US — Softwood Lumber III, Report of the Panel, 27 Sept 2002

1.1.

On 21 August 2001, 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" or "the Agreement"), with regard to the preliminary countervailing duty determination and the preliminary critical circumstances determination made by the US Department of Commerce ("USDOC") on 9 August 2001, with respect to certain softwood lumber from Canada, and with regard to US measures on company-specific expedited reviews and administrative reviews.¹

1.2.

On 17 September 2001, Canada and the United States held the requested consultations, but failed to reach a mutually satisfactory resolution of the matter.

1.3.

On 25 October 2001, Canada requested the establishment of a panel to examine the matter.²

1.4.

At its meeting of 5 December 2001, the Dispute Settlement Body ("the DSB") established a Panel in accordance with Article 6 of the DSU and pursuant to the request made by Canada in document WT/DS236/2.

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 therefore are the following:

"To examine, in the light of the relevant provisions of the covered agreements cited by Canada in document WT/DS236/2 the matter referred to the DSB by Canada 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 22 January 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 1 February 2002, the Director-General accordingly composed the Panel as follows:

Chairman: Mr. Dariusz Rosati

Members: Mr. Robert Arnott

Mr. Gonzalo Biggs

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

1.8.

The Panel met with the parties on 24-25 April 2002 and 4 June 2002. The Panel met with third parties on 24 April 2002.

1.9.

On 26 July 2002, the Panel provided its interim report to the parties.

2.1.

This dispute concerns the preliminary countervailing duty determination and the preliminary critical circumstances determination made by the USDOC on 9 August 2001 in respect of certain softwood lumber imports from Canada, classified under headings 4407.1000, 4409.1010, 4409.1020, and 4409.1090.³ This dispute also concerns US law on expedited and administrative reviews in the context of countervailing measures.

2.2.

On 2 April 2001 an application for countervailing duties was filed with the USDOC by the Coalition for Fair Lumber Imports Executive Committee; the United Brotherhood of Carpenters and Joiners; and the Paper, Allied-Industrial, Chemical and Energy Workers International Union. On 20 April 2001, the application was amended to include as applicants Moose River Lumber Co., Inc.; Shearer Lumber Products; Shuqualak Lumber Co.; and Tolleson Lumber Co., Inc. On 30 April 2001, the USDOC published a notice of initiation of a countervailing duty investigation in the US Federal Register.

2.3.

In May 2001, the US International Trade Commission ("ITC") published its preliminary affirmative determination that there was a reasonable indication that the US industry was threatened with material injury by reason of imports from Canada of softwood lumber, which were alleged to be subsidized by the Government of Canada.

2.4.

On 27 July 2001, the USDOC amended the initiation of the investigation, to exempt from investigation imports of certain softwood lumber produced in the Maritime Provinces from timber harvested in the Maritime Provinces.⁴

2.5.

On 17 August 2001, the 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 (withholding of appraisement and posting of cash deposit or bond) were imposed on the basis of a preliminary subsidy rate of 19.31 per cent, applicable to all producers/exporters, and applied to all entries of the subject merchandise from Canada entered, or withdrawn from warehouse, for consumption on or after 90 days prior to the date of publication of the notice.

3.1.

Canada requests the Panel to:

· find that the Preliminary Countervailing Duty Determination of the United States in the softwood lumber case violates Articles 10, 14, 17.1, 17.2, 17.5, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994;

· find that the Preliminary Critical Circumstances Determination of the United States in the softwood lumber case violates Article 17.1(b), 17.3, 17.4, 17.5, 19.4 and 20.6 of the SCM Agreement and Article VI:3 of GATT 1994;

· find that US countervailing duty law regarding expedited and administrative reviews and the application of that law in the Lumber IV investigation violate Articles 10, 19.3, 19.4, 21.2 and 32.1 of the SCM Agreement and that as a result, the United States has failed to ensure that its laws, regulations and administrative procedures are in conformity with its WTO obligations as required by Article XVI:4 of the WTO Agreement and Article 32.5 of the SCM Agreement; and

· recommend that the United States bring its measures into conformity with the SCM Agreement and the WTO Agreement, including by lifting the suspension of liquidation for the period of 19 May through 16 August 2001, and making company-specific expedited and administrative reviews available to exporters and producers subject to any countervailing duty order that may be issued as a result of the Lumber IV investigation.

3.2.

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

4.1.

The arguments of the parties are set forth 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. Summaries of the parties' written answers to questions are set forth in the Annexes to this report (see list of annexes at page).

4.2.

The following are Canada's arguments in its first written submission.

4.3.

At issue in this dispute are the preliminary countervailing duty determination (the "preliminary determination") and the preliminary critical circumstances determination made by the USDOC on 9 August 2001, with respect to certain softwood lumber from Canada, which violate US obligations under the SCM Agreement and GATT 1994. Also at issue is the denial of company-specific expedited reviews and administrative reviews under US countervailing duty law, which violates US obligations under the SCM Agreement and the WTO Agreement.

4.4.

In the preliminary countervailing duty determination, the USDOC concluded that "provincial stumpage programmes" in Quebec, British Columbia, Ontario, Alberta, Manitoba and Saskatchewan are countervailable subsidies. It determined (a) that stumpage is the "provision of a good or service", (b) based on a "cross-border" analysis of "benefit", that the stumpage programmes were subsidies to softwood lumber producers, and (c) that the alleged subsidies were specific. It assumed that the benefit was passed through to certain producers. Of the 19.31 per cent country-wide subsidy rate calculated by the USDOC, a full 19.21 per cent is attributed to these "stumpage programmes".

4.5.

The USDOC’s findings and determinations and the provisional measures imposed as a result are inconsistent with US obligations under the SCM Agreement and GATT 1994. Specifically: (a) the Canadian practices in question are not "subsidies" as defined in Article 1 of the SCM Agreement, (b) the USDOC impermissibly inflated the alleged subsidy rate by calculating a country-wide rate based on only a portion of Canadian production and exports of softwood lumber; and (c) the USDOC impermissibly inflated the provisional measures imposed by applying them on an entered value after having calculated the subsidy rate using a first mill value. Although Canada is not making submissions regarding the USDOC’s preliminary finding of specificity, Canada does not accept that finding as correct⁵.

4.6.

The Canadian practices are not "subsidies" because: (a) "stumpage" is not a "financial contribution" within the meaning of Article 1.1(a) of the SCM Agreement; (b) the USDOC’s determination and measurement of a "benefit" is based on a "cross-border" methodology that is not permitted by the SCM Agreement; and (c) the USDOC’s determination assumes holders of harvesting rights pass through an alleged benefit to softwood lumber producers, without any basis for the assumption.

4.7.

"Stumpage" is not a "financial contribution". Most forest land in Canada is publicly owned "Crown" land. As stewards of this land, Federal and provincial governments manage forestry resources not for the benefit of specific users, but for the country as a whole, and with a view to conservation and preservation of Canada’s natural heritage for future generations. Forest resource management is, therefore, concerned with a range of economic and public interests and activities associated with forest lands. These include timber, trapping, fishing, recreation, water quantity and quality, wildlife habitat, wilderness and aesthetics and erosion control. The management of forestry resources related to timber harvesting is characterized by a system of interlocking rights and obligations between provincial and federal governments, and timber harvesters. This system of resource management is based most frequently on tenure and licensing agreements.

4.8.

Tenure and licensing agreements vary from province to province, but they are all similar in that they are a complex bundle of rights and obligations, containing at a minimum: (a) the right to harvest standing timber on Crown land or "stumpage"; (b) service and maintenance obligations on the part of the concern, such as road-building and maintenance, and protection against fire; (c) implementation of forestry management and conservation measures, including silviculture and reforestation; and (d) payment of a volumetric "stumpage charge ", levied upon the exercise of the harvesting right.

4.9.

"Stumpage", as a right to exploit an in situ natural resource, takes two forms in Canada: a servitude referred to as a profit à prendre and a licence to harvest standing timber. Both rights are in respect of specified provincial Crown lands. A profit à prendre is a form of property right that conveys a non-possessory interest in the land to the recipient. Similarly, 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. Other related forms of rights include: mineral servitudes, mineral entry, timber easements, licensing quotas to harvest fish, and rights of access to exploit inland water currents for use in irrigation or electrical power generation.

4.10.

By the terms of Articles 10 and 32.1 of the SCM Agreement, to be countervailable a practice must satisfy the definition of "subsidy" in Article 1.1. Where an investigating authority determines the existence of a subsidy in respect of a measure that does not fit within the terms of Article 1, that determination is not in accordance with the terms of the SCM Agreement and is, accordingly, in violation of Articles 10 and 32.1 of the Agreement. Article 17.1(b) specifically provides that provisional measures may be imposed only if "a preliminary affirmative determination has been made that a subsidy exists". (emphasis added).

4.11.

Article 1 of the SCM Agreement sets out an exclusive definition for what constitutes a subsidy for the purposes of the SCM Agreement. The Appellate Body recognized in Brazil – Export Financing Programme for Aircraft that a subsidy as defined by Article 1 has two discrete elements: (i) a financial contribution that (ii) confers a benefit. The panel in Export Restraints noted that the definition of "subsidy" in Article 1 reflects the Members’ agreement not only as to the types of government action subject to the SCM Agreement, but also that not all government actions that may affect the market come within the ambit of the SCM Agreement.

4.12.

Under Article 1.1(a)(1)(iii) of the SCM Agreement, a financial contribution exists where a government provides goods. The ordinary meaning of "goods" is "tangible or movable personal property other than money; [especially] articles of trade or items of merchandise ‹goods or services›". Nothing in the context of the SCM Agreement in any way detracts from or expands this ordinary meaning. A good is a good, a product, something on the cross-border trade of which tariffs may be imposed.

4.13.

This is confirmed by the negotiating history related to the measurement of a benefit. On 4 September 1990, the Chairman of the Negotiating Group on Subsidies and Countervailing Measures circulated seven "informal discussion papers" in preparation for issuing a revised version of the Chairman’s text. Discussion Paper No. 6 dealt with the measurement of the amount of a subsidy and offered draft language for the current Article 14. Draft Article 14.4(a), as set out in Discussion Paper No. 6, reflects an understanding at the time of the negotiations on the SCM Agreement of the fundamental difference between tangible commercial inputs and intangible real property rights. This draft provided in relevant part that "the amount of subsidy arising from government provision of goods, services, or extraction/harvesting rights …" (emphasis added). The terms "or extraction/harvesting rights" are nowhere found either in the final text of Article 1.1(a)(1)(iii) or in the final text of Article 14(d) of the SCM Agreement. This confirms that rights, such as profits à prendre, are not included within the scope of the Agreement.

4.14.

The USDOC simply asserted that stumpage is a financial contribution in the form of a provision of goods or services. It did not declare itself as to whether, in its view, stumpage is the provision of "goods" or "services". The petitioner in Lumber IV, however, has argued that stumpage is the provision of goods ("wood fiber") in the form of timber or logs. Canada therefore understands the USDOC to have determined that stumpage is "the provision of goods".

4.15.

The USDOC also made no attempt to examine the evidence on the record and did not analyse how property rights, such as profits à prendre and timber harvesting licenses, are a "financial contribution" under Article 1.1. Properly understood, profit à prendre and the license to harvest standing timber is not the provision of "goods" within the meaning of Article 1. These rights are not in themselves goods or services. As a simple factual matter, "stumpage" – the right to harvest standing timber – is not a log. "Stumpage" is instead the right to exploit an in situ natural resource, akin to the right to extract oil and minerals from public lands, quotas to harvest fish from a country’s territorial waters, or the right of access to exploit inland water and water currents for use in irrigation or electrical power generation. To determine otherwise is to expand the scope of "provides goods" and, therefore, the SCM Agreement beyond all recognition.

4.16.

Timber harvesters have the right to harvest timber from Crown lands by virtue of their tenures or licenses; they do not pay stumpage charges as remuneration to acquire this right. Rather, a "stumpage charge" is a levy on the exercise of an existing right to harvest timber. It is properly viewed as a form of revenue collection by the government and is the economic equivalent of a tax.

4.17.

The USDOC erred in determining that "stumpage" is a "financial contribution". On a plain reading of Article 1.1(a)(1)(iii), the term "provides goods" cannot be interpreted to include the granting of rights such as "stumpage". Since stumpage is not a "financial contribution" and, therefore, not a subsidy as defined in Article 1.1, the determination by the USDOC that it is a subsidy and the imposition of provisional countervailing measures as a result, violates Articles 10, 17.1(b), 17.5, 19.4 and 32.1 of the SCM Agreement and Article V1:3 of GATT 1994.

4.18.

The USDOC’s use of "cross-border" benchmarks to find and measure "benefit" violates the SCM Agreement. Nothing in the SCM Agreement permits the USDOC to do so; indeed, the text, context, and Appellate Body interpretations of Articles 1 and 14 indicate that such an analysis violates the SCM Agreement.

4.19.

The USDOC purported to establish that Canadian stumpage practices conferred a benefit by comparing: stumpage charges levied by Canadian provinces with stumpage prices on selected state lands in the United States, on the basis that such prices are "commercially available world market prices…" to softwood lumber producers in Canada. The USDOC found US stumpage prices to be higher than the charges levied by Canadian provinces. the USDOC then multiplied this difference by what it considered the portion of the provinces’ harvest consumed in sawmills to arrive at the calculated amount of the "stumpage subsidy". The "stumpage subsidy" was wholly derived from the comparisons of stumpage charges in Canada and cross-border prices for stumpage in the United States.

4.20.

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". In Canada – Aircraft, the Appellate Body stated that "the word ‘benefit’, as used in Article 1.1(b), implies some kind of comparison… [since] there can be no "benefit" to the recipient unless the "financial contribution" makes the recipient "better off" than it would otherwise have been, absent that contribution." In the case of a government provision of goods, the question is therefore whether the purchaser of a good from the government is "better off" than other purchasers who buy the same good from other sellers in the country subject to the investigation.

4.21.

This is confirmed by Article 14(d), which sets out guidelines to calculate the amount of a subsidy based on a "benefit to the recipient" test in cases of an alleged government provision of goods. It provides in particular that, "[t]he adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase" (emphasis added). The words of Article 14(d) are unambiguous. "In the country of provision or purchase" means "in the country of provision or purchase." It does not mean adequacy can be determined as against prevailing market conditions in some other country or internationally. Nothing in the context, object and purpose or the negotiating history of Article 14 permits reading "in"as anything other than "in"; "in the country" does not admit of "cross-border" analysis. A cross-border analysis using transactions in another country to determine the existence of and measure a "benefit" is thus inconsistent with Article 1 and Article 14 as interpreted by the Appellate Body, and viewed in context and in the light of the object and purpose of the SCM Agreement.

4.22.

The USDOC’s cross-border analysis is illogical even in the context of its own previous determinations. In each of the prior lumber cases – Lumber I, Lumber II and Lumber III – the USDOC rejected the use of cross-border comparisons for a number of reasons, including the USDOC’s view that they are "arbitrary and capricious".

4.23.

By using a benchmark in the United States, outside the country of the alleged provision of goods, the United States breached its obligations under Article 14 of the SCM Agreement. The USDOC’s finding of a subsidy based on criteria not permitted by the SCM Agreement is also inconsistent with US obligations under Articles 10, 17.5, 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994. Furthermore, the United States violated Article 17.1 of the SCM Agreement by imposing provisional measures with respect to a practice that is not a subsidy.

4.24.

The USDOC also impermissibly assumed a pass-through of an alleged benefit. In the preliminary determination, the USDOC found that the alleged "financial contribution" to timber harvesters conferred a benefit on softwood lumber producers. This presumption that the alleged benefit to timber harvesters passes through to lumber producers, without a determination that this did, in fact, occur, is inconsistent with the SCM Agreement.

4.25.

In Canada, standing timber is harvested and processed into logs. Logs are then usually processed in sawmills and pulp mills to produce a wide variety of products including softwood lumber. Lumber may be sold as an end product or sold to remanufacturing industries that make a vast array of products. Both softwood lumber and remanufactured products, but not logs, are subject to the US investigation. A significant portion of harvesting is done by entities operating at arm’s-length from lumber producers; in these instances, logs are sold to lumber producers and other industries in arm’s-length transactions.

4.26.

A countervailing duty may be imposed only where all the elements of a subsidy have been established. A subsidy is exhaustively defined in Article 1 of the SCM Agreement. A direct subsidy exists where a financial contribution confers a benefit to the recipient of that contribution. The criteria for an indirect subsidy are found in Article 1.1(a)(1)(iv) of that Agreement. In the context of Article 1.1(a)(1)(iii), i.e. where the alleged financial contribution is the government provision of goods, an indirect subsidy may be found only where a private entity is entrusted or directed by government to provide these goods in a manner that confers a benefit. Thus, where the recipient of a subsidy (whose products are not subject to the investigation) enters into transactions with other entities, an investigating authority may not assume that the subsidy has been passed on, or if so, that the recipient was entrusted or directed by government to pass it on. Rather, the authority must establish the existence of a subsidy in respect of the entity being investigated. This is especially the case where the transaction is at arm’s-length.

4.27.

The findings of the Appellate Body in British Steel are particularly relevant in this instance. There, the Appellate Body agreed with the Panel that "in order to determine whether any subsidy was bestowed on the production [of the subject merchandise], it is necessary to determine whether there was any "benefit" to [the recipient]." This included examining, on administrative review, the continued existence of any "benefit" already found to have been conferred by "financial contributions" pre-dating the privatization of the original recipient of those contributions. Moreover, this had to be done from the perspective of the producers of the imports subject to the review, not the producer that had been privatized prior to the review (i.e. whose imports were not subject to the review). Finally, in that case, the Appellate Body confirmed that where fair market value is paid on privatization, no previously conferred benefit could be passed through to the acquiring entity.

4.28.

The Appellate Body’s analysis in British Steel is even more apt in respect of original determinations where an investigating authority has the duty to establish each element of a subsidy. In such cases, the authority may find an "indirect" subsidy only where an indirect financial contribution has been found in the sense of Article 1.1(a)(1)(iv). The reason is simple. Where transactions take place in the market and at arm’s-length, and where there has been no "direction" or "entrustment", the original recipient of a subsidy must be presumed to have retained the benefit. Conversely, to assume pass-through in such arm’s-length transactions without establishing "direction" or "entrustment" in the sense of Article 1.1(a)(1)(iv) would nullify the clear meaning of that Article.

4.29.

Since the USDOC did not do any indirect subsidy or pass-through analysis, its finding of "benefit" is, on its face, incorrect and illegal. In the current investigation there are no allegations of direct stumpage subsidies to the subject merchandise, softwood lumber. Softwood lumber is processed from logs, and logs from standing timber; neither logs nor timber are within the scope of the investigation. Logs result from the harvesting of timber – the subject matter of stumpage, which is the allegedly subsidized economic activity. The alleged subsidies therefore are on log production.

4.30.

Lumber producers may not legally be deemed to be subsidized simply because of a finding of subsidization to upstream producers. Rather, to find that the downstream industries are subsidized, the USDOC must first establish an indirect financial contribution, and then demonstrate a benefit conferred upon the recipient by that contribution. The USDOC did not establish, as is required by the SCM Agreement, that any "financial contribution" by the government to timber harvesters had been "entrusted" or "directed" to be passed through to lumber producers or remanufacturers. It did not find that the alleged benefit of the financial contribution in question was also passed through to and conferred upon lumber producers or remanufacturers (the producers of the subject merchandise within the scope of the investigation). The USDOC did not provide any analysis of either requirement of Article 1 in respect of the merchandise on which it imposed a countervailing duty. Afortiori, remanufacturers who buy lumber from lumber producers may not legally be presumed to have benefited from an alleged stumpage subsidy two transactions away.

4.31.

The USDOC has failed to establish the elements of a subsidy in respect of the subject merchandise by failing to demonstrate a pass-through of financial contribution and benefit. In imposing provisional measures on practices not properly found to be a subsidy, the United States has violated Articles 10, 17.1(b), 19.4 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994.

4.32.

