provision of goods context are those determined on the basis of prevailing market conditions in the country of provision. USDOC sought to avoid the plain meaning of "prevailing market conditions … in the country of provision" by interpreting the phrase "in relation to" to mean "taking account of". However, the panel in US – Softwood Lumber III disagreed with this interpretation. It found the phrase means "on the basis of" or "in comparison with". USDOC’s interpretation effectively read out of the text of Article 14(d) the clear and explicit reference to "in the country of provision", and turned the mandatory "shall" in Article 14(d) into the discretionary "may". Finally, any determination under Article 14(d) must consider the ordinary meaning of "adequate remuneration". The ordinary meaning of "adequate" is sufficient or satisfactory, not "maximum".
4.21.
USDOC rejected evidence concerning in-Canada benchmarks for the alleged good, based on: (1) its unfounded assumption that it could legally reject in-country benchmarks; and (2) the unsupported factual conclusion that there are no usable market determined prices because prices were suppressed as a result of government involvement. USDOC also sought to avoid the prohibition in Article 14(d) against using out-of-country benchmarks by arguing that US stumpage prices are world market prices for stumpage available in Canada, and are therefore part of in-country prevailing market conditions. This conclusion is without foundation for three reasons.
4.22.
First, USDOC asserted that US stumpage was purportedly available in Canada. Although a small quantity of logs harvested from some US comparison areas is exported to some Canadian provinces this, does not mean that the right to harvest US timber is somehow imported into Canada. USDOC consistently blurs the distinction between standing timber and logs. The record makes clear, however, that what is provided is either timber harvesting rights or "standing timber". Neither may be "imported" into Canada and neither is "available" in Canada. In fact, logs harvested from standing timber in the US comparison areas for over half of the exports subject to countervailing duties cannot be exported to Canada. Second, USDOC conceded that no world market price for stumpage existed when it found that there was not a single US price for stumpage or even a single price within individual US states. Third, prices outside the country of provision do not become acceptable because such prices are available in another country with allegedly "comparable market conditions." Even if market conditions in the US were "comparable", USDOC must base its determination on prevailing market conditions "in" the country.
4.23.
The panel in US – Softwood Lumber III concluded that although "conditions of purchase or sale" and "availability" were listed as market conditions in Article 14(d) this did not mean that US stumpage was available to Canadian producers. It found that the fact that a good may also be bought on a market outside the country of provision, did not imply that the prices for that good in the other country become part of the market conditions "in the country of provision". The panel further noted that acceptance of the US argument would mean that the phrase "prevailing market conditions in the country of provision" refers to world market conditions. As the text of Article 14(d) did not support this conclusion it could not be correct. Instead the panel indicated that "availability" was an aspect of the market conditions existing in the country of provision. Finally, the panel noted that the US interpretation would effectively read out of the SCM Agreement the explicit reference to the country of provision, thereby violating the principle of effectiveness.
4.24.
The US recourse to the same cross-border methodology in the FD consists again of simply substituting "prevailing market conditions" in the US for "prevailing market conditions" in Canada. This is the only way the US was able to determine the existence of a "benefit" and construct a subsidy rate of nearly 20 per cent.
4.25.
A treaty interpreter must ensure that its interpretation of a treaty provision does not give rise to absurd or unreasonable results. An interpretation of Article 14(d) that would permit the use of cross-border comparisons would give rise to such unreasonable results for several reasons.
4.26.
International borders affect market conditions and, in particular, prices; these effects are substantial and notoriously difficult to quantify. Political boundaries drive differences in government regulatory regimes, tax regimes, investment regimes, currency, banking and financial systems, business practices, and business climate. Government policies and other factors in different jurisdictions affect economic conditions, including wage rates, taxes, capital costs, labour costs and exchange rates.
4.27.
Cross-border comparisons also do not reflect the effect of differences in the natural resource endowments between two countries. Prices of goods and services will generally differ between countries for reasons relating to comparative advantage. In US – Softwood Lumber III the panel found that USDOC’s methodology for determining a benefit would lead to anautomatic determination of subsidization in a resource-rich exporting country, even where the perceived price difference simply reflected the exporting country’s comparative advantage.
4.28.
A wide variety of other factors also affect forestry resources in different countries. These factors 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 associated with tenures such as the duration of harvesting rights and obligations associated with silviculture, road building and forest management responsibilities.
4.29.
USDOC itself confirmed that cross-border comparisons are illogical in its own previous determinations in Lumber I, II and III. In each of these prior lumber cases, USDOC rejected the use of such comparisons on the basis that they simply could not be done. In particular, in Lumber I USDOC found that cross-border comparisons were "arbitrary and capricious" and that no unified North American market for stumpage existed. In this proceeding USDOC dismissed these decisions by claiming that they were made "in the context of a different legal framework." The change in law is irrelevant, however. All of the facts that led USDOC to reject the use of cross-border comparisons in the past still exist today.
4.30.
In the FD, USDOC concluded there were no usable benchmarks in Canada that would allow USDOC to analyze whether Canadian stumpage programmes provided a benefit to the softwood lumber producers. This conclusion is contradicted by the record, which provided several in-country benchmarks as well as economic analysis of the adequacy of remuneration charged by provincial governments. This information included private timber sales, cost-revenue comparisons, an economic analysis of provincial stumpage charges, competitive auction prices, and private sector assessments of timber value.
4.31.
Private Timber Sales ‑ Canada provided substantial information regarding in-country sales of private stumpage, including private stumpage prices in Québec. In Québec, private forest lands account for 17 per cent of the total softwood sawmill supply. Private stumpage transactions in Québec are the basis for that province’s parity approach, which Québec uses to determine the market value of standing timber on public land. The evidence before USDOC included three years of annual private stumpage surveys and the original survey results reporting private forest stumpage transactions in Québec. In response to questions from USDOC about the private forest in Québec, comprehensive economic data and analyses were submitted showing that private forest stumpage transactions in Québec occur in a large, open market consisting of hundreds of well-informed buyers and sellers, including competing private timber sources outside Québec.
4.32.
Similarly, the information for Ontario demonstrated that the volume of private sales was significant, representing 7 per cent of total softwood stumpage sales. Canada submitted an expert study by Resource Information Systems Inc. (RISI) that provided a detailed assessment of the private market in Ontario. The RISI Study found that the private market in Ontario was competitive, efficient, and independent from the market for Crown timber. Another study of the private market in Ontario, prepared by Charles River Associates Inc., evaluated the market conditions for private timber sales, concluded that the prices for private timber were established by the "marginal" price for timber, and calculated the average price for private timber purchased by sawmills.
4.33.
Competitive Auctions ‑ The record also included information on competitive sales of stumpage by provincial governments, including information from B.C. on the volume and value of competitive sales of stumpage through the Small Business Forest Enterprise Programme, which are made through competitive auction to the highest bidder.
4.34.
Private Sector Assessments of Timber Value ‑ Canada also provided information regarding the market values for standing timber based on an amalgam of public bid and private sale values. These market values are known as "timber damage assessments" (TDAs). Three industry sectors in Alberta, the oil and gas sector, the mining sector and the forest sector, jointly developed the TDA methodology. After a series of negotiations, all parties agreed on a TDA methodology to provide a fair and balanced estimate of the market value of Alberta’s standing timber. The TDA data represent the full value of the resource, both because they come from this arm’s-length process and because the prices used to develop TDA are from market transactions between unrelated buyers and sellers where each participant is free to decide not to buy or sell.
4.35.
Evidence Demonstrating Consistency With Market Principles ‑ Canada submitted information demonstrating that provincial stumpage systems collected more than adequate remuneration and were consistent with market principles. This information established that substantial profits were earned from the provision of timber harvesting rights. Evidence demonstrated, for example, that B.C. received adequate remuneration because it produced a return of 75 per cent of expenditures on its timber harvesting system. Consistent with market principles, this enormous profit on timber harvesting operations demonstrated that harvesters cannot be said to be receiving stumpage for "less than adequate remuneration". The other major producing provinces also showed substantial profits on their stumpage programmes – 35 per cent for Ontario, 67 per cent for Québec, and 25 per cent for Alberta.
4.36.
Cost-revenue comparisons provided USDOC with in-country information to evaluate the adequacy of remuneration collected for rights to harvest Crown timber. As USDOC's existing practice and regulations confirm, this information is relevant to USDOC’s adequacy of remuneration determinations. This analysis is consistent with the requirement in Article 14(d) that the provision of a good be for "adequate," not "maximum," remuneration. In addition, an analysis of the economics of B.C.’s stumpage system demonstrated that the province’s stumpage system is administered consistent with market principles. B.C. stumpage charges are a volumetric levy imposed upon the exercise of previously conferred timber harvesting rights. The economic analysis shows that a profit-maximizing forestland owner would not impose a volumetric charge upon the exercise of those rights. Further, the tenure system imposes costs on tenure holders that they would not bear in a competitive market. Therefore, consistent with market principles, harvesters again cannot be said to be receiving stumpage for "less than adequate remuneration".
4.37.
In the FD USDOC rejected "transaction-based" in-country Canadian benchmarks because of alleged "price suppression" allegedly resulting from government involvementin the marketplace. There is no basis for the rejection of in-country benchmarks in the SCM Agreement. Article 14(d) refers to "prevailing" market conditions. In this context, the meaning of "prevailing" is "as they exist". Nothing in the context, object and purpose or negotiating history of the SCM Agreement suggests that the "market conditions" referred to are those of a perfectly competitive market. In US – Softwood Lumber III the panel found that even if the alleged "price suppression" existed, this would not permit USDOC to reject in-country benchmarks. The panel concluded that Article 14(d) SCM Agreement did not require that prevailing market conditions be those of an "undistorted" market. It also concluded that USDOC provided no acceptable rationale for rejecting Canadian stumpage prices. Evenassuming, arguendo, that Article 14(d) permitted the rejection of in-country benchmarks because of "price suppression", USDOC’s evidence and analysis was clearly inadequate to establish that such distortion existed.
4.38.
For these reasons USDOC’s rejection of in-country Canadian benchmarks and reliance on "cross-border" US benchmarks is inconsistent with Articles 1.1(b) and 14(d) of the SCM Agreement. The US has therefore imposed countervailing duties in the absence of the required finding of "subsidy" in violation of Articles 10, 14, 14(d), 19.1, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994.
4.39.
Evidence demonstrating no trade advantage - USDOC also had before it substantial evidence demonstrating that the provincial stumpage charges imposed in Canada do not increase the production of logs or lumber or lower their prices, or increase the quantity or lower the prices of lumber exports to the US, in comparison with the outcome in a market in which government is not involved. The SCM Agreement requires the investigating authority to consider the existence of a benefit and adequacy of remuneration in relation to the "prevailing market conditions" for the good in the country of provision. The prevailing market for standing timber is a natural resource market, which is an economic rent market. Rent markets have different characteristics than many other markets. This must be taken into account in making any determination of whether provincial stumpage systems confer a benefit.
4.40.
Analyzing benefit in the particular market context under investigation is consistent with panel and Appellate Body interpretations of Article 1.1(b) and the object and purpose of the Agreement, which is to discipline subsidies, as defined in the SCM Agreement, that distort trade. All panel and Appellate Body decisions concerning Article 1.1(b) confirm that the word "benefit" implies a comparison that is market-based. As the Appellate Body has stated, this permits identification of any "trade-distorting potential." The analysis of remuneration in relation to prevailing market conditions in this case should therefore include a review of whether provincial stumpage fees or charges are capable of causing trade distortion in downstream markets. USDOC asserted that "the whole point" of the investigation was to "quantify and remedy" alleged distortion of the US market. In reaching these determinations, USDOC by its own admission ignored the economic evidence offered by Canada. Had USDOC analyzed, rather than assumed, the existence of trade distortion in the downstream markets for logs and lumber, it would have found that not only is there no benefit as measured by existing market comparators, but that economic analysis shows that there is no trade-distorting potential from provincial stumpage programmes, because positive stumpage charges neither increase production of logs and lumber nor lower their prices relative to a private competitive market.
4.42.
In the FD, USDOC concluded that no subsidy pass-through analysis of any kind was required because the alleged subsidy is a subsidy "to the production of lumber rather than the production of timber or logs". With respect to producers of remanufactured lumber that do not hold provincial stumpage rights and that purchase lumber from stumpage holders at arm’s length, USDOC concluded that as the case was conducted on an aggregate basis, "a review is the appropriate avenue to determine if there are specific companies that do not receive countervailable benefits."
4.43.
Under the SCM Agreement, a "direct subsidy" exists where government makes a financial contribution that confers a benefit to the recipient of that contribution. Similarly, an "indirect subsidy" exists where a government "entrusts or directs" a private body to provide a financial contribution that confers a benefit to the recipient. If the recipient of a subsidy enters into transactions with other entities, an investigating authority may not presume that those other entities have benefited from the alleged subsidy. An investigating authority must always establish that both elements of the subsidy definition exist. In US – Lead and Bismuth II, the Appellate Body found that an authority must establish that a benefit has been conferred upon the recipient of the alleged subsidy, and may not irrebuttably presume that the benefit has been passed through a subsequent transaction. This analysis is even more apt in respect of original determinations where an investigating authority must establish each element of a subsidy. In transactions that take place in the market and at arm’s-length, the applicable presumption is that fair market value has been paid.
4.44.
USDOC was required to find that the alleged subsidy to a harvester of timber was passed through to the downstream producer of subject merchandise. USDOC did not provide any analysis of either requirement of Article 1 in respect of downstream producers. USDOC did not establish that any "financial contribution" by government had been made to lumber producers or remanufacturers in respect of the inputs they purchased at arm’s-length. USDOC also did not find that the alleged "benefit" was conferred to lumber producers or remanufacturers through downstream purchases.
4.45.
Moreover, there was substantial evidence demonstrating arm's-length transactions between timber harvesters and lumber producers, and between lumber producers and remanufacturers, including: (1) In B.C. approximately 24 per cent of the timber from Crown licenses was harvested by companies that did not own sawmills. Similarly, in Ontario approximately 30 per cent of the softwood timber harvested from Crown lands was sold by tenure holders to third parties for processing; (2) At least 18 per cent of the volume of logs harvested in B.C. from Crown lands were purchased at arm’s length; and (3) Numerous company exclusions filings demonstrated that arm’s-length purchases of logs and lumber were significant. On this basis 230 companies applied for exclusion.
4.46.
In US – Softwood Lumber III the US indicated that it knew that a portion of the logging companies did not own sawmills, and sell their logs in arm’s-length transactions. The panel found that the US had conceded that pass-through analysis was required; it found that the US had violated its obligations under the SCM Agreement because USDOC had failed to consider evidence regarding arm’s-length transactions and because an authority may not assume that a subsidy provided to producers of the "upstream" input product automatically benefits unrelated producers of downstream products (especially where there is evidence of arm’s-length transactions between these entities). In the FD, USDOC ignored these facts and presumed that all producers of subject merchandise received countervailable subsidies in all cases. USDOC had the data to calculate and correctly deduct from the numerator the alleged benefit incorrectly attributed to arm’s-length log and lumber sales. USDOC instead chose to presume the existence of a subsidy arising from such sales, and as a result, overstated the amount of the alleged subsidy (and the subsidy rate).
4.47.
USDOC has therefore failed to establish the elements of a subsidy by failing to demonstrate a pass-through of financial contribution and benefit. Accordingly, the US has violated Articles 10, 19.1, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994.

2. Canadian provincial stumpage programmes are not specific to certain enterprises

4.48.
USDOC concluded that recipients under provincial stumpage programmes are limited to a group of industries; it found that this factor alone established the programmes as specific in fact. USDOC’s finding was based on its definition of the term "group of industries", by which it meant those companies and individuals that use the programme.
4.49.
Under Article 2, a subsidy may be determined to be specific to an enterprise, industry or group of enterprises or industries (certain enterprises) either in law or in fact. A subsidy is specific in law where a government expressly limits access to that programme to certain enterprises. Where a subsidy is not specific in law, a Member may still determine that it is specific to certain enterprises based on evidence of the factors listed in Article 2.1(c), subject to consideration of the diversification of economic activities in the jurisdiction and the length of time the programme has been in operation. Where these factors do not indicate that a Member is deliberately limiting access, the programme is not specific. Article 2.4 requires that any specificity determination be "clearly established" on the basis of "positive evidence". This exacting burden of proof requires both reasoned analysis and "positive evidence" supporting the factual conclusion. An investigating authority must therefore correctly analyze and weigh all evidence of the factors set out in Article 2.1(c), as applied in a given case, in the light of the standard in Article 2.4.
4.50.
The term "certain enterprises" is a defined term for the purposes of Article 2: "an enterprise, industry, or group of enterprises or industries". At issue in this case is the meaning of the terms "industry" and in particular "group of… industries". The meaning of "industry" is "[a] particular form or branch of productive labour; a trade, a manufacture". In the context of the WTO Agreement and the SCM Agreement this requires an examination of product-based criteria. Part V of the SCM Agreement provides that the term "domestic industry" "shall … be interpreted as referring to the domestic producers as a whole of the like products or to those of them whose collective output of the products constitutes a major proportion of the total domestic production of those products …" [emphasis added]. The term "domestic industry" thus refers to the producers on the basis of "products". The logical inquiry to be undertaken by the investigating authority of an importing Member is therefore whether the parallel foreign industry is subsidized on a specific basis. Accordingly, an "industry" in the sense of Article 2 is properly interpreted to refer to enterprises engaged in the manufacture of similar products. The nature of the output products is also an important link that holds "a group of enterprises or industries" together; in the absence of a product-based identification of industries, no "group of industries" may be found.
4.51.
USDOC explained that the label "limited group of wood products industries" identified "pulp and paper mills and the saw mills and remanufacturers which are producing the subject merchandise". In concluding that the alleged benefits of stumpage programmes are limited to those entities specifically authorized to cut timber on Crown lands, USDOC’s determination amounts to the statement that "stumpage is specific to those using stumpage", and assumes the ultimate conclusion under the "limited users" factor. USDOC’s finding renders the specificity requirement redundant and inutile. This is achieved also by USDOC’s use of the entire Canadian economy as a benchmark and finding that the majority of companies and industries in Canada do not receive benefits under these programmes. As a result of its circular reasoning, USDOC failed in particular to accurately determine the actual users of stumpage programmes and failed to address the record evidence that established that many enterprises and industries use stumpage programmes. USDOC also failed to analyze the industries that use stumpage programmes, based on the types of enterprises, in order to determine whether they properly constitute a "group of industries".
4.52.
Canada submitted significant evidence pertinent to the specificity issue, including voluminous questionnaire responses and expert studies on factual issues relevant to specificity. These studies considered the number and types of industries using stumpage, the types of products produced by stumpage users, and the proportionate distribution of the wood fibre harvested in Canada to various product categories. These studies demonstrated that there were 23 separate classes of industries, producing over 200 products, that used stumpage programmes. They also showed that softwood lumber was not the dominant end use. Many producers of subject merchandise also produce products not subject to the investigation, and other stumpage users include, inter alia, producers of pulp and paper products, hardwood products, shakes and shingles, kitchen cabinets, furniture, and sporting gear. Moreover, by arguing that a subsidy programme that does not subsidize the "vast majority of companies and industries" is "specific", USDOC is stating a negative rather than determining the required positive – that the government has deliberately limited access to the programme to certain industries.
4.53.
USDOC also failed to analyze whether stumpage programmes were specific in fact within the context of all four factors found in Article 2.1(c). In an analysis under Article 2.1(c), evidence must be analyzed and factors must be weighed in the light of differing explanations. The US has, by its own admission, recognized that it is the inherent characteristics of the alleged good that limit the number of users of the programme, rather than any deliberate government favouritism. In the light of the nature of the forestry resource in question, it is untenable to base a specificity finding on the "limited users" factor alone. To hold otherwise impermissibly merges the tests of Articles 1 (provision of a good) and 2 (government favouritism), by rendering the specificity requirement superfluous where the provision of a natural resource has been found to be a subsidy under Article 1.1.
4.54.
The US specificity finding in the FD amounts to an irrebuttable presumption, based on the nature of the subject merchandise and the alleged "good" provided, that the alleged subsidy is specific. A determination of de facto specificity under Article 2.1(c) in this case would have required at a minimum examination of the other listed factors. Moreover, Article 2.1(c) mandates the consideration of economic diversification. Evidence of economic diversification in the Canadian provinces, and in particular in B.C., greatly reduces the weight to be given to the "limited users" factor in this case. When account is taken of the evidence of the diversity of provincial economies, the correct conclusion under the first factor is that, (1) stumpage programmes are not used only by two or three industries and, to the contrary, (2) stumpage programmes are widely available to more than a limited number of industries. Even if this were not the case, the lack of diversity of provincial economies and the inherent characteristics of stumpage would provide the reason.