The USDOC also impermissibly inflated the subsidy rate by calculating a "weighted-average country-wide rate" based upon only a portion of Canadian production and exports. Having determined that various federal and provincial programmes were subsidies, the USDOC calculated the subsidy rate by 1) for each provincial stumpage programme, dividing the total calculated stumpage benefit by the total value of the province’s production of softwood lumber and co-products by sawmills; and 2) for other provincial and federal programmes found to be countervailable, dividing the total calculated benefit by the value of sales (or exports, for an alleged export subsidy) of softwood lumber and co-products by sawmills for the relevant jurisdiction. In each case, the alleged benefit was the numerator, and the shipment value was the denominator of the calculation. The USDOC then weight-averaged the resulting provincial rates by the provinces’ relative shares of exports to the United States to arrive at a "country-wide" rate. In these calculations, the USDOC impermissibly excluded Maritime shipments from the total Canadian shipments used as the denominator for calculating certain federal programme rates and excluded Maritime exports in weight averaging provincial rates to construct a country-wide rate.

4.33.

Articles 17.2 and 19 (through Article 17.5) of the SCM Agreement, and Article VI:3 of GATT 1994 require the USDOC to estimate "the amount of the subsidy found to exist" so as to ensure it is representative of the actual subsidization. Accordingly, a "country-wide" countervailing duty rate must approximate the average rate of subsidization of the subject merchandise. This means that shipments of subject merchandise by any company in the country under investigation (including those companies that have been excluded from the investigation or countervailing duty order) must be included in calculating a country-wide rate. Exclusion of the Maritime Provinces’ shipments and exports from the calculation results in imposition of provisional measures "in excess of the amount of the subsidy found to exist."

4.34.

The impropriety of the USDOC’s country-wide subsidy rate calculation becomes all the more evident when it is considered that the USDOC relied on import statistics that included imports from the Maritimes to find evidence of causation of material injury or threat of material injury sufficient to initiate the investigation. The USDOC cannot now credibly exclude these Maritime shipments from the subsidy calculation. Likewise, the International Trade Commission based its preliminary determination of threat of material injury on its analysis of total imports of softwood lumber from Canada, including the Maritime Provinces. Article 17.1(b) of the SCM Agreement requires that provisional measures may be applied only if "a preliminary affirmativedetermination has been made that a subsidy exists and that there is injury to a domestic industry caused by subsidized imports." Here, the ITC made no finding of injury based solely on the subnational group of imports on which the USDOC calculated provisional duties.

4.35.

Since the preliminary determination inflates the weighted average country-wide subsidy rate in violation of Article 19.4 of the SCM Agreement and Article VI:3 of GATT 1994, the United States is also in violation of Articles 10 and 32.1 of the SCM Agreement.

4.36.

The USDOC also impermissibly applied provisional measures in excess of the subsidy preliminarily found to exist. In its preliminary determination, the USDOC found a net subsidy rate of 19.31 per cent ad valorem and stated that it was directing the US Customs Service ("Customs") to suspend liquidation of entries of subject merchandise and to require a cash deposit or bond in the amount of the subsidy found. It did not in fact do so, however. Instead, the USDOC calculated the subsidy rate on a first mill basis, but applied it on an entered value basis, with the effect of significantly increasing the provisional measures applied to a considerable portion of Canadian exports of softwood lumber to the United States.

4.37.

In all of the USDOC subsidy calculations, described above, the denominator of the calculation was the value of sawmill shipments or exports, i.e., the "first mill" value. Sawmills ("first mills") produce lumber from logs. They ship lumber to end users, and also sell some quantity of lumber to downstream value-added remanufacturers ("final mills") that use lumber inputs, produce further processed lumber products (of which some are within the scope of the investigation).

4.38.

A USDOC decision memorandum subsequently claimed that "[t]he record for the Preliminary Determination supports the collection of CVD deposits on an entered value basis" and the USDOC instructions to Customs referenced in the preliminary determination instructed Customs to require countervailing duty cash deposits or the posting of a bond without specifying that such provisional measures applied to the first mill value, thus ensuring application on an entered value basis. Thus, for example, where a 19 per cent duty calculated on first mill value is applied to the entered value (and, for illustration, assuming an import with first mill value of $100 and final mill or entered value of $125), the importer of the value-added product faces an actual duty not of 19 per cent but of 23.75 per cent of the first mill value.

4.39.

Articles 17.2 and 19.4 (through 17.5) of the SCM Agreement and Article VI:3 of GATT 1994 establish the fundamental obligation that a duty may not exceed the subsidy found to exist. In applying the preliminary determination on an entered value basis, the United States significantly increased the provisional measures in violation of Articles 17.2 and 19.4 of the SCM Agreement and Article VI:3 of GATT 1994.

4.40.

Commerce also made a preliminary critical circumstances determination as a result, the United States retroactively applied the provisional measures to entries occurring within 90 days prior to the date of publication of the preliminary determinations, i.e. entries from May 19 through 16 August 2001. The retroactive application of provisional measures is inconsistent with US obligations under the SCM Agreement. Even if such action were permitted under the Agreement, Commerce’s preliminary critical circumstances determination is itself inconsistent with US obligations under the SCM Agreement and GATT 1994.

4.41.

Under Article 20.6, "critical circumstances" exist only where four conditions are satisfied: (1) there is injury to the domestic industry that is difficult to repair; (2) such injury is caused by massive imports in a relatively short period; (3) such imports are of a product benefiting from subsidies paid or bestowed inconsistently with the provisions of GATT 1994 and of the SCM Agreement; and (4) retroactive assessment of definitive countervailing duties on those imports is necessary to preclude the recurrence of such injury.

4.42.

Even where these elements are present, Article 20.6 states that the type of duties that may be assessed are "definitive", not "provisional". The term "definitive" is defined as "having the function or character of finality" or "decisive", "conclusive" and "finally settled." Accordingly, the ordinary meaning of the provision prohibits any retroactive application of countervailing measures under the Article until after a final determination is made. This understanding of the meaning of the word "definitive" in Article 20.6 of the SCM Agreement is reinforced by the consistent distinction in the Agreement, for example in Articles 20.1 and 20.3, and 22.4 and 22.5, between "provisional measures" on the one hand and "countervailing duties" or "definitive duties" on the other hand. Despite the clear application of Article 20.6 to definitive countervailing duties and not provisional measures, Commerce acted otherwise.

4.43.

In its preliminary critical circumstances determination and related analysis, Commerce preliminarily determined that there had been "massive imports" of a product benefiting from a prohibited export subsidy. For Commerce, this was a sufficient basis to apply countervailing measures retroactively. Commerce recognized that the ITC had not considered (even preliminarily) the injury factors required to be considered under Article 20.6 of the SCM Agreement, and that "[f]or purposes of a final determination whether retroactive relief is warranted, other factors are considered by the ITC in its final determination". Nonetheless, Commerce applied its preliminary critical circumstances determination on a provisional basis. Since Article 20.6 permits the retroactive application of only definitive countervailing duties, and not provisional measures, for the reasons set out above, the United States has violated this provision.

4.44.

Moreover, since the investigation was initiated on 23 April 2001, Article 17.3 requires that provisional measures in this case not be applied sooner than 22 June 2001. However, the United States applied provisional measures as of 19 May 2001. Article 17.3 thus not only confirms that Article 20.6 does not permit the retroactive application of provisional measures, but to the extent the United States has applied such measures sooner than 22 June 2001, it has also violated Article 17.3 outright.

4.45.

Similar inconsistencies result under Article 17.4. This provision states that "[t]he application of provisional measures shall be limited to as short a period as possible, not exceeding four months." Pursuant to the preliminary determination, the United States has applied provisional duties to imports of softwood lumber from Canada for a period of four months, beginning on the date of publication of the determination on 17 August 2001 and ending 14 December 2001. However, in also retroactively applying provisional measures for the period from 19 May 2001 to 17 August 2001, the United States has applied provisional measures for a total of nearly 7 months. Here again, not only does Article 17.4 confirm that Article 20.6 does not permit the retroactive application of provisional measures, but to the extent the United States has applied such measures from 19 May 2001 through 14 December 2001, the United States has also violated Article 17.4 on its face.

4.46.

Even if provisional measures could be applied retroactively under Article 20.6, Commerce did not establish that "critical circumstances" exist in its preliminary critical circumstances determination. First, the IQ SMB Guarantee programme upon which the determination is based is not a prohibited export subsidy and even if it were, the amount of subsidy found for the programme was de minimis and thus did not provide the basis for a determination under Article 20.6. Assuming, arguendo, that the IQ SMB Guarantee loan guarantees programme conferred a "benefit", the programme itself is not contingent on exports from Canada. Record information demonstrated that the programme is contingent on developing markets outside Quebec, not outside Canada. Accordingly, for the purposes of Commerce’s investigation, the IQ SMB Guarantee programme is not "contingent on export performance" under Article 3.1(a) and the determination that the "massive imports" in question have benefited from "subsidies paid or bestowed inconsistently with the provisions of GATT 1994 and of [the SCM] Agreement" is flawed.

4.47.

Furthermore, a critical circumstances determination cannot be based on a prohibited subsidy of a negligible amount. Commerce found that the benefit from this programme was less than 0,005 per cent, i.e. a rate that is de minimis. A de minimis rate is insufficient to provide a basis for applying any countervailing measure (provisional or final). By its own terms, Article 11.9 of the SCM Agreement applies to any part of a countervailing duty investigation. Therefore, a determination under Article 20.6 is governed by the de minimis threshold under Article 11.9, since action under the former is based solely on a subsidy that is "paid or bestowed inconsistently with the provisions of GATT 1994 and of this Agreement" and not all alleged subsidy programmes under investigation. Since Commerce’s preliminary critical circumstances determination is based solely on the SMB Guarantee programme, which was not an export subsidy and was found to be de minimis, the United States has taken action under Article 20.6 in the absence of "critical circumstances", i.e. in violation of that provision.

4.48.

Second, even if the SMB Guarantee programme had correctly been found to be a prohibited export subsidy, the rate applicable to the retroactive measures should have been the rate attributed to this programme – less than 0,005 per cent – and not the rate attributable to all other alleged subsidies taken together – 19.3 per cent. The text of Article 20.6 does not refer to "massive imports" of a product benefiting from "any or all of the subsidies under investigation". The provision specifically refers to "subsidies paid or bestowed inconsistently with the provisions of GATT 1994 and of this Agreement". The text of Article 20.6 of the SCM Agreement and the logic behind it allow the retroactive application of only the rate that is commensurate with the benefit bestowed by the alleged prohibited subsidy. Furthermore, any countervailing measures applied under Article 20.6 must conform to the basic requirement under Articles 17.5 and 19.4 of the SCM Agreement and Article VI:3 of GATT 1994 that they may not exceed the amount of the subsidy found to exist, i.e. such measures can be in an amount no greater than that needed to offset the benefit conferred by the alleged prohibited subsidies found to exist. To do so at a higher rate would countervail in an amount in excess of that required to "preclude the recurrence of [the] injury" caused by such subsidies in "critical circumstances", the object and purpose of Article 20.6. In the instant case, the applicable rate was less than 0,005 per cent as opposed to 19.31 per cent.

4.49.

In applying provisional measures retroactively in the amount of 19.31 per cent, the United States has violated Article 20.6 of the SCM Agreement, as well as Articles 17.5 and 19.4 of the SCM Agreement and Article VI:3 of GATT 1994.

4.50.

Third, no countervailing measure, whether provisional or final, can be applied retroactively under Article 20.6 without the requisite injury findings and no such findings were made by US authorities. There is no dispute that the USDOC’s determination contains no finding on the two injury elements set out in Article 20.6 of the Agreement. First, neither the USDOC nor the ITC had found "injury which is difficult to repair" and neither the USDOC nor the ITC had determined that retroactive application of definitive countervailing duties was necessary "in order to preclude the recurrence of such injury". There can be no dispute on this point because the USDOC itself expressly stated that these determinations would be made by the ITC when the ITC made its final determination. Accordingly, in applying such countervailing measures retroactively under Article 20.6 without first making the requisite injury findings, the United States violated outright Article 20.6 of the Agreement.

4.51.

Fourth, the USDOC’s finding of "massive imports" (1) incorrectly attributed to all imports from Canada the alleged benefit conferred by the IQ SMB Guarantee programme, which applies only to shipments from Quebec and (2) attributed to an alleged export subsidy an increase in imports resulting from the impending and then actual expiration of the Canada-United States SoftwoodLumber Agreement (SLA).

4.52.

The USDOC determined that imports of softwood lumber from Canada had increased by 23.34 per cent in the three months following the filing of the petition compared to the previous three months and on this basis that the requirement of "massive imports" over a "relatively short period" of time had been satisfied. The SLA expired two days before the petition was filed, i.e. at the end of the first quarter of 2001. Its impending expiration sharply reduced exports in the first quarter of 2001 and its actual expiry led to an increase in the second quarter. These dramatic and well-documented trade trends were nonetheless attributed by the USDOC to the existence of a de minimis alleged export subsidy.

4.53.

Even assuming that the SMB Guarantee programme were a prohibited export subsidy, it is patently impossible to attribute the "massive imports" finding in this case, an increase of 23.34 per cent, to a programme that did not benefit any exports during the period of investigation – and in any event could have benefited only a small fraction of exports and only in an amount of less than 0,005 per cent. Since the United States has applied provisional measures retroactively in the absence of a valid finding of "massive imports", it has violated Article 20.6.

4.54.

Fifth, the USDOC’s finding of "massive imports" improperly excludes imports from the Canadian Maritime Provinces. If it is permissible, as the USDOC did, to include shipments that have not benefited from the prohibited subsidy, then it should include all such shipments and not simply the portions of those shipments that suit its needs. In this respect, the USDOC’s "massive imports" finding is defective also because it was "net of the Maritime Provinces", i.e. the USDOC excluded from any of its calculations imports from the Canadian Maritime provinces. Under various methods of calculating "massive imports", inclusion of exports from the entirety of Canada, including the exports from the Maritime Provinces, would have resulted in a negative "massive imports" finding under the SCM Agreement. There is no basis in Article 20.6 of the SCM Agreement for making a "massive imports" finding on the basis of only a segment of total imports.

4.55.

Article 19.3 of the SCM Agreement expressly requires Members to grant an expedited review to those exporters that were not individually investigated who have requested such a review, in order to establish an individual countervailing duty rate for that exporter. Article 21.2 requires the same for any interested party in cases of administrative review. The Agreement thus ensures that exporters and producers not individually investigated will nevertheless be able to obtain an individual countervailing duty rate if they so request. It also ensures that each exporter and producer is not subject to a duty rate higher than that called for in its individual circumstances. The United States has failed to implement these obligations in US law.

4.56.

Section 777A(e)(1) of the Tariff Act of 1930 establishes the general rule that the USDOC will determine an individual subsidy rate for each known exporter or producer of the subject merchandise. Where the application of the general rule is not practicable because of the large number of exporters or producers involved in the investigation, exception to this rule can be made under section 777A(e)(2)(A) and (B) of the Tariff Act of 1930 ("the Act"), as interpreted by the SAA. Under subparagraph (A), the USDOC can limit its examination to a statistically valid sample of exporters or producers or limit its examination to those exporters and producers accounting for the largest volume of exports of the subject merchandise that the USDOC determines can reasonably be examined. Under subparagraph (B), the USDOC can determine a single country-wide rate to be applied to all exporters and producers.

4.57.

The regulations implementing US obligations under the SCM Agreement regarding individual expedited and administrative reviews limit the availability of such reviews to instances where the USDOC has undertaken its investigation according to subsection (A) of section 777A(e)(2). The regulations limit the availability of expedited reviews and company-specific administrative reviews in cases where the USDOC elects to conduct its investigation on an aggregate "country-wide" basis. In such cases, the USDOC must deny individual exporters the benefit of company-specific expedited reviews and administrative reviews.

4.58.

In the case of individual expedited reviews, section 351,214(k)(l) provides for a request for individual expedited review only if "the Secretary limited the number of exporters or producers to be individually examined under section 777A(e)(2)(A) of the Act" (i.e. by sample or by taking account of those exporters and producers accounting for the largest volume of exports). Significantly, this is the case as soon as the initial decision is made as to how the investigation is to be conducted. In the case of administrative reviews, subparagraphs (1), (2) and (3) of section 351,213(b) each expressly bar the request by an foreign government, exporter, or importer of record for an individual administrative review where the "investigation or prior administrative review was conducted on an aggregate basis". Moreover, the only requests the USDOC will consider for an individual administrative review in cases where administrative reviews are conducted on a country-wide basis are those for individual assessment and cash deposit rates of zero under subparagraph (1) of section 351,213(k) and then, "only to the extent practicable." Section 351,213(k)(2) provides, however, that if, in the review, the USDOC calculated a country-wide rate, "that rate will supersede, for cash deposit purposes, all rates previously determined in the countervailing duty proceeding in question."

4.59.

This result is inconsistent with the obligations of the United States under the SCM Agreement. Article 19.3 provides that exporters not "actually investigated" are entitled upon request in all cases to an expedited review "in order that the investigating authorities promptly establish an individual countervailing duty rate for that exporter". Article 21.2 entitles exporters and producers to a company-specific administrative review upon request in all cases. This ensures that exporters and producers not given an individual rate during the countervailing duty investigation will be given one in an administrative review. This also means that exporters and producers already given an individual rate during the investigation, may be given an individual rate again in an administrative review. Nothing in the context or object and purpose of these provisions or indeed the SCM Agreement in any way modifies the nature of these obligations. Accordingly, section 351,214(k)(l) of the regulations violates Article 19.3 of the Agreement and section 351,213(b) violates Article 21.2.

4.60.

Section 351,213(b) on administrative reviews also violates US obligations regarding expedited reviews under Article 19.3. Under the US retrospective duty system, final liability for countervailing duties is not determined until the administrative review. Section 351,213(b) specifically denies exporters and producers an administrative review if the investigation was conducted on an aggregate basis. This means that an exporter or producer would still be denied the opportunity to obtain a final individual countervailing duty rate contrary to Article 19.3, even if it were given the right to an expedited review to establish an individual cash deposit rate.

4.61.

Finally, since section 351,213(k)(2) mandates that the single country-wide countervailing duty rate calculated by the USDOC in an administrative review must supersede all individual rates previously determined, this provision violates both Article 19.3 and Article 21.2. First, mandating that a single country-wide rate supersedes all individual rates effectively undoes the benefit of any expedited review that an exporter or producer may have been granted by the USDOC pursuant to an investigation conducted under section 777A(e)(2)(A). Second, it prevents exporters and producers from obtaining an individual rate in an administrative review if that review is conducted on an aggregate basis.

4.62.

The USDOC decided to conduct the Lumber IV investigation on a country-wide basis. Three consequences flow from this decision. First, by operation of the regulations, exporters and producers involved in the investigation are denied expedited reviews and company-specific administrative reviews, in violation of Articles 19.3 and 21.2 of the SCM Agreement. Second, in this case, the USDOC will, as a result, impose a countervailing duty in excess of the amount of the subsidy found. This is because a country-wide rate necessarily imposes a duty on some exporters and producers in excess of what would be their individual duty rate. The United States therefore also violates Article 19.4. Third, as a consequence, the United States also violates Articles 10 and 32.1 of the SCM Agreement.

4.63.

The US failure to provide for expedited reviews and company-specific administrative reviews in all cases means that the United States has failed to ensure the conformity of its laws, regulations and administrative procedures with its obligations under the SCM Agreement. Thus the United States should also be found in violation of its obligations under Articles XVI:4 of the WTO Agreement and Article 32.5 of the SCM Agreement.

4.64.

The following are the arguments of the United States in its first written submission.

4.65.

"No Member should cause, through the use of any subsidy..., adverse effects to the interests of other Members, i.e.... injury to the domestic industry of another Member...."⁶ That obligation is the core of the dispute now before the Panel. When one Member causes injury to the domestic industry of another Member through the use of any subsidy, the injured Member has the right to take countervailing measures.

4.66.

The United States has acted entirely within its rights under the SCM Agreement in this case by taking provisional countervailing measures to offset the injurious subsidies that Canada provides to its lumber mills. Canada’s claims to the contrary are without merit. Canada is asking this Panel to ignore the text of the SCM Agreement and create exceptions to the subsidy disciplines for Canada’s decades-old system of subsidies to its lumber industry. In addition, Canada’s claims of WTO-inconsistent US laws are, in reality, an effort to resolve a future dispute that may never occur. Therefore, consistent with the SCM Agreement and the DSU, the United States asks the Panel to reject Canada’s claims.