3. USDOC’s Calculation Methodology Impermissibly Inflates the Rate of the Alleged Subsidy and the Countervailing Duty

4.55.
The US imposed countervailing duties in excess of the amount of the alleged subsidy to the subject merchandise. First, USDOC inflated the alleged subsidy rate by adopting an outdated and factually unsupportable "national" factor for converting US log volume measurements into Canadian log measurements in order to determine comparison prices for its illegal cross-border analysis. Second, USDOC calculated the total alleged benefit based on all Crown logs entering sawmills, rather than basing the alleged benefit on the log volume (less than 40 per cent of the total) that becomes softwood lumber, and then allocated that alleged benefit over the sales value of only certain products produced from the logs. The effect, again, was to overstate the alleged subsidy. Third, USDOC inflated the duty rate by understating the sales value of subject merchandise; it purported to calculate the subsidy rate on a "final mill" basis (including sales of remanufacturers), but contrary to the record evidence, devised a final mill sales estimate that largely excluded such sales. All of these actions inflated the amount of the alleged subsidy, thereby violating the SCM Agreement.
4.56.
Countervailing duties may not be imposed in an amount that exceeds the subsidy. Article 19.4 of the SCM Agreement and Article VI:3 of GATT 1994 establish this fundamental discipline on countervailing duties. A countervailing duty so imposed also violates Articles 10 and 32.1, which provide that a countervailing duty may only be imposed in accordance with the provisions of the SCM Agreement and GATT 1994.

4. Conduct of the Investigation

4.57.
In conducting the investigation, the US failed to provide the interested parties with critical information and evidence, failed to give notice of its use of information highly relevant to its determination, and failed to give interested parties an opportunity to present evidence, make presentations, and otherwise defend their interests. In imposing countervailing duties pursuant to an investigation that did not conform with Articles 12.1, 12.3 and 12.8 of the SCM Agreement, the US violated Articles 10 and 32.1 of the SCM Agreement.
4.58.
As noted, in its illegal cross-border comparisons, USDOC used prices for short-term cutting rights on US state lands as the benchmarks against which to compare Canadian provincial stumpage charges, making the choice of a particular comparator state central to the determination of an alleged provincial subsidy. Yet in the cases of Alberta and Saskatchewan, USDOC switched the comparator state from Montana in the PD to Minnesota in the FD, without any notice to interested parties or opportunity to provide evidence or argument concerning the inappropriateness of the Minnesota benchmark. As the Guatemala – Cement II panel reasoned, "[d]isclosure of the ‘essential facts’ forming the basis of a preliminary determination is clearly inadequate in circumstances where the factual basis of the provisional measure is significantly different from the factual basis of the definitive measure."
4.59.
Similarly, USDOC failed to give interested parties the opportunity to present full evidence and arguments concerning information that was highly relevant to the calculation of the US benchmark price applied to Québec. Specifically, USDOC requested and obtained timely information from the Maine Forest Products Council (MFPC), yet withheld it from the record until Quebec formally demanded its production. USDOC then characterized the MFPC information as "untimely", yet subsequently accepted and relied upon two reports submitted by the petitioner to reject the MFPC information. Interested parties were given no opportunity to rebut the petitioner’s reports.

5. Initiation of the Lumber IV Investigation

4.60.
USDOC initiated the Lumber IV investigation, based on a finding that 67 per cent of the US softwood lumber producing industry supported the petition. Softwood lumber producers that brought or supported the petition are eligible to receive cash payments under the Dumping and Subsidy Offset Act of 2000 (Byrd Amendment)for supporting the petition. Counsel for the petitioner, the Coalition for Fair Lumber Imports Executive Committee, used the prospect of Byrd Amendment payments as inducement to garner support for the petition. The investigation was therefore initiated on the basis of domestic producer support that was actively solicited by promise and prospect of a direct payment by the US government.
4.61.
Article 11.4 requires Members to conduct an "examination" of the degree of support for an application and to "determine", on the basis of that examination, that the application has been made by or on behalf of the domestic industry. The words "determine" and "examination" denote, singly and collectively, an active consideration, assessment or weighing of evidence that results in a conclusion. This plain reading of the words is further confirmed by the context. In addition to "quantitative thresholds", Article 11 also provides that the original complaint of alleged injury to an industry must contain evidence that has to be substantiated. The obligation under 11.4 is therefore not simply on the applicants to present evidence of domestic industry support, but also on the investigating authority to conduct an objective determination and examination of the level of that support. The panel in US – Offset Act (Byrd Amendment) described the object and purpose of Article 11.4 as requiring an authority to examine the degree of support which exists for an application and to determine whether the application was thus filed by or on behalf of the domestic industry.
4.62.
If Article 11.4 is to have any meaning, the "examination" of the degree of support for the petition and determination that the petition was made by or on behalf of the domestic industry must be objective and impartial. The countervailing duty order resulting from the Lumber IV investigation is subject to the Byrd Amendment. As payments by the US under the Byrd Amendment induce domestic producers to support such petitions, the US is precluded from making an objective and impartial examination and determination of the level of support among domestic producers for such petitions. This is consistent with the finding of the panel in US – Offset Act (Byrd Amendment). That panel found that the low costs of supporting a petition coupled with the strong likelihood that all producers would feel obliged to keep open their eligibility for offset payments would mean that the vast majority of petitions would achieve the required level of support. The panel concluded that by requiring support for the petition as a prerequisite for receiving offset payments, the CDSOA in effect mandates domestic producers to support the application and renders the threshold test of Article 11.4 meaningless. Since the initiation of Lumber IV is inconsistent with Article 11.4, the US has, as a consequence, imposed countervailing measures in violation of Articles 10 and 32.1 of the SCM Agreement.

6. Administrative Reviews

4.63.
Canada raised certain questions concerning the operation of US law on administrative reviews in the course of consultations. In particular, Canada asked whether individual producers and exporters may request and receive company-specific administrative reviews under US law. In its panel request, Canada claimed US law relating to administrative reviews violated Articles 10, 19.3, 19.4, 21.1, 21.2 and 32.1 of the Agreement and Article VI:3 of GATT 1994. Canada raised similar issues in the US – Softwood Lumber III case. In that proceeding, the US took issue with Canada’s characterization of its law and stated that it had the discretion to conduct company-specific administrative reviews. The panel in US – Softwood Lumber III made findings in this regard substantially endorsing the US explanation of the source and extent of USDOC’s discretion. The US confirmed these statements in the consultations held for this case. In the light of the foregoing statements and findings, it is Canada’s understanding that the US possesses and will use discretion in the conduct of administrative reviews in a WTO-consistent manner. Canada reserves the right to advance additional arguments in respect of these claims, if its understanding of the US position is incorrect.

B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES

4.64.
The following summarizes the United States' arguments in its first written submission.

1. Introduction

4.65.
The recurring theme of Canada’s case is succinctly presented in its assertion that no countervailing duties may be imposed on government programmes "that are adopted in the context of a Member’s broader economic and social policy framework, such as the sustainable exploitation of natural resources." Canada’s assertion rings hollow when compared to the obligations undertaken by Members in the SCM Agreement.
4.66.
Over 60 per cent of Canada’s subsidized lumber is exported to the US. The countervailing duty provisions of the SCM are designed to ensure that, when Canada chooses to subsidize the production of lumber in the interest of social policy, the US lumber industry is not required to pay the price. The United States’ right to impose countervailing duties to offset the subsidy on billions of dollars of injurious imports of Canadian lumber is protected in the SCM and, therefore, should not be denied.

2. Standard Of Review

4.67.
Article 11 of the DSU sets forth the standard of review that applies to this case. Article 11 requires a panel to make an objective assessment of the matter before it and determine whether the identified measure is consistent with the provisions of the WTO agreement upon which the claim is based. In that regard, it is important to bear in mind that panels cannot add to or diminish the rights and obligations provided in the SCM or the GATT 1994. It is also well settled that a panel must not conduct a de novo review of the evidence nor substitute its judgment for that of the competent authority.

3. Argument

(a) Canada Bears the Burden of Proving Its Claim

4.68.
The complainant in a WTO dispute bears the burden of proof. This means, as an initial matter, that Canada, as the complainant, bears the burden of coming forward with evidence and argument that establish a prima facie case of a violation. It also means that, if the balance of evidence is inconclusive with respect to a particular claim, Canada must be held to have failed to establish that claim.

(b) The Final Countervailing Duty Determination Is Consistent with the SCM

(i) USDOC Properly Determined That Provincial Stumpage Programmes Constitute a "Financial Contribution"

Timber Is a Good within Article 1.1(a)(1)(iii) of the SCM
4.69.
Article 1.1(a)(1)(iii) states that a financial contribution shall be deemed to exist where the government "provides goods or services other than general infrastructure." The SCM does not specifically define the meaning of "provides" or "goods." The Panel therefore should look to the ordinary meaning of these terms. The dictionary definition that Canada itself cites explicitly defines the term "goods" as encompassing all "property or possessions," including "growing crops, and other identified things to be severed from real property." "Goods" is similarly defined under Canadian law. Through their tenure systems, the Canadian provinces provide an "identified thing to be severed from real property," i.e., timber.
4.70.
Canada makes the extraordinary contention that a good must be a tradeable product. Canada bases this conclusion on logically flawed arguments, and ignores the basic principles of treaty interpretation reflected in Article 31 of the Vienna Convention on the Law of Treaties. Canada asks the Panel to infer, from the use of the phrase "imported goods" in Article 3.1(b) of the SCM and the word "products" in Parts III and V of the SCM Agreement, that "goods" can only mean traded goods that fall within the GATT 1994 Article II schedules. The fact that "products" are goods and "imported goods" are goods does not, however, logically give rise to the inference that nothing else can come within the meaning of "goods."

Provincial Tenures "Provide" Timber

4.71.
Canada argues that provincial governments are not providing timber to lumber producers, but rather are merely granting certain property rights in the timber: the right of access to, or the right to harvest, the timber. According to the New Shorter Oxford English Dictionary, however, "provides" means to "make available" in addition to "supply or furnish for use." Thus, even if provincial tenures are viewed as simply providing the right to access or harvest the timber rather than providing the timber itself, such a provision would still constitute the provision of a good within the meaning of Article 1.1(a)(1)(iii) of the SCM because the government is making the timber available to lumber producers.
4.72.
A review of the facts further demonstrates that Canada is attempting to elevate form over substance. USDOC found, and the US – Softwood Lumber III panel agreed,6 that from the tenure holder’s point of view, there is no difference between the government granting a right to harvest timber and the government actually supplying the timber through the holder’s exercise of this right. In fact, the only way to provide standing timber (the good in question) is by providing the right to harvest the timber. It should be beyond dispute that when a government gives a company the right to take a good, whether it is the right to take widgets from a government warehouse or timber from government land, the government is "providing" that good within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.

(ii) The United States Properly Determined That Provincial Stumpage Programmes Provide a Benefit

A Benefit Is Something More Favorable Than the Market Would Provide Absent the Financial Contribution
4.73.
The US, having properly determined that a financial contribution was provided to Canadian softwood lumber producers, was required to determine whether a benefit was "thereby conferred" within the meaning of Article 1.1(b) of the SCM Agreement. The SCM Agreement does not define the term "benefit." The meaning of the term as used in Article 1.1(b) has, however, been explored by previous WTO panels and the Appellate Body, which have established that a benefit is something better than the market would otherwise provide, absent the financial contribution, and that "the ‘market’ to which reference must be made is the commercial market, i.e., a market undistorted by government intervention."7

Comparing the Government’s Price for a Good to the Fair Market Value of the Good in the Country of Provision Is Consistent with Article 14(d) of the SCM

4.74.
Article 14 of the SCM contains guidelines for calculating a subsidy benefit, providing that "the provision of goods or services... by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration." "Adequate remuneration" is not defined in the text of the SCM Agreement. In the context of Article 14(d), however, "adequate" remuneration must mean remuneration that is sufficient to eliminate any benefit. As discussed above, a benefit is something more favorable than would otherwise be available in the commercial market, i.e., fair market value. Logically, therefore, "adequate" remuneration is fair market value. Article 14(d) therefore provides that the benefit should be measured by comparing the government’s price for goods or services with the fair market value of the goods or services in the country of provision.
4.75.
The issue is what evidence may be used to establish that fair market value pursuant to the guidance in Article 14(d) of the SCM that adequate remuneration must be measured "in relation to prevailing market conditions... in the country of provision." Article 14(d) does not address the type of evidence to be used in evaluating the question of benefit. Observed prices in Canada were either unavailable or unreliable indicators of fair market value. Thus, after a thorough analysis to ensure comparability, the US used market prices for timber from the northern US border states as the starting point for the calculation of fair market benchmarks for each of the provinces, then analyzed the prevailing market conditions in Canada (e.g., obligations for road building, silviculture, and fire and disease protection) and adjusted the benchmark calculation accordingly to arrive at the fair market value of timber in Canada.
4.76.
Canada itself acknowledged that price data from sources outside of the country of provision can be used as the basis for assessing fair market value in the country of provision. The issue at the heart of Canada’s complaint is thus not whether Article 14(d) precludes the use of "out of country" prices (e.g., import prices) to assess fair market value in the country of provision. Rather, the issues at the heart of Canada’s claim are questions of fact: (1) did the US have a reasonable basis to reject private prices in Canada as a basis for assessing fair market value; and (2) could price data for comparable timber in the northern United States provide a reasonable factual basis for assessing the fair market value of timber in Canada. As discussed below, the answer to both inquiries is yes; therefore, Canada’s claim must fail.

Private Prices in Canada Did Not Provide a Reliable Basis to Determine Fair Market Value

4.77.
As noted above, the Appellate Body and previous WTO panels have found that "the marketplace provides an appropriate basis for comparison"8 and that "the ‘market’ to which reference must be made is the commercial market, i.e., a market undistorted by government intervention."9 Prices suppressed by the government’s financial contribution do not represent a commercial market price against which a benefit can be measured because they do not represent a "market undistorted by government intervention."
4.78.
In the present case, the US sought evidence on non-government prices for Canadian timber. The record evidence demonstrates, however, that the limited non-government price data submitted by the Canadian parties was inadequate and that such prices were significantly affected by the financial contribution itself, i.e., the supply of provincial government timber. These observed prices were therefore simply uninformative of adequate remuneration, i.e., fair market value.

Prices for Comparable Timber in Northern US States, Properly Adjusted, Provide a Reasonable Basis for Assessing the Fair Market Value of Timber in Canada

4.79.
As discussed above, there was no appropriate market price data from Canadian sources on which to base a fair market value assessment. Canada’s claims notwithstanding, starting with prices for comparable timber of the same species immediately across the border and adjusting those prices, as appropriate, for provincial market conditions is a reasonable basis to assess the fair market value of timber in Canada. An examination of the underlying facts and the assessment performed by the US in this case demonstrates this point.
4.80.
It is undisputed that the North American market for lumber is highly integrated. Canada, in fact, exports over 60 per cent of its softwood lumber to the US. US and Canadian timber are therefore supplying the same North American demand for lumber products. Thus, because of the derived nature of timber prices, market prices for US timber are a logical and reasonable starting point for an assessment of the fair market value of Canadian timber. US timber is also commercially available to lumber producers in Canada. Canada does not contest the fact that Canadian mills actually do purchase US timber – both on the stump and as logs – and consume it in their mills in Canada.
4.81.
To compensate for any differences in species mix, the US calculated species-specific fair market value benchmarks. The US also used averages – an average, species-specific fair market value benchmark for each province and an average administered price for each province – to account for other differences that may affect the value of specific stands of timber. The use of averages is an accepted and widespread aspect of Canadian stumpage systems. In addition, the US made appropriate adjustments to the US price data to arrive at an assessment of the fair market value of timber in Canada. As evidenced in the Final Determination,10 the US conducted a thorough analysis of the conditions of sale in Canada and made necessary adjustments for obligations such as road building and silviculture that are conditions of sale in Canada. The result was a reasonable assessment of the fair market value of timber in Canada that is entirely consistent with Article 14(d) of the SCM Agreement.

The SCM Does Not Define "Benefit" in Terms of Increased Output or Lower Prices for the Subject Merchandise and Does Not Create an Exception for Natural Resource Inputs

4.82.
Without any justification in the text of the WTO agreements, Canada asserts that the Panel should graft onto the SCM a special rule for financial contributions that take the form of a government provision of a natural resource that is fixed in supply. According to Canada, the conditions that prevail in such a market are such that no failure by the government to collect adequate remuneration can result in increased output or have an adverse trade impact. Thus, Canada claims that "any benefit analysis should assess" the trade effects of the subsidy.
4.83.
This argument is completely without foundation in the SCM Agreement. Article 14, which is titled "Calculation of the Amount of a Subsidy in Terms of the Benefit to the Recipient," provides that the existence of a benefit to the recipient, not the existence of demonstrable trade effects, is determinative of whether a benefit exists for purposes of Article 1.1. Nothing in Article 14 describes benefit in terms of the effect on the output of the recipient. If the government makes a financial contribution, and the recipient obtains a benefit, then the definition of a subsidy in the SCM Agreement is fulfilled. What Canada asserts "should" be added to this definition cannot supersede the actual text of the SCM Agreement.

(iii) The United States Calculated the Subsidy Rate in a Manner Consistent with the SCM and GATT 1994

4.84.
In industries, such as softwood lumber, with an extremely large number of producers, it is not feasible, in an investigation, to examine the subsidies received by each individual producer. As reflected in Article 19.3 of the SCM Agreement, Members are accorded the flexibility to conduct investigations other than on a company-specific basis. In this case, rather than investigate specific producers, the US examined the government subsidy programmes at issue and, based on data supplied by the provincial and federal governments, calculated the aggregate amount of all subsidies to producers of the subject merchandise (the numerator). The US then allocated the aggregate subsidies over all sales of merchandise that benefitted from the subsidies (the denominator).
4.85.
This type of aggregate subsidy investigation is entirely consistent with the SCM Agreement, and Canada does not argue to the contrary. Rather, Canada argues that the manner in which the US calculated the countervailing duty is inconsistent with Articles 19.1 and 19.4 of the SCM Agreement, and Article VI:3 of GATT 1994. Canada has failed, however, to make a prima facie case.
4.86.
Article 19.1 of the SCM requires a final determination of the amount of the subsidy and a final determination of injury as pre-conditions to the imposition of a countervailing duty. Article 19.1 does not, however, establish any requirements concerning how a subsidy or injury is to be determined. Those obligations are found elsewhere in the SCM Agreement.
4.87.
Article 19.4 of the SCM establishes an upper limit on the amount of the countervailing duty that may be levied, i.e., the amount of the subsidy found to exist. The issue addressed by Article 19.4 expressly is the levying of duties after a subsidy has been "found to exist." The sole calculation requirement in Article 19.4 is a requirement to calculate the subsidy on a per-unit basis. Article 19.4 does not establish any other requirements concerning how the subsidy is to be calculated.11 Canada, in fact, concedes that its claim under Article 19.4 is dependent upon the existence of an inconsistency with some other provision of the SCM that imposes obligations with respect to the subsidy calculation.
4.88.
Article 19.3 of the SCM establishes two obligations: (1) when countervailing duties are "imposed," they must be "levied" on a non-discriminatory basis; and (2) when an uninvestigated exporter is "subject to" countervailing duties, the exporter is entitled to an expedited review to establish an individual countervailing duty rate. Nothing in the text of Article 19.3 establishes any obligations concerning the methodology used to calculate the amount of the subsidy, either in the aggregate or with respect to a specific exporter.
4.89.
Thus, while other provisions of the SCM contain obligations regarding the calculation of the benefit, Canada has failed to identify any such obligations in Article 19 or GATT 1994 in support of its claims concerning the subsidy calculation. It has, therefore, failed to establish a prima facie case of a violation.
4.90.
Furthermore, to the extent Canada’s claims relate to factual findings used to support the US methodology, the Panel may, of course, make an objective assessment of the facts. The Panel is not, however, charged with conducting a de novo review of the facts. Rather the Panel is to determine whether the US "evaluated all relevant factors, and... provided a reasoned and adequate explanation of how the facts support [its] determination."12 The US findings of facts in this case were well supported and well reasoned.