4.67.

On 17 August 2001, the USDOC published its preliminary determination, which contained a preliminary affirmative countervailing duty determination and a preliminary affirmative finding of critical circumstances. In the preliminary determination, the USDOC preliminarily found that provincial stumpage programmes in Canada provided a countervailable subsidy to Canadian lumber producers. In addition, the USDOC found reasonable cause to believe or suspect that critical circumstances existed based on evidence that lumber producers received prohibited export subsidies and that there were massive imports of the subject merchandise over a relatively short period of time.

4.68.

Accordingly, the USDOC imposed provisional measures (i.e., suspension of liquidation and posting of security in the form of cash deposits or bonds), effective on the date of publication of the preliminary determination, i.e., 17 August 2001. In light of the affirmative finding of critical circumstances, the USDOC ordered provisional measures applied to entries of the subject merchandise made during the period 90 days prior to the date of the publication of the preliminary determination.

4.69.

Article 11 of the DSU 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 SCM Agreement upon which the claim is based. Panels cannot add to or diminish the rights and obligations provided in the SCM Agreement.

4.70.

A panel does not conduct a de novo review of the evidence nor substitute its judgment for that of the competent authority. Moreover, the sufficiency of the evidence in this case should be judged in relation to the particular measure that Canada has challenged. It is important to bear in mind the preliminary nature of the determination at issue. The consistency of a preliminary determination with the obligations imposed on Members should be based on the record evidence before the authority at the time the determination was made.

4.71.

Canada, as the complainant, bears the burden of coming forward with evidence and argument that establish a prima facie case of a violation. If the balance of evidence is inconclusive with respect to a particular claim, Canada must be held to have failed to establish that claim.

4.72.

The Canadian provincial governments own approximately 90 per cent of the forested land in Canada ("Crown land"), and the provincial governments control access to the timber on Crown land. The provinces enter into contractual arrangements that allow companies to harvest the timber on Crown land in exchange for an administratively set stumpage fee and the assumption of certain forest management obligations associated with harvesting operations. To be awarded such a contract, normally the company must either have a Canadian lumber mill, or have an agreement with a Canadian lumber mill to process all of the harvested timber. The vast majority of the Crown timber is awarded under long-term contracts that are not subject to competition (these contracts are usually referred to as tenures), with the fees set administratively by the provincial government.

4.73.

In the preliminary determination, the USDOC concluded that these Canadian provincial "stumpage programmes" constitute a financial contribution because they provide a good to lumber producers within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. That good is timber.

4.74.

Article 31 of the Vienna Convention on the Law of Treaties, which reflects customary rules of interpretation of public international law, states that a treaty shall be interpreted "in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose." Article 1.1 of the SCM Agreement defines a subsidy as a "financial contribution" by a government that confers a benefit. Article 1.1(a)(1)(iii) states that a financial contribution shall be deemed to exist where, inter alia, the government "provides goods or services other than general infrastructure." The SCM Agreement does not specifically define the meaning of "provides" or "goods." The Panel should look to the ordinary meaning of these terms.

4.75.

The New Shorter Oxford English Dictionary defines "provides" as meaning, among other things, to "supply or furnish for use." Black’s Law Dictionary defines "goods" as specifically including "growing crops, and other identified things to be severed from real property." Provincial stumpage programmes therefore constitute a "financial contribution" because they "supply or furnish" an "identified thing to be severed from real property," i.e., timber.

4.76.

The text of Article 1.1(a)(1)(iii) does not contain any exclusions for natural resources, nor can such an exclusion be read into the text. To the contrary, the Members evidently considered exceptions, and the sole exclusion from the phrase "goods and services" that they agreed on is reflected in Article 1.1(a)(1)(iii) itself, i.e., general infrastructure. It would be extraordinary if the Members intended sub silentio to provide a safe harbour for a broad group of government subsidies. Rather, this sole, express exclusion demonstrates that the Members intended to include all other goods and services.

4.77.

Canada argues that provincial governments are not providing timber to lumber producers, but rather are merely granting the right to harvest the timber. There is, however, no meaningful distinction between providing the right to harvest timber and providing the timber itself. The provincial stumpage systems are designed for one purpose: to provide timber to Canadian mills that make lumber or wood pulp. Participation in these programmes is restricted to Canadian sawmills or pulpmills, or companies that have contracts with Canadian mills to process the harvested timber. Furthermore, each of the provincial stumpage programmes charges the tenure holder on a "volumetric" basis. Tenure holders do not pay stumpage fees for timber that they do not harvest. In light of these facts, it is obvious that the provincial governments are providing timber through these stumpage systems.

4.78.

Moreover, the New Shorter Oxford English Dictionary defines "provides" as meaning to "make available" in addition to "supply or furnish for use." Thus, even if provincial tenures are viewed as simply providing the right to take timber off the land 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 Agreement because the government is making the timber available. Therefore, the USDOC’s preliminary determination that provincial stumpage programmes constitute the provision of a good is entirely consistent with the text of Article 1.1(a)(1)(iii) of the SCM Agreement.

4.79.

The USDOC’s Preliminary Determination is also consistent with the context, object and purpose of Article 1.1(a)(1)(iii). The object and purpose of the SCM is to impose multilateral disciplines on subsidies because of the "the trade-distorting potential" of government largesse. It is evident from Article 1.1 that the Members recognized that governments have a variety of mechanisms at their disposal to confer an advantage on specific domestic enterprises or industries and that they intended to bring those mechanisms within the disciplines of the Agreement. Article 1.1(a)(1)(iii) should be interpreted in that context.

4.80.

If the major input for a product is a natural resource – timber, bauxite, iron ore – a government that provides the natural resource to producers has the ability, depending upon the price charged, to provide an advantage that would not otherwise be available in the market. Canada’s attempt to exempt such potentially market-distorting government practices from the disciplines of the SCM Agreement has no basis in the text of the Agreement and is entirely at odds with its object and purpose.

4.81.

The Canada Aircraft panel stated that authorities must "determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution."⁷ In this case, the USDOC used market stumpage prices from comparable regions of the United States, adjusted as appropriate, as the benchmark price to determine whether the stumpage programmes administered by the Canadian provincial governments provided timber to lumber producers on a more favorable basis than the marketplace would provide. The USDOC declined to use non-government prices between buyers and sellers within each province as the benchmark prices because provincial government sales constitute the overwhelming majority of timber sales in each of the provinces. As a result of the provincial governments’ dominance of the timber market, the USDOC could not conclude that non-government prices within the provinces were unaffected by the very distortion a market benchmark price is intended to measure, i.e., that they reflected the market "but for" the government financial contribution.

4.82.

The USDOC’s decision to use a US benchmark is consistent with Article 14 of the SCM, which sets forth guidelines for measuring the amount of the benefit to the recipient of a government’s financial contribution. Article 14(d) states that "the provision of goods... by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration.... The adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision... (including price, quality, availability, marketability, transportation and other conditions of purchase or sale)."⁸

4.83.

The dictionary definition of "in relation to" is "with reference to." Thus, under Article 14(d), the prevailing conditions in the country of provision are a reference point, not necessarily an end point, for the market benchmark. The proper benchmark measures the market but for the financial contribution. Thus, the issue is finding a market benchmark with reference to what the "in country" market would be but for the subsidy. It would therefore be improper to look outside a country simply to determine what the market value of a good is elsewhere in the world. It is, however, entirely proper to do so if one can use such prices, properly adjusted, to determine the market value of the good in the country under investigation.

4.84.

Moreover, Article 14(d) states that the "prevailing market conditions" to be taken into account are the conditions of purchase or sale. Therefore, when read in context, "in relation to prevailing market conditions" requires the authority to determine the adequacy of remuneration with reference to market prices for transactions that, while not necessarily between buyers and sellers within the country of provision, are (or could be adjusted to be) comparable to the government transactions at issue with respect to the conditions of purchase or sale in the market.

4.85.

The "in relation to" language in Article 14(d) demonstrates the Members’ intent to provide more flexibility in the selection of market benchmarks for determining the adequacy of remuneration for the provision of goods and services. This flexibility is evident elsewhere in the Agreement. The "market," as generally referred to in the Agreement, is not restricted to the exporting country, but rather encompasses the entire market available to the subsidized producer or exporter. For example, Article 14(b) refers to comparable commercial loans available to the firm "on the market." In Canada Dairy, the Appellate Body recognized this flexibility, confirming that "[w]orld market prices do... provide one possible measure of value of milk to producers" in Canada.⁹

4.86.

Limiting the benchmark to the exporting country’s market would also seriously undermine the object and purpose of the SCM Agreement generally, and Articles 1.1(b) and 14(d) specifically. If the government were the sole provider of a good in the exporting country, for example, there would be no non-government benchmark prices in the exporting country to use as a point of reference and it therefore would be impossible to determine that the government had provided a benefit – even if it provided the good for a fraction of its value.

4.87.

The trade-distorting potential of the government’s provision of a good can be identified only by reference to an independent market price, i.e., a price that is unaffected by the very trade distortion the test is designed to identify. If the comparison price were entirely, or almost entirely, dependent upon the government price, as in the case where the government sales overwhelmingly dominate the market, the analysis would become circular because the benchmark price would reflect the very market distortion that the comparison is designed to detect. Using prices largely dictated by the government to measure the adequacy of government prices would therefore defeat the purpose of Article 14.

4.88.

Whether a particular market benchmark price for the adequacy of remuneration is consistent with Article 14(d) must depend upon the facts of the particular case. Canada has failed to make a prima facie case that the USDOC’s use of stumpage prices for comparable US forests, adjusted to take into account differences in the conditions of sale (i.e., in relation to prevailing market conditions) in the Canadian timber market, is per se inconsistent with Article 14(d) where the government sales dominate the Canadian market. To the contrary, the USDOC properly determined that US stumpage prices, as adjusted, represent prices under prevailing market conditions in Canada. The adjusted US prices represent an appropriate measure of what Canadian prices would be but for the subsidy.

Exclusion of Maritime Lumber

4.89.

The investigation in this case initially covered softwood lumber products from all Canadian provinces. After receiving comments from Canada, however, the USDOC subsequently excluded from the investigation imports of softwood lumber products produced in the Canadian Provinces of New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland (the "Maritime Provinces") from timber harvested in the Maritime Provinces ("Maritime Lumber").

4.90.

In accordance with its aggregate methodology, the USDOC then calculated a single, country-wide rate based on the ratio of the total subsidy provided to producers of the subject merchandise to the total sales of the subject merchandise. In this calculation, neither the numerator nor the denominator included the excluded Maritime Lumber because Maritime Lumber was not subject merchandise, i.e., it was not within the scope of the investigation. Canada’s alternative methodology would require the USDOC to allocate some portion of the aggregate subsidy found for subject merchandise to non-subject merchandise. The result of such a calculation would be a rate that would require the United States to impose duties in an amount less than the subsidy found to exist with respect to the subject merchandise. Articles VI:3 and 19.4 do not require such a result.

Total Value of All Sales that Canada Provided

4.91.

The Panel should review the WTO consistency of the USDOC’s preliminary determination based on the record before the Department at the time the determination was made. The record at the time of the preliminary determination establishes that the USDOC used in the denominator of its subsidy calculations the amount that Canada reported in its questionnaire response as the total value of softwood lumber sales, including all sales of first-mill lumber products and remanufactured products.

4.92.

After the publication of the preliminary determination, Canada asserted, for the first time, that the total amount reported in its questionnaire response as the total value of softwood lumber sales did not, as indicated in its questionnaire response, include the value of remanufactured lumber shipments. Whatever the merits of this late claim by Canada that the data it submitted did not include sales of "remanufactured" products, that question is not before this Panel. Factual determinations should be reviewed "as perceived by the [administering authority] at the time it made its determination based upon the record before it...."¹⁰

4.93.

The stumpage subsidies at issue in this case are direct subsidies. As noted above, the provincial governments enter into tenure contracts with producers of the subject merchandise. As a general matter, there is no "private body" intermediary between the government and the recipient, as that term is used in Article 1.1(a)(1)(iv). Therefore, the provisions of Article 1.1(a)(1)(iv) do not apply to this case.

4.94.

Furthermore, nothing in the SCM Agreement precludes a Member from issuing a preliminary determination and imposing provisional measures based on data establishing the total amount of the subsidy that the government provides to the subject merchandise. Although company-specific subsidy calculations may be preferred, they are not required. Canada does not contest this point.

4.95.

The SCM Agreement simply requires that the countervailing duty rate applied not exceed the subsidy found to exist. As explained above, the USDOC in this case properly determined that Canadian federal and provincial governments provided subsidies to producers and exporters of softwood lumber, and properly calculated a country-wide subsidy rate based on the total amount of the subsidy preliminarily found to exist for the subject merchandise.

4.96.

The Panel should reject Canada’s argument that the USDOC should have conducted a "pass-through" analysis. While such an analysis might be relevant for purposes of determining the level of subsidy received by a specific producer or exporter, no producer or exporter-specific subsidy rates are calculated in an aggregate investigation. The USDOC did not collect company-specific information, and Canada neither objected to the aggregate approach taken in this case nor recommended a company-specific approach. Nor did Canada supply any company-specific data to support is claim of the necessity of a "pass-through" analysis.

4.97.

As an initial matter, the United States notes that the USDOC issued a final negative critical circumstances finding in this case. The USDOC’s preliminary critical circumstances finding is no longer of any practical consequence; retroactive provisional measures have been terminated and no retroactive assessment will be imposed. The Panel therefore should not address Canada’s critical circumstances claim because it is not "necessary to resolve the particular matter."¹¹ In this case, the normal course of the investigative process has resolved Canada’s critical circumstances claim and has provided Canada with the relief it seeks.

4.98.

If the Panel decides to resolve this issue on the merits, it should conclude that Canada has failed to make a prima facie case that the USDOC’s preliminary critical circumstances finding was inconsistent with the SCM Agreement.

4.99.

The USDOC’s imposition of provisional measures on merchandise entered during the 90-day period prior to the publication of the preliminary determination is consistent with the text of Article 20 of the SCM Agreement, as well as with its object and purpose. Article 20.1 generally provides that provisional measures and final countervailing duties shall only be applied prospectively, i.e., to products that enter for consumption after the date of the preliminary determination under Article 17.1 or the final determination under Article 19.1, respectively. This rule, however, is not absolute. Article 20.1 expressly provides that the prospective application of provisional measures and final duties is "subject to the exceptions set out in this Article."

4.100.

Article 20.6 of the SCM Agreement provides that a Member may assess final, definitive duties retroactively for a period "not more than 90 days prior to the date of application of provisional measures," if critical circumstances are present. Article 20.6 is intended specifically to provide retroactive relief in a "critical" situation. At the time of the preliminary determination, there may be a reasonable basis to believe or suspect that such a situation exists. However, retroactive assessment of definitive duties cannot be ordered until a final determination has been made many months later, following a full investigation. Absent suspension of liquidation, entries made 90 days prior to the preliminary determination might be liquidated during the intervening period. If the entries are liquidated, the possibility of retroactive relief, even though fully warranted, no longer exists.

4.101.

Articles 17 and 20 of the SCM Agreement do not intend such an outcome. Article 17 of the SCM Agreement provides for the imposition of provisional measures to preserve a Member’s right to relief once there is sufficient evidence to determine preliminarily that such relief is warranted. Retroactive provisional measures are essential to enable a Member to avail itself of the special remedy provided under Article 20.6. Therefore, Article 20.1 should be interpreted as providing for retroactive provisional measures where there is preliminary evidence of critical circumstances. A contrary interpretation would render Article 20.6 a nullity.

4.102.

In order to find critical circumstances pursuant to Article 20.6 of the SCM Agreement, the authority must determine that there have been "massive imports" within a relatively short period, and that the imported product benefitted from "subsidies paid or bestowed inconsistently" with the SCM Agreement. The USDOC’s preliminary finding of critical circumstances satisfied each of these requirements. An objective review of the facts in this case demonstrates that the USDOC had a reasonable factual basis to preliminarily determine that a Canadian province provided an export subsidy, which is prohibited under Article 3.1 of the SCM Agreement, and that imports of softwood lumber from Canada had increased more than 23 per cent over the base period. Moreover, the ITC preliminarily found that imports of softwood lumber from Canada were injuring the US industry before the USDOC made its preliminary critical circumstances determination. This preliminary injury determination, together with the evidence concerning prohibited subsidies and massive imports described above, constituted sufficient evidence to take the limited step of imposing provisional measures retroactively, pending the outcome of the full investigation.

4.103.

Under established WTO jurisprudence, a Member’s law violates that Member’s WTO obligations only if the law mandates action that is inconsistent with those obligations. If the law provides discretion to authorities to act in a WTO-consistent manner, the law, as such, does not violate a Member’s WTO obligations.

4.104.

None of the US laws that Canada challenges mandates that the United States take action inconsistent with its obligations under the SCM Agreement. US law gives the USDOC broad discretion to conduct reviews. Until the USDOC exercises that discretion in a particular case, any exploration of the issues raised by Canada would be hypothetical. That is particularly true in this case because aggregate cases are extremely rare.

4.105.

Section 777A of the Tariff Act of 1930, as amended (the "Act") implemented several changes to US law to meet obligations under the SCM Agreement by eliminating the presumption in favor of country-wide rates and establishing a general rule in favor of company-specific rates. Section 777A(e)(2) contains two exceptions to the general rule to address cases, such as the lumber case, where there is such a large number of exporters and producers that it is not practicable to investigate each company individually.

4.106.

Canada has not cited a single provision in the SCM Agreement that prohibits the investigative procedures set out in Section 777A(e)(2), and nothing in Section 777A(e)(2) limits the USDOC’s broad authority to conduct reviews. Canada has therefore failed to establish a prima facie case of a violation because it has utterly failed to establish that Section 777A(e)(2) is inconsistent with any provision of the SCM Agreement.

4.107.

The USDOC’s regulations governing expedited reviews do not cover aggregate cases. As noted above, aggregate cases are rare and, because they have only been used in cases involving industries with an extremely large number of producers and exporters, they present unique issues with respect to expedited reviews. Because these cases are so rare, the USDOC has not yet addressed these issues, by regulation or in practice.

4.108.

Section 751 of the Act gives the USDOC broad authority to conduct reviews. The fact that the USDOC has not elected to promulgate specific regulations for handling what could potentially be an extremely large number of expedited reviews in an aggregate case does not in any way diminish the Department’s statutory authority to conduct such reviews. Statutory authority is sufficient; regulations are not essential. Therefore, the fact that 19 C.F.R. § 351,214(k)(1) does not cover expedited reviews in aggregate cases does not in any way prohibit such reviews. The Panel therefore should reject Canada’s claim that 19 C.F.R. § 351,214(k)(1) mandates that the United States violate its obligation to provide expedited reviews.

4.109.

Section 751 of the Act also provides broad authority for the USDOC to conduct administrative reviews. Again, Canada erroneously concludes that the USDOC’s regulations limit that authority and require the Department to deny administrative reviews in aggregate cases.

4.110.

In its first oral statement, Canada made the following arguments.

4.111.

The complaint of Canada before this Panel involves three distinct sets of claims:

· first, the preliminary countervailing duty determination made by the US USDOC is inconsistent with US obligations;

· second, there is no basis in the SCM Agreement for retroactive application of provisional measures under a preliminary critical circumstances determination, and

· third, the denial of expedited reviews and company-specific administrative reviews where the USDOC conducts a country-wide investigation violates US obligations.

4.112.

These actions stem primarily from two US interpretations of the SCM Agreement that Canada believes are fundamentally wrong, and that have immense implications for Members’ rights to manage their natural resources. The first is an unwarranted reading by the USDOC of the agreed definition of "financial contribution". The second is the US determination that Canadian provincial stumpage programmes confer a "benefit".

4.113.

The repeated US assertion that the appropriate comparison for determining "benefit" is between provincial and selected US jurisdictions demonstrates that the US measures are a demand that Canadian forest management practices mimic their own. The United States assumes that any public ownership of forestry resources is subsidised and argues that only by auction is there any assurance that this will not occur. The WTO Agreement does not direct Members to abandon public ownership of their natural resources.

4.114.

The repeated references to the alleged "market distorting" effects of "stumpage" also indicate that the United States is arguing that any government action that might have the potential to distort trade is a subsidy under the SCM Agreement. This interpretation, however, was expressly rejected by the panel in Export Restraints.

4.115.

The panel in Export Restraints also found that the definition of "subsidy" in Article 1.1 reflects the Members’ agreement not only as to the types of government action subject to the SCM Agreement, but also that not all government action that may affect the market comes within its ambit.

4.116.

As noted in the first written submission "stumpage" is a right to harvest standing timber. Provinces grant these rights through tenures or through licences. Tenures and licences both carry with them a broad range of forest management responsibilities and significant in-kind costs.

4.117.

Timber harvesters have the right to harvest timber from Crown lands by virtue of their tenures or licences; they do not pay stumpage charges as remuneration to acquire this right. Rather, a "stumpage charge" is a levy on the exercise of an existing right to harvest timber. Stumpage charges are properly viewed as a form of revenue collection that is the economic equivalent of a tax.

4.118.

Tenures and licences both confer real property rights – the right to exploit a natural resource on public land. They are comparable in this respect to the licensing of quotas to harvest fish or the leasing of the right to extract oil or minerals from public lands. The United States nevertheless treats these rights to harvest standing timber as a financial contribution in the form of a "provision of goods". In so doing, the United States makes two fundamental errors.

4.119.

First, the ordinary meaning of the term "goods" refers to "articles of trade or items of merchandise " or "saleable commodities." The United States misinterprets the term "goods" by confusing it with the term "property". The United States found that property in its widest sense, includes all a person’s legal rights of whatever description. The issue, however, is not what property means – and certainly not what the term property might be construed to include in its widest meaning – but rather what "goods" means in the context of the SCM Agreement. The right to exploit an in situ natural resource – the right to harvest standing timber – is not a saleable commodity. It is not an article of trade or an item of merchandise and therefore it does not come within the meaning of "goods". The right to harvest standing timber is not "wood fibre" or logs, any more than a lease to develop petroleum resources is gas at the pump or the right to catch fish is tuna in a can.

4.120.

Indeed, this meaning of the term "goods" as articles of trade or saleable commodities is the only meaning that could have been intended by the negotiators of the WTO Agreements. As evidenced by the "General interpretative note to Annex 1A" to the WTO Agreement "goods" subject to GATT 1994 are those things in respect of which a tariff binding may be negotiated: in other words, tradable things. It follows that things that are inherently incapable of being traded across borders are not "goods". Accordingly, standing timber cannot be considered "goods" as it cannot be traded across borders.

4.121.

The second US error relates to the determination that a "financial contribution" occurs when a tenure holder exercises its right to harvest timber. This is confirmed by the USDOC’s finding in the preliminary determination that benefits conferred by the provinces’ administered stumpage programmes had been expensed in the year of receipt or when the timber was harvested. The USDOC has thus found that the "goods" were provided during the period of investigation when timber was harvested. The United States erred in its finding that a "financial contribution" under Article 1.1(a) occurred through the action of the alleged recipient, rather than in the action of a government as required.

4.122.

In addition, the claim by the United States that Canada has requested the panel to read a "safe harbour" into subparagraph (iii) misses the entire point to having an agreed definition of "subsidy" to define the scope of Members’ obligations under the SCM Agreement. The claim of the United States has no support in either the text of Article 1.1 or the negotiating history of Article 14. This confirms that real property rightswere not intended to be included within the scope of the Agreement.

4.123.

There are three fundamental problems with the USDOC’s use of cross-border price comparisons to determine whether a benefit has been conferred, and to calculate the alleged subsidy.

4.124.

First, Article 14(d) of the SCM Agreement requires that the adequacy of remuneration be determined in relation to prevailing market conditions for the good or service in question in the country of provision. This direction is unambiguous and nothing in the context, object and purpose or the negotiating history of Article 14 permits reading "in the country" in any other manner. In addition, the ordinary meaning, in context, of "prevail" is "exist". The reference to "prevailing market conditions" is, therefore, to conditions that actually exist in the country of provision and not to conditions that would exist only under hypothetical circumstances.

4.125.

The United States offers a number of interpretations of the term "in relation to" that would effectively read out the phrase "in the country", and would turn the mandatory "shall" into the discretionary "may". The United States also attempts to justify using prices in the United States as a benchmark by suggesting that US stumpage is available "in" Canada. It is clear that US stumpage is not available in Canada, because producers can harvest this timber only in the United States

4.126.

Second, Article 14(d) was drafted in this manner because cross-border comparisons make no economic sense. The mere fact that the domestic price in one country is lower than the price in another does not mean that the first country is providing a subsidy, because a wide range of complex political and economic factors may account for differences in prices between countries. These border-related differences make valid international comparisons substantially more difficult than comparisons within a province or a country. As well, the USDOC itself has repeatedly recognised the vast differences in natural and timber conditions that exist. These differences are so great that the USDOC rejected this methodology in all three of the previous Lumber cases, finding in one instance that such an analysis would be "arbitrary and capricious". These determinations were factual and all of the factors that led the USDOC to reject the use of cross-border comparisons in the past still exist today.

4.127.

Third, the USDOC’s reliance on cross-border benchmarks was based on unsubstantiated assertions that no in-country benchmarks were available. The USDOC asserted this without bothering to demonstrate that no valid benchmark existed "in" Canada. It simply presumed that provincial stumpage charges are distorted because most standing timber is harvested on provincial lands.

4.128.

In fact, the USDOC had compelling evidence before it related to private sales of timber harvesting rights, competitive tenures in certain provinces, and other evidence that provinces operate their stumpage systems on market terms. Instead of addressing this evidence, the USDOC simply asserted that stumpage fees on private lands are largely derivative of the public land prices. In the USDOC’s opinion this meant that stumpage fees on private lands were distorted by that very fact. Moreover, the USDOC’s purported rationale for moving to cross-border benchmarks, i.e., that there is distortion if the government does not auction timber harvesting rights, does not reflect its obligations under Article 14(d) – to determine if remuneration is "adequate".

4.129.

If cross-border comparisons were permitted, then the only way Canada would ever know whether it was conferring a "benefit" would be to examine prices and market conditions in other countries. This interpretation is unreasonable and unduly onerous. It would also be impossible for Canada to be certain that the benchmark examined would be acceptable to the investigating authority. The SCM Agreement contemplates no such thing.

4.130.

Under Article 1.1(a)(1)(iv), the USDOC must establish that any "financial contribution" by the government to timber harvesters had been "entrusted" or "directed" to be passed through to lumber producers. It also must establish that the alleged benefit of the alleged financial contribution was passed through to and conferred upon lumber producers and remanufacturers. It is not sufficient for the United States to simply assert, as it did here, that the subsidies at issue in this case are direct subsidies.

4.131.

In this case, there is no allegation of directsubsidisation in respect of the subject merchandise, which is softwood lumber. Softwood lumber is produced from logs, and logs are made from standing timber; neither logs nor standing timber are within the scope of the investigation. In fact, a significant amount of harvesting is done by independent entities operating at arm’s-length from lumber producers.

4.132.

The United States argues that it does not matter if some producers do not receive direct benefits because it is conducting a country-wide investigation. It is Canada’s position that lumber producers legally may not be deemed to be subsidised simply because of a finding of subsidisation to producers of the input product.

4.133.

This issue concerns two problems with the USDOC’s determination of the rate of subsidisation. The first is the effect of the exclusion of goods from Maritime Provinces in the preliminary determination on the calculation of a "country-wide" subsidy rate.

4.134.

A "country-wide" rate is precisely that: the average rate of subsidisation of the exported product. It is the total amount of a subsidy in a country divided by all shipments or exports to the investigating Member. When the USDOC disregarded unsubsidised Maritime shipments in calculating the country-wide duty rate, it calculated a country-wide duty exceeding the average country-wide level of subsidisation. The SCM Agreement requires that a countervailing duty rate not exceed the amount of the subsidy.

4.135.

The United States attempts to excuse its calculation by claiming, first, that its Maritime exclusion was a product exclusion for certain lumber produced in the Maritimes. In fact, the lumber is indistinguishable from other lumber and the exclusion was of the "Maritime provinces". More specifically, the exclusion is a partial exclusion of Maritime companies for lumber they produce from Maritime timber. This exclusion does not alter the proper method for calculating a country-wide weighted average subsidy rate.

4.136.

The United States’ second argument – that Canada simply misunderstood the US calculation methodology – is even further from the mark. This methodology is clearly flawed as it places the country-wide benefit in the numerator and only a portion of total shipments in the denominator.

4.137.

This is the second problem relating to the application of the effective rate of duty. The United States determined a subsidy rate of 19.31 per cent ad valorem, but it employed a different basis for calculating this rate than it later used in applying the duties. Accordingly, the provisional measures were effectively applied at a higher rate than 19.31 per cent.

4.138.

As stated in the preliminary determination, the United States calculated the amount of subsidy on a "first mill" basis. This means that the denominator of the calculation was the value of sawmill shipments, that is, the "first mills" that produce lumber from logs. The denominator did not include the value of shipments by secondary value-added producers of merchandise, or "final mills", that are also covered by the investigation.

4.139.

The United States now claims that, at the time of the preliminary determination, it did not know that the data that it used was first mill data. It further argues that statements by the USDOC indicating that it had used first mill data were "inadvertent" and that it was surprised to find out later that the data was first mill data. Finally, the United States asserts that that the panel must limit its analysis to evidence used by the importing Member in making its determination to impose the measure.

4.140.

These arguments are factually incorrect and cannot relieve the United States of its obligation, not to apply a duty that exceeds the subsidy found to exist. The data reported in the investigation was the same sawmill ("first mill") data that were provided and relied upon in all previous lumber investigations. Furthermore, by the time the USDOC issued its instructions to impose duties, it had received substantial information from Canada confirming that the data used was first mill data. Indeed, the United States acknowledges that Canada made this clarification, but it did not act upon the information. The US application of duties was inconsistent with its preliminary determination, and resulted in application of provisional measures in excess of the subsidy found to exist. As such, it violated Articles 17.2 and 19.4 of the SCM Agreement and Article VI:3 of GATT 1994.

4.141.

The preliminary critical circumstances determination imposed a retroactive duty liability going back 90 days that amounting to $300 million and violated the obligations of the United States under Article 20.6 of the SCM Agreement. This provision permits the retroactive application of "definitive duties" following a critical circumstances finding. Article 20 and the SCM Agreement both indicate that "definitive duties" are distinct from preliminary or provisional measures. In the proper context, the term "definitive duties" plainly refers to countervailing duties imposed following a final determination. Consequently, the United States may apply measures retroactively under a critical circumstances finding after it has made a final countervailing duty determination.

4.142.

The United States argues that it is permitted to make a preliminary critical circumstances determination and impose provisional measures retroactively. In support of its position, it relies on the findings of the Hot Rolled Steel panel and the object and purpose of Articles 17 and 20.

4.143.

The Hot Rolled Steel panel report concerned a preliminary determination of critical circumstances under Article 10.7 of the Antidumping Agreement. The panel confirmed the limited scope of its own findings by observing that measures taken under Article 10.7 were not based on the evaluation of the same criteria as final measures that may be imposed at the end of the investigation. As there is no provision that corresponds to Article 10.7 in the SCM Agreement; the Hot Rolled Steel panel report is not relevant.

4.144.

The plain text of Article 20.6 also belies the arguments of the United States concerning the object and purpose of this provision. The term definitive means definitive; it does not mean preliminary. The United States concedes as much, as it too equates definitive with final determination. The United States also invokes the object and purpose of Article 17, but neglects consideration of the specific provisions of that Article. Article 17.3 requires that a Member may not impose provisional measures sooner than 60 days after the date of initiation of the investigation. The preliminary critical circumstances determination imposed measures soon after the date of initiation, immediately violating this provision. Similarly, within a month of the preliminary critical circumstances determination the measures had violated Article 17.4 that limits the application of provisional measures to four months.

4.145.

A "critical circumstances" measure must satisfy several requirements under the provisions of Article 20.6; this measure violated all of these requirements.

4.146.

The United States violates Articles 19.3 and 21.2 because it does not provide for company-specific reviews where it determines an "aggregate" subsidy level. It also violates Article 19.4, as exporters that would have benefited from these reviews pay more in countervailing duties. Finally, the United States proceeded with the investigation on an "aggregate" basis thereby denying exporters expedited and individual administrative reviews in violation of Articles 19.3 and 21.2.

4.147.

Article 19.3 requires WTO Members to provide an expedited review when an exporter requests a review. The United States provides for expedited reviews only in non-country-wide cases. The United States argues that the regulations do not mandate a violation because the USDOC has broad discretion to conduct reviews and has only neglected to promulgate regulations. The United States position is untenable, for four reasons:

• First, the United States has the burden of establishing that the measure at issue is "discretionary". It asserts that the USDOC may conduct reviews, but it failed to create regulations. This explanation is insufficient to discharge this burden.

• Second, these regulations are procedural rules relating to every aspect of countervailing proceedings. The neglect of any right as fundamental as an individual review in aggregate cases would be deliberate. The preamble to the US regulations reinforces this conclusion, stating that the USDOC will not individually review firms when it uses a country-wide rate.

· Third, it is a basic principle of statutory construction that if a right is provided for in certain circumstances, its deliberate exclusion in other circumstances must be given meaning: that is, that no such right exists in those other cases. In this respect, the practice of the USDOC and its analysis of its own discretion with respect to the regulations concerning voluntary respondents demonstrates that it also interprets US law in this manner.

• Finally, the United States argues that it has broad authority under section 751 of the Tariff Act to conduct expedited reviews. This provision relates to annual administrative reviews and other forms of review, but is silent with respect to expedited reviews.

4.148.

The United States argues that Article 21.2 does not create an obligation to conduct company-specific administrative reviews. In this instance, the US regulations also expressly prohibit company-specific administrative reviews in aggregate cases. In contrast, the text of Article 21.2 clearly requires company-specific administrative reviews. In British Steel the Appellate Body found that Article 21.2 required a Member to review the need for continued imposition of a countervailing duty when appropriate. The Appellate Body also indicated that this provision was designed to ensure that countervailing duties only remained in force long enough to counteract the injury caused by the subsidisation.

4.149.

The administrative review provisions also violate Article 19.3 as the single country-wide rate arrived at in an administrative review supersedes all individual rates. Therefore, even if the United States had discretion to grant expedited reviews, in country-wide cases the benefits of those reviews vanish as soon as there is a country-wide rate on an administrative review. Finally, the regulations demonstrate that the discretion provided under s. 751 does not extend to individual administrative reviews. In fact, these regulations specifically deny the USDOC the discretion to grant individual administrative reviews.

4.150.

The United States has argued that a violation of Articles 19.3 and 21.2 exists only where it has expressly refused to grant these reviews. This is not correct. Once the decision had been made to make an aggregate assessment, Canadian exporters could not secure a different form of assessment. Consequently, exporters were effectively denied these reviews as soon as the decision to make an aggregate assessment was made thereby breaching Articles 19.3 and 21.2.

4.151.

In its first oral statement, the United States made the following arguments.

4.152.

Although some of the facts of this case are technically complex and can be confusing, in the end the issues are simple. The preliminary record indicates that the Canadian provincial governments provide timber to lumber producers at less than market prices. Under Article 1 of the WTO Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), that is a subsidy.

4.153.

Article 5 of the SCM Agreement states that "No Member should cause, through the use of any subsidy..., adverse effects to the interests of other Members, i.e.... injury to the domestic industry of another Member..." When one Member causes injury to the domestic industry of another Member through the use of any subsidy, the injured Member has the right to take countervailing measures. The United States’ preliminary decision to exercise that right was fully warranted in this case.

4.154.

Article 1.1 of the SCM Agreement defines a subsidy as a financial contribution by the government that confers a benefit. Thus, there are two elements to a subsidy: financial contribution and benefit.

4.155.

The USDOC preliminarily determined that the system of timber contracts administered by the Canadian provincial governments constitutes a financial contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement. Although Canada focuses on the complexities of these arrangements, none of those complexities alters the fundamental fact that these provincial programmes provide timber to lumber producers.

4.156.

Over 90 per cent of the forested land in Canada is held by the provincial governments ("Crown timber"). Each province administers a system of contracts called tenures or licenses ("timber contracts") that allow the tenure holder or licensee to harvest the Crown timber.

4.157.

There is no dispute that lumber producers participate in provincial timber contracts for one reason – to obtain timber. The definitions discussed in the US first submission leave no doubt that timber is a good within the ordinary meaning of Article 1.1(a)(1)(iii). Nevertheless, Canada argues that when the provinces issue these contracts they are not providing a good – timber – to lumber producers, but the right to take timber off the land. Neither the SCM Agreement nor the facts of this case support Canada’s claim.

4.158.

Although there are some variations across the provinces, the core elements of all timber contracts are the same, that is, the lumber producer obtains the right to cut timber in a specified area in exchange for an administratively set fee, the "stumpage" fee, and the assumption of certain forest management obligations. The lumber producer knows the specific area in which it will be able to harvest and knows the timber, that is, the species and quality of the trees. The producer pays stumpage fees only for the volume of timber actually harvested. The lumber producer is therefore obtaining a specifically identified good – timber.

4.159.

Moreover, the ordinary meaning of "provide" includes "make available." Thus, the fact that a lumber producer has to get the timber off the stump is irrelevant. The economic consequences of providing a good or a right to a good are the same. To treat them as distinct would invite circumvention of the subsidy disciplines and seriously undermine their purpose.

4.160.

Given the ample evidence that the provinces are providing lumber producers with timber, Canada’s only hope is that the Panel will read into the SCM Agreement an exemption for all extraction and harvesting rights. There is no support in the text for such an exemption, and a treaty interpreter may not read into the SCM Agreement what is not there.

4.161.

The USDOC preliminarily determined that the provincial governments provide timber for less than adequate remuneration, within the meaning of Article 14(d) of the SCM Agreement, thereby conferring a benefit.

4.162.

As the Appellate Body has confirmed, a benefit is conferred when the government’s financial contribution places the recipient in a more advantageous position than would have been the case absent the financial contribution. Moreover, the Appellate Body has recognized that the marketplace provides an appropriate basis for comparison. In the underlying investigation, the USDOC preliminarily determined that no market benchmarks existed in Canada, and therefore used stumpage prices in US states with comparable forests, adjusted to reflect prevailing market conditions in Canada.

4.163.

Article 14(d) states that: "The adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase (including price, quality, availability, marketability, transportation and other conditions of purchase or sale)." Canada ignores most of that language and argues, in effect, that Article 14(d) says: "The adequacy of remuneration shall be determined in the country of provision or purchase." The treaty interpreter, however, must give meaning to all the words in the Agreement.

4.164.

World market prices can constitute part of the "market conditions in the country of provision." As the European Communities ("EC") points out, the relevance of world market prices is recognized in item (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement.

4.165.

Therefore, the question is not whether Article 14(d) permits a Member to use something other than a domestic benchmark price, but when it is appropriate to do so. The facts more than adequately support the USDOC’s preliminary decision to do so in this case.

4.166.

As noted previously, 90 per cent of the forested land in Canada is held by the Crown. The market for timber is therefore dominated by the provincial governments. The impact of the governments’ administratively set prices on the very small residual market is virtually inescapable. Nevertheless, the USDOC did request information on private prices in each of the provinces. Only three of the provinces responded, and the USDOC determined that the prices provided were not market-based. For example, the record contained statements by a Quebec official and a Canadian forestry expert acknowledging that private timber prices in Quebec are suppressed by the overwhelming market power of low-cost Crown timber.

4.167.

It is evident why Canada would insist that the United States use prices in Canada despite the evidence of a market dominated by the provincial governments. Canada would require the United States to measure the governments’ prices against prices that reflect the very distortion that we are attempting to measure. Article 14(d) does not require such an obviously flawed and circular methodology.

4.168.

The USDOC determined the total amount of the subsidy provided to Canadian producers of the subject merchandise based on aggregate data from the provincial governments. The Department then divided the total subsidy by total sales of the subject merchandise to obtain the subsidy rate. Canada claims that this calculation improperly assumed that benefits to tenure holders passed through to lumber producers. The United States does not, as the EC suggests, concede that this is the case. Some clarification of the facts is necessary to better understand the basis for the USDOC’s subsidy calculation and shed light on the flaws in Canada’s claim.