(iv) Canadian Provincial Stumpage Subsidies Are Specific within the Meaning of the SCM

4.91.
Under the SCM Agreement, a subsidy "shall be deemed to exist" where "there is a financial contribution by a government or any public body within the territory of a Member" and a benefit is thereby conferred. Pursuant to Article 1.2 of the SCM Agreement, a programme that otherwise meets the definition of a subsidy shall be subject to countervailing measures if it is "specific" within the meaning of Article 2 of the SCM Agreement. Article 2.1 of the SCM Agreement provides three principles that must be applied to determine whether a subsidy is specific to "an enterprise or industry or group of enterprises or industries" — referred to collectively by the SCM Agreement as "certain enterprises" — within the jurisdiction of the granting authority.
4.92.
First, a subsidy is specific as a matter of law if the granting authority explicitly limits access to a subsidy to certain enterprises. Second, a subsidy is not specific as a matter of law where the granting authority establishes objective criteria or conditions governing eligibility for, and the amount of, a subsidy, provided that eligibility is automatic and the criteria or conditions are strictly adhered to. Third, even where the law under which the granting authority operates does not appear to create a de jure specific subsidy under the first two steps of the analysis, Article 2.1(c) of the SCM provides that other factors may be considered to determine if the subsidy is, in fact, specific. Thus, Article 2.1(c) establishes that, even if a subsidy has the "appearance" of being widely available throughout an economy, it may nevertheless be specific if, as a matter of fact, the subsidy is used only or predominantly or disproportionately by a limited number of certain enterprises.
4.93.
The US acted consistently with its obligations under the SCM in finding that Canada’s provincial stumpage programmes are specific. The subsidy at issue in this case is the provision of Crown timber to lumber manufacturers at below-market prices. Thus, the proper inquiry under Article 2.1(c) of the SCM is whether the actual recipients of Crown timber, whether considered on an enterprise, industry, or group basis, are limited.
4.94.
The record clearly demonstrates that provincial stumpage subsidy programmes were used by a "limited number of certain enterprises" within the meaning of Article 2.1(c). The SCM does not define the term "limited number." As a factual matter, USDOC found that stumpage subsidy programmes were used by a single group of industries, comprised of pulp and paper mills, and the saw mills and remanufacturers that produce the subject merchandise. Such a small number of users would count as "limited" by any reasonable definition.
4.95.
Canada does not deny that there are no recipients of timber outside of the lumber and pulp and paper industries. Instead, it attempts to redefine the specificity test. Canada would have this Panel ignore the plain language of the SCM Agreement, and instead establish obligations and requirements that exist nowhere in the SCM Agreement. First, Canada attempts to read an intent requirement into the SCM Agreement, notwithstanding that nothing in the text requires any findings as to the granting authority’s intent to limit a subsidy. To the contrary, the very purpose of Article 2.1(c) is to let the facts speak for themselves. Article 2.1(c) refers simply to whether a limited number of enterprises use a subsidy, not why that is so. Next, without any foundation in the SCM Agreement, Canada claims that subsidies are not specific if they are "adopted in the context of a Member’s broader economic and social policy framework, such as the sustainable exploitation of natural resources." A "policy" exception would, however, obliterate the specificity requirement to the extent that all subsidies fall within some broader social or economic policy framework. Finally, Canada seeks to create an exception to Article 2 that would explain away a finding of specificity where "the inherent characteristics of the alleged good... limit the number of users of the programme, rather than any deliberate government favouritism." However, the "inherent characteristics" of the subsidized good are also not a factor under Article 2.1. The fact that a subsidized input has economic utility for a limited number of potential recipients does not and cannot exempt it from the disciplines of the SCM Agreement.
4.96.
Canada also claims that the US undercounted the number of industries that used stumpage subsidies because it used an improper definition of the word "industry." Canada seeks to constrict the natural meaning of "industry" such that an industry would be identified not by the general class of products it produces, but by a particular product or narrow set of products. Canada further claims that a "group of industries" is similarly restricted to individual members that make similar products. There is absolutely no basis in the text, or logic, for Canada’s argument. Canada’s reading contradicts the ordinary meaning of the word "group," which in the context of Article 2.1 plainly and simply means "one or more" enterprises or industries; it does not require that all of its members be identical, or even similar, to be called a group.
4.97.
The Panel should likewise reject Canada’s argument that the term "domestic industry," as defined in Article 16.1 of the SCM Agreement, forms the context for understanding what is meant by "industry" in Article 2.1. Article 16.1 defines "domestic industry" within the context of the determination of the domestic "like product," whereas specificity determinations under Article 2 are not limited to particular "like products." There is no logical connection between defining the domestic industry that is injured by a specific imported product and determining whether a subsidy is limited to certain enterprises or industries.
4.98.
Finally, the US explicitly found that "the subsidies provided by the[] stumpage programmes are not ‘broadly available and widely used.’ The vast majority of companies and industries in Canada does not receive benefits under these programmes."13 No matter how Canada attempts to subdivide or redefine the industries that received the subsidy, the simple fact remains that the Canadian economy as a whole and each of the provincial economies are large and diversified, and provincial stumpage programmes are used by a single group of forest product industries within those diverse economies. Canada’s claims with respect to the economic diversification provisions of Article 2.1(c) therefore should be rejected by the Panel.

(c) The Conduct of This Investigation Was Consistent with the Obligations of Article 12 of the SCM

4.99.
The US conducted this investigation in full compliance with the obligations in Article 12 of the SCM Agreement. The US ensured that all parties were given notice of the information it required for the investigation, had ample opportunity to submit relevant information, had access to all information submitted to the US during the course of the investigation, and were informed of the essential facts under consideration. The US thus ensured that all interested parties had ample opportunity to defend their interests. Neither of Canada’s two claims of error bears scrutiny under the facts of record.
4.100.
The US fully complied with Articles 12.1, 12.3, and 12.8 of the SCM Agreement with regard to the selection of the benchmark for the stumpage programmes of Alberta and Saskatchewan. Consistent with Article 12.1, all interested parties were informed that the US required information on the US northern border states in order to choose appropriate benchmarks for the Canadian stumpage programmes. Because all information submitted to the US was actually served on all of the interested parties participating in the investigation, the US procedures were consistent with Article 12.3. Because thePreliminary Determination14announced that the United States was using US northern border states as the benchmarks for the Canadian stumpage programmes, set forth the criteria the US used in selecting the benchmarks, identified Minnesota as one alternative USDOC might use, and because all information submitted to the US regarding Minnesota was provided to all of the interested parties, the US informed the interested parties of the "essential facts under consideration" and therefore acted consistently with Article 12.8.
4.101.
The US conduct was also in full compliance with the SCM with regard to the Maine Forest Products Council ("MFPC") letter. The US provided copies of the MFPC letter to all interested parties and afforded them the opportunity to submit information "that clarifies, corrects or rebuts" the information contained in that letter. By providing copies of the letter to all of the interested parties, the US ensured that it met the requirements of Article 12.1. Moreover, the opportunities to comment on and rebut the information more than met the requirements of Article 12.3. Beyond the requirements of Article 12.8, the US specifically identified the information contained in the MFPC letter as "important to certain issues in the proceeding, and relate[d] to an ongoing exchange of expert advice on a technical matter." The US, therefore, informed the interested parties that the information in the MFPC letter was part of the "essential facts under consideration," and specifically provided them with the opportunity to use this information in the presentation of their case, or to submit additional information to clarify, correct, or rebut this information. Thus, the disclosure took place in sufficient time for parties to defend their interests.

(d) The United States Initiated the Softwood Lumber Investigation Based on Adequate Domestic Industry Support Consistent with the Requirements of Article 11.4 of the SCM

4.102.
The softwood lumber petition contained uncontested evidence establishing that US softwood lumber producers representing 67 per cent of total US softwood lumber production supported the petition. That level of industry support unquestionably satisfies the criteria in Article 11.4 of the SCM Agreement. Canada does not contest this fact.
4.103.
Canada is not challenging the provisions of US law governing industry support, but rather the specific factual determination of industry support in this case. Nevertheless, the sole argument presented by Canada is the unsubstantiated claim that the very existence of the Continued Dumping Subsidy Offset Act of 2002 induced support for the petition, thereby precluding an objective determination of industry support. In effect, Canada would inject a requirement into the SCM Agreement that investigating authorities examine the motives of prospective petitioners. In US – Offset Act (Byrd Amendment), however, the Appellate Body unequivocally rejected this argument. Canada’s claim is therefore without any support in the text of Article 11.4 or the facts of record.

4. Conclusion

4.104.
Thus, the United States requests that the Panel reject Canada’s claims in their entirety.

C. FIRST ORAL STATEMENT OF CANADA

4.105.
The following summarizes Canada's arguments in its first oral statement.

1. Financial Contribution

4.106.
"Stumpage" refers to the right of a harvester to enter into a forest owned by a province, select a tree and harvest it. Provincial governments transfer stumpage to harvesters through tenure agreements or licences. Timber refers to the standing tree. Harvesters cut down timber and process it into logs that are processed further to produce softwood lumber and a wide variety of other products. Lumber and certain products manufactured from lumber are the subject merchandise. Lumber and logs, which are physical, tradable items, are goods. Standing trees and timber-harvesting rights are not tradable or physical items; they are not goods. The fact that from each of these rights a good may be produced does not make the right a good in itself.
4.107.
In general, the provinces own forests and trees and enter into tenure or licence agreements to transfer to private persons the right to harvest trees. In return for this right, these agreements require tree harvesters to undertake a broad range of forest management responsibilities and significant in-kind costs, as well as the payment of stumpage fees upon harvest.
4.108.
At issue in this case, is the interpretation of the phrase "provision of goods" in Article 1.1(a)(1)(iii). The plain meaning of the word "goods" is movable, tangible personal property. In ordinary usage the term "goods" does not cover intangibles, such as intellectual property rights, or real property interests. "Goods" does not include all property, or everything that has economic value or is an economic resource.
4.109.
This plain meaning of "goods" is further supported by the context of this term. Nothing in the WTO Agreement justifies interpreting "goods" to encompass everything of economic value. Equally, nothing in the object and purpose of the SCM Agreement requires this Panel to interpret the word "goods" as anything other than its ordinary meaning. As the panel in United States – Export Restraints noted, the SCM Agreement regulates certain government actions, but not others. The objective of the SCM Agreement in general and Article 1 in particular, was not to govern all transfers of economic resources by a government.
4.110.
As a matter of law, "goods" are movable personal property; for the purposes of the WTO Agreement, they are tradable items that are capable of bearing a tariff classification.
4.111.
In the facts of this case, timber harvesting rights are intangible real property interests. As such, they do not fall under the "provision of goods" heading of Article 1.1(a)(1). The only way to fit the rights in question, or indeed standing trees, into the term "goods" is to suggest that the term encompasses all a person’s legal rights of whatever description. The WTO Agreement does not support this proposition.
4.112.
A right to harvest standing timber cannot bear a tariff classification, as it cannot be traded across borders. The transfer of stumpage rights does not constitute the provision of goods.

2. Benefit

4.113.
In the CVD FD, USDOC compared provincial stumpage charges with stumpage prices on selected lands in its own territory. USDOC found US prices to be higher and concluded that the stumpage charges conferred a benefit through this cross-border comparison.
4.114.
This approach to determining and measuring benefit violates the SCM Agreement. The plain meaning Article 14(d) requires that benefit must be determined and measured on the basis of prevailing market conditions in the country of provision. This is a legal issue. It is not a factual debate.
4.115.
Canada’s position is based on the ordinary meaning of Article 14(d), which provides that: "[A]dequacy of remuneration shall bedetermined in relation to prevailing market conditions for the good … in the country of provision…"[emphasis added]. Nothing in the context, object and purpose or the negotiating history of Article 14 permits reading "in" as anything other than "in". As the panel in US – Softwood Lumber III found: "Article 14 (d) does not just refer to "market conditions" in general, but explicitly to those prevailing "in the country of provision" of the good."
4.116.
Article 14(d) requires the use of "prevailing market conditions … in the country of provision" to determine adequacy of remuneration. The ordinary meaning of the term "prevailing" is "as they exist". This requirement cannot be avoided by interpreting "in relation to" to mean "taking account of".
4.117.
The SCM Agreement does not provide an authority with the discretion to reject in-country benchmarks. Instead, Article 14(d) requires the use of "prevailing market conditions … in the country of provision". Notwithstanding this requirement, USDOC rejected in-country benchmarks arguing that government involvement allegedly suppresses private market prices making them unusable.
4.118.
The US argues that (1) the information submitted was "limited" and that (2) the "observed prices were simply uninformative of adequate remuneration" because they were "significantly affected by the financial contribution itself." Both arguments are without merit.
4.119.
First, there is no question that USDOC had before it extensive evidence regarding the prevailing market conditions in Québec, Ontario, Alberta and BC. This evidence was not "limited". Canada also submitted information demonstrating that stumpage systems are operated in a manner consistent with market principles. This information showed that all of the provinces were making substantial profits on the management of their forests.
4.120.
Second, the SCM Agreement does not permit dispensing with prevailing market benchmarks because of "price suppression". This was confirmed by the panel US – Softwood Lumber III. Moreover, the US did no analysis to arrive at the conclusion that price suppression existed.
4.121.
The United States’ most recent attempt to justify its cross-border comparisons consists of an entirely new argument that relies on word substitutions, and on so called "logic" to replace the law. The argument – that Article 14(d) requires is that the "fair market value" ("FMV") of timber in Canada is the appropriate benchmark for measuring the benefit – is wholly new. It is found nowhere in the Preliminary or Final Determinations, US law or in the SCM Agreement.
4.122.
The argument is the latest in a series of changing positions that the US has taken over the course of this dispute. In US – Softwood Lumber III, the US moved from arguing "in" means "out" to arguing "out" really means "in". In anther attempt to argue for the use of US prices as an appropriate benchmark the US again asserts that "out" really means "in" – but this time with several twists.
4.123.
The US begins by arguing that a benefit determination is a "but for" analysis that involves comparing the government’s price for a good with what the price for that good would have been absent the financial contribution. In a provision of goods context, however, the marketplace is the prevailing market as it exists. The panel in US – Softwood Lumber III confirmed this interpretation.
4.124.
Building on this erroneous understanding of "benefit", the US turns to Article 14(d) itself and argues that: "[A] benefit is something more favorable than would otherwise be available in the commercial market, i.e., fair market value. Logically, therefore, "adequate" remuneration is fair market value." It then argues that it had to look elsewhere for prices to calculate FMV benchmarks because prevailing market conditions in Canada are "unreliable indicators" of FMV. In doing so it turns Article 14(d) into a provision that measures adequacy of remuneration by comparing the government price to a constructed FMV, rather than to in-country prevailing market conditions.
4.125.
In a final effort to refashion the requirements for a determination of "adequate remuneration", the US asserts that FMV "must" be determined "in relation to" "conditions of sale". The replacement of "prevailing market conditions" by "conditions of sale", is justanother attempt by theUS to again evade the plain meaning of "prevailing" which is "as they exist". The text of the agreement demands a determination that is grounded in existing Canadian market factors, not an adjustment to US prices based on an erroneous interpretation of "conditions of sale".
4.126.
Interwoven through this is the now familiar argument that "in relation to" means "taking account of." Although the reasons for the US argument have changed, Canada’s response is the same. The ordinary meaning of "in relation to" is "on the basis of". It is not "taking account of".
4.127.
These word substitutions allow the US to interpret Article 14(d) as if it read: The fair market value shall be determined using a benchmark derived from a market undistorted by government intervention, taking account of conditions of sale for the good … in the country of provision.
4.128.
According to the US, this metamorphosis is so compelling that there is "no dispute" about any of it. Every step of this so-called "logic" is in dispute. No amount of word substitution can change the fact that Article 14(d) requires a determination of adequacy of remuneration using in-country prevailing market conditions.
4.129.
USDOC also improperly rejected economic analysis that demonstrates that stumpage charges provide no trade advantage to lumber producers or harvesters. USDOC explained in its CVD FD that its task was to "quantify and remedy" distortion of the US market that was at "the heart of this inquiry". In response, Canada provided USDOC with detailed economic evidence that demonstrated that stumpage programmes do not cause trade distortion.
4.130.
USDOC then claimed that it could not examine this evidence because of its "complexity". The US now contradicts its own investigating authority by claiming that the evidence is not relevant to a "benefit" determination and that Canada is attempting to "graft" a special rule onto the SCM Agreement. Canada is doing no such thing. Rather, Canada provided evidence to USDOC regarding an issue that USDOC itself stated was central to this case.
4.131.
Any benefit determination relating to stumpage systems must take into account the fact that the market in this case is a rent market. This approach is consistent with panel and Appellate Body interpretations of Article 1.1(b) and the object and purpose of the Agreement. The Appellate Body has confirmed that the word "benefit" implies a comparison that is market-based and stated that this allows for identification of any "trade-distorting potential." As such, the analysis of remuneration in relation to prevailing market conditions in this case should include consideration of whether stumpage charges are capable of causing trade distortion.

3. Pass-through

4.132.
The US purports to have determined that provinces subsidize those who harvest standing timber. The US has imposed countervailing duties on lumber. Record evidence demonstrates, and the US does not contest, that there are lumber producers who obtained log or lumber inputs from unrelated sources other than government. The question before the Panel therefore is whether the US may legally presume, as it did, that such producers benefited from an alleged timber harvesting subsidy.
4.133.
Under Article 1, to establish that a person is "subsidized" an investigating authority must establish that the person received a financial contribution, and that this confers a benefit. Where lumber producers do not harvest timber but obtain inputs from upstream producers, any alleged subsidy is by definition indirect. An indirect subsidy is established by demonstrating the existence of both an indirect financial contribution under Article 1.1(a)(1)(iv), and a benefit under Article 1.1(b). The Appellate Body has confirmed that in a countervailing duty investigation, the existence of any subsidy may never be presumed. The panel in the US – Softwood Lumber III case came to the same conclusion, finding that the obligation to establish the existence of a subsidy is not excused by conducting an investigation on an aggregate basis. Articles 10, 32.1, 19.1 and 19.4 of the SCM Agreement require the US to establish the existence of a subsidy before it imposes countervailing duties.