4.169.

First, an input subsidy under Article 1.1(a)(1)(iii) is a direct subsidy. Under Canada’s interpretation, all financial contributions through the provision of a good are transformed into an indirect subsidy under Article 1.1(a)(1)(iv). Canada’s submission suggests that there are three distinct industries in Canada: loggers, lumber producers and remanufacturers. This is not the case. The vast majority of the Crown softwood timber is harvested under timber contracts held by integrated producers.

4.170.

The vast majority of the timber contracts in Canada are directly between the provincial governments and Canadian forest products producers, or wood processing facilities. In most instances, only wood processing facilities, such as sawmills that produce lumber, are eligible to obtain a timber contract. Thus, Canada’s alleged middleman between the provincial governments and the lumber producers is largely a myth.

4.171.

Canada also claims that the USDOC should have included non-subject merchandise in the calculation of the subsidy. The United States excluded certain Maritime lumber from the scope of the investigation, not producers. Canada nonetheless argues that the calculation of the benefit must exclude Maritime lumber, but the denominator must include Maritime lumber. Canada’s reasoning would result in a rate less than the subsidy found to exist with respect to the subject merchandise.

4.172.

Canada also argues that the USDOC calculated the subsidy on the basis of the total value of first milled lumber products, but then applied the subsidy rate to the entered value of subject merchandise. Canada’s claim ignores the fact that the Department’s calculation and application of the subsidy rate was entirely consistent with the preliminary record before the Department at the time of the preliminary determination. As previous panels have stated, the consistency of an authority’s decisions must be assessed based on an objective assessment of the facts before the authority at the time the decision was made.

4.173.

Canada’s claims relating to the USDOC’s imposition of retroactive provisional measures rest on an interpretation of Article 20.6 that would render the retroactive remedies provided for a nullity. It is beyond dispute that the general principles of treaty interpretation preclude such a reading of the Agreement.

4.174.

The general rule in Article 21 that provisional measures and definitive duties are applied prospectively is expressly made "subject to the exceptions set out in [Article 20]." Nothing in Article 20.1 limits the applicability of those exceptions to definitive countervailing duties.

4.175.

Article 20.6 defines a set of exceptional circumstances that warrant retroactive relief. Under the text of Article 20.1 those exceptional circumstances apply to provisional measures.

4.176.

Finally, Canada claims that various provisions of US law are inconsistent with its obligations under the SCM Agreement because they preclude reviews in aggregate cases. Under established WTO jurisprudence, a Member’s law breaches that Member’s WTO obligations only if the law mandates action that is inconsistent with those obligations. If the law provides discretion to authorities to act in a WTO-consistent manner, the law, as such, does not breach a Member’s WTO obligations.

4.177.

US law provides the USDOC with discretion to conduct expedited and administrative reviews in all cases, including aggregate cases. Nothing in the regulations cited by Canada limits that discretion. Thus, US law does not mandate action that is inconsistent with US WTO obligations. The United States is entitled to the presumption that it will implement its obligations in good faith.

4.178.

In its second written submission, Canada made the following arguments.

4.179.

This submission responds to the incorrect factual assertions and legal arguments that the United States has continued to make in its Oral Statement and in its Answers ("Answers") to the Panel’s 26 April 2002 questions. Canada will demonstrate that: the United States misunderstands the "financial contribution" requirement of Article 1.1(a); its cross-border analysis of "benefit" is not permitted by Article 14(d); its response to the "pass-through" question is flawed and exhibits lack of comprehension of the "benefit" analysis that is required; in respect of critical circumstances, it continues to make implausible arguments. As well, Canada seeks to clarify US admissions concerning expedited reviews and will demonstrate that the US position on administrative review misstates US law and SCM Agreement obligations.

4.180.

In its Answers, the United States asserts that, "Canada claims that the benefit is received when the timber is harvested." From this faulty premise, the United States wrongly attributes to Canada the argument that, "the act of harvesting (which is not performed by the government) is the financial contribution." It then argues that, "[t]he provincial governments provide the timber by placing it at the lumber producer’s disposal under the tenure contract."

4.181.

The US argument distorts Canada’s submission and conflates a series of distinct relationships into one transaction. A right to cut a tree is not the same thing as a log; nor are timber harvesters the same as lumber producers.

4.182.

Under tenure agreements, timber harvesters have the right to harvest standing timber and undertake a number of forest management obligations. These obligations, such as fire protection and pest control, constitute their share of a fiduciary duty for the public good. Indeed, tenure holders must undertake such costly obligations regardless of whether they harvest any trees. The bundle of rights and obligations that a tenure represents does not admit of simplification into "provision of goods".

4.183.

The right to harvest trees is, in law and in fact, distinct from trees themselves (standing timber), which is a physical thing attached to the land. Standing timber is, in turn, different from logs. The cutting down of timber is the point at which "goods" – logs – are produced from natural resources; this is similar to when fish are caught, or water is bottled. Logs are input goods into the production of lumber, which is the subject matter at issue. The right to harvest a tree is, therefore, different from the end results of harvesting (the cutting down of standing timber to produce logs) and processing (turning logs into lumber); this right does not amount to "goods" or "services" within the meaning of Article 1.1(a)(1)(iii). In fact, even the thing in which provincial governments convey an interest – standing timber – is not "goods" or "services".

4.184.

The United States attempts to rebut this reading by relying on two arguments, neither of which has merit.

4.185.

First, it states that "from the reference in Article 1.1(a)(1)(iii) to goods and services other than ‘general infrastructure,’ it follows a contrario that any specific immovable object may be a covered good." The conclusion in no way follows the premise. The converse of "general infrastructure" is not "any specific immovable object". In any event, "general infrastructure" is an exception to "services".

4.186.

Second, the United States argues that "the economic consequence of providing a good and providing a right to a good are exactly the same." This argument follows the same faulty logic of the US argument in Export Restraints that, "an export restraint is ‘functionally equivalent’ to an entrustment of or direction to a private body to provide goods domestically." The panel in that case rejected the "functional equivalence" argument on the grounds that the verbs "entrust" and "direct" implied "an explicit and affirmative action of delegation or command." The panel also held that the "financial contribution" element of Article 1 was concerned with actions of governments and not the effects of those actions. The term "provides goods" implies a positive action on the part of the government in respect of the goods themselves.

4.187.

The United States then relies on one of several definitions of "provide" set out in one dictionary, to try to persuade the Panel that the term "provide" should be interpreted to mean "make available" in the broadest sense of the phrase.

4.188.

The US position is untenable as the more common meaning of "provide" is "supply". As well, the proposed US interpretation encompasses a range of government action that goes far beyond those actions contemplated under Article 1.1(a). To "make available services", for example, would include any circumstance in which a government action makes possible the receipt of services.

4.189.

Finally, throughout the WTO Agreement, the word "provide" is used to indicate the giving of something rather than the more generally enabling someone to obtain or produce something. For example, the word "provide" in Articles 3.2 and 8 of the Agreement on Agriculture refers not to the availability of subsidies or support to potential recipients, but rather the giving of such support or of subsidies. This is also the case in respect of Article XV:1 of the GATS.

4.190.

The US argument also ignores the distinction: between timber harvesters and lumber producers. Timber harvesters produce logs from trees; and logs are not subject to the investigation. Timber harvesters "provide" these logs to their own mills or to other mills for the production of lumber or other products. This equation of timber harvesting and production of lumber has serious consequences in two respects.

4.191.

First, the repeated and erroneous reference to "lumber producers" diverts attention from the issue before the Panel: the provision of a right to harvest to timber harvesters. Second, it ignores the nature of the rights and obligations contained in tenure agreements. The US assertion is based on its contention that the laws of each province "require the tenure holders be sawmills." This is simply incorrect.

4.192.

In B.C. a tenure holder is not required to build a sawmill. The major forms of tenure may require an applicant to maintain a "timber processing facility," but that facility can be any of a wide variety of facilities, such as pulp mills, waferboard plants, etc. Moreover, the relevant provisions in the Forest Act are more discretionary. Section 13(3)(c) has provisions regarding timber processing facilities, but only if they are required in the invitation for application.

4.193.

The United States also argues that in B.C. most loggers operate as employees or contractors for tenure holders rather than as independent entities. There are thousands of Crown tenure holders, unaffiliated with any sawmill, that independently harvest standing timber, produce logs, and either use or sell the logs at arm’s-length to sawmills and other kinds of processors. The record prior to the preliminary determination (PD) documented that of 5,932 Crown tenure holders in B.C. during the POI, only 105, or 1.8 per cent, owned sawmills.

4.194.

In Quebec, there are two common forms of tenure. The dominant form of tenure, the TSFMA, can be and is held by any primary processing mill (for example, pulp mill, panel mill, veneer mill, etc.) and is not limited to sawmills. The second common form, the forest management contract ("FMC"), is rarely held by sawmills or even primary processing mills.

4.195.

The United States further confuses the issues by leaving out two central facts in its discussion of Ontario tenures. Ontario, like other provinces, routinely grants export licenses for the export of logs. Indeed, Ontario granted export licenses pursuant to all requests.

4.196.

Alberta also does not "generally require the tenure holders be sawmills." The United States misrepresents Alberta’s questionnaire response that "[a]ll forms of commercial tenure own and operate sawmills". There, Alberta was indicating that when all sawmills are considered together, one will find among them all the types of tenures that exist in the province. Alberta at no point suggested that all tenures were held only by sawmills, or that only sawmills could get a tenure.

4.197.

A benefit analysis under Articles 1.1(b) and 14(d) of the SCM Agreement must use benchmarks "in the country of provision". Canada’s submissions in this regard are based on three complementary points: first, that the text of Article 14(d) did not permit "cross-border" comparisons; second, that the injunction in Article 14(d) is based on sound economic principles; and third, that, in any event, there were ample benchmarks inside Canada that the United States could have used to determine "adequacy of remuneration".

4.198.

The United States argues that the concept of "commercial availability" is incorporated in Article 14(d). Article 14(d) does not refer to "commercial" availability of goods, much less "prices commercially available" for those goods. The term "availability", read in context, refers not to the price of a good, or commerciality of that price, but whether the goods are available in the country in question. Article 14(d) reflects a simple economic reality: the availability of a product – its "supply" – has an impact on its price.

4.199.

In any event, even if the United States were correct in its interpretation, its conclusions do not follow. The existence of imported goods in a market does not make the price of those goods the "prevailing market condition". Imported goods may, and often do, command premium prices on domestic markets.

4.200.

The United States rejects the use of benchmarks reflecting market conditions prevailing in Canada and justifies the use of US benchmarks on grounds of subsidization and price suppression. The United States then proceeds to "prove" such subsidization and suppression solely on the basis of the US benchmark. Under this standard, any country enjoying a natural comparative or competitive advantage over the United States in anything would automatically be found to be giving countervailable subsidies.

4.201.

The United States is also not correct in citing item (d) of Annex I as support for its proposition that "in the country of provision" means outside the country of provision. Item (d) identifies the elements of a specific practice that is considered in itself to constitute a prohibited export subsidy. It in no sense suggests that world prices can be used as a measure of benefit to domestic producers. Item (d) is framed in a way consistent with other items in Annex I, and it has the same relationship to Article 1 of the SCM Agreement as those other items. For example, the first paragraph of item (k) refers to lending at rates below the government’s cost of borrowing. However, that does not mean that a "financial contribution" analysis must always find a cost to government.

4.202.

The United States argues that it can do what the specific text of Article 14(d) does not allow, because forestry resources are for the most part owned by the Crown. It asserts that the only way it can determine "benefit" independently of the alleged distortion is to look beyond the borders of the "country of provision". The arguments of the United States must not prevail, for two reasons.

4.203.

First, a "benefit" analysis seeks to identify whether a government practice has had "trade-distorting effects" but only in the sense of Article 1.1(b). The question is whether as a result of the financial contribution by the government, the recipient has got something it could not otherwise have got on its own in the market. Article 14(d), in turn, sets out the benchmark that can be used to determine the existence of "benefit" when the financial contribution in question is in the form of provision of goods. Neither Article 1 nor Article 14 presumes the existence of "distortion" because there is a financial contribution by the government. Furthermore, neither of these provisions permits dismissing benchmarks because of a presumption that these benchmarks might be "distorted" by a financial contribution.

4.204.

The US argument is circular: market prices can be "suppressed" – driven below "normal" levels – by dominant government prices only if those government prices are below that "normal" level. However, that is the very point a benefit analysis must demonstrate.

4.205.

Article 14(d) requires an investigating authority to use in-country benchmarks to determine and measure an alleged benefit. The finding of government dominance in the alleged supply of goods does not establish that the remuneration it receives is not adequate. And the United States did not make such a finding; it only asserted it. A Member also may not short-circuit the "in-country" requirement of Article 14(d) by a finding regarding the market share of the government. Market share does not equal market dominance; and neither may give rise to a presumption of price suppression.

4.206.

Second, nothing in Article 1.1(a)(1) or in the jurisprudence of the WTO mentions alleged "price suppression" as a reason for dispensing with the market benchmarks set out in Article 14(d) in favour of US benchmarks. The benchmark under Article 1.1(b) is not the highest price the recipient might have liked to get, but rather the price prevailing in the market.

4.207.

There are good reasons why Article 14(d) was written the way it was: cross border comparisons make no economic sense. The use of US stumpage prices as a benchmark rests on the wholly unsupported premise that "there should be no difference between the private prices in the country of exportation and world market prices, except for import taxes." In concluding this, the USDOC implicitly made an incorrect assumption that stumpage is a commodity product with negligible transportation and transactions costs.

4.208.

In particular, borders affect prices and "thick border effects" are substantial and notoriously difficult to quantify. The border is highly relevant as political boundaries drive differences in government regulatory regimes, tax regimes, investment regimes, currency, banking and financial systems, business practices, and business climate. Government policies and other factors in different jurisdictions may affect economic conditions, including wage rates, taxes, capital costs, and exchange rates.

4.209.

A wide variety of complex factors also affect stumpage rates. These factors include locational characteristics, timber characteristics, measurement systems, operating costs, government regulation, economic conditions, and tenure holders’ obligations and responsibilities. Adjustments for these factors are difficult or even impossible to quantify for the following reasons:

· Locational differences: The PD assumes that tree-growing and harvesting conditions are "comparable" (an ambiguous term the USDOC never bothered to define) between the Canadian and US comparison areas. The USDOC addressed none of the contrary evidence in the record that significant differences in topography, soil conditions, climate, availability of ground and water transport, and distance to mills and to markets differentiate the Canadian and US market conditions.

· Timber differences: Differences in timber characteristics such as quality and stand density affect stumpage values but the USDOC made no adjustment for these differences

· Differences in Measurements: Differences in measurement conventions between the scales used to measure timber volumes in the United States and Canada and in the way in which timber is classified as "sawtimber" make cross-border comparisons impossible.

· Differences in economic conditions: Economic conditions such as wages, capital costs, taxes, and governmental regulatory policies affect stumpage values, and cross border comparisons must take into account these differences. The only economic condition that the USDOC made an adjustment for was in the PD exchange rates.

· Differences in rights and obligations of timber harvesters: The bundle of rights and obligations under any harvesting programme affects stumpage values. Canadian tenure holders obtain harvesting rights through tenures effectively of indefinite duration. This differs from the transactions used by the USDOC that consisted of short-term timber harvesting rights in US sales. Similarly, the lump-sum payments to obtain timber harvesting rights in the United States are not equivalent to stumpage charges in Canada levied on a volumetric basis that were previously conferred. With only limited exceptions, the USDOC did not attempt adjustments for these differences.

4.210.

While Canada believes that the Panel need not address the issue of adjustments, the United States advised the Panel that the USDOC made adjustments. It further asserted that the USDOC examined the obligations that Canadian tenure holders were legally obligated to assume, and calculated a per unit amount for each category, which it then added to the stumpage fee to arrive at a total "price" for stumpage in Canada. The USDOC did not make or even attempt any adjustments for almost all of these factors. Where it did, it did so incorrectly, including as follows:

· the USDOC refused to make adjustments for the costs Canadian timber harvesters incur scaling (measuring) provincial logs, because it claimed that "costs related to scaling are not mandatory and are not borne exclusively by tenure holders….". Provincial regulations across Canada require tenure holders to scale timber to the provinces’ requirements.

· the USDOC’s claim that it calculated "a per-unit amount for each category of Canadian obligations that was above and beyond obligations incurred by parties paying stumpage charges in the United States" is equally without foundation. The USDOC did not examine US costs and did not compare US and Canadian obligations, but simply asserted that, where similar costs existed in the United States, no adjustments were necessary.

· In Quebec, the USDOC made an adjustment for primary and secondary roads, but refused to make an adjustment for the costs of haulage roads, rather than measuring the difference between haulage road costs in Quebec and Maine. In Ontario, the USDOC used a different methodology, measuring road costs by their in-kind revenue to the Crown, rather than by the actual costs incurred by harvesters.

· In relation to B.C., the USDOC refused to adjust for timber sale costs incurred by B.C. licensees, such as the engineering and layout costs incurred to design and layout the appropriate contours and areas for harvesting. In Washington State lands (the benchmark the USDOC used) these costs are not imposed on the tenure holder.

4.211.

One of the most significant errors made by the USDOC was the conversion factor it used to compare the stumpage rates in different jurisdictions. Comparing US and Canadian stumpage rates involves different measures of log volumes. Log volumes in several of the US comparison areas used by the USDOC are measured in thousand board feet (MBF) whereas stumpage in Canada is measured in cubic metres (m3) using a metric scale designed to measure the total volume of solid wood in logs..

4.212.

The issue of conversion rates arises because cubic log scales attempt to measure the total content of each log while the US log scales attempt to measure only that portion of total log volume that would be contained in the lumber produced from each log. This portion varies with the diameter, taper, and length of the log. Further, that portion will vary with which US log scale is being converted (and the United States has many different scales) the scale’s log measurement conventions, and the scale’s allowances for volume deductions for log defects. To accurately compare stumpage rates, the conversion factor must also account for differences in timber size and the utilization standards of the jurisdictions being compared.

4.213.

Taken together this means that there is no such thing as a constant log scale conversion factor. Instead, the conversion factor must be specifically chosen to reflect differences in the log scales, the measurement conventions, the current timber profiles and the utilization standards of the jurisdictions being compared. The USDOC did not do this. Instead it took a "national" average factor and applied it across all provinces. The application of a proper conversion factor would have resulted in a rate substantially less than was calculated by the USDOC in the PD.

4.214.

The United States continues to assert that "only the governments of Alberta, Quebec and Ontario provided any information" in response to the USDOC’s request for in-country benchmarks, and that only "Quebec and Ontario actually provided private prices."

4.215.

To the contrary, Alberta answered every US question and provided all documentation requested by the United States Alberta discussed and provided information on wood volumes. Further, Alberta responded fully to a series of follow up questions regarding Alberta’s "private market stumpage figure." The USDOC’s questions did not include any requests for further documentation of the stumpage value data.

4.216.

Ontario provided the USDOC with a study entitled "Ontario’s Private Timber Market" prior to the PD. The study was conducted by Resource Information Systems Inc. and explained that:

The results of the survey suggest that the market for private timber in Ontario appears to be both competitive and efficient. Buyers and sellers have the same information about market conditions, sellers produce homogeneous products, they are price-takers and they can enter and exit the market easily. Hence the market meets the classic definition of a competitive market. The market can also be classified as efficient given its low transaction costs and low level of government involvement.

4.217.

Quebec submitted to the USDOC the results of the private forest stumpage surveys conducted annually for the three years preceding the period of investigation and explained that these surveys are used to determine stumpage rates on public land under the Forest Act. Quebec reminded the USDOC that it had accepted earlier versions of the same private forest surveys in Lumber III as a benchmark. Quebec also submitted a lengthy study demonstrating that the private forest in Quebec, is an open, competitive, and functioning market. This study analysed the conditions and circumstances of the private forest and found that it exhibited all the indicia of a competitive market.

4.218.

Finally, the United States states that B.C. did not provide private stumpage rates. However, B.C. explained on the record before the PD that most private timber transactions are for logs, and log price data was provided.

4.219.