4. Specificity

4.134.
In the CVD FD, USDOC found stumpage to be specific in fact by relying solely on an incorrect and perfunctory application of the "limited users" factor under Article 2.1(c) of the SCM Agreement. The phrase "is specific to" in Article 2 establishes a legal standard. The standard is whether government is limiting access to a programme, in law or in fact, to certain enterprises. Analyzing whether a subsidy is specific in fact under Article 2 is not different from analyzing whether a subsidy is contingent on export performance in fact under Article 3.1(a). A member may find specificity in fact only where the total configuration of facts allows it to infer that government is deliberately limiting access to the programme.
4.135.
As a threshold issue, the US determination on the "limited users" factor is wrong. First, it assumes the conclusion. The CVD FD asserts that stumpage programmes "are limited to those companies and individuals specifically authorized to cut timber on Crown lands." USDOC’s determination says nothing regarding the industries that actually use stumpage, and more fundamentally, whether their number was limited.
4.136.
Second, it fails to provide any legal analysis of the meaning of the terms "industry" or "group of industries". The record evidence demonstrates that the many industries in which these companies operate are not the only users of stumpage and that the actual users are not limited in number. Moreover, an industry must be identified for the purposes of specificity with reference to the products it produces. The US argument amounts to an assertion that the term "industry" means whatever it needs to find a programme specific.
4.137.
Third, it compares the purportedly sole users of stumpage to the entire Canadian economy. Using the entire economy as a benchmark misinterprets Article 2, as it ignores the fact that the universe of eligible users under Article 2.1(b) can be something less than "everyone". The benchmark is the universe of eligible users.
4.138.
The determination is wrong on the facts because record evidence demonstrates that enterprises in more than 23 classes of industries manufacturing 201 distinct products use stumpage. Finally, even if the US had been correct in finding that stumpage was used by a limited number of industries, that finding by itself could not establish per se that the programmes are specific in this case, as the US is required to provide legal and factual analysis on this point. As Canada demonstrated in its First Written Submission, the US failed to address in the CVD FD that the purported finding of "limited users" is explained by the nature of the alleged "good" and the nature of the economic diversification of provincial economies.

5. Calculations

4.139.
Where the amount of a subsidy has been improperly calculatedand illegally inflated, a countervailing duty imposed in that amount violates Article 19.4 of the SCM Agreement and Article VI:3 of GATT 1994. The US violated these obligations in three ways.
4.140.
First, the US nearly doubled the amount of the alleged subsidy by using wrong conversion factors when comparing Canadian stumpage rates, calculated in dollars per cubic metre, to US timber prices, determined in dollars per thousand board feet.
4.141.
Second, the US inflated the amount of the subsidy by considering the total volume of logs entering sawmill establishments as subsidized inputs into subject merchandise, even though not all of the output was subject merchandise. The US should have determined based on evidence the amount of the subsidy attributable to the volume of the log that actually goes into the production of the subject merchandise.
4.142.
Third, the US inflated the per unit subsidy rate, and therefore the countervailing duties imposed by approximately US$120 million per year, by spreading the alleged subsidy over an incorrectly determined low sales value.

6. Conduct of the Investigation

4.143.
In the CVD PD, the US used data from Montana to establish a benchmark rate for Alberta and Saskatchewan. These provinces objected to this choice, both on legal and factual grounds. In the CVD FD, USDOC selected Minnesota as the benchmark state. At no point were the affected provinces made aware of USDOC’s choice of Minnesota as the benchmark state. As a consequence, the US violated Articles 12.1, 12.3 and 12.8.
4.144.
With respect to Québec, the investigation was inconsistent with Article 12.3 in two respects. First, USDOC itself requested and received important information from the Maine Forest Products Council concerning its benchmark determination for Québec. It sat on that information for two months. This denied parties the opportunity to see relevant information. Second, USDOC accepted and relied upon new factual information submitted by the petitioners criticizing the Council’s information. Interested parties were then denied the opportunity to prepare presentations on the basis of this relevant information.

7. Initiation

4.145.
Canada does not consider it appropriate to press its claim set out in paragraph 1 of its panel request.

8. Administrative Reviews

4.146.
Canada has not abandoned the claim in paragraph 3(b) of its panel request. Canada understands that the US believes that it has the discretion to conduct company-specific administrative reviews in this case; that the US will use its discretion to conduct such reviews of requesting exporters; that rates obtained by individual exporters in expedited reviews will not be superseded by an aggregate rate in an administrative review. Canada may advance additional arguments if its understanding of the US position is incorrect.

D. FIRST ORAL STATEMENT OF THE UNITED STATES

4.147.
The following summarizes the United States' arguments in its first oral statement.

1. Opening Statement of the United States of America at the First Meeting of the Panel

(a) Financial Contribution

4.148.
The first legal issue in this dispute is whether Canadian provincial timber sales systems constitute the provision of a "good" within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. The text and context of Article 1.1(a)(1)(iii), and the object and purpose of the SCM Agreement, all lead inexorably to the conclusion that standing timber is a "good."
4.149.
Canada argues that "goods" is limited to items that are tradeable across borders and subject to tariff classification. To the contrary, the ordinary meaning of "goods" is broad, encompassing all property and possessions, including things to be severed from the land, such as standing timber. The sole exclusion in Article 1.1(a)(1)(iii) for "general infrastructure" underscores the intent that the provision sweep broadly. "Infrastructure" is not tradeable across borders. Nevertheless, infrastructure that is not "general" must fall within Article 1.1(a)(1)(iii). To conclude otherwise is to render the explicit exclusion for infrastructure that is "general" entirely meaningless.
4.150.
The uncontested facts leave no doubt that the provinces sell timber. There is one reason and one reason only that companies enter into provincial timber contracts, which we generally refer to as "tenures." They do so to obtain the government-owned timber for their mills. Through tenures, the provinces are providing a good – timber – to lumber producers. Accordingly, the provinces provide a financial contribution within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.

(b) Benefit

4.151.
We turn to the methodology used to determine whether and to what extent the provinces confer a benefit on lumber producers through the sale of timber for less than adequate remuneration. This methodology poses two distinct issues. First, there is a question of legal interpretation of "benefit" within the meaning of the SCM Agreement. Second, there is the issue of the application of that legal concept to the particular facts of this case. It is imperative to examine the legal question before turning to the facts.
4.152.
A financial contribution confers a "benefit" if it "makes the recipient ‘better off’ than it would otherwise have been, absent that contribution."15 In determining whether a benefit has been conferred, the "marketplace" is the appropriate basis for comparison, i.e., the issue is whether "the recipient has received a ‘financial contribution’ on terms more favourable than those available to the recipient in the market."16
4.153.
The guidelines in Article 14(d) of the SCM state that a benefit is conferred if the government provides the good for "less than adequate remuneration." Article 14(d) also states that the adequacy of remuneration shall be determined in relation to "prevailing market conditions" for the good in the country of provision. The concept of a comparison "market" therefore is central to the concept of "benefit" generally, and to adequate remuneration specifically. The Brazil–Aircraft panel concluded that the concept of a comparison market necessarily means a "commercial market, i.e., a market undistorted by government intervention."17 The United States agrees.
4.154.
As the EC states in its third-party submission, "market" conditions exist where prices are "determined by independent operators following the principles of supply and demand." Thus, as the EC implicitly acknowledges, not all observed prices are necessarily "market" prices. We agree. "Market" prices are prices between independent buyers and sellers in a competitive market where prices are determined by the forces of supply and demand. Such prices represent what is commonly referred to as "fair market value." It therefore follows logically that adequate remuneration is fair market value. That is also how the term adequate remuneration is defined in Canadian law.
4.155.
Article 14(d) sets forth the principle underlying the adequate remuneration inquiry – it must be made "in relation to prevailing market conditions" in the country of provision. However, Article 14(d) does not set out rules governing the specific types of data that may be used in conducting that analysis.
4.156.
Where reliable commercial market prices are available in the country of provision, ignoring such prices would be inconsistent with Article 14(d). Where, however, no such prices exist or are unreliable, an investigating authority may use prices commercially available on world markets as the basis for an assessment of the adequacy of remuneration, provided that those prices are informative as to the fair market value of the goods in the country of provision.
4.157.
There is no real dispute that there are circumstances under which an investigating authority may look to sources outside the country of provision for data to assess the fair market value of goods in the country of provision. The US – Softwood Lumber III panel,18 Canada, the EC and Japan have all implicitly or explicitly acknowledged this. The real issue in this dispute is what factual circumstances warrant the use of price data from sources outside the country of provision to determine the fair market value of goods in the country of provision.
4.158.
To determine the adequacy of remuneration in the underlying investigation, the United States calculated province-specific, species-specific market benchmark prices for stumpage. The United States requested data on private market transactions for stumpage in each province for the purpose of calculating those market benchmark prices. Three of the six provinces – Alberta, Manitoba and Saskatchewan – did not provide any data on private market prices for stumpage. Thus, there should be no dispute that the United States acted consistently with Article 14(d) in using commercially available prices from sources outside Canada to determine the fair market value of timber in those provinces.
4.159.
British Columbia ("B.C.") submitted a survey containing a few average prices. The volume of the private timber on which those averages were based, however, represented less than one-half of one per cent of the total timber harvested by the survey respondents. Moreover, the survey did not contain the detail or underlying support that would be necessary to calculate market benchmark prices. Ontario provided a limited survey and analysis of private stumpage sales in the province. Similarly, Quebec submitted an average price for private stumpage in the province, which was based on a survey.
4.160.
The United States determined that there were no commercial market conditions – that is, a market undistorted by the government’s financial contribution – in any of the provinces. The evidence, including the governments’ dominant market share, the lack of incentive for sawmills to pay more for private stumpage than they pay the government, and statements by provincial officials and forestry economists concerning the impact of the government prices on the sale of private timber, is more than adequate to support that determination. Thus, although there is data on observed prices in certain provinces, the record demonstrates that those observed prices are not commercial market prices. Therefore, the United States acted consistently with Article 14(d) in using data from sources outside of Canada as the starting point for determining the fair market value of timber in Canada. Moreover, numerous adjustments were made to reflect conditions of sale in Canada.

(c) Calculation Issues

4.161.
Canada claims that the United States was required under Article 19 of the SCM and Article VI:3 of the GATT 1994 to conduct an "upstream" subsidy analysis. Canada makes this claim with respect to two distinct situations.
4.162.
With respect to remanufacturers: The United States determined the total amount of the benefit, but did not determine what portion of the benefit individual sawmills or remanufacturers received. The United States allocated the total subsidy benefit over all sales of the products resulting from the lumber production process. The total amount of the subsidy benefit does not change, however, regardless of how the benefit is allocated. Thus, allocating a portion of the benefit to remanufacturers cannot overstate the total subsidy benefit. Moreover, nothing in Article 19 precludes this method of calculation. Article 19.3 specifically contemplates that a producer’s exports may be subject to countervailing duties without knowing whether or to what extent that particular producer received a benefit. Article 19.3 simply obligates Members to provide expedited reviews for such exporters to calculate individual subsidy rates.
4.163.
With respect to the second "upstream" subsidy situation, i.e., the alleged independent loggers: This is the only situation that could have any impact on the calculation – rather than the allocation – of the total amount of the benefit to producers of the subject merchandise. The record evidence indicates, however, that sales by independent loggers could only account for a very small portion of the volume of Crown timber entering sawmills. In addition, the evidence suggests that all or most of the sales by independent loggers may not be at arm’s-length. Moreover, an upstream subsidy analysis requires company-specific data and analysis. Canada’s claim that the United States was required to conduct this type of company-specific analysis in the investigation is without foundation in Article 19 of the SCM or Article VI:3 of GATT 1994.

(d) Specificity

4.164.
Pursuant to Article 2.1(c) of the SCM Agreement, a subsidy is specific when the users of the subsidy are limited to certain enterprises or industries or to a limited group of enterprises or industries. The users of provincial stumpage are limited to timber processing facilities, which constitute a very limited group of industries. In accordance with Article 2.1, therefore, the subsidy from provincial stumpage is specific. Canada’s claims to the contrary are based on its own definition of specificity, not the definition in Article 2.1. Article 2.1 does not require an investigation into the motives of Members that provide subsidies, does not require an analysis of the number of products made by the users of the subsidy, and does not require that a subsidy be limited to the producers of the subject merchandise, or that a "group of industries" must share common characteristics.

2. Closing Statement of the United States of America at the First Meeting of the Panel

(a) Financial Contribution

4.165.
Canada criticizes the United States’ reliance on the definition of "goods" in Black’s Law Dictionary, which cross-references the US Uniform Commercial Code ("UCC"). Canada, however, relies on that same definition. Nevertheless, Canada states that the UCC provision cross-referenced in Black’s "expressly excludes" standing timber, "except in certain limited circumstances that do not apply here." The UCC is, of course, not controlling in this forum. However, the relevant provision reveals that sales of standing timber are expressly "included" – not "excluded" – from the term "goods" as used in the UCC. We also refer the Panel to our first written submission, which quotes a similar definition of "goods" in the British Columbia Sale of Goods Act.

(b) Benefit

4.166.
With respect to record evidence concerning private stumpage prices, Canada makes a number of statements at the first Panel meeting which we would like to comment on:
4.167.
Canada asserts that Timber Damage Assessments are based on private transactions representing approximately 6 per cent of Alberta’s timber harvest. According to Alberta’s questionnaire response, however, only 1 per cent of the harvest in Alberta comes from private land.
4.168.
Canada states that B.C. submitted evidence that demonstrates that B.C. operates its stumpage system consistent with market principles. That evidence merely established that B.C. made a profit on its timber sales, which does not mean that it is receiving adequate remuneration.
4.169.
Regarding paragraph 58 of Canada’s oral statement, we have several comments:
4.170.
The Final Determination analyzes the reliability of Canadian private timber prices in detail.
4.171.
The Economists, Inc. study that the United States relied on concludes that the "existence of an administered market that is willing to supply the preponderance of market demand at an artificially low price drives the price that can be attained in the non-administrative sector below the level that would obtain if the administered market were not subsidized."
4.172.
The student thesis Canada refers to is actually a 1995 doctoral dissertation that analyzes data as recently as 1993.

(c) Market Distortion

4.173.
Canada claims that the United States ignored Canada’s evidence "and simply assumed trade distortion." Rather, the United States determined that US law does not require an analysis of whether a subsidy has market distorting effects. Likewise, there is no obligation in the SCM to find the existence of trade distortion to impose countervailing duties.

(d) Calculation Issues

4.174.
Canada implies that Article 19.4 effectively imposes obligations with respect to the calculation of the subsidy. Canada, however, fails to cite to any language in Articles 10, 19.1, 19.4 or 32.1 of the SCM or Article VI:3 of the GATT 1994 establishing any such obligations.
4.175.
Canada asserts that "there is no single log conversion factor", yet the Canadian Government itself publishes a single conversion factor. And if the United States had used Canada’s published conversion factor, the calculated subsidy rate would have been greater.

(e) Administrative Reviews

4.176.
With respect to administrative reviews, Canada improperly attempts to bring hypothetical future measures by the United States before this Panel. As the US – Softwood Lumber III panel stated, "the WTO dispute settlement system allows a Member to challenge a law as such or its actual application in a particular case, but not its possible future application."19

(f) Conclusion

4.177.
Canada went to great lengths to criticize the United States for interpreting the words in Article 14(d). For example, Canada criticized the United States for interpreting "adequate remuneration" to mean "fair market value" even though Canada’s own regulations define adequate remuneration as "fair market value." Having criticized the United States for interpreting the language in Article 14(d), Canada then proceeded to criticize the United States for failing to interpret the specificity provisions in Article 2.1(c). In both instances, the United States interpreted the provisions in accordance with the ordinary meaning of their terms, in context, and applied the provisions accordingly.

E. SECOND WRITTEN SUBMISSION OF CANADA

4.178.
The following summarizes Canada's arguments in its second written submission.

1. Financial Contribution

4.179.
What is the scope of the word "goods" in Article 1.1(a)(1)(iii) of the SCM Agreement? The word "goods" in Article 1, read in context and in the light of the object and purpose of the WTO Agreement, has the same meaning and scope as the word "goods" elsewhere in the WTO Agreement. And elsewhere in the WTO Agreement, the word "goods" has the same meaning and scope as the word "products" in Article II of GATT 1994. Therefore, interpreted in accordance with the principles of treaty interpretation, the word "goods" in Article 1.1(a)(1)(iii) refers to tradable items that are capable of bearing a tariff classification.
4.180.
May the transfer of tree harvesting rights by provinces properly be characterized as "provision of goods" by a government within the meaning of Article 1.1(a)(1)(iii)? Provinces enter into tenure agreements or grant licences to harvest timber. Under these tenures or licences, the harvester has certain proprietary interests in standing trees and must undertake a series of obligations, some of which are related to the land and others to the volume of harvest. Under these tenure agreements and licences, the trees to be harvested are not identified and many of the obligations must be performed regardless of any harvest. This transfer of a right to harvest standing trees does not amount to the provision of goods.
4.181.
After having argued that "goods" includes all property, the US now states that this case is not about "intellectual property" or other property rights; that its earlier assertions about "goods" encompassing all property rights were arguments in the alternative. Again misrepresenting the nature of the transactions at issue, it continues to argue that living trees with roots firmly in the ground are "goods" for the purposes of the SCM Agreement.
4.182.
In its closing arguments at the First Substantive Meeting, the US suggested that sales of "standing timber" are included in the definition of goods in the UCC. This definition is in turn reproduced, albeit imperfectly, in the Black’s Law Dictionary as one definition for the term "goods". The US has not credibly contested Canada’s Vienna Convention analysis of the word "goods". The only issue appears to be whether a particular definition of "goods", found in the UCC, supports the US position. It does not.
4.183.
The UCC definition of "goods" provides that, "‘Goods’ means all things, including specially manufactured goods, that are movable at the time of identification to a contract for sale and future goods. … The term does not include … general intangibles." [emphasis added]
4.184.
The UCC further provides that, "A contract for the sale apart from the land …[of] other things attached to realty and capable of severance without material harm … or of timber to be cut is a contract for the sale of goods … whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance." [emphasis added]
4.185.
First, this definition flatly contradicts the US assertion that "goods" somehow includes all property rights, including the right to harvest timber. The basic definition is that of movable things; and the basic definition expressly excludes "general intangibles". Second, the reference to "timber to be cut" is not part of the ordinary meaning. Rather, it is a special provision covering certain "things" that are not ordinarily "movable" and that would not, absent the clarification, be covered by the ordinary meaning of the word "goods". Third, what is included in the UCC definition is not "standing timber", but "timber to be cut". "Timber to be cut" refers to individual trees identified to be cut in a sales contract, as indeed expressly set out in this definition. This is to be contrasted with standing trees that are subject to tenure agreements and licences. Those trees may or may not be cut during the term of the tenure, but in any event are not specifically identified to be cut; after all, they may not even have been planted.
4.186.
The inclusion of "timber to be cut" in the UCC definition of a "good" implies the exclusion of all other timber – that is, timber subject to tenures and licenses – from the scope of the UCC definition. In US law, therefore, standing trees are not "goods". And because the definition of the word "goods" in the UCC does not cover "intangibles", in US law the right to harvest does not amount to "goods".
4.187.
The US relies heavily on its incorrect assertion that tenure agreements and licences are "timber sales contracts". The US supports this assertion by arguing that the tenure agreements and licences result in the timber harvesters owning felled timber and paying for that timber. Canada has demonstrated that there is a distinction between tenure agreements and licences on the one hand, and "sales of goods contracts" on the other.
4.188.
Under the SCM Agreement, this distinction makes a crucial legal difference. A timber sales contract concerns a contract that identifies individual standing trees to be cut and hauled away. In contrast, a tenure or licence grants a right of harvest in an area of land in return for certain rights and obligations. No trees are identified to be cut – and in fact, due to disease, fire and environmental reasons, it may well be that no trees are cut. And yet, certain forest maintenance and fire protection obligations continue to run for the length of the tenure or licence in the area covered by the tenure or licence.