The four primary exporting provinces also provided the USDOC with information demonstrating that they were operating their stumpage systems consistently with market principles. This information established that each of these provinces earned substantial profits from timber harvesting rights.

4.220.

Finally, B.C. put on the record extensive economic analysis that established that B.C.’s price setting practices were consistent with market principles. This was because provincial stumpage charges were equal to, or even higher, than the prices that would prevail in a competitive market and prices for logs were no lower and quantities no higher than what would prevail in a competitive market. As well, B.C. provided the USDOC with information on competitive sales of stumpage in B.C. through the Small Business Forest Enterprise Programme sales.

4.221.

The USDOC rejected the above evidence on the basis that private stumpage prices in Canada were not valid benchmarks for determining and measuring benefit. It stated in the PD:

"Since the stumpage fees on public lands are the price driver for the stumpage market in those provinces, we conclude that the stumpage fees on private lands are largely derivative of the public land prices and are therefore distorted".

and later,

"Because of the provincial government’s control of the market through a system of administratively-set prices and other market distorting measures, there is no market-determined price for stumpage that is independent of the distortion caused by the government’s interference in the market".

4.222.

The USDOC cited the petition in support of its position. In particular, it relied on a letter of the Quebec Minister of Natural Resources to the President of the Wood Producer’s Federation of Quebec (an association of private land owners). The United States now argues that this letter, and other outdated and anecdotal evidence, "[indicates] that private stumpage prices were depressed by the overwhelming majority of government-supplied timber in the market."

4.223.

The letter is a Government response to the private land owners’ association’s criticisms of the cost adjustments used to make public and private timber comparable in Quebec’s parity system, which itself is used for setting public land stumpage rates. The relevant portion of the letter relied upon by the USDOC states:

"Toutefois, je suis conscient que la tarification des bois des forêts publiques puisse avoir une influence indirecte sur le marché privé".

4.224.

The verb "puisse," as used in the letter, translated means "could" or "might". It does not translate into "does". Therefore, the above sentence, translated, reads:

"However, I am aware that public land stumpage charges [could or might] have an indirect influence on the private market".

4.225.

This in itself demonstrates the United States’ gross mischaracterization of the value and import of the letter. However, the context of the above passage is equally revealing: the statement is simply the reason given by the Minister as to why the Government of Quebec continues to undertake meaningful dialogue with Quebec private landowners.

4.226.

The United States also relies on a 1995 paper for its conclusion that Quebec private stumpage prices are distorted. The 1995 paper cites earlier studies (published between 1972 and 1985) that spoke to the Quebec stumpage regime that was replaced in 1989 as support for the relevant passage used by the United States In Lumber III, the Coalition made the same "distortion" argument regarding Quebec private stumpage prices. The USDOC addressed the argument and the evidence at that time as follows:

"The Coalition contends the entire provincial stumpage system in Québec is not "market-based" because private prices in Québec are distorted and depressed by decades of artificially cheap provincial stumpage, and these prices are used to set public stumpage.

Citing a study published in 1988 of the "20 quality zones" in Québec …, the Coalition asserts the "cost adjustments" which Québec used to make public and private timber comparable are utterly fanciful and lead to anomalous results. Respondents point out that the Aktrin study cited by the Coalition is completely outdated and irrelevant since it examined a system that was replaced in 1989 by Québec’s current system of 28 'biophysically and geologically homogeneous tariffing zones.'

We agree with Respondents that private prices in Québec collected under Québec’s own contracted out surveys, which we examined in depth at verification, are a viable benchmark. The evidence cited by the Coalition is either outdated and irrelevant or anecdotal…"

4.227.

In Lumber III the USDOC, therefore, rejected evidence that was arguably more current, reliable and relevant than the material it is now relying on to arrive at the opposite conclusion.

4.228.

Evidence on the record at the PD demonstrated that some lumber producers had purchased log inputs at arm’s-length from timber harvesters; the alleged recipients of the "stumpage" subsidy. The USDOC failed to consider or even acknowledge that evidence and proceeded to grossly overstate the alleged benefit to lumber producers.

4.229.

The United States now attempts to argue that it had, in fact, made a finding of no arm’s-length transactions in respect of such downstream producers; and that no such analysis was necessary. This attempt must fail, for two reasons.

4.230.

First, the US position is internally illogical and contradictory. If it was not necessary to make a finding, then the USDOC presumably did not make such a finding; and if it did make such a finding, it was because it found that the analysis was necessary. Second, the US assertion is simply untrue. The determination does not contain a "pass-through" analysis. In fact, there is no mention of the issue anywhere in the determination. The USDOC undertook no factual enquiry into the question of pass-through; it simply presumed that all lumber producers benefited from alleged subsidies.

4.231.

Given the evidence on the record of arm’s-length transactions between downstream producers of lumber and timber harvesters, the United States was under an obligation to establish an indirect subsidy in the sense of Article 1.1(a)(1)(iv) for all those transactions. In the absence of any such findings, even recognition of the evidence, the United States must be found in violation of its obligations under the SCM Agreement not to impose countervailing measures without first establishing the existence of a subsidy.

4.232.

If the United States had examined the evidence on the record, it would have – indeed, should have – determined that, first, there were arm’s-length transactions in which the pass-through of a subsidy may not be presumed; and second, that no subsidy was in fact passed-through from timber harvesters to arm’s-length lumber producers. The United States now concedes that, if there were in fact independent loggers who sell logs in arm’s-length transactions, then those sales cannot be countervailed, or at the very least, that a pass-through analysis must be conducted. To counter this, the United States claims that it "preliminarily concluded that the overwhelming majority of Crown timber is provided directly to sawmills."

4.233.

The following examples provide a sampling of the evidence on the record on this issue. In B.C., more than 30 per cent of the timber harvested on Crown lands is harvested by entities that do not own sawmills. Similarly, in Ontario "approximately 30 per cent of the softwood timber harvested from Crown land during the USDOC’s period of investigation was sold by tenure holders to third parties who subsequently processed this timber into forest products."Further, forest management contracts ("FMCs") in Quebec are typically held by municipalities, communities, or non-profit organizations and rarely held by primary processing mills.

4.234.

This evidence was not considered by the USDOC and it made no finding on "pass-through" at the PD. The United States has now proceeded, for the first time, to counter the evidence on the record. It claims that there were no "true" independent loggers and cites evidence regarding the harvesting of timber in each province. The attempt by the United States to justify its failure to analyse evidence on the record must fail, for four reasons.

4.235.

First, the facts presented by the United States do not support its conclusions. For example, the United States expressly admits that approximately 17 per cent of B.C. Crown timber is "provided under licenses that are normally reserved to entities not owning timber processing facilities," and that, in Saskatchewan, approximately 14 per cent "of the harvest was provided to smaller licenses… some of whom have their own sawmills." The United States also does not claim that all stumpage benefits are direct benefits, only that an "overwhelming majority" of Crown timber is provided directly to sawmills. Thus, notwithstanding that the United States’ belated factual conclusion is incorrect, there was uncontroverted evidence on the record demonstrating arm’s-length transactions between independent loggers and lumber.

4.236.

Second, contrary to the United States’s claim, the presence of domestic processing requirements or other regulations in no way preclude arm’s-length transactions. The United States rests on the existence of an additional element in determining what constitutes an "arm’s-length" transaction: the concept of an absence of "outside control or influence" For there to be an arm’s-length transaction, there is no requirement that the Parties must operate independently of all other external influences.

4.237.

Third,the US attempt to dismiss the evidence on the record after the fact only further highlights the USDOC’s unjustifiable failure to undertake an indirect subsidy analysis in the preliminary determination. For example, the United States argues that in B.C., most loggers operate as employees or contractors for tenure holders rather than as independent entities. However, as noted above, the evidence on the record indicates otherwise.

4.238.

Finally, the United States is simply incorrect to suggest that no pass-through analysis is necessary with respect to arm’s-length purchasers who produce some merchandise that is subject to the investigation. Unaffiliated remanufacturers purchase lumber in arm’s-length transactions from lumber producers. In those arm’s-length transactions, any alleged benefit to the lumber producers would not be passed through to the remanufacturers.

4.239.

The United States insists that no analysis of pass-through was necessary in a country-wide investigation. According to the United States, in such cases, "[t]he precise amount of the benefit received by any specific producer would only be determined in a company-specific review." An investigation undertaken on a country-wide basis does not relieve the United States of its obligation to establish the existence and amount of a subsidy. The effect of the US’ failure to analyse the pass-through of alleged benefits was to countervail in instances where no benefit was received and to sharply increase the countervailing duty rate.

4.240.

Although the calculation methodology in the survey makes clear that the data provided were from a survey of "sawmills" (also noted as "first mills"), the discussion of the methodology further intended to explain that the data also included a small portion of remanufactured products that were produced by the sawmills. Thus the statement -- " [b]ecause the MSM does not collect commodity data, it was not possible to exclude ‘remanufacturers’ from its results" -- intended to say that "it was not possible to exclude ‘re-manufactures' from its results." Canada explained this clearly in its August 21 and August 27 submissions, prior to the time at which the USDOC issued its Customs instructions implementing the decision.

4.241.

The United States argues that it is not possible for the United States to apply definitive countervailing duties retroactively, if it were not permitted to suspend liquidation provisionally with respect to entries made before the PD that may later be subject to a definitive critical circumstances determination. This position is untenable for three reasons.

4.242.

First, the essence of the US argument appears to have become this: the only way, under US law, the United States may exercise its right under Article 20.6 to make a definitive critical circumstances determination, is for it to breach that Article by imposing provisional measures not provided for by the Article, to preserve this right. At issue is not what the United States may or may not do under US law, but rather what are the United States’s obligations under Article 20.6. If the United States is concerned about its ability to preserve retroactive imposition of definitive countervailing duties pursuant to a critical circumstances determination, it should ensure that its laws provide for this.. The United States does not lose its ability to impose duties retroactively by virtue of making a final determination of critical circumstances.

4.243.

Second, the United States misinterprets Article 20.3 of the SCM Agreement. Article 20.3 in no way limits, or in fact speaks to, the right of Members under Article 20.6 to impose definitive duties retroactively pursuant to a critical circumstances determination. Rather Article 20.3 addresses the amount of countervailing duties that may be collected with respect to provisional measures imposed pursuant to a preliminary countervailing duty determination.

4.244.

Third, Canada reiterates its position that the United States’ reliance on Hot Rolled Steel from Japan is misplaced. Article 10.7 of the AD Agreement has no analogue in the SCM Agreement. Further, Article 20.6 does not permit a preliminary critical circumstances finding.

4.245.

On the basis of the United States’ replies, Canada understands US to have confirmed that:

· it has an unconditional obligation under Article 19.3 of the SCM Agreement to provide expedited reviews to any exporter not actually investigated for reasons other than a refusal to cooperate who requests such a review and in doing so promptly establish an individual countervailing duty rate for that exporter; and

· it has the discretion to grant such reviews when such a request is made.

4.246.

In the light of these statements, Canada further understands that the United States does not propose to argue that its discretionto grant a review includes the discretion to reject such a review. Any such argument would directly contradict the US acceptance of its obligation under Article 19.3.

4.247.

Canada is not convinced that US law provides the United States with the discretion to meet its obligations under Article 19.3. Nevertheless, its statements to the Panel represent declarations by the United States of both its understanding of its obligations under the WTO Agreement and also the operation of its laws. Therefore, Canada requests that the Panel find that the United States:

· has failed to fully implement its obligation under Article 19.3 to provide for expedited reviews in case of specific requests to do so in country-wide cases;

· now asserts that it has the lawful "discretion" to conduct such reviews despite the absence of specific statutory or regulatory provisions;

· may not exercise its "discretion" to deny any request for an expedited review; and

· must promptly grant all such requests made in Lumber IV, and in any other investigation.

4.248.

It is critical that the USDOC give exporters subject to the country-wide countervailing duty rate in Lumber IV expedited reviews "promptly," as Article 19.3 requires. Within a few days, these exporters will be required to pay cash deposits at a country-wide CVD rate of 18.8 per cent. Moreover, expedited reviews provided months or years from now cannot, by definition, constitute the "expedited" reviews that Article 19.3 requires.

4.249.

With respect to administrative reviews, the United States’s responses effectively concede that Canada’s understanding that US law prohibits granting exporters individual rates in country-wide cases is correct. In paragraph 67 of its answers, for example, the United States confirms that Section 351,213(b) of the Regulations does not provide for individual reviews in country-wide cases.

4.250.

By relying on this section of the regulations, the United States asserts that its obligations with respect to administrative reviews are not to determine individual rates so as to ensure that individual companies are not paying more than the extent of the subsidy they actually receive. Rather, the United States argues that it is required to provide for individual rates only ifsuch a rate turns out to be zero. This interpretation turns Articles 19.3 and 21.2 on their head. If adopted, the US interpretation would result in these provisions being read in a manner that would reduce the scope of their application far beyond that intended by drafters of the SCM Agreement, something a treaty interpreter must not do.

4.251.

Furthermore, if the Panel does not find that the United States must conduct individual administrative reviews in country-wide cases, any relief granted regarding expedited reviews is virtually moot. Exporters and producers would obtain individual cash deposit rates that would be in effect only until completion of the first administrative review, given that the regulations mandate that a single country-wide rate calculated in an administrative review supersedes any individual rate previously determined.

4.252.

In its second written submission, the United States made the following arguments.

4.253.

Over the course of this proceeding, the issues have been focused and the facts clarified. If there was ever a doubt, the United States has now demonstrated that the Canadian provincial governments provide timber to lumber producers – that is a financial contribution under the WTO Agreement on Subsidies and Countervailing Measures ("SCM Agreement").

4.254.

The United States and the European Communities ("EC") also share the view that, in appropriate circumstances, the benefit from the government’s provision of a good may be measured by comparison to commercially available world market prices, consistent with Article 14(d) of the SCM Agreement. Even Canada agrees that the use of import prices may be appropriate in certain circumstances. Therefore Article 14(d) does not prohibit the use of world market prices in appropriate circumstances.

4.255.

There has, however, been much debate over whether the USDOC’s recourse to such prices in this case was appropriate. In the end, as discussed below, the evidence demonstrates that the USDOC’s use of US stumpage prices commercially available to Canadian lumber producers was entirely consistent with the SCM Agreement.

4.256.

The United States has also amply rebutted Canada’s claim that the USDOC inflated the amount of the subsidy benefit by failing to take into account so-called "independent loggers." The USDOC’s preliminary determination that the Canadian provincial stumpage systems provide a subsidy to lumber producers was therefore entirely consistent with US obligations under the SCM Agreement.

4.257.

Thus, we come full circle to where we began. "No Member should cause, through the use of any subsidy..., adverse effects to the interests of other Members, i.e.... injury to the domestic industry of another Member."¹³ When one Member causes injury to the domestic industry of another Member through the use of any "specific" subsidy, the injured Member has the right to take countervailing measures. The US right to impose provisional measures to counteract the injurious effects of billions of dollars of imports of subsidized Canadian lumber should therefore not be denied.

4.258.

It should be beyond dispute that the provincial governments are providing a good – timber – to lumber producers, within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. This conclusion is inescapable under any definition of "good" in any language. It should also be beyond dispute that when a government gives a company the right to take a good, whether it is the right to take widgets from a government warehouse or timber from government land, the government is "providing" that good within the meaning of Article 1.1(a)(1)(iii). The Canadian provincial governments give tenure holders the right to take timber off Crown land and, thus, give them the timber itself. The only logical conclusion is that, in doing so, the provincial governments are providing a good within the meaning of Article 1.1(a)(1)(iii).

4.259.

Canada’s attempts to obfuscate this simple fact rely on logically flawed arguments, and ignore the basic principles of treaty interpretation reflected in Article 31 of the Vienna Convention on the Law of Treaties. For example, Canada asks the Panel to infer from the use of the phrase "imported goods" in Article 3.1(b) of the SCM Agreement and the word "products" in Parts III and V of the SCM Agreement, that "goods" can only mean traded goods that fall within the GATT 1994 Article II schedules. The fact that "products" are goods and "imported goods" are goods does not, however, logically give rise to the inference that nothing else can come within the meaning of "goods."

4.260.

To sustain its strained interpretation, Canada simply ignores the most relevant aspect of the ordinary definition of "goods" in the source it relies upon, which is the inclusion of "growing crops, and other identified things to be severed from real property." Moreover, Canada’s attempt to narrow the ordinary meaning of "goods" would render superfluous the only express limitation in the text itself, i.e., the exclusion for "general infrastructure." If "goods" were intended to be read as narrowly as Canada suggests, it could never encompass any infrastructure (e.g., a building, road, etc.), let alone general infrastructure. "Goods" must include some infrastructure, otherwise the specific exclusion in Article 1.1(a)(1)(iii) is superfluous. Thus, the very existence of that express limitation demonstrates that the Members intended "goods" to be read in accordance with its ordinary meaning and therefore to include things other than those listed in the GATT 1994 tariff schedule.

4.261.

In addition, Canada’s arguments are premised on the notion that the only thing at issue here is an intangible "right" granted by the provincial governments, which Canada then proceeds to totally divorce, analytically, from the object of the right granted. Under Canada’s theory, form is everything: what something is called (e.g., an "exploitation right") is more important than what it actually is. In Canada’s truncated analysis, if the government has granted a right, the inquiry stops, regardless of what the "right" entitles the holder of the right to do. By ignoring substance, Canada concludes that, while granting a right may constitute a financial contribution, it can never constitute the provision of a good. However, as the Export Restraints panel stated:

We believe, in particular, that the appropriate way to conceive of a "financial contribution" is purely as a transfer of economic resources by a government to private entities in the market, without regard to the terms of the transfer.

4.262.

Thus, it is in fact the "right," i.e., the terms under which the provinces transfer timber to lumber producers, that is irrelevant. To determine whether there is a financial contribution, the treaty interpreter should look at the reality of what actually occurs. In the case of provincial tenures, what actually occurs is that the provincial governments grant tenure holders the right "to take" a tangible good – timber – off the land. The right "to take" is, in fact, the mechanism (or terms) by which the government "provides" the timber, i.e., places the timber at the disposal of the lumber producer. The provincial governments are therefore providing goods within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.

4.263.

Canada concedes that offering steel producers the opportunity to load and haul (i.e., "to take") iron ore from a government stockpile would constitute the provision of goods. In reality, there is no meaningful difference between giving lumber producers the right to take trees off Crown land and giving steel producers the right to take iron ore from a government stockpile. While Canada may disagree, the United States is confident that the steel producers and the lumber producers would not.

4.264.

The reality of the provincial tenure systems is readily apparent. The evidence demonstrates that companies obtain tenures for the sole purpose of obtaining timber, not to manage the forest. Tenure holders acquire nothing under the tenure but timber, and pay stumpage fees only on the amount of timber actually harvested. These facts leave no doubt that through the tenure systems the provincial governments are "providing" a "good" – timber.

4.265.

Canada has made several claims with respect to the USDOC’s measurement of the benefit from provincial stumpage systems. In this section, the United States will address Canada’s claims concerning the USDOC’s selection of a market benchmark for stumpage.

4.266.

As discussed in the US prior submissions, Article 14 of the SCM Agreement sets forth guidelines for determining the benefit conferred by a financial contribution. Prior panel and Appellate Body reports have defined a benefit as some form of advantage that would not otherwise be available in the marketplace, absent the financial contribution. The guidelines in Article 14(d) should therefore be interpreted to achieve an appropriate comparison of the financial contribution to the marketplace, i.e., a comparison that would identify the artificial advantage resulting from the government’s financial contribution.

4.267.

Article 14 does not purport to address every conceivable scenario in which a benefit must be determined. For instance, some types of financial contributions are not addressed at all in Article 14 (e.g., grants and debt forgiveness). Thus, authorities have the discretion to develop appropriate methodologies. It is the view of the United States that an appropriate methodology is one that is consistent with the guidelines in Article 14, considered in light of the object and purpose of Article 14 to compare the financial contribution to what would be available to the recipient in the market absent the financial contribution.

4.268.