2. Benefit

4.189.
Canada demonstrated that USDOC’s rejection of valid in-country benchmark evidence and its choice of cross-border benchmarks to determine adequacy of remuneration is inconsistent with Articles 1.1(b) and 14(d) of the SCM Agreement. Canada’s submissions are based on three complementary points:

· first, Article 14(d) requires the use of benchmarks that are based on prevailing market conditions in the country of provision;

· second, substantial evidence of prevailing market conditions in Canada that could have been used as benchmarks to determine "adequacy of remuneration" was improperly rejected; and

· third, the US has offered no valid defence of its actions.

4.190.
Canada’s response to the United States’ most recent assertions follows the same structure.
4.191.
The US claims that this is a dispute over the factual circumstances that warrant the use of price data from sources outside the country of provision. It is not. This is a legal dispute over whether the plain meaning of Article 14(d) requires that benefit be determined and measured on the basis of prevailing market conditions in the country of provision – in this case Canada.
4.192.
Article 14(d) provides that where a government has provided goods, a benefit is conferred if remuneration is not "adequate". It also provides that, "[A]dequacy of remuneration shall be determined in relation to prevailing market conditions for the good … in the country of provision". [emphasis added]
4.193.
First, the ordinary meaning of "in relation to" is "on the basis of" or "in comparison with". This phrase prescribes a comparison to "prevailing market conditions".
4.194.
Second, the ordinary meaning of the term "prevailing" is "as they exist". Accordingly, Article 14(d) requires a comparison to existing market conditions.
4.195.
Third, "in the country of provision" means "in the country of provision." It cannot refer to "prevailing market conditions" in some other country.
4.196.
This interpretation is consistent with the Appellate Body’s analysis of Article 1.1(b) in Canada – Aircraft. There, the Appellate Body found that in determining whether the financial contribution conferred a benefit on the recipient, the "marketplace is the appropriate basis for comparison." The Appellate Body also found that Article 14 provides context for Article 1.1(b). The marketplace, in a provision of goods context under Article 14(d), is the existing "market" in the country of provision.
4.197.
Further contextual evidence that Article 14(d) does not permit cross-border comparisons is found in the Accession Protocol of China. The Protocol provides for the application of the SCM Agreement generally, but in language clearly indicating exceptional circumstances, it specifically permits the use of "methodologies for identifying and measuring the subsidy benefit which take into account the possibility that prevailing terms and conditions in China may not always be available as appropriate benchmarks." If Article 14(d) already permitted the consideration of conditions outside "the country of provision", Members would not have considered it necessary to provide for this exceptional treatment. This understanding is confirmed by the USTR on its official website.
4.198.
In the CVD FD, USDOC concluded there were no usable benchmarks in Canada. This conclusion is flatly contradicted by the record. Canada provided extensive evidence to USDOC concerning prevailing market conditions in Canada. More specifically, this evidence included private timber sales, cost-revenue comparisons, an economic analysis of provincial stumpage charges, and private sector assessments of timber value. USDOC was obligated by Article 14(d) to use this evidence.
4.199.
The reasons given by USDOC for rejection of this evidence are baseless. First, USDOC relied on the Preamble to its regulations to irrebutably presume price suppression. No analysis of actual price suppression was ever conducted. Second, the "economic" report which USDOC chose to use as support for its presumption of price suppression is purely theoretical and based on a flawed economic model. It did not include consideration of any actual transaction prices.
4.200.
Canada submitted economic studies during the course of the investigation that demonstrated that it is the nature of the competition in the market that determines whether the market produces market prices, not the size of the market. If the market has the indicia of a competitive market – which it does in this case – the size of the government presence does not affect private prices.
4.201.
Finally, the US efforts to dismiss evidence provided on in-country benchmarks as either not useable or not representative, are not credible. This evidence includes evidence that satisfies the third benchmark – consistency with market principles – in the US regulations. The US itself confirmed that it uses this benchmark where "no world market price for [the goods in question are] commercially available in the countries under investigation". Here, there is no "world market price" for stumpage and US stumpage is not available in Canada. Accordingly, the evidence submitted by the Canadian provinces that demonstrated that their stumpage systems are operated in a manner consistent with market principles should have been considered by USDOC.
4.202.
The US claim that it made adjustments that took into account the prevailing market conditions is not supported by the record. USDOC has admitted in previous lumber investigations that it would be "arbitrary and capricious" to use cross-border comparisons as it is not possible to identify a country or countries where some market conditions are the same as those in the country of provision and where all differences in market conditions can be identified and adjusted. These differences include: differences in economic conditions such wages, capital costs, taxes and government regulatory policies, comparative advantages in resources, timber characteristics, operating conditions, measurement systems and tenure rights and obligations.
4.203.
Moreover, the US assertions respecting the adjustments that it did perform are incorrect. For example, the US claims that it "averaged the [US] price data by species to match the species in the relevant province." For several provinces there were little or no price data by species. In almost all (ninety-nine per cent) of the US sales used by USDOC as a benchmark for the B.C. coast, the purchaser bid a single lump-sum price for all timber of all species. The result of the use of these benchmarks was to overstate the value in the US sales of the lower-value species common in BC and other provinces.
4.204.
In the case of Québec, adjustment categories considered by USDOC were not derived from an analysis of differences in market conditions between Québec’s public forest and Maine’s private forest, but from carefully surveyed cost differences between the public and private forests within Québec. If USDOC had attempted to analyze and compare market conditions in Québec and Maine, it would have discovered that much of the data needed to make necessary adjustments were unavailable.
4.205.
In order to argue that it is "well established" that the Article 1.1(b) test for benefit is a "but for" test, the US focuses on the word "absent" in an excerpt from Canada - Aircraft. In doing so, the US both misinterprets the Appellate Body’s statement and ignores the context of the sentence.
4.206.
If the balance of the paragraph is considered, it is clear that the Appellate Body was saying that a "benefit", as used in Article 1.1(b), "implies some kind of comparison" and that the "marketplace" must be the basis for this comparison. The Appellate Body has therefore, directed a comparison that is to be informed by what the recipient could have actually obtained in the market and not a comparison to some artificial "undistorted" market, as the US asserts.
4.207.
The Appellate Body then notes that, "Article 14, which we have said is the relevant context in interpreting Article 1.1(b), supports our view that the marketplace is an appropriate basis for comparison." As Article 14 provides relevant context in interpreting Article 1.1(b), the "marketplace"that is to be used for comparison purposes must be the markets referred to in Article 14. In a situation involving the government provision of goods, Article 14(d) refers to "prevailing market conditions … in the country of provision". Accordingly, in this situation this refers to the in-country market as it exists.
4.208.
Even though the US now contends that it has never advocated a "hypothetical undistorted market", its arguments indicate the contrary. In the NAFTA proceeding, for example, it specifically describes adequate remuneration as, "the price that the purchaser would pay in an open and competitive market but for the government’s financial contribution." [emphasis added].
4.209.
Canada addressed what had been, to that point, the most recent attempt by the US to construct an argument that supported USDOC’s use of US prices as the appropriate benchmark. Canada showed how the US was attempting, through an elaborate exercise in word substitution, to turn Article 14(d) into a provision that measures adequacy of remuneration by comparing the government price to a constructed "fair market value", rather than to prevailing market conditions in the country of provision.
4.210.
The US has changed tack once again. It now asserts that where no "commercial market prices" exist in the country of provision or where they are "unreliable", an investigating authority may use, "prices commercially available on world markets as the basis for an assessment of the adequacy of remuneration provided that those prices are informative as to the fair market value of the goods in the country of provision". Accordingly, in the US view, the prices it uses "outside" the country of provision "to assess the fair market value of goods in the country of provision" need only to be available on the "world market" (and not in the country of provision). In support of this proposition, the US points to alleged acknowledgements by the US – Softwood Lumber III panel, Canada, Japan and the EC.
4.211.
The US asserts that Canada has acknowledged that "the use of world market prices is appropriate in the case of a government monopoly for the good in question," and describes the EC regulation as providing that the use of world market prices is appropriate when "market benchmark prices in the country of provision do not exist or are unreliable." It goes so far as to claim that the "US regulations which Canada has not challenged establish essentially the same rule as that found in the EC regulation."
4.212.
None of these sources supports the US position. First, the EC regulation refers to "world market" prices and "terms and conditions prevailing in the market of another country", and the US regulations to "world market price[s]", that are available to purchasers in the country of provision of the good. The United States’ own regulation makes clear that before a "world market price" is used it must be "reasonable to conclude that such price would be available to purchasers in the country in question." Similarly, the EC regulation states that "when appropriate, the terms and conditions prevailing in the market of another country or on the world market which are available to the recipient shall be used."
4.213.
Second, Canada has consistently taken the position that a price that is available to purchasers in the country of provision makes that price part of the prevailing market conditions in the country of provision. This is why Canada stated in US – Softwood Lumber III that in the context of a government monopoly over domestic production import prices for the same good if available to purchasers in Canada, could be used as a benchmark to measure adequacy of remuneration.
4.214.
Third, the US mischaracterizes what was said by the Panel in US – Softwood Lumber III. In the paragraph cited by the US, the panel stated that "prices of imported goods in the market of provision can indeed form part of the prevailing market conditions in the sense of Article 14(d)". The Panel further stated that "the text of Article 14(d) SCM Agreement … does not provide for … a world market test".
4.215.
Central to all of these positions is that regardless of whether domestic prices in the country of provision, "world market prices", import prices or other indicia of prevailing market conditions are used as benchmarks, such prices or conditions must be "available" in the country. If this requirement is satisfied the benchmark will constitute part of the prevailing market conditions in the country of provision.
4.216.
That is not the case here. US stumpage is not available in Canada. The good that USDOC contended was available in Canada at a world market price is logs, a product that is produced from standing timber. Canadian producers may purchase US timber "on the stump", but only where the stumps are – in the US. Stumpage is inherently local. The US is therefore reduced to arguing that prices in another country, not available in the country of provision, may be used because they are commercially available on the world market. This position is clearly inconsistent with the words of Article 14(d) and is not supported by Canada’s earlier statements, the findings of the Panel in US – Softwood Lumber III r, or either of the EC or US regulations.
4.217.
In its Closing Statement, the US asserts that it "did not simply assume trade distortion." Rather, it claims, it "determined that US law does not require an analysis of whether a subsidy has market distorting effects." At "the heart" of USDOC’s final determination, however, was a conclusion that these charges result in countervailable market distortion in the US lumber market. According to USDOC, "the whole point of this investigation is to quantify and remedy the impact" of the Canadian "administered pricing" system on the US market, as its "mere existence" has "a resulting impact … on Canadian lumber production" that "distort[s] the US market." It may not now contend that "the heart" of the case – its "whole point" – was of no consequence to its determination.

3. Pass-Through

4.218.
The pass-through issue in this case may be summarized as whether the US, in presuming rather than demonstrating the pass-through of the alleged stumpage subsidy to certain producers of subject lumber, has violated its obligations under the SCM Agreement and GATT 1994. The producers in question are those who buy log or lumber inputs at arm’s-length. Canada has demonstrated in its submissions that a subsidy may never be presumed in a countervailing duty investigation. The US argument to the contrary is that the SCM Agreement allows it to presume the pass-through of a subsidy in aggregate investigations, regardless of any evidence establishing arm’s-length transactions. However, there is no irrebuttable presumption in the SCM Agreement that allows a Member to disregard evidence establishing no subsidy. Because the US has failed to conduct any pass-through analysis regarding independent harvesters, the volume of Crown timber harvested by these entities and the amount of subsidy derived from that volume, for example, must therefore be excluded from the total amount of the subsidy. Further, no countervailing measure can lawfully be imposed on the products of lumber remanufacturers purchasing at arm’s length.

4. Specificity

4.219.
Even if the US had correctly determined that provincial stumpage programmes were a subsidy, it failed in the CVD FD to correctly determine that the programmes are "specific". The US finding under the "limited users" factor in Article 2.1(c) is incorrect. Even if there was a "limited number of users", the US nevertheless failed to determine that provincial stumpage programmes were "specific to certain enterprises" based on the total configuration of facts and evidence of the case.
4.220.
Stumpage programmes are not used by a "limited number" of certain enterprises under Article 2.1(c). The record evidence in this case establishes that thousands of enterprises, in at least 23 standard industry categories, used provincial stumpage programmes during the period of investigation. The survey submitted by the Canadian parties showed that companies using provincial stumpage programmes during the period of investigation manufactured a minimum of 201 distinct products, many of which are not produced by USDOC’s purported group of a "limited number of industries".
4.221.
The US failed to analyze the record evidence regarding which enterprises and industries actually used and allegedly benefited from stumpage programmes. In the CVD FD, it simply asserted that "pulp and paper mills and the saw mills and remanufacturers which are producing the subject merchandise" were the sole users of stumpage programmes. While the US argues that "no other industries" use or allegedly benefit from stumpage, it can point to noevidence in support of its assertion. Indeed, this finding is directly contradicted by the US acknowledgement of significant amounts of log harvesting done by enterprises other than the supposed "sole users" of stumpage. The EC and Japan agree that the "limited users" finding is flawed.
4.222.
Moreover, even if the US had properly identified the users of stumpage programmes, its impermissible use of the entire economy as a benchmark would mean that virtually all programmes would be specific, since virtually no programme is used by "everyone". In particular, every government programme involving the provision of a good would be specific. Unlike money, goods are not fungible and have a limited base of users who will expend the effort to procure the good. On the facts, therefore, the US determination is inconsistent with Article 2.1(c) and fails to satisfy the requirements of Article 2.4.
4.223.
The existence of an alleged limited number of users does not ipso facto establish specificity in fact. The factors in Article 2.1(c) simply indicate that a subsidy may be specific despite being non-specific in law. A determination does not satisfy Article 2 unless it is clearly substantiated that the subsidy is in fact specific; this requires cogent reasoning and an assessment of all the evidence to translate a "limited users" finding into a determination that a government is restricting access to a subsidy in fact. Provincial stumpage programmes are not specific. The US failed to clearly substantiate its specificity determination, and has therefore violated its WTO obligations.
4.224.
To determine that a subsidy is "specific " under Article 1.2 is to determine, under Article 2, that a government limits access to the subsidy to certain enterprises over other eligible enterprises. The ordinary meaning of the term "is specific to" is that the subsidy is made available to certain enterprises but not available to others. The specificity requirement is meant to capture instances where a government targets a subsidy to certain enterprises.
4.225.
This is confirmed by the structure of Article 2.1; paragraph (c) must be read in the context of paragraphs (a) and (b). Under Article 2.1(a), a subsidy is specific in law where a government explicitly limits access to it. Article 2.1(b) provides an exception that where access is limited by objective and neutral eligibility requirements, the limitations do not establish the favouritism necessary to find specificity. Under Article 2.1(c), a subsidy is specific in fact where, instead of limiting access to a subsidy in law, a government does so through its implementation of the programme in fact. The "appearance of non-specificity", of which Article 2.1(c) speaks, is an appearance that government is not limiting access to a programme, when in fact it might be.
4.226.
According to the US, specificity is deemed to exist where any one of the four factors in Article 2.1(c) is shown to exist without regard to why they might exist. This interpretation impermissibly reduces indicative factors to irrebuttable presumptions.
4.227.
Article 2.1(c) provides that where there is an appearance of non-specificity in law, "other factors may be considered" to determine whether the government is limiting access to certain enterprises in fact. Unlike the US interpretation of paragraph (c), Canada’s interpretation is based on the ordinary meaning of the word "specific", read in the context of paragraphs (a) and (b) and the chapeau of Article 2.1. For example, it would be nonsensical under Article 2.1(c) to find that a subsidy is specific in fact solely on the basis of "the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy", without any consideration of whether that manner directs the subsidy to certain enterprises. Likewise, the third factor is "the granting of disproportionately large amounts of subsidy to certain enterprises" by a government. Where there is no other explanation for the existence of such amounts, the inference under Article 2.1(c) is that the government is directing the subsidy to certain enterprises. On a plain reading of the third and fourth factors, the analysis required under Article 2.1(c) goes to inferring government action in the application of the programme.
4.228.
The specificity requirement deals with government action, and thereby requires direct evidence establishing such action. Where the government action limiting access to a programme is not explicit, evidence will necessarily be circumstantial – allowing an investigating authority to infer the targeting of a subsidy to certain enterprises based on the existence of the factors listed in Article 2.1(c). However, to "clearly substantiate" a determination under Article 2.4, an investigating authority must provide cogent analysis that establishes a high level of confidence. As the EC correctly observes, the distinction between de jure and de facto determinations is one of evidence; Article 2.1(c) does not create a different test for specificity. In assessing the evidence pertaining to the factors, the many reasons why there might be "limited users" or "predominant use", for example, are highly relevant. If these factors do not indicate government targeting action, the subsidy is not specific in fact.
4.229.
The negotiating history surrounding Articles 1.2 and 2 of the SCM Agreement confirms Canada’s interpretation that specificity relates to a determination that government action restricts access to the alleged subsidy. The specificity concept concerns government limitations on access, not simply patterns of "use" on the part of alleged recipients – the latter being merely indicative of the former.
4.230.
The concept of "specificity" has been with the WTO and GATT for nearly two decades. It was first considered by the Committee on Subsidies and Countervailing Measures ("SCM Committee") in 1985, when the SCM Group of Experts provided it with Draft Guidelines for the Application of the Concept of Specificity in the Calculation of the Amount of a Subsidy Other than an Export Subsidy ("Draft Guidelines"). The Draft Guidelines set out a series of rules based on what government did to restrict the availability of a programme. Where access was restricted to certain enterprises based on non-neutral criteria, the programme was considered de jure specific. On de facto specificity, the lone paragraph (f) addressed government action affecting availability in terms of a "de facto deliberate[] granting [of] an advantage to certain industries." The draft language on de facto specificity evolved over the course of the Uruguay Round negotiations, but at all times remained concerned with the granting by government of selective access to a subsidy programme.
4.231.
The US failed to convince other members to abandon the specificity requirement during the Uruguay Round. Accordingly, US countervailing duty law, the US application of the requirement in the CVD FD, and the US specificity arguments before this Panel, all attempt to re-write Article 2 of the Agreement for a "next-best" result: that a finding of "limited users" is dispositive of specificity. This interpretation of Article 2 is contrary to the ordinary meaning of the text of Article 2, read in context and in the light of the object and purpose of the Agreement and the negotiating record; it also renders the provision meaningless. The US has failed in the CVD FD to address the other explanations for any alleged pattern in the "use" of stumpage, and failed to explain why its incorrect finding of a "limited number of industries" means that stumpage is specific in fact to certain enterprises.
4.232.
The US has also violated its obligations under the SCM Agreement because it failed to take into account, as explicitly required under Article 2.1(c), record evidence concerning the extent of diversification of provincial economies. In British Columbia, for example, forestry-related activity is responsible for a substantial share of economic activity. The value of forestry-related shipments totalled $C20.2 billion in 2000, accounting for more than half the value of all manufactured shipments in the province. Forestry product sales were valued at $C15.6 billion in 1998 and $C16.8 billion in 1997. Indeed, since 1995, forestry product shipments have represented approximately half the value of manufactured shipments in British Columbia. The significant share of manufacturing shipments translates to a substantial contribution to provincial gross domestic product. In 1999, the various forest products industries accounted directly for 24 per cent of the goods-producing industries’ provincial GDP, and 6 per cent of the total provincial GDP. The Final Determination does not even address this significant factual information.

5. Other Claims

(a) Calculations

4.233.
The US did not correctly determine the amount of the subsidy, did not correctly calculate the subsidy per unit rate, and therefore applied countervailing duties at a rate in excess of the alleged subsidization per unit of the "subsidized and exported product." By imposing these countervailing duties the US violated Article 19.4 of the SCM Agreement. The errors of the US include:

· use of a manifestly incorrect log scale conversion factor;

· massive inflation of the subsidy amount used in the numerator in its subsidy per unit calculation; and

· understatement of the denominator in the flawed calculation methodology it chose.

4.234.
In response to Canada’s claims, the US simply argues that, "[t]he sole calculation requirement in Article 19.4 is a requirement to calculate the subsidy on a per-unit basis; Article 19.4 does not establish any other requirements concerning how the subsidy is to be calculated." The US position is untenable.
4.235.
The US concedes that Article 19.4, "establishes an upper limit on the amount of the countervailing duty that may be levied" and that it requires calculation of the subsidy "on a per-unit basis." Thus, the US agrees with Canada that Article 19.4 establishes requirements in calculating a subsidy rate. However, the US claims that it has no obligation to correctly calculate that rate. The US is therefore arguing that a Member may impose countervailing duties at any rate it wishes, as long as it is not in excess of a subsidy per unit rate, however arrived at.
4.236.
Article 19.4 is the sole provision establishing an upper limit to the countervailing duty rate to be imposed. Other provisions set out what constitutes a subsidy and what the total amount of that subsidy is; only Article 19.4 sets out any discipline on what the maximum countervailing duty rate may be. To give proper effect to Article 19.4, that discipline must require a per unit subsidy rate correctly calculated, based on a subsidy amount correctly derived, as against a practice correctly determined to be a subsidy.
4.237.
The US alleges that the conversion factor mentioned in the Minnesota Public Stumpage Price Review and Price Index ("Price Report") "only applied to the data contained in Table 2", while the US used only "sawtimber data in Table 1." But the statement on the cover of the Price Report says that, "All reported volumes and values were converted to a sawlog and pulpwood basis for inclusion in Table 1."
4.238.
Where "converted" data are based on a specific conversion factor, to ignore the specified factor is to render the data hopelessly distorted and therefore useless. In this case, as a result of the choice of conversion factor, subsidies were found where none existed; and, in any event, subsidies were found using an improper cross-border analysis. The use of a single, and incorrect, conversion factor highly inflated the alleged subsidy per unit rate.
4.239.
A conversion factor was necessary in the first place because the US elected to compare tree volumes and values in certain US jurisdictions, to widely disparate trees across Canada. The effective use of a single factor for most of these conversions created significant distortions in the assessment of whether any stumpage benefit even exists, as well as in the subsequent subsidy calculations. The US had a draft report prepared by an economist of the US Forest Service on the record that demonstrates the irrationality of its approach to conversion factors. The report notes that "[t]o properly compare prices, conversion factors must be tailored to the measurement system used in order to adjust for any bias that may have developed." The bias referred to is the tendency for contemporary prices expressed in board feet to underestimate lumber yield and boost stumpage prices to a degree that cubic measurements do not. In addition, the very publication that the US used to choose its conversion factors explicitly stated that smaller logs, like those in Canada, require use of much larger factors than the US used.
4.240.
The alleged subsidy at issue was the provision of "timber" at less than adequate remuneration. The allegedly subsidized merchandise subject to the countervailing duty was softwood lumber and certain products manufactured from that lumber. The alleged subsidy per unit may not properly be calculated using more than the volume of wood actually used in the subject merchandise. The portion of a log that becomes sawdust is not used in the production of lumber; equally, logs destined for the production of posts are manifestly not used in the production of softwood lumber.
4.241.
The alleged subsidy attributable to the subject merchandise was easy to trace and just as easy to calculate: out of the total volume of logs entering sawmills, the portion used in the manufacture of lumber created the only possible "subsidy" to the production of lumber and lumber products. Logs used in the production of posts or poles, and the portion of logs that ended up as chips, did not involve a subsidy attributable to softwood lumber.
4.242.
An accurate calculation of the subsidy per unit rate of the exported product required that only the volume of logs used in the softwood lumber products be reflected in the numerator; the denominator would then be limited to the output lumber products from those logs. Because Article 19.4 refers to the subsidy per unit rate of the allegedly "subsidized and exported product", the proper starting point would have been for USDOC to have determined the correct amount of the subsidy attributable to the subject merchandise – softwood lumber products.
4.243.
USDOC claims that it corrected for its overbroad numerator by expanding the denominator to include the value of the non-lumber products whose volumes had dramatically increased the numerator. USDOC failed to do this; however, even if it had, this approach would not cure the bias or the subsidy inflation. Non-lumber products account for a significant volume of products produced from softwood logs entering sawmills. Yet, typically, the value of non-lumber products such as chips or sawdust is low when shipped from the sawmill. Further, chips and sawdust are input products to other more expensive products such as pulp and paper. By including the volume of these non-lumber products while not accounting in the denominator for the full value of the products included in the numerator, the per unit subsidy calculation was significantly inflated.
4.244.
The United States, having adopted a methodology that grossly inflated the subsidy amount, then did not include the value of all the non-lumber products in its denominator. It seriously understated the denominator because 1) it did not include softwood "residual" products produced in sawmills, and 2) it used a wholly inaccurate and understated sales value for remanufactured products.

(b) Conduct of the Investigation

4.245.
With respect to its choice of Minnesota as benchmark state for Saskatchewan and Alberta, the US claims that the responding parties should have had notice of the possibility of that choice. For this reason, it argues, its failure to notify the responding parties of the change from Montana to Minnesota did not violate Article 12.8.
4.246.
Canada recalls footnote 225 of the First Written Submission of the US. An oblique reference, in a countervailing duty petition, to the entirety of the US as a potential source of benchmark does not amount to the disclosure of the "essential fact" of Minnesota as a benchmark state by the US. Canada notes the new US argument that only a few of the fifty states were reasonably to be considered as candidates for serving as benchmark. In this respect, Canada recalls the findings of the US in the Preliminary Determination in this case, where USDOC stated, "[I]nformation on the record indicates that stumpage in the United States along the border with Canada is comparable to Canadian stumpage …. we only compared stumpage prices in each Canadian province with stumpage prices in states bordering that province." [emphasis added]
4.247.
Canada also recalls the statement of the US to the panel in US – Softwood Lumber III, "Even within the United States, not all timber prices are appropriate. … Commerce did not use prices from the large timber-growing areas in the southeast, or from any non-contiguous state, because as a matter of commercial reality, Canadian lumber producers do not consider it commercially viable to transport logs over that long a distance." [emphasis added]
4.248.
The only notice given to the responding parties was that data from a state "bordering" the province in question would be used. A state that is at least 700 km from the closer of the two provinces is not a "contiguous" state. Minnesota is not a state that borders either Saskatchewan or Alberta. There was no notice of the choice of Minnesota as a benchmark state. The US violated Article 12.8.

F. SECOND WRITTEN SUBMISSION OF THE UNITED STATES

4.249.
The following summarizes the United States' arguments in its second written submission.
4.250.
The standard of review set forth in Article 11 of the DSU applies to disputes arising under the SCM Agreement. Article 11 requires a panel to "make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements." In conducting this inquiry, the Panel may only address those provisions of the covered agreements that Canada cited in relation to specific claims in its request for the formation of a panel. With few citations to the record, Canada recites a laundry list of facts and figures in support of its arguments, failing to note the substantial record evidence that contradicts its arguments. Canada is asking the Panel to step into the shoes of USDOC and engage in a de novo review and evaluate the facts. It is well-established, however, that panels may not engage in such an exercise.
4.251.
The parties’ answers to the Panel’s questions have confirmed that companies enter into tenure agreements with the provinces for the sole purpose of obtaining timber. In return for fulfilling the tenure obligations and paying the stumpage fee, the tenure holder acquires ownership of the timber, not a "right" to harvest timber.
4.252.
The ordinary meaning of "goods" is broad and encompasses, at the very least, all tangible property, including "growing crops, and other identified things to be severed from real property." Simply labeling standing timber a "natural resource" does not remove it from the ordinary meaning of the term "goods." Canada has acknowledged that provincial tenures identify specific, defined areas of forest from which the tenure holder may harvest trees. The identified trees to be severed from provincial land fall squarely within the ordinary meaning of the term "goods."
4.253.
Canada’s argument suggests that tenures are simply about forest management obligations that, almost incidentally, also confer an intangible "right" to harvest. Canada’s analytical approach is based on the flawed premise that the existence of a financial contribution is a matter to be determined from the government’s perspective. However, a financial contribution, as defined in Article 1.1(a)(1)(iii) of the SCM Agreement, exists whenever the government provides a good. As the US – Softwood Lumber III panel recognized, the existence of a subsidy is determined from the perspective of the benefit to the recipient, not the perspective of the government. Specifically, the US – Softwood Lumber III panel found that in spite of the fact that the provincial governments have certain policy objectives, "the fact of the matter remains that from the harvesting company’s point of view, the only reason to enter into such tenure or licensing agreements is to cut trees for processing or sale."
4.254.
As detailed in the United States’ response to the Panel’s questions, the record demonstrates that tenure holders do not acquire a freely transferable "right" to harvest. All provinces prohibit the transfer of tenures without government approval. Without any citation to record evidence, Canada asserts that the right to harvest is freely transferable, without approval. There is an obvious conflict, however, between the record evidence and Canada’s suggestion that tenure holders may freely sell or subcontract the "right to harvest." Despite Canada’s efforts to sever the right to harvest from the sale of the trees, the facts demonstrate that tenure holders are buying trees. In doing so, the provinces make a financial contribution within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
4.255.
As the United States pointed out in its first written submission, the Canada – Aircraft panel stated that a benefit exists where "the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution." In reviewing that report, the Appellate Body affirmed that a benefit exists where "the ‘financial contribution’ makes the recipient ‘better off’ than it would otherwise have been, absent that contribution." In determining the existence of a benefit, therefore, the issue is the position of the recipient "but for" or "absent" the government’s financial contribution.
4.256.
Moreover, the Appellate Body has stated that the point of comparison is "the marketplace," i.e., a benefit exists where the financial contribution is received on terms more favorable than those available in the market. Finally, as the United States has pointed out, following the reasoning of the Appellate Body in Canada – Aircraft, the Brazil – Aircraft panel concluded that the concept of a comparison market necessarily means a "commercial market, i.e., a market undistorted by the government’s financial contribution."
4.257.
Canada erroneously argues that the Brazil – Aircraft report is inapposite because that panel was considering Article 14(b) of the SCM Agreement, which establishes commercial lending rates as the benchmark for a government loan. The panel found that the financial contribution at issue was in the form of a non-refundable payment, however, rather than in the form of a loan. Thus, as Canada argued in that case, the payments at issue were "essentially grants." In the passage cited by the United States, the Brazil – Aircraft panel was not discussing Article 14(b) of the SCM Agreement. In fact, there is no reference at all to Article 14 of the SCM Agreement in the panel’s report. Rather, the panel was discussing the concept of benefit generally. The panel’s reasoning, which follows logically from the findings of the Appellate Body, is compelling. Only by comparison to a market undistorted by the government’s financial contribution is it possible to determine whether the recipient is better off than it otherwise would have been absent the financial contribution. That is true regardless of the form of the financial contribution.
4.258.
Article 14 does not redefine the concept of benefit in Article 1.1(b), as interpreted by the Appellate Body and prior panels. Article 14 merely provides guidelines that must be followed in establishing "methods" for applying that concept to particular types of financial contributions. Each guideline in Article 14, including Article 14(d), must therefore be interpreted in a manner that is consistent with the interpretation of the term "benefit" as used in Article 1.1(b) of the SCM Agreement.
4.259.
When the government provides a good, Article 14(d) states that a benefit is conferred if the government receives "less than adequate remuneration" for that good. Applying the reasoning of the Appellate Body, "less than adequate remuneration" must mean a price less than would otherwise be available in the marketplace absent the government’s financial contribution. The proper benchmark therefore is an independent market-driven price for the good, i.e., fair market value – which is also the standard applied under Canadian law.
4.260.
Article 14(d) does not specify the type of evidence that must be used to establish the fair market value of goods in the country of provision. Rather, Article 14(d) establishes the general principle that adequate remuneration (fair market value) must be determined "in relation to prevailing market conditions" in the country of provision. There is no basis in the SCM Agreement to conclude that "benefit" means anything less when the government provides a good than when it makes any other type of financial contribution. Thus, "market" conditions must be interpreted in a manner consistent with the concept of benefit in Article 1.1(b) of the SCM Agreement. Following the reasoning of the Appellate Body and the Brazil – Aircraft panel, therefore, the point of comparison under Article 14(d) must be prevailing commercial market conditions, i.e., a market undistorted by the government’s financial contribution, in the country of provision. It is the view of the United States that where such benchmark prices exist in the country of provision, they must be used. However, where such benchmark prices do not exist in the country of provision or are unreliable, a Member may, consistent with Article 14(d), rely on data from outside the country of provision to assess the fair market value of the goods in the country of provision. This is the case with respect to Canadian timber.
4.261.
As the United States demonstrated in its response to the Panel’s questions, the actual data on private stumpage prices is virtually non-existent for four of the six provinces. Canada does not dispute the fact that Manitoba and Saskatchewan did not provide any data on private stumpage prices. With respect to Alberta, as the United States explained in response to the Panel’s questions, the record demonstrates that the Timber Damage Assessments ("TDAs") that Alberta provided are simply voluntary guidelines for settling disputes for damages. Moreover, TDAs are based on log prices and do not differentiate between private and Crown logs. With respect to B.C., Canada acknowledges that the evidence provided establishes that the private market for stumpage in B.C. is "limited" and that "nearly all private wood fibre sales are of logs rather than standing timber." The data on sales of standing timber accounted for only 0.1 per cent of the B.C. harvest.
4.262.
Recognizing the lack of any private stumpage benchmark data for these four provinces (Alberta, B.C., Manitoba, and Saskatchewan), Canada continues to argue, without any basis in the SCM Agreement, that evidence demonstrating that the provinces made a profit on their timber sales suffices. A benefit, however, is not determined based on the cost to the government in making the financial contribution, e.g., whether the government incurred a loss. The issue is whether there is a benefit to the recipient.
4.263.
With respect to Ontario and Quebec, as discussed in response to the Panel’s questions, some data on private stumpage prices exists. However, prices that are distorted by the government’s financial contribution do not reflect "market" conditions. It is undisputed that Canadian timber sales are overwhelmingly dominated by the provincial governments. The fact that the government is a price leader does not in and of itself establish the absence of independent commercial market conditions. As the Appellate Body has cautioned, however, governments have the ability to obtain certain results from the market by shaping the circumstances and conditions in which the market operates. The dominance of the government in the marketplace can, therefore, warrant further examination in determining the adequacy of remuneration for government-owned goods. Ultimately, as noted by the European Communities, the issue must be determined on a case-by-case basis.
4.264.
The facts of this case demonstrate that the provincial governments not only dominate the Canadian timber market, but also that the governments do not participate in the market as commercial actors. Rather, the provincial governments administer the sale of the overwhelming majority of Canadian timber in a manner designed to further social policy goals. The evidence further demonstrates that, as a result, the administration of provincial timber sales systems distorts the small private timber market.
4.265.
All of the provinces generally restrict the sale of Crown timber to purchasers that own a processing facility in the province. These local processing requirements artificially reduce the demand for Crown timber. In addition, the vast majority of Crown timber is under some form of renewable ("evergreen"), long-term tenure. These tenures are not freely transferable. The existence of evergreen, non-transferrable tenures creates significant barriers to entry into the timber market. For example, Canada offers no support for its assertion that a newcomer in Quebec could obtain a provincial tenure, even though 100 per cent of the Crown timber is currently under tenure or reserved and not subject to harvest. Nor does Canada reconcile this claim with its subsequent statement that the vast majority of mills in Quebec are "shut out of the public forest." Moreover, "transfers" of tenure are, in fact, normally cases in which the entity that holds the tenure is acquired. No new tenure is created in such cases.
4.266.
Other aspects of tenures artificially increase supply. For example, B.C. imposes minimum cut requirements and restricts mill closures, thus forcing tenure holders to harvest timber even in down markets and thereby artificially increasing the supply of Crown timber. Nevertheless, the record demonstrates that, during the period of investigation, tenure holders in all of the provinces except Alberta did not harvest their full AAC, thus demonstrating an ample supply of additional Crown timber available at administered prices.
4.267.
Central to each of the provincial systems is, of course, administered rather than competitive pricing of that timber supply. The evidence demonstrates that the price leaders, i.e., the provincial governments, do not price to the market. Rather, they administer prices under systems designed to promote employment and keep mills operating even in down markets.
4.268.
A study by Economists Inc. ("EI Study"), which the United States found compelling, addressed the impact of the administered provincial systems on the private market. The EI Study applied generally accepted economic analysis to demonstrate that when a single supplier controls the overwhelming portion of market share, that supplier will necessarily influence non‑administered prices. It found that "[t]he lower the market share of the firms in the non‑administered sector relative to the administered sector, the less the ability of the non‑administered sector to raise price above the administered (subsidized) level." The essence of this analysis is that private (non‑administered) sellers cannot increase prices significantly above administered price levels of the competing supply because, if they did, demand would shift to the administered sector. The study referred to record evidence establishing that provincial governments not only supply the vast majority of timber, but also are willing to provide yet more timber to the major licensees that comprise most of the demand. The study showed that if private landowners attempted to raise their prices significantly above government‑set levels, the major licensees would rely relatively more on administered timber sales and less on private or auctioned timber. Therefore, while local variations will exist, overall the government price effectively sets the average province‑wide price as well.
4.269.
Canada criticizes this study and cites to other evidence it finds compelling. The issue, however, is not which evidence Canada finds persuasive. The issue is whether the record evidence supports the United States’ determination. The EI Study and other record evidence, some of which is summarized in the United States’ first written submission and oral statements at the first substantive meeting of the Panel, support that determination. There also is significant documentary evidence confirming this economic analysis and demonstrating that each provinces’ system of public timber sales distorted private timber prices.
4.270.
The evidence demonstrates that the provincial governments shape the timber market to achieve public policy goals, and that the government-controlled, public-policy driven sector of the timber market distorts the private timber market. There was therefore ample support for the United States’ conclusion that there are no independent, market-driven timber prices available in Canada. The United States’ use of data from other sources to assess the fair market value of timber in Canada was therefore warranted and was consistent with Article 14(d) of the SCM Agreement.
4.271.
The evidence also supports the United States’ decision to use timber prices in the northern United States, properly adjusted to reflect conditions of sale in Canada, as an alternative source for assessing the fair market value of timber in Canada. The rationale for the United States’ choice of data for establishing market benchmarks is sound. As the United States explained in its first written submission, the value of timber depends on the demand for the downstream products. US and Canadian timber satisfies the same demand in the integrated North American lumber market, and Canada has no comparative advantage in serving that demand. In addition, the record demonstrates that US timber is commercially available to lumber producers in Canada. The US timber is also comparable to Canadian timber, and the United States established species-specific, province-specific benchmarks to conduct the comparison.
4.272.
In response to the Panel’s questions, Canada stated that out-of-country benchmarks that are available to purchasers in the country of provision would be suitable benchmarks because they "would then form part of prevailing market conditions ‘in’ the country of provision." As discussed in the Final Determination, the evidence demonstrates that US timber is, in fact, commercially available to lumber producers in Canada. Further, Canada asserts that the United States could have used an alternate methodology, i.e., evaluation of the government’s prices based on evidence of the government’s costs and profitability. The standard is not the cost to the government, but rather the benefit to the recipient. We have demonstrated that the use of prices for US timber in the northern United States, adjusted for differences in conditions of sale in Canada, is consistent with Article 14(d) of the SCM Agreement.
4.273.
Canada cites to Articles 10, 19.1, 19.4, and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994 as the basis for its calculation-related claims. As the United States previously indicated, Canada’s claims under Articles 10, 19.1, and 32.1 of the SCM Agreement are necessarily derivative claims that cannot succeed because Canada has failed to establish that the United States has breached its obligations under another provision of the SCM Agreement.
4.274.
Canada admits that neither Article 19.4 of the SCM Agreement nor Article VI:3 of GATT 1994 contain any obligation regarding the methodology a Member may use in calculating the ad valorem subsidy rate. None of the provisions of the SCM Agreement that Canada cited in support of its claim establish the calculation obligations Canada suggests the United States has violated. Given that a panel’s terms of reference "establish the jurisdiction of the panel by defining the precise claims at issue in the dispute," and that the identification of the specific provision of the covered agreements is a "minimum prerequisite" for stating the legal basis of the claim, this Panel should reject Canada’s attempts to bootstrap claims that the ad valorem rate calculation is inconsistent with other provisions of the SCM Agreement.
4.275.
Article 19.4 of the SCM Agreement and Article VI:3 of GATT 1994 merely provide that the countervailing duty rate imposed may not exceed the amount of the subsidy the investigating authority has found to exist. Neither provision contains particular calculation obligations of the sort Canada asserts have been violated. Canada, therefore, has failed to present a prima facie case on this issue.
4.276.
The United States’ calculation of the ad valorem subsidy rate is consistent with the SCM Agreement and the evidence developed through the investigation. The United States included in the numerator the volume of provincial softwood timber entering sawmills, multiplied by the benefit per cubic meter. This method captured the total value of the subsidy provided to sawmills. The United States then allocated that benefit over all sales of products that resulted from the lumber production process. This methodology accounted for the fact that the production process yields other products as well as lumber.
4.277.
The United States conducted this investigation on an aggregate basis, calculating the total benefit provided by each province, as discussed above. Canada does not dispute the United States’ authority to conduct this aggregate analysis, but it continues to assert that the United States was obligated to conduct a pass-through analysis to establish the amount of any benefit received by certain producers of the subject merchandise, i.e., independent remanufacturers.
4.278.
In Canada’s first response to the Panel’s questions, it acknowledged that, "[w]here the timber harvester and the producer of subject merchandise are the same ‘recipient’ of the alleged subsidy, no pass-through analysis would be required." This fact pattern describes the vast majority of the producers of the subject merchandise and includes both sawmills and remanufacturers. Thus, Canada’s statement acknowledges that the United States was not required to conduct a pass-through analysis for at least the vast majority of the lumber at issue.
4.279.
Canada also fails to address Article 19.3 of the SCM Agreement, which specifically allows Members to apply definitive countervailing duties to exports of an uninvestigated exporter or producer as long as the exporter or producer may obtain an expedited review to establish its own rate.
4.280.
Additionally, Canada overreaches when it contends that a "[s]ubsidy pass-through analysis is required in every instance where the subsidy found to exist is allegedly bestowed on one person while the countervailing duty is imposed on the products of another." Canada’s attempt to read such an obligation into Article 19.4 of the SCM Agreement has no basis in the text. If Canada were correct, every time a Member investigates one or more companies and applies their subsidy rate to uninvestigated exporters or producers – a common practice – that Member violates the SCM Agreement. Such practices do not, however, violate the SCM Agreement, as evidenced by the last sentence of Article 19.3 of the Agreement.
4.281.
Canada argues that the United States understated the denominator by failing to include the value of certain "residual products" in the denominator. Canada failed to submit any evidence from which the United States could separate the value of additional products resulting from the lumber production process from the broader residual products category. Accordingly, the United States did not include the residual products category in the denominator. Canada also disputes the value used to represent remanufactured products that the United States selected and used in the denominator. As noted above, the Panel should decline Canada’s request to engage in a de novo review and re-weigh the evidence before the administering authority.
4.282.
In its questions to the parties, the Panel requested Canada to address how the conversion factors that the United States used were based on "manifestly incorrect data." Canada failed to provide the information the Panel requested. Instead, Canada cited alternative sources of conversion factors. The existence of alternative sources, however, does not mean that the United States’ selection was "manifestly incorrect."
4.283.
Article 2.1(c) of the SCM Agreement contains clear and objective criteria for determining when a subsidy is specific. Where a subsidy programme is used by a limited number of "certain enterprises" – i.e., an enterprise, industry, or group of enterprises or industries – it is specific in fact. Other than considering the extent of diversification of economic activities and the length of time the subsidy programme has been operating, Members are not obligated to conduct any further specificity analysis.
4.284.
The United States met its obligation to demonstrate that provincial stumpage subsidies are specific and thus actionable under the SCM Agreement. In theFinal Determination, the United States found that the users of stumpage were a "limited group of wood product industries" that included "pulp and paper mills and the saw mills and remanufacturers which are producing the subject merchandise." The industries comprising this limited group fall squarely within the ordinary meaning of the term "industry," which identifies industries by general product, such as automobiles or textiles, or by the type of activity engaged in, such as mining or banking. Thus, the provincial stumpage subsidies are specific under Article 2.1(c) of the SCM Agreement.
4.285.
Canada responds to this finding by attempting to rewrite the specificity test, seeking to redefine terms such as "industry" and "group," and to create exceptions that do not exist in Article 2. For example, Canada claims that the term "industry" requires a "product-based identification of industries," such that individual industries would be distinguished on the basis of a particular end product, or set of end products, that they make. By contrast, both in its ordinary meaning, and within the context of Article 2 of the SCM Agreement, "industry" is used broadly, referring to makers of a general class of products – such as "the steel industry" – regardless of the number or diversity of end products that the industry produces.
4.286.
Canada itself admits, in response to question 27 from the Panel, that a subsidy to a single large industry could be found specific, even where its producers make a vast diversity of products, as in the steel, automobile, textile, and telecommunications industries. This admission contradicts Canada’s argument that an "industry" must be defined narrowly on the basis of a particular end product or set thereof.
4.287.
Canada likewise admits that a subsidy granted solely to auto and textile producers could be specific under Article 2.1, notwithstanding the dissimilarity of their end products. It nonetheless still insists that the two industries cannot form a single "group" of industries that is specific within the meaning of Article 2.1(c). Instead, Canada maintains that "the industries producing ‘autos’ and the industries producing ‘textiles’" are actually "two groups of industries" that "appear to be a ‘limited number’ of certain enterprises," and thus specific. Notwithstanding Canada’s acceptance of diversity in the product mix of an "industry," Canada finds such dissimilarity incompatible with its view of the term "group," which for Canada requires "similarity and relatedness" of output products. In its ordinary meaning, and in the context of Article 2 of the SCM Agreement, the definition of "group" is far more straightforward, meaning simply "more than one" enterprise or industry, without regard to the "similarity or relatedness" of their end products.
4.288.
Canada continues to argue that each industry is defined by a narrow class of end products, claiming that the "immediate users of stumpage" include "at least 23 categories of industries, and the industries are as unrelated as lumber, agricultural chemicals, paper, and furniture." This argument is not only legally flawed, it rests on misleading evidence. Canada’s key exhibit is a survey of forest product industries that lists 201 products made by tenure holders, categorized into 23 categories that Canada claims to be different industries. In reality, Canada’s list of industries is little more than an exercise in hairsplitting – assigning multiple industries to a single sawmill based on its output.
4.289.
The fact remains that the vast majority of tenures in Canada are entered into directly between the provincial governments and "wood processing facilities," and in most instances only wood processing facilities – such as sawmills that produce lumber – are eligible to obtain a tenure contract. The record clearly demonstrates that provincial stumpage is used by an extremely limited group of industries in Canada. Changing the definition of "industry" cannot change the objective facts.
4.290.
The Panel likewise should reject Canada’s attempt to create exceptions to the specificity test contained in Article 2.1(c) of the SCM Agreement. Nothing in the text of Article 2 permits an actionable subsidy to escape the disciplines of the SCM Agreement based on the intent of the granting Member or the "inherent characteristics" of a good provided at below market rates. Nor does Article 2 require the "limited number of certain enterprises" to be established relative to the "eligible users," as Canada claims. Finally, the Panel should dismiss Canada’s contention that a finding on the "limited number" prong is not sufficient to support a determination of specificity under Article 2.1(c). Both the language and underlying logic of Article 2.1(c) make clear that it is unnecessary to make findings on all prongs of the test for a determination of specificity in fact. The provisions of the SCM Agreement are clear, and the United States has met those obligations. Canada should not be permitted to rewrite the Agreement in a manner more to its liking.
4.291.
Canada claims that the United States’ final decision, in response to comments from Canadian parties, to use data from Minnesota as the basis for calculating the market benchmarks for Alberta and Saskatchewan was inconsistent with Articles 12.1, 12.3, and 12.8 of the SCM Agreement. The United States’ conduct of this investigation was entirely consistent with its obligations.
4.292.
Canada’s claim under Article 12.1 is premised on the assertion that parties were denied the right to present evidence because the use of alternative states, such as Minnesota, had not been an issue in this investigation. The use of northern US states generally, and the issue of the benchmark state to use for Alberta and Saskatchewan specifically, were very much at issue. Moreover, all parties had ample opportunity to present information and argument on this issue, as evidenced by Saskatchewan’s proposal that the United States use Alaska instead of Montana.
4.293.
Canada’s claim under Article 12.3 of the SCM Agreement is equally unfounded. Canada has failed to cite to a single piece of record information on market benchmarks to which the parties were denied access.
4.294.
Finally, Canada acknowledges that nothing in Article 12 suggests that an investigating authority must engage in endless cycles of notice and comment. Nevertheless, Canada’s claim under Article 12.8 is based on the erroneous premise that Article 12.8 requires the investigating authority to provide an opportunity for notice and comment with respect to the final decision made on each issue before the determination becomes final. Nothing in Article 12.8 imposes such a requirement.
4.295.
In the context of the SCM Agreement, the "essential" facts are those that are necessary to determine whether definitive measures are warranted. A market benchmark is certainly essential to a determination of adequate remuneration, but all of the facts "under consideration" with respect to the calculation of the market benchmarks were made known to the parties. Significantly, Article 12.8 of the SCM Agreement refers to the "essential facts under consideration." Thus, by its own terms, Article 12.8 is concerned with the ongoing investigative process during which the investigating authority is still "considering" the facts. Article 12.8, therefore, cannot be interpreted to apply to the investigating authority’s final decision, at which point the issues have been decided and the facts are no longer "under consideration."
4.296.
Article 12.8 does not impose any specific method of informing the parties of the "essential facts under consideration." Rather, it specifies that the process used must inform parties "in sufficient time for the parties to defend their interests." The United States’ procedural rules are designed to guarantee a very open and transparent process in order to accomplish this goal, which was achieved in this case.
4.297.
The record establishes that the United States provided parties with ample opportunity to provide information and argument on whether the Maine stumpage price should include studwood and pulpwood. Quebec submitted considerable information and argument on this very issue. In the end, the United States agreed with Quebec and adjusted the benchmark calculation accordingly. Canada claims, however, that the United States withheld information from the parties and denied them the opportunity to prepare presentations on the basis of that information, in violation of Article 12.3 of the SCM Agreement. The information allegedly withheld is the December 20, 2001, letter from the Maine Forest Products Council ("MFPC"). As discussed in response to the Panel’s questions, this information was provided to the parties in time for them to prepare presentations on the basis of that information. Neither party was afforded an opportunity for sur-rebuttal and there is no obligation in Article 12 to provide such an opportunity.
4.298.
The thrust of Canada’s claim is a wholly unsubstantiated allegation that the United States intentionally withheld the MFPC Letter. The US regulations for the filing of information require the parties submitting the information to ensure that the information is placed on the record and provided to all interested parties. The MFPC Letter was not filed in accordance with those regulations. Canada’s claim that the United States acted inconsistently with Article 12.3 of the SCM Agreement must therefore fail.
4.299.
For the reasons set forth above as well as in the United States’ first written submission, oral statements at the first substantive meeting of the Panel, and first response to the Panel’s questions, the United States requests that the Panel reject Canada’s claims in their entirety.