With respect to the provision of a good, Article 14(d) of the SCM Agreement states that the comparison should be made "in relation to prevailing market conditions for the good [] in question in the country of provision....". There is no dispute that the basis for the comparison described in Article 14(d) is the prevailing market conditions in the country under investigation. What constitutes prevailing market conditions is also described in Article 14(d), i.e., "price, quality, availability, marketability, transportation and other conditions of purchase or sale." Where the United States and Canada disagree is in defining what constitutes the universe of permissible market benchmarks that could be used to measure the adequacy of remuneration "in relation to prevailing market conditions" in the country under investigation, consistent with Article 14(d).

4.269.

As the EC stated: "[t]he expression ‘market conditions in the country of provision’ in Article 14(d) of the SCM Agreement is sufficiently broad to allow the consideration of world market prices." In particular, as noted above, the concept of commercial "availability" is expressly incorporated in Article 14(d). The use of "commercially available" world market prices is also expressly sanctioned in item (d) of the Illustrative List of Export Subsidies, and has been endorsed by the Appellate Body. Prevailing market conditions in the country of provision may therefore encompass prices commercially available on the world market to purchasers in the country under investigation. Commercially available world market prices can therefore be used as a market benchmark, in appropriate circumstances, consistent with Article 14(d).

4.270.

As the EC points out, the issue therefore is not whether Article 14(d) permits the use of commercially available world market prices (such as US stumpage prices) per se, but rather whether it was appropriate to do so in this case. The facts discussed below demonstrate that the USDOC’s use of commercially available US stumpage prices was appropriate in this case and therefore consistent with Article 14(d) of the SCM Agreement.

4.271.

When considering the entire universe of potential market benchmarks, the United States agrees that prices within the country under investigation should be used whenever possible. Use of prices within the country under investigation is, however, not always possible. The obvious example, which the EC noted, is the case of a government monopoly for the good in question. In such a case there is no "market" benchmark price. That example is no different in principle from the circumstances of this case. The provincial governments control 85 to 95 per cent of the market for timber. There is extremely limited information on non-government prices and the evidence indicates that non-government prices are suppressed by government prices. There is therefore no "market" benchmark price in Canada that could measure the benefit. That conclusion is not based on theory, it is based on the record evidence.

4.272.

First, only three provinces provided any private price data in response to the USDOC’s questionnaire. Canada’s claim that there was "extensive evidence" related to private markets in those provinces is simply not supported by the record. The limited data provided by the provinces was inadequate for purposes of establishing a market benchmark. For example, as the United States explained in its response to the Panel’s questions, Alberta stated that it does not have any data on private timber used in sawmills. The so-called "extensive" data provided by Alberta was a two-page excerpt from a KPMG survey, which contained a single estimated stumpage value derived from some price data for log sales. Moreover, Alberta acknowledged that the estimated value was based on information that did not distinguish between private and Crown timber.

4.273.

Ontario and Quebec submitted market surveys. However, the Ontario survey was flawed in several respects (e.g., it provided no information on quality or grade). Moreover, there was substantial evidence on the record, including statements by an official in Quebec’s Ministry of Natural Resources, that government prices suppressed private prices in the provinces. In fact, one Canadian group said that "downward pressure on the price of private wood is built into the system." The influence of a dominant owner has been recognized in other markets as well. A study of stumpage trends in South Australia notes:

Of the total [productive forest land]... [a]bout 70 per cent of the resource is publicly owned. The percentage of the publicly owned resource was even higher in the past. Hence it is likely that stumpage for public pine logs has held a dominating influence on stumpage for similar logs sold by private growers in [South Australia].

4.274.

The remainder of the evidence that Canada cites consists of evidence that does not actually pertain to private prices. That evidence instead largely pertains to whether the provinces recover their costs and earn a profit when they sell timber. The government’s profitability is, however, not the issue. It is now well settled that the cost to the government is irrelevant in measuring benefit. Moreover, the purported fact that the provincial governments made a profit does not establish that they sold Crown timber at market prices. The information provided therefore does not address the relevant inquiry, i.e., whether provincial prices for timber are more advantageous than those that would have been available to lumber producers on the market absent the provincial governments’ financial contribution.

4.275.

As the above analysis of the record demonstrates, there was insufficient evidence of "market" prices in Canada to form a benchmark. As the EC asked, "which other benchmark should be used in [such a case]?" The United States agrees with the EC that, in the absence of market prices in Canada, the use of other prices commercially available to Canadian lumber producers on world markets is a reasonable alternative. As demonstrated below, stumpage prices for comparable timber in the United States are commercially available to lumber producers in Canada.

4.276.

Canada agrees that some prices commercially available on the world market, specifically import prices, can provide a benchmark consistent with Article 14(d). Canada argues, however, that it is impossible for there to be import prices in this case. Canada does not claim that Canadian producers cannot or do not harvest timber in the United States, or that US timber cannot be imported into Canada. Canada simply reverts to its argument that the provincial governments are providing a "right," not timber, and that a "right" cannot be imported. Once again, in Canada’s view, form is all that matters. As the United States has amply demonstrated above, the provincial governments are not merely providing rights, they are providing timber. US timber can be, and in fact is, imported into Canada.

4.277.

More importantly, Canadian lumber producers can and do purchase US timber on the stump for harvesting and import into Canada. The SCM Agreement states that "commercially available means that the choice between domestic and imported products is unrestricted and depends only on commercial considerations." Canadian lumber producers have virtually unrestricted access to US stumpage for import into Canada. US stumpage is therefore commercially available to Canadian lumber producers. Because US stumpage prices are commercially available to Canadian lumber producers, they fall within the universe of benchmarks that can be considered for purposes of measuring the benefit from provincial stumpage, consistent with Article 14(d) of the SCM Agreement.

4.278.

In fact, based on commercial considerations, US stumpage prices are the most reasonable world market prices to use because the terrain, topography and species mix for US timber in border states are most comparable to those in Canada, and because the record shows that Canadian companies do in fact purchase US timber. In fact, virtually all of Canada’s timber imports come from the United States.

4.279.

Furthermore, it is reasonable to conclude that US stumpage prices represent appropriate market-based benchmark prices to measure whether provincial prices confer an artificial advantage. The observed price difference for Canadian and US stumpage does not reflect differences in inherent market characteristics in Canada versus the United States. Rather, it reflects the fact that the Canadian system precludes price arbitrage for timber. There is a fully integrated North American lumber market that coexists with a largely segregated North American timber market. Canada exports over half of its total lumber production to the United States, but only three per cent of its timber production. The United States exports little lumber to Canada, but exports nearly six times as much timber. The low volume of timber trade between the two countries is the result of domestic processing requirements in Canada that limit the flow of Canadian logs southward, and the advantageous stumpage prices in Canada inhibit the flow of US logs northward. The segregated timber market in North America allows for virtually no price arbitrage in timber markets across the border.

4.280.

The unusual nature of the situation in the North American market is evident when compared to the substantial amounts of lumber and timber exports from other countries with major timber and lumber industries. More importantly, the data indicates that US stumpage prices are comparable to prices in Australia, New Zealand, Finland and Chile.

4.281.

The USDOC’s use of prices for comparable US timber that is commercially available to lumber producers in Canada was therefore appropriate in this case. Moreover, in establishing the market benchmark, the USDOC took into account other market conditions prevailing in Canada for timber, such as species, quality and tenure obligations. The market benchmark that the USDOC used in the preliminary determination was therefore consistent with Article 14(d).

4.282.

Canada alleges that the USDOC improperly assumed that the benefit from a financial contribution to one entity accrued to another entity. These allegations pertain to three distinct situations: (1) logs harvested by one sawmill and then sold in arm’s-length transactions to other sawmills; (2) lumber sold in arm’s-length transactions to companies that produce remanufactured lumber products; and (3) timber harvested by independent loggers who sell at arm’s-length to lumber mills. In each case, the allegations do not withstand close scrutiny.

4.283.

In the first two situations, all of the alleged recipients of the financial contribution and the benefit are producers of the subject merchandise. As discussed previously, in an aggregate case no further analysis of these situations is necessary to perform the aggregate calculation. The numerator (total benefit to the subject merchandise) is properly matched to the denominator (total sales of the subject merchandise). The precise amount of the benefit received by a specific producer would only be determined in a company-specific review.

4.284.

Canada’s claim with respect to the third situation rests on the assertion that the provincial governments provide a significant volume of Crown timber to independent loggers who then sell the timber at arm’s-length to lumber mills. In response to the Panel’s questions on this issue, the parties have provided record evidence concerning the operation of provincial tenures, and, in particular, the restrictions that the provinces impose on who may acquire a tenure and what the tenure holder may do with the harvested timber. While it is not the Panel’s task to conduct a de novo review of those facts, a careful analysis of this evidence demonstrates that it does not support Canada’s claim that lumber producers acquire a significant volume of timber from independent loggers.

4.285.

First, as the United States has previously demonstrated, the potential volume of timber provided by so-called "independent" loggers is small. Canada’s "evidence" to the contrary relies in large part on confusing or irrelevant statistical data. For example, Canada claims that "large numbers of harvesters" are independent loggers. The number of harvesters is, however, irrelevant. The issue is not how many independent loggers there are, but rather whether they provide a significant volume of Crown timber to lumber producers. Moreover, it is irrelevant if the harvester is "independent" if the mill owns the license (or is tied to the license contractually, as in Ontario).

4.286.

The record demonstrates that the vast majority of the Crown softwood sawlog harvest is, in fact, under tenure to sawmills. This fact is obscured by Canada’s province-specific data. For example, instead of estimating the volume of softwood sawlogs harvested by independent loggers in British Columbia, which is the relevant data, Canada estimates the volume of "timber" harvested by companies "not owning sawmills." "Timber" includes hardwood as well as softwood, and pulpwood as well as sawlogs. Moreover, it is completely irrelevant that some portion of the Crown timber was harvested by a tenure holder owning a pulpmill rather than a sawmill, if that timber was not used to make subject merchandise. The relevant fact is that more than 83 per cent of the British Columbia Crown softwood timber harvest is provided under tenures that require the tenure holder to own a sawmill.

4.287.

Canada’s statements with respect to the potential universe of "independent loggers" in Quebec are perhaps the most difficult to understand because they are almost entirely irrelevant. The issue is the percentage of the Crown harvest of softwood sawlogs that is provided to lumber mills by independent harvesters. In Quebec, 99 per cent of the Crown harvest is provided under Timber Supply and Forest Management Agreements ("TSFMA"). The Quebec Forest Act states that "[n]o one except a person authorized under Title IV to construct or operate a wood processing plant is qualified to enter into" a TSFMA. The harvest from Federal lands, which is minuscule (less than 1 per cent), and private lands is irrelevant to the benefit calculation, as is the fact that there are 40,000 registered woodlot owners. Given the TSFMA requirements, it is virtually impossible to have a significant percentage of independent loggers harvesting Crown timber in Quebec.

4.288.

Similarly, in Saskatchewan, more than 86 per cent of softwood sawlogs were harvested by tenure holders that own sawmills and process their own timber, and in Manitoba, approximately 95 per cent of the softwood sawlogs were provided directly to sawmills. Alberta also stated that "[a]ll forms of commercial tenure own and operate sawmills."

4.289.

Second, to the extent there may be a small portion of Crown timber harvested by entities that do not own processing facilities, transactions between those entities and the lumber mills are not at "arm’s-length." A truly arm’s-length negotiation is one where neither party is under any outside control or influence, either from the party with whom they are bargaining, or other parties.

4.290.

Canada claims that tenure holders are free to sell their logs to unrelated mills. In fact, the record evidence demonstrates the contrary. For example, Quebec indicated that there were essentially no arm’s-length transactions involving Crown timber sold by independent loggers to sawmills. Moreover, the record establishes that all of the provinces generally require that Crown timber be processed in a mill within the province. Each province also imposes other restrictions that impede a harvester’s ability to negotiate freely and that compel the harvester to sell to particular customers. For example, in Ontario, as a condition of the license, tenure holders are required to sign "wood supply agreements," in which they agree to supply specific quantities of wood to specific mills. The licenses also provide that the Ministry of Natural Resources can direct excess log production to specific mills. In British Columbia, major licensees are required by law to process their logs or an "equivalent volume" of wood in their mills. Similarly, in Alberta, all licenses on the record specify a particular fixed volume that must be processed in a specific mill. Moreover, the evidence shows that the so-called independent loggers often operate as employees or contractors for tenure holders. In addition, Canada’s claim of significant "sales" by independent harvesters includes transactions that are, in fact, "swaps."

4.291.

In light of this evidence, the only reasonable conclusion is that there are no true arm’s-length transactions for Crown timber between independent loggers and lumber mills. There is therefore no basis for Canada’s claim.

4.292.

As fully discussed in the US prior submissions, Canada has failed to make a prima facie case that the USDOC’s preliminary critical circumstances finding was inconsistent with the SCM Agreement. The USDOC’s imposition of provisional measures in this case on merchandise entered during the 90-day period prior to the publication of the preliminary determination was in fact fully consistent with the text of Article 20 of the SCM Agreement, as well as with its object and purpose.

4.293.

Article 20.1 expressly provides that the prospective application of provisional measures and final duties is "subject to the exceptions set out in this Article." Article 20.6 provides such an exception, stating that a Member may assess final, definitive duties retroactively for a period "not more than 90 days prior to the date of application of provisional measures" if critical circumstances are present. As discussed in the US prior submissions, retroactive provisional measures (including suspension of liquidation and cash deposits or bonds) are essential to enable a Member to avail itself of the special remedy provided under Article 20.6. It is therefore the view of the United States that a Member may impose retroactive provisional measures if there is a reasonable basis to believe or suspect at the time of the preliminary determination that critical circumstances exist.

4.294.

With respect to Canada’s remaining critical circumstances claims, the United States will, at this time, rely on its prior submissions.

4.295.

No reviews have been requested, much less denied, in this case because the United States has not yet imposed definitive countervailing duties. Canada simply claims that the US laws governing such reviews are inconsistent with the SCM Agreement. Under established WTO jurisprudence, however, a Member’s law breaches that Member’s WTO obligations only if the law mandates action that is inconsistent with those obligations. If the law provides discretion to authorities to act in a WTO-consistent matter, the law, as such, does not breach a Member’s WTO obligations.

4.296.

For the reasons fully discussed in the US prior submissions, the US laws that Canada challenges clearly do not mandate action inconsistent with US WTO obligations. US law instead gives the USDOC broad discretion to conduct reviews in a WTO-consistent manner.

4.297.

For the reasons set forth above, the United States requests that the Panel reject Canada’s claims in their entirety.¹⁴

4.298.

In its second oral statement, Canada made the following arguments.

4.299.

We are here because the United States, in violation of its WTO obligations, is imposing duties on Canadian softwood industries that are crippling our forest industries. This dispute is not just about trees or logs or lumber. It is, rather, about how the WTO Agreement applies to a Member’s management of its natural resources. The United States claims a right to countervail the products of Members who manage their natural resources in a way that differs from the way chosen by the United States. Ignoring the SCM Agreement, the United States simply presumes that the difference between Canadian stumpage fees and US prices is a countervailing subsidy. In effect the US view is that where a government owns natural resources, it may exploit those resources only by auctioning them off in the US style. Of course this is not the way Canada manages its timber resources. And it is not the way the United States manages its natural resources, such as fisheries and mineral rights.

4.300.

The US approach is also neither logical nor consistent with economic theory. For example, it is not at all evident that auctioning off stumpage in Canada would result in higher returns than those prevailing under Canada’s current systems. However, where there is an abundance of resources and a small market, one would expect prices to be lower. And, the owner of those resources might well command a higher return by setting rates administratively.

4.301.

The United States has imposed provisional countervailing measures against practices that are not subsidies within the meaning of the SCM Agreement. The United States has, also, impermissibly imposed retroactive provisional measures pursuant to a "preliminary" critical circumstances determination. Finally, in countrywide cases, the United States does not provide for expedited reviews as required by Article 19.3, and outright prohibits company-specific administrative reviews contrary to Article 21.2 of the SCM Agreement.

4.302.

The distinction between the right to harvest trees, standing timber, and logs, and the distinction between timber harvesters and lumber producers, are at the heart of this dispute. They are as follows:

· the right to harvest trees is a form of property interest. The owner of this right may go on someone’s land and cut down the trees on that land;

· standing timber refers to trees in the forest, that are incapable of being traded; and

· logs are what is produced when trees are cut down and prepared for transportation;

· Sawmills, in turn, process logs into lumber, which is the subject merchandise.

The second set of distinctions relate to the different players.

· provinces own most forests in Canada;

· timber harvesters enter into agreements with provinces to manage these forestry resources. Under these agreements, the tenure holder has the right to harvest trees, but also incurs obligations (including reforestation, and the like), regardless of the quantity of trees harvested. The tenure holder may or may not own a mill; or if it has a mill, it may not be able to process all of the logs that result from its own harvest of standing timber. So the tenure holder could sell logs, process logs itself, or export them; and

· lumber producers are the sawmill operators that process logs into lumber. They are also secondary manufacturers that buy lumber from sawmills for further processing.

4.303.

The United States assertion that provinces provide "timber" to lumber producers is, therefore, incorrect as a matter of fact, and its assertion that provinces "provide goods" when they enter into tenure agreements is incorrect as a matter of law.

4.304.

The ordinary meaning of "provide" is to "supply", in the sense of to "give".

4.305.

The United States proposes an alternative meaning, to "make available", in the sense of to "make it possible to obtain". The verb "provide", however, does not have such a wide scope:

· in subparagraph (iii), the converse of "provide" is "purchase". Properly construed, therefore, "provide" must mean "give" or "sell"; and

· elsewhere in the WTO Agreement, the verb "provide" is used when the drafters intended to denote "give".

4.306.

If the negotiators had wanted to say, "make it possible to obtain", they would have said so in Article 1.In the light of its context, "provide" means to "give" or to "sell".

4.307.

The term "goods" has the same meaning in Article 1 as elsewhere in the SCM Agreement and the WTO Agreement. "Goods" in Article 1 are the "goods" to which the modifier "imported" is applicable in Article 3; they are the same "goods" that are the subject of Article II of GATT 1994 and the Customs Valuation Agreement. "Goods" are tradable items – products – that are capable of bearing a tariff, and exclude real property, intellectual property and other property interests.

4.308.

Moreover, the terms "goods" and "products" are used interchangeably in the WTO Agreement. Article II of GATT 1994 refers to "products" in paragraph 1(b) and "goods" in paragraph 1(c) – and both refer to items that may be subject to tariff bindings. The term "goods" is translated into "biens" and "bienes" in Article 1 of the French and Spanish versions of the SCM Agreement, and "produits" and "productos" in Article 3. The term "goods" is also translated into "marchandises" and "mercancías" in the French and Spanish versions of the Customs Valuation Agreement. "Goods", "biens", "bienes", "produits", "productos", "marchandises", "mercancías" – all mean the same thing: tradable items, or products in the sense of Article II of GATT 1994.

4.309.

The United States persists in its argument that providing the right to produce goods is in effectthe same as providing goods. In this respect, the United States is rehashing its failed "functional equivalence" arguments from United States – Export Restraints.Subparagraph (iii) does not refer to the effects of a government action, but the action itself. This government action is entering into a tenure agreement, one element of which is a right to harvest trees.

4.310.

The question before you is the scope of the phrase "provides goods" and not Article 1.1(a) of the SCM Agreement more generally. The United States tries to justify its stretching of "provides goods" by saying that Canada’s objections elevate form over substance. On the contrary, it is evident that the drafters of the SCM Agreement made conscious and careful choices in defining "financial contribution" under the SCM Agreement, and we ask the Panel to give effect to those choices.

4.311.

The Parties agree: that there is a "benefit" where "the recipient has received a ‘financial contribution’ on terms more favourable than those available to the recipient in the market"; where the alleged financial contribution is a government provision of goods, Article 14(d) of the SCM Agreement is the relevant guideline; and that Article 14(d) requires an investigating authority to determine adequacy of remuneration in relation to prevailing market conditions in the country of provision of the goods. The United States now concedes that "[t]here is no dispute that the basis for the comparison described in Article 14(d) is the prevailing market conditions in the country under investigation."

4.312.

This is a significant departure from the USDOC’s position in the preliminary determination (PD) and from the position the United States took earlier in this case. In the PD, the USDOC found that in-country benchmarks were not required.In its First Written Submission, the United States argued that Article 14(d) "requires [an] authority to determine the adequacy of remuneration with reference to market prices for transactions that, while not necessarily between buyers and sellers within the country of provision, are (or could be adjusted to be) comparable to the government transactions …".