G. SECOND ORAL STATEMENT OF CANADA

4.300.
The following summarizes Canada's arguments in its second oral statement.

1. Financial Contribution

4.301.
The ordinary meaning of "goods" is movable, tangible items. Immovables – such as buildings, roads, mineral deposits and trees in the forest – are not goods. Intangible rights, whether concerning intellectual property or real property, are not goods. In the facts of this case, tenure agreements and licences convey a right to harvest trees in a defined area. This is a right in respect of real property, and with that right come obligations that run regardless of any harvest; the right exists even in respect of trees that have not yet been planted. This right is in respect of an immovable – a standing tree – that is not a good; and it is a right in respect of something that may not even exist at the time the right is conveyed. It is an intangible and therefore not a good.
4.302.
The ordinary meaning of "goods" excludes intangibles. An intangible right does not become a "good" just because it is a factor enabling the creation of a good. An intangible right does not become a "good" just because the right holder’s objective is to produce a good. Harvesting rights permit the holders to produce logs; however, rights are distinct from the trees to which they attach. Harvesting rights are also distinct from the good, the log, which is not produced until the harvester invests the effort and incurs the significant costs of harvesting and processing standing timber into logs. The provision of rights is not the same thing as the provision of goods.
4.303.
The ordinary meaning of goods also excludes immovables subject only to limited exceptions. Among these exceptions are growing crops and "timber to be cut" that is identified in a sales contract. A timber sales contract covers specific trees; it does not cover just any trees that are or may be found in an identified area. Tenure agreements do not relate to identified trees, but as conceded by the US in its Second Written Submission, they relate to an identified area. Non-identified trees, whether or not they are in an identified area, are "immovables" and because they do not fit within the exception, they are not goods. The provision of immovables is not the same thing as the provision of goods.
4.304.
The definition of subsidy has two elements. Financial contribution relates to what the government does, benefit to what the recipient receives. Article 1.1(a)(1) does not require a determination as to what the recipient ends up with at the end of the day or why the recipient enters into a given relationship with a government; rather, it requires a determination as to what the government provides. The government, in this instance, does not provide "cut timber".
4.305.
Harvesters subject to a tenure or licence assume a variety of forest management obligations for the period of the tenure or licence over the area covered by the tenure or licence. These obligations run regardless of the harvest of any trees. Tenures and licences do not involve the sale of anything – they involve the conferral of harvesting rights. The United States has admitted that tenures and licences involve identified areas. They do not involve identified trees. Standing trees under tenures and licences are not "goods" for the purposes of the SCM Agreement.
4.306.
A right to harvest standing timber is an intangible interest in respect of real property and is therefore not "goods"; standing trees with roots firmly in the ground are immovables and therefore not "goods". Stumpage programmes do not provide goods and do not constitute a financial contribution.

2. Benefit

4.307.
Article 14(d) requires that the adequacy of remuneration be determined and measured on the basis of "prevailing market conditions … in the country of provision". Accordingly, benefit must be determined on the basis of existing market conditions in Canada. Article 14(d) does not permit benefit to be determined and measured using benchmarks that are outside the country of provision. It also does not permit an investigating authority to measure adequacy of remuneration by comparing the government price to a hypothetical "fair market value".
4.308.
This interpretation of Article 14(d) is consistent with the Appellate Body’s analysis of Article 1.1(b) in Canada – Aircraft. In that case, the Appellate Body directed a comparison that is to be informed by what the recipient can obtain in the market. The Article 1.1(b) "market" in a provision of goods context under Article 14(d) is the actual "market" as it exists in the country of provision.
4.309.
The US reliance on an extract from the second implementation panel in Brazil – Aircraft to argue that the comparison market must be a market undistorted by the government’s financial contribution is misplaced. First, Brazil – Aircraft did concern the standard set out in Article 14(b). At issue in that case was whether the PROEX payments made by the Brazilian government to certain banks resulted in a benefit to purchasers of Brazilian aircraft. In order to determine this, the panel looked at the impact of the PROEX payments on the terms and conditions of the export credit financing available to the purchasers of these aircraft. Therefore, though unstated, this part of the decision did in fact turn on the standard set out in Article 14(b).
4.310.
Second, the reference to an undistorted market should be seen in its proper context – that is, against the background of the original case. The panel determined in that case that the comparison must be to the market for commercial lending rates and not another government market. The panel did not find that a commercial or private market rate or price cannot be used as a benchmark if there is government involvement in the marketplace.
4.311.
The Appellate Body’s decision in US – Countervailing Measures on Certain EC Products also provides no support for the rejection by the US of the in-country evidence submitted by Canadian provinces. First, the Appellate Body’s decision was made in a different context that did not consider the explicit language of Article 14(d). Second, while that case involved consideration of the presumption at issue in arm’s-length sales by government, the plain language of Article 14(d) governs this case. In the present case, the SCM Agreement’s plain language requires a benefit determination based on benchmarks that reflect the "prevailing market conditions … in the country of provision". This language establishes a clear rule, not a "presumption" that might be rebutted in limited circumstances.
4.312.
The central issue before this Panel with respect to benefit is whether the SCM Agreement requires investigating authorities to use in-country evidence to determine adequacy of remuneration. Canada’s purpose in presenting the in-country evidence on the record in this case is to demonstrate that (i) the record contained substantial evidence of prevailing market conditions in Canada that should have been used to determine adequacy of remuneration, and (ii) even if arguendo the US was permitted to reject this evidence, the reasons it offers fail to stand up to any objective scrutiny.
4.313.
In its Second Written Submission, the US has again conceded that data on private stumpage in both Québec and Ontario exist. With respect to the TDAs, this data was developed by opposing commercial interests in Alberta to establish the market value of healthy standing timber. In addition, the four primary exporting provinces all provided evidence that showed that their stumpage programmes are administered consistent with market principles. Similarly, BC provided economic evidence that reinforced this conclusion. Finally, the United States’ focus on alleged flaws in how public timber prices are set is misplaced as these are irrelevant to the benchmarks required under Article 14(d).
4.314.
The US rationalizes the rejection of in-country evidence by discussing certain forest management practices that allegedly demonstrate that the provinces distort private timber markets. In particular, the United States makes selective reference to appurtenancy requirements, alleged restrictions on the transfer of tenures and annual allowable cuts in specific provinces. None of these practices were the subject of the investigation. Further the Final Determination contains no analysis that demonstrates that the provinces’ management of their stumpage programmes distorted the market. Rather, USDOC relied on the Preamble to presume price suppression and supported this presumption with anecdotal evidence and a flawed economic analysis. In any event, as the panel in US – Softwood Lumber III found, Article 14(d) does not allow an investigating authority to decline to use in-country prices because they may be affected by the government’s financial contribution.
4.315.
Article 14(d) requires that adequacy of remuneration be determined using prevailing market conditions in the country of provision. Market prices available on the world market can become part of prevailing market conditions "in" the country of provision where there are imports of the good into the country of provision. If there are imports at a given price, then the price is no longer an out-of-country price, but rather is part of the prevailing market conditions in the country of provision.
4.316.
The US prices used by USDOC as benchmarks do not fall within this category. USDOC found that the subsidized "good" was either standing timber or the right to harvest standing timber. US stumpage is not, and cannot, be made "available" in Canada. Standing trees growing in the US cannot be harvested in Canada, and the right to harvest these trees growing in the US cannot be exercised in Canada. Logs are not timber-harvesting rights, nor are they standing timber. Standing timber in the UScannot be transported across the border, as it must be cut in the US.
4.317.
Also, contrary to the United States’ assertion, USDOC did not compare prevailing market conditions in Canada with those in the US. USDOC ignored a host of differences in market conditions, and as for the adjustments it did make, failed to adequately take into account differences between individual provinces and US comparison areas.
4.318.
The US dismisses the provincial evidence demonstrating that stumpage programmes are operated in accordance with market principles as not relevant to a benefit analysis. This is so, it argues, because the "standard is not the cost to government, but rather benefit to the recipient." The US thus dismisses the third benchmark under the regulations it adopted to implement the results of the Uruguay Round. There is no question that the United States believed, at the time of adoption, that this benchmark was consistent with the analysis contemplated by Article 14(d), and was not, as the US now argues, based on a "cost to government" standard.
4.319.
In using this benchmark over the last seven years and as recently as two weeks ago, USDOC has examined whether the government in question has covered its costs; whether it has earned a reasonable rate of return; and whether it applied market principles in setting its rates or prices. In considering these factors, USDOC has described its analysis as examining "whether the government’s price was determined according to the same market factors that a private... [party] would use....."20 USDOC’s current attempt to dismiss the third benchmark as irrelevant is contradicted by its consistent application of this benchmark since the regulations were promulgated.
4.320.
USDOC also expressly refused to consider evidence demonstrating that provincial stumpage systems cannot confer a trade advantage. This economic evidence demonstrated that, for in situ natural resource markets, receipt of the input for a lower fee or charge does not affect the supply curve for the exported product. In this instance, USDOC assumed the existence of trade distortion rather than considering evidence that demonstrated that there was no effect on the marginal cost or supply. This evidence demonstrates that provincial stumpage programmes neither increase the production of logs and lumber, nor lower their prices relative to a private competitive market.

3. Pass-through

4.321.
The pass-through issue in this dispute is not simply about calculating the amount of the alleged stumpage subsidy; it is first about determining whether a subsidy exists. This means making the required determinations of an indirect financial contribution and of a benefit conferred thereby. The amount of a subsidy cannot be calculated, aggregated or allocated until a subsidy is first determined to exist.
4.322.
The United States does not contest that arm’s-length transactions exist and that no subsidy has been determined to exist in those instances. The United States impermissibly presumed subsidization in all cases other than alleged direct subsidization, asserting incorrectly that all producers of subject lumber were "direct recipients" of Crown stumpage. There is no exception in the SCM Agreement that allows a Member to presume subsidization in a countervailing duty investigation.
4.323.
The United States has countervailed softwood lumber, not standing timber. The subject lumber products are a few examples of the many downstream products produced in many distinct industries that receive the alleged subsidy directly. If the subsidy to timber harvesters is presumed to have passed through to downstream producers of the subject lumber, then it must be presumed to have passed through to producers of all downstream products. The question then is how the stumpage subsidy could be limited to the mills upstream in the US specificity finding, when all products and industries downstream are presumed to have received it. US arguments on pass-through make US arguments on specificity impossible, and internally contradictory.

4. Specificity

4.324.
There are two central errors in the US approach to specificity: first, it applied the wrong standard; and second, it incorrectly found that stumpage was used by a limited group of industries.
4.325.
First, sole reliance on the "limited users" factor, as interpreted and applied by the United States, renders the specificity requirement meaningless. The factors set out in Article 2.1(c) do not, in and of themselves, establish specificity. Nowhere in that provision does it say, "a subsidy is de facto specific if one or more of the following factors exist"; nowhere does it say, "where the users of the subsidy are limited in number, no matter the reason, the subsidy shall be deemed to be specific". Article 2 requires not automaticity, but clear substantiation on the basis of positive evidence.
4.326.
Second, the words "industry" and "group of industries" require an objective analysis of the record evidence in terms of the products produced by the users of a programme. In this case, an objective assessment of the products produced by the thousands of actual immediate users of stumpage identifies at least 23 standard categories of industries. When the analysis is extended to include indirect users of stumpage, as the US has done in its impermissible pass-through presumption, many more and varied industries are added.
4.327.
The US interpretation reads the word "group" out of Article 2 altogether. However, as the United States itself put it recently in US – Offset Act (Byrd Amendment), the issue is "how small and homogenous a group of beneficiaries must be in order to qualify as a ‘a group of enterprises or industries’", not whether the subsidy is used by the entire economy, or simply by more than one enterprise or industry. The products produced by stumpage users are as numerous and diverse as those produced in the agricultural sector, which in the view of the United States is neither a "single large industry" nor even a group of industries. Again, in US – Offset Act (Byrd Amendment), the United States argued that groupings "such as ‘all manufacturing’ and ‘all agriculture,’ are too broad to qualify as a ‘group of enterprises or industries’ for specificity purposes." Stumpage is used by many varied industries because it is a right of access to exploit a natural resource. That natural resource is not altered in any way by governments.
4.328.
Moreover, the purpose of countervailing duties is to protect domestic producers from injury caused by subsidized imports of like products. Logically, therefore, the level of aggregation used to identify the user industries for specificity purposes (through the products they produce) should be commensurate with the level of aggregation used to identify the allegedly injured domestic producers (through the products they produce). To do otherwise impermissibly concentrates for specificity purposes an otherwise broad alleged subsidy and imputes it solely to producers of the subject merchandise – exactly what the United States did in the Final Determination.

5. Calculations

4.329.
Canada’s Article 19.4 claims rest on two legal foundations. First, and as the US agrees, Article 19.4 requires that a countervailing duty rate must not exceed the subsidy per unit rate found in respect of exported and subsidized goods. Second, the subsidy per unit rate must be calculated correctly, based on a correctly determined subsidy amount, and a correctly determined subsidy. The United States disagrees. It argues that Article 19.4 requires nothing more than a reconciliation of a subsidy per unit rate, however determined, with the countervailing duty rate actually imposed. Such an outcome renders the obligation in Article 19.4 meaningless.
4.330.
The Panel must determine whether the United States has met its legal obligation, under Article 19.4, to limit the amount of the countervailing duty rate to the correctly determined alleged subsidy per unit. The United States has a legal obligation to ensure that any countervailing duty imposed does not go beyond the purposes of a countervailing duty – to offset injurious subsidization. It may not escape its obligations by characterizing every issue as a matter that is within the unfettered discretion of investigating authorities.

6. Conduct of the Investigation

4.331.
Canada’s claims concerning the conduct of the investigation at issue are independent from its claims regarding the illegality of the Final Determination of subsidy. In conducting this investigation, the United States violated its obligations under Article 12, and the countervailing duties imposed on the basis of this tainted investigation therefore violate Articles 10 and 32.1 of the SCM Agreement.
4.332.
First, USDOC determined that its benchmark states would border the relevant provinces. The US appeared before the WTO and argued that its benchmarks were valid because they were "contiguous" to the relevant provinces. The United States switched the benchmark state to compare with Alberta and Saskatchewan from Montana – a contiguous state – to Minnesota – a non-contiguous state – without giving interested parties notice or any opportunity to comment on the specific choice of the benchmark. The United States thus violated Articles 12.1, 12.3 and 12.8.
4.333.
Second, a senior USDOC official specifically requested information vital to USDOC’s use of Maine as a benchmark state for Québec. The Maine Forest Products Council sent a letter in response. USDOC did not put the letter on the record for months. The petitioners then submitted new evidence – and the United States admits that new evidence was submitted – in response to USDOC’s request for comments on the letter. USDOC refused to permit interested parties to respond to the petitioners’ new evidence despite the fact that USDOC relied on it in making its Final Determination. The United States failed to provide a timely opportunity to see relevant information; it failed to provide an opportunity for interested parties to prepare presentations on the basis of that relevant new information. It thus violated Article 12.3.

H. SECOND ORAL STATEMENT OF THE UNITED STATES

4.334.
The following summarizes the United States' arguments in its second oral statement.
4.335.
The record demonstrates that the provinces own timber and, through provincial tenures, provide timber to lumber producers. There should therefore be no question that the provinces provide a financial contribution within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
4.336.
The ordinary meaning of "goods" includes standing timber. Canada’s argument to the contrary is reduced to the assertion that tenures are not sales of "timber to be cut," within the meaning of the US UCC, even though the sole reason for acquiring a tenure is to harvest timber, and the tenure holder pays for and receives title to only the timber it cuts. Moreover, the UCC provides that the sale of timber to be cut is always a contract for the sale of goods, regardless of whether the timber is "identified" at the time of the contract. More to the point, however, the provinces "provide" a "good" within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.
4.337.
Canada also suggests, without citation to record evidence, that many tenures create freely transferable "rights to harvest." The record evidence establishes, however, that the provinces retain control over tenures, which cannot be transferred without the provinces’ approval. The subcontracting of harvesting operations is not the sale or transfer of a "right to harvest." The tenure holder, not the subcontractor, remains at all times the province’s contracting party.
4.338.
It is the substance of what occurs in the provincial tenure systems that is controlling, i.e., whether a provision of goods takes place. As discussed in our previous submissions, the ordinary meaning of the terms "provides" and "goods or services other than general infrastructure" sweeps broadly. No matter how Canada characterizes provincial tenures, the fact remains that the provinces are providing timber to lumber producers. A financial contribution therefore exists.
4.339.
The key legal issue in this dispute is whether Article 14(d) of the SCM precludes, in all cases, the use of data from sources outside the country under investigation to determine the adequacy of remuneration. As the Appellate Body has stated, the issue is whether "the ‘financial contribution’ makes the recipient ‘better off’ than it would otherwise have been, absent that contribution."21 In other words, the Appellate Body recognized that in order to determine whether a financial contribution confers a benefit, it is essential to compare the position of the recipient with the financial contribution to what the position of the recipient would have been absent the financial contribution. Moreover, the Appellate Body’s statement provides the context for the Appellate Body’s conclusion that the point of comparison is the "marketplace." Thus, as the Brazil – Aircraft panel concluded, looking to the marketplace to determine whether the recipient is better off than it would otherwise have been absent the financial contribution necessarily means looking to a marketplace undistorted by the government’s financial contribution.22
4.340.
It is the view of the United States, as well as the European Communities, that Article 14(d) does not prohibit Members from relying on data from sources outside the country of provision to determine the adequacy of remuneration if reliable, market-driven pricing data does not exist in the country of provision. We will not repeat the arguments supporting that conclusion, but will comment on Canada’s flawed three-pronged analysis of Article 14(d).
4.341.
First, Article 14(d) provides that the adequacy of remuneration must be determined "in relation to" prevailing market conditions in the country of provision. Canada, however, substitutes "in relation to" with "on the basis of" or "in comparison with." The more reasonable interpretation is that the broader phrase "in relation to" was agreed to by Members because Article 14 explicitly sets out "guidelines," i.e., general principles, not detailed rules. "In relation to" is sufficiently broad to allow for various means of performing a comparison that relates to market conditions in the country under investigation, rather than limiting Members to analyses "on the basis of," or "in comparison with," certain types of data. Permitted methods can include analyses that rely on data from sources outside the country, if the data is probative of the fair market value for the good in the country of provision.
4.342.
Second, Canada ignores the word "market" in the phrase "prevailing market conditions," as if any conditions are "market" conditions. The Panel, however, must give meaning to the word "market." In that regard, the logic of the Brazil – Aircraft Panel Report is compelling. In determining whether the government’s financial contribution confers a benefit – i.e., whether the recipient is better off with the financial contribution than it would otherwise have been absent the financial contribution – the "market" conditions must be conditions that are undistorted by the government’s financial contribution.
4.343.
Third, adequacy of remuneration must be determined in relation to prevailing market conditions "in the country of provision." That begs the question, however, whether there are in fact "market" conditions for the good "in the country of provision" that provide probative evidence for determining adequacy of remuneration. Where such evidence does not exist in the country of provision, as in this case, nothing in Article 14(d) precludes a Member from relying on market data from sources outside the country that is probative of fair market value in the country of provision.
4.344.
The importance of using market benchmarks, even if they are based on data from sources outside the country of provision, is underscored by Article 15(b) of the Protocol on the Accession of the People’s Republic of China23, which is cited, but misinterpreted, by Canada. The United States negotiated Article 15(b) of the China Protocol because the United States, along with other Members, recognized that China was in transition from a state-controlled economy to a market economy. Although Article 14(d) of the SCM permits the use of market data outside China, it only applies in countervailing duty cases under Part V of the SCM Agreement. Recognizing the importance of "market" benchmarks, the Members incorporated the language that Canada references in Article 15(b) of the China Protocol to clarify that external benchmark data can be used under Article 14(d) of the SCM Agreement, and also to ensure that such data can be used in proceedings under Parts II and III of the SCM Agreement.
4.345.
Other provisions in the China Protocol likewise repeat obligations already binding on WTO Members. For example, the China Protocol provides that "China shall ensure that internal taxes and charges... shall be in conformity with the GATT 1994."24 The inclusion of this provision does not mean that other Members need not ensure that their internal taxes conform to GATT 1994, yet this is effectively Canada’s argument.
4.346.
With respect to the facts of this case, the United States has, in its prior submissions and oral presentations, demonstrated that four of the six provinces did not provide private prices for timber that could be used for market benchmark purposes. Canada has failed to refute that fact. Rather, it argues that evidence that the provinces earn a profit on timber sales is sufficient to establish that they do not provide a benefit, even though those profit calculations do not include any cost or value for the trees themselves. More importantly, however, a sale for less than adequate remuneration – even a profitable one – confers a benefit.
4.347.
The record evidence also demonstrates that the overwhelming state control of timber sales in Canada distorts sales in the private sector. Canada responds to this evidence by inviting the Panel to conduct de novo review. Canada argues, for example, that the United States "ignored" evidence of market conditions in Canada. The record in this case demonstrates that the United States in fact considered and weighed all of the evidence and was persuaded by economic analyses, which are cited to in the Final Determination, and other documentary evidence that the state-controlled timber sales systems distorted the private market.
4.348.
Canada also now states that it has "consistently taken the position... that a price that is available to purchasers in the country of provision makes that price part of the prevailing market conditions in the country of provision."25 Given that US timber prices are available to purchasers in Canada, the United States’ benchmark calculation is consistent with the position Canada now endorses. Canadian lumber producers can purchase US timber, cut it (or have it cut), and transport it to their mills in Canada.
4.349.
The United States has also established that the calculation of the market benchmarks included appropriate adjustments for conditions of sale in Canada. Canada’s attempts to call those adjustments into question do not withstand scrutiny.
4.350.
Finally, Canada has not made a prima facie case that the United States erred in failing to conduct a market distortion analysis. Canada has failed to identify any obligation in the SCM to conduct such an analysis because no such obligation exists. The United States’ benefit calculation is consistent with Article 14. Nothing further is required, and obligations that are not found in the Agreement may not be imposed on the United States.
4.351.
Under Article 2.1 of the SCM Agreement, a subsidy is specific if it is used by a limited number of industries or group of industries. The unrefuted record facts demonstrate that provincial tenures are used by a very limited group of timber processing industries. To construct an argument that these provincial programmes are, nonetheless, not specific, Canada artificially inflates the very limited group of industries.
4.352.
Canada interprets the term "industry" so narrowly that almost every product becomes an industry unto itself. Canada’s dissection of the timber processing industries flies in the face of the ordinary meaning of "industry" as the term is used in Article 2. Moreover, Canada’s position with respect to the timber processing industries is inconsistent with its acknowledgement that a subsidy used by a single large industry, such as automobiles or textiles, may be specific notwithstanding the diverse range of products the industry produces.
4.353.
Canada also challenges the United States’ specificity finding by inventing criteria that do not exist. Nothing in Article 2.1(c) requires an investigating authority to consider the government’s intent or the "nature" of the good when determining whether a subsidy is specific. It is entirely permissible to find specificity based solely on the limited number of users.
4.354.
Canada cites the negotiating history of the SCM in an effort to overcome the lack of any support in the text of Article 2.1(c) for its claim that Article 2.1(c) requires consideration of factors such as the "inherent characteristics" of the good and evidence of intentional targeting. In fact, the negotiating history that Canada cites demonstrates that such concepts ultimately were not adopted by the Members. The Members abandoned language on intent and "inherent characteristics" after the second Cartland draft, and such factors may not be read into the SCM Agreement.
4.355.
The only additional factors that a Member must take into account under Article 2.1(c) are the extent of diversification of economic activities within the granting authority’s jurisdiction and the length of time the subsidy programme has been in operation. No one argued that the number of subsidy recipients is limited because the programme had not been in operation long enough to be more widely distributed. The issue of economic diversification was raised only by British Colombia ("B.C."). The evidence B.C. submitted, however, demonstrated that the timber processing industries accounted for approximately 6 per cent of B.C.’s economy. Thus, based on B.C.’s own data, 94 per cent of B.C.’s economy did not use the provincial tenure system.
4.356.
The United States’ views on Canada’s claims regarding the calculation of the ad valorem rate and the conduct of the investigation have been presented in our prior submissions and statements. We would like to make only a few additional points in response to Canada’s second submission.
4.357.
First, Canada mischaracterizes the United States’ views on Article 19.4 of the SCM Agreement. Article 19.4 provides that the countervailing duty rate must be calculated on a per-unit basis. It also provides that the countervailing duty levied may not exceed the subsidy found to exist. That is the extent of the obligations in Article 19.4. The United States’ argument that Canada has failed to identify any obligation in Article 19.4 to conduct an upstream subsidy analysis or to allocate subsidies by volume rather than by value is a far cry from arguing that a Member may impose countervailing duties at any rate it wishes. The fact remains, however, that Canada has failed to identify any obligation in Article 19.4 that supports its claim.
4.358.
Second, the United States calculated the ad valorem duty rate by dividing the subsidy by the value of the output of the lumber production process. Canada argues that the numerator in that ad valorem rate calculation was impermissibly inflated by the inclusion of that portion of the Crown timber that ended up as products other than lumber. Canada’s numerator argument is simply an argument that the United States was required to allocate the subsidy on the basis of volume rather than on the basis of value. As discussed previously, Article 19.4 simply obligates Members to calculate the countervailing duty rate on a per-unit basis. There is no requirement to allocate an input subsidy based on volume rather than value.
4.359.
Third, Canada continues to suggest that the Minnesota Public Stumpage Price Report ("Minnesota Price Report") specifies a conversion factor of 6.25 for converting from thousand board feet to cubic meters. It does not. The Minnesota Price Report contains sawtimber prices reported in thousand board feet and pulpwood prices reported in cords. The price report contains a factor that Minnesota uses to convert between cords and board feet. The United States, however, only used the sawtimber prices, which are bid, sold, and reported in thousand board feet, and therefore needed to convert from board feet to cubic meters. The Minnesota Price Report does not contain such a conversion factor. We note, however, that the timber sales manual of the Minnesota Department of Natural Resources ("Minnesota Timber Sales Manual"), which publishes the Minnesota Price Report, was on the record. The Minnesota Timber Sales Manual provides a conversion factor of 3.48 cubic meters per thousand board feet. Canada does not, however, advocate using that conversion factor. Rather, Canada derived its own conversion factor from selected information in the Minnesota Price Report.
4.360.
There is no one conversion factor that is universally accepted. The record evidence suggested a wide range of possible conversion factors, ranging from 3.48 to 8.51. The United States considered all of that evidence and provided a reasoned explanation for its decision to rely on the factors in the report by the International Trade Commission. The choice of conversion factor is therefore entirely consistent with the SCM Agreement.
4.361.
Finally, Canada suggests that, even though the provinces knew the criteria the United States was using to select the benchmark states and had all the data on the states under consideration, Alberta and Saskatchewan were not on notice of the possibility that the United States could select a state more than 1,000 kilometres away. That assertion is contradicted by the record of the investigation. Alberta and Saskatchewan both argued that the United States should not use Montana as a benchmark state because of differences in the species mix. Saskatchewan also proposed using data from Alaska, which is more than 1,000 kilometres from, and obviously not contiguous with, Saskatchewan. Thus, it is evident that the provinces knew that factors such as climate, terrain, and species mix – not proximity – were the key considerations, and that a non-contiguous state might be selected for the benchmark. The record of the investigation therefore establishes that the provinces knew the essential facts under consideration.