4.313.

The United States now argues that out-of-country benchmarks are "commercially available" in Canada. For the United States, it is no longer the case that "in" means "out" – rather, it is that "out" really means "in": that is to say the prevailing market conditions in the United States are somehow "available" in Canada, the appropriate benchmarks in Canada are those to be found in the United States

4.314.

Moreover, Article 14(d) does not refer to "commercial" availability of the goods in question, much less "prices commercially available" for those goods. Rather, "availability", read in context, refers to whether the goods are available in the country of provision.

4.315.

The United States argues that the US stumpage prices from selected lands it used as benchmarks in this case are "world market prices". This is untenable. Goods that are capable of having a "world market price" are essentially homogeneous commodities or ones whose characteristics can be defined so that they are interchangeable. Standing timber is not such a commodity. This is why the USDOC used six different US benchmarks

4.316.

The United States also argues that US stumpage prices are comparable to stumpage prices in other parts of the world and are, therefore, "appropriate" and consistent with Article 14(d). It asserts that support for its position can be found in item (d) of the Illustrative List of Export Subsidies and case law - Canada – Dairy.

4.317.

Withrespect to item (d), Canada has explained that its only possible relevance to this dispute is that it equates "goods" with "products". Further, Canada – Dairy is not relevant because the phrase "commercial availability" relates only to item (d) and there was no decision concerning this provision, as the Panel’s findings were rendered moot and of no legal effect by the Appellate Body (AB). If anything, the significance of this decision is limited to the conclusion of the AB that world market prices did not provide a valid basis for determining whether there were "payments" under Article 9.1(c) of the Agreement on Agriculture. The AB found that a comparison between commercial export milk prices and world market prices gave no indication as to whether Canadian export production had been given an advantage.

4.318.

Not only are US prices not "world market prices", they are also not "available" in Canada. According to the United States, US stumpage is commercially available "in" Canada for two reasons: (1) because Canadian producers can purchase US timber on the stump for harvesting, and (2) because logs produced from timber harvested in the United States can be exported to Canada. Neither reason is valid.

4.319.

First, the fact that a Canadian can bid on timber in the United States does not make that standing timber available in Canada. Second, that some Canadian firms can use logs produced from US timber does not mean that they can use US timber harvesting rights in Canada. Rights to harvest timber in the United States are available only in the United States

4.320.

Moreover, US law prohibits the export of logs from the public lands in the western US that the USDOC used as benchmarks for B.C. (Washington), Alberta (Montana) and Saskatchewan (Montana). Thus, the United States has used as benchmarks, stumpage from public lands where the export of logs is prohibited.

4.321.

At the time of the PD the USDOC had before it ample evidence of benchmarks in Canada that it chose to ignore. The United States initially asserted that the in-country benchmarks were unusable because they were artificially suppressed by government involvement in the marketplace. However, the rejection of an in-country benchmark as "distorted" because of government involvement is not supported by the SCM agreement.

4.322.

The United States now argues that the evidence was inadequate to establish a market benchmark. Yet the USDOC did no analysis of this evidence.Alberta, Ontario and Quebec all provided evidence on private sales of timber harvesting rights. B.C. provided private log price data. Alberta and B.C. also provided information on competitive tenures.

4.323.

In addition, these four provinces, which represent 96 per cent of softwood lumber exports from Canada provided the USDOC with information demonstrating that they were operating their stumpage systems consistently with market principles. The United States attempts to dismiss this evidence on the basis that "cost to government" is irrelevant in determining benefit. But the point has nothing to do with "cost to government". Rather, the substantial profits show that the provinces are acting consistently with market behaviour.

4.324.

Moreover, the US position cannot be reconciled with the USDOC’s own regulations, which provide for analysing consistency with market principles as a way to evaluate adequacy of remuneration. The USDOC has consistently determined adequacy of remuneration using this benchmark where it has found that the government played a dominant role in the market. Finally, the USDOC ignored evidence that there is no benefit to lumber producers when the situation in Canada is compared with results that would be produced in a competitive market. Regardless of what the United States now says respecting the adequacy of this evidence, the USDOC had an obligation to analyse it. It did not do so.

4.325.

The United States has not demonstrated that a subsidy exists in this case. Rather, it has improperly presumed the existence of a "subsidy" to producers of subject merchandise that buy their inputs at arm’s-length.

4.326.

The United States has admitted that at least 17 per cent of Crown timber harvest is done by independent harvesters in B.C., 14 per cent in Saskatchewan, and 5 per cent in Manitoba, and that a pass-through analysis is required at least in respect of companies that do not produce subject merchandise. Prior to the PD, the record evidence indicated even higher percentages. The requirement for a pass-through analysis, however, goes beyond this and includes instances of arm’s-length transactions for inputs (logs or lumber) into the production of the subject merchandise. In all these cases, the United States has failed to demonstrate the existence of a subsidy because it has not undertaken the required pass-through analysis.

4.327.

The United States now attempts to justify this violation by arguing that it does not need to undertake a pass-through analysis in countrywide cases. This argument is not relevant because it ignores the required elements of Article 1. More specifically, the United States has failed to establish that governments have made a financial contribution or that the financial contribution confers a benefit on a recipient. In arm’s length transactions the profit maximizing recipient of an alleged subsidy must be presumed to have retained subsidies it received.Under the SCM Agreement, there are no exceptions to the obligation to establish the existence of a subsidy.

4.328.

The USDOC calculated the subsidy rate on a first-mill basis, but applied it on an entered-value basis, with the effect of significantly increasing the countervailing measures applied. There is no dispute that the data used was first mill data. Therefore, there should be no dispute that the United States violated its obligations. The United States has attempted to excuse its violation, claiming that the USDOC did not know that the data it used was first mill data. This claim is not credible. The United States has acknowledged that the USDOC received clarification of the information provided to it before it made its decision to impose measures on a final mill basis.

4.329.

The United States argues that the term "definitive duties" in Article 20.6 also refers to preliminary measures, because, first, Article 20.1 refers to both definitive duties and preliminary measures. And second, Article 20.3 prohibits the collection of preliminary duties in an amount greater than definitive duties. The United States then argues that it must be permitted to breach Article 20.6 in order to be able, under its domestic law, to exercise the right to collect retroactive duties.

4.330.

Article 20.1 prohibits retroactive application of preliminary measures and countervailing duties subject to exceptions listed in the rest of the Article. Each of the exceptions is applicable only to the extent relevant; Article 20.6 refers to definitive duties and not preliminary measures; it does not, therefore, create an exception in respect of preliminary measures.

4.331.

The USDOC has posted a notice indicating that it will accept requests for expedited reviews in the Lumber IV case. The notice contains no information on timelines or procedures for these reviews or whether the reviews will actually be conducted for all requesting companies.

4.332.

In the light of these considerations, and to ensure that there is no doubt as to the substance of the obligations under Article 19.3, Canada requests the following findings:

· First, that the United States is required under Article 19.3 to grant expedited reviews upon request and to establish an individual countervailing duty rate;

· Second, as the United States has repeatedly stated, nothing in US law or regulations prohibits the United States from granting expedited reviews in all instances upon request and establishing individual countervailing duty rates for requesting exporters; and

· Third, that the United States has no discretion to refuse to grant expedited reviews upon request or to establish an individual countervailing duty rate for the requesting exporter.

4.333.

Accordingly, Canada asks that the Panel recommend that the United States may conform to its obligations under Article 19.3 only where it grants expedited reviews upon request and establishes individual countervailing duty rates for requesting exporters in countrywide cases at least in accordance with the timetable and procedures applicable to other expedited review requests.

4.334.

The United States continues to deny its obligations under Article 21.2 of the SCM Agreement and maintains that it has provided for some form of administrative review in countrywide cases. US arguments in respect of Article 21.2 ignore two critical points.

4.335.

First, the first sentence of Article 21.2 refers to "the duty". This can only mean the "countervailing duty" mentioned in Article 21.1. Accordingly, Article 21.2 should be read in the light of the preceding paragraph, which reads, "A countervailing duty shall remain in force only as long as and to the extent necessary to counteract subsidization which is causing injury." This means that the review must also consider the level of the countervailing duties. Second, there are three elements in Article 21.2. Article 21.2 requires that a Member review, "the need for the continued imposition of the duty … upon request by any interested party which submits positive information substantiating the need for a review". It gives a right to an interested party to request such reviews in respect of "whether the continued imposition of the duty is necessary to offset subsidization" and whether injury would continue if the duty were removed or varied. And it requires that the authorities terminate the duty if it is no longer warranted.

4.336.

Read together, in the light of Article 21.1, the obligation becomes clear: the United States must provide for, and conduct, administrative reviews upon request to determine not only whether countervailing duties are necessary at all, but also to establish company-specific rates.

4.337.

The United States is in breach of Article 21.2 because it expressly denies administrative reviews in countrywide cases. The United States persists in arguing that it has the "discretion" to grant administrative reviews in certain limited circumstances and subject to certain qualifications. This is not enough. The "discretion" in question is to grant an administrative review only "where practicable" and then only when there is a request for a "zero rate".

4.338.

Finally, if individual administrative reviews are not necessary in aggregate cases, any relief relating to expedited reviews becomes moot. This is because the aggregate rate determined at the first administrative review supersedes all other previously determined rates.

4.339.

In its second oral statement, the United States made the following arguments.

4.340.

The provincial governments identify specific stands of timber and enter into tenure agreements that allow companies to harvest that timber, that is, to take the timber off the land, in exchange for a fee based on the volume of timber harvested. The provincial governments are therefore providing a good within the meaning of Article 1.1(a)(1)(iii) of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement").

4.341.

Canada’s attempts to argue to the contrary defy general principles of treaty interpretation, the rules of logic and common sense. The essence of Canada’s argument is that when the provincial governments grant lumber producers the right to take timber from government land, the producers actually provide themselves with a good when they cut down a tree. To support this rather extraordinary proposition, Canada ignores the ordinary meaning of "goods," which includes things to be severed from the land, such as timber. In Canada’s view, a government can identify a whole forest of trees and give a specific lumber company the right to take those trees for free. The violence such a theory does to the subsidy disciplines is obvious.

4.342.

Canada’s strained interpretation is not supported by the text of the SCM Agreement. Based on the ordinary meaning of the text, when the provincial governments grant companies the right to take an identified good – timber – from government land, the government makes a financial contribution within the meaning of Article 1.1(a)(1)(iii) of the Agreement.

4.343.

A financial contribution confers a benefit if it provides some form of artificial advantage that would not otherwise be available in the marketplace absent the government’s financial contribution. Under the guidelines in Article 14(d), the benefit from a government’s provision of goods is to be determined in relation to the prevailing market conditions for the good in the country of provision. The United States shares the view of the European Communities that the concept of "prevailing market conditions in the country of provision" is sufficiently broad to permit consideration of prices for competitive goods commercially available on the world markets to purchasers in the country of provision.

4.344.

That interpretation is firmly grounded in the text of the SCM Agreement and commercial reality. "Commercially available," as defined in the SCM Agreement, means that the choice between domestic and imported goods is unrestricted and depends solely on commercial considerations. Commercially available goods, both imported and domestic, compete in the domestic market and constitute the supply available to purchasers in the country of provision, that is, goods that the purchasers could obtain in the market absent the government’s financial contribution.

4.345.

Canada has acknowledged that "prevailing market conditions" in the country of provision include the available supply and that imports, which are part of the available supply, can, in appropriate circumstances, provide a market benchmark consistent with Article 14(d). Even under Canada’s reading of Article 14(d), therefore, prices for competitive goods commercially available on world markets fall within the universe of potential market benchmarks in certain cases. Because prices for competitive goods commercially available on world markets fall within the ordinary meaning of the terms used in Article 14(d), there is no basis to interpret that provision as precluding the use of such prices, under any circumstances.

4.346.

As the Canada Aircraft panel stated, the purpose of a benefit analysis is to determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution. Likewise, the Appellate Body stated that the analysis is to determine whether the recipient is better off than it would otherwise have been absent the financial contribution. Private prices for a good that are driven by government prices for that good do not represent prices that would otherwise have been available in the market absent the government financial contribution. The USDOC’s preliminary investigation indicates that such is the case with respect to private stumpage prices in Canada.

4.347.

The USDOC found that the provincial governments control approximately 90 per cent of the softwood timber supply. Moreover, tenure holders consistently harvest less than their annual allowable cut ("AAC") and, if necessary, a tenure holder may harvest in excess of its AAC. These undisputed facts indicate that Canadian lumber producers would have no incentive to purchase private stumpage unless the private seller was willing to meet, or better, the government’s administratively set stumpage price. The record facts, when taken as a whole, support the USDOC’s conclusion that private stumpage prices in Canada are integrally linked to the government prices and therefore could not logically serve as a benchmark.

4.348.

Stumpage prices in contiguous US states were the most logical choice. US stumpage is commercially available to Canadian producers and the contiguous forests are generally comparable. The United States is the only country from which Canada obtains significant amounts of softwood timber. Canadian companies own timberland in the United States, bid on US stumpage and regularly import US timber.

4.349.

In sum, the Panel should find that Article 14(d) permits the use of prices commercially available on world markets in appropriate circumstances. The Panel should also find that the use of such a benchmark was appropriate under the specific facts of this case.

4.350.

Canada argues in its second submission that, if the United States wishes to preserve the possibility of retroactively imposing definitive countervailing duties pursuant to a critical circumstances determination, it should provide in its laws for retroactive assessment. That is, however, precisely what suspension of liquidation does. Furthermore, Canada’s assertion that US Customs’ practice resolves this issue is incorrect. Under US law, an entry that is not liquidated within one year from the date of entry is deemed liquidated by operation of law at the rate of duty in effect at the time of entry. Countervailing duty investigations frequently take more than a year to complete; the SCM Agreement permits the investigation to go as long as 18 months. Entries during the 90-day retroactivity period would, in such cases, be liquidated by operation of law and no retroactive countervailing duties could be imposed.

4.351.

The United States also notes that Canada’s flexible interpretation of Article 20.3 stands in stark contrast to its restrictive reading of Article 20.1. The United States therefore takes little comfort in Canada’s assertion that Article 20.3, which on its face does not contain the limitations assumed by Canada, would not be interpreted as precluding the imposition of retroactive duties where the amount of the duties has not been guaranteed by cash deposit or bond.

4.352.

The United States has demonstrated that US law provides the USDOC with discretion under section 751 of the statute to implement the United States’ obligations under Article 19.3. Canada nonetheless asks the Panel to find "for the sake of clarity" that the United States has failed to implement its obligations under the SCM Agreement. Moreover, Canada even goes so far as to ask the Panel to make findings that the United States must implement its obligations in a specific fashion, not just in this case, but "in any other investigation." Such a request is, to say the least, inappropriate.

4.353.

Where a Member’s laws do not mandate WTO-inconsistent action, the Member is accorded the presumption that it will implement its obligations in good faith. The United States has demonstrated that the laws and regulations at issue do not mandate WTO inconsistent action or preclude it from implementing the obligations in Article 19.3 of the SCM Agreement. Therefore, the measures are not inconsistent with the SCM Agreement. No further findings or recommendations are necessary or appropriate.

4.354.

Canada has also misstated the United States’ position with respect to administrative reviews. Canada notes that the United States stated that Section 351,213(b) of the USDOC’s regulations does not apply to aggregate cases. Canada fails to note, however, that the United States also stated that the regulation does not restrict the USDOC’s authority to conduct reviews. More importantly, however, the regulations cited by Canada govern only assessment proceedings and Article 21.2 does not address assessment proceedings.

4.355.

The factual record at the time of the preliminary determination consists largely of the information that Canada submitted in its initial responses to the USDOC’s questionnaire. The United States has provided the Panel with a great deal of that information. The United States therefore finds very disturbing Canada’s serious and entirely baseless accusation that the United States has wilfully misrepresented certain facts concerning tenures in Alberta. The documents provided by the United States speak for themselves.

4.356.

Canada also argues at length in its second submission about the USDOC’s preliminary adjustments. Although the United States could refute those claims, they are not before the Panel for the simple reason that Canada has not challenged those adjustments in this proceeding. Canada’s eleventh hour attempt to expand the Panel’s terms of reference is improper and should, therefore, be rejected.

4.357.

Moreover, Canada cites its criticisms of the adjustments in an attempt to bolster its argument that the use of a cross-border comparison is prohibited per se. In doing so, Canada attempts to give the impression that the study relied upon by Canada to support this argument is the only record evidence on this issue. In fact, the record at the time of the preliminary determination contains extensive evidence that the US stumpage prices in contiguous states provide a very reasonable and logical basis for determining the market value of Canadian timber.

4.358.

Canada also accuses the United States of engaging in post hoc rationalizations. Canada has not, however, claimed that the preliminary determination is inconsistent with Article 22 of the SCM Agreement regarding public notice and explanation of determinations.

4.359.

The United States would now like to turn the Panel’s attention to certain record facts before the USDOC at the time of the preliminary determination. The debate over the record facts has primarily centered on two issues: processing requirements imposed on tenure holders by the provincial governments and private stumpage prices in Canada.

4.360.

With respect to tenure processing requirements and the existence of so-called independent loggers, the United States would stress at the outset that the benefit calculation was based solely on the volume of Crown timber that went into the production of softwood lumber. Data pertaining to other tenure types, to timber from private lands or to timber going to the production of other types of products are entirely irrelevant.

4.361.

In addition, the record at the time of the preliminary determination indicates that the vast majority of Crown timber obtained by lumber producers was provided by the provinces directly to those producers. The record also indicates that, due to the restrictions imposed by the provinces, any truly arm’s-length transactions for the small amount of timber that a lumber producer may have acquired outside its own tenure are insignificant. In short, the record at the time of the preliminary determination does not indicate that pass-through is an issue, nor did Canada raise it as an issue until the day before the preliminary determination.

4.362.

Canada attempts to argue around the fact that only three provinces provided any information concerning non-government prices for stumpage. The fact remains that Alberta provided a single estimated stumpage value for all species and quality of trees; a value that is calculated by the province for the purpose of settling disputes over damaged timber. The United States provided the Panel with a copy of the Resource Information Systems study, which Ontario submitted to the USDOC. I refer the Panel to the United States’ previous comments on the study and to the study itself, which we believe confirm the validity of the USDOC’s assessment. With respect to Quebec, the United States notes that the record evidence of suppression of private stumpage prices that the United States has cited is only a sample of the record evidence.

4.363.

Moreover, as discussed previously, this was not the only evidence on the record. Other facts concerning the governments’ position as the dominant supplier of timber are consistent with the various statements on the record concerning price suppression. All of the evidence of the dominant influence of the provincial government on private stumpage prices, taken together, is more than sufficient to support the USDOC’s preliminary determination that private prices could not logically serve as a valid market benchmark.

4.364.

As previous panels have recognized, what constitutes sufficient evidence to support a determination varies depending on the nature of the determination in question. At the time of the preliminary determination the investigation was, of course, incomplete. Canada appears to be asking the Panel to resolve the outstanding issues and render its own findings of fact. Accordingly, Canada has spent a great deal of time explaining the facts and statements it provided to the USDOC prior to the preliminary determination and even supplementing those facts with references to evidence submitted after the preliminary determination. In this proceeding, however, the preliminary record must speak for itself.

4.365.

The question in this proceeding is whether Canada has established, based on the evidence before the USDOC at the time of the preliminary determination, that there is a breach of the cited WTO provisions. If there is a reasonable basis for the preliminary determination, as there is in this case, there can be no breach of the SCM Agreement. Moreover, Canada, as the complainant, bears the burden of establishing a prima facie case of a breach. Therefore, if the balance of evidence is inconclusive with respect to a particular claim, Canada must be held to have failed to establish that claim.

4.366.

It is the view of the United States that an objective assessment of this matter, as presented here and in our prior submissions, and a proper application of the standard of review will lead the Panel to conclude that Canada has not established a breach of the cited WTO provisions.

5.1.

The arguments of the third parties, the European Communities, India and Japan, as contained in their written submissions and oral statements are summarized below.

5.2.

In its written submission, the European Communities made the following arguments.

5.3.

The question whether stumpage is covered by the term "goods" can be determined at least in two different ways:

5.4.

First, stumpage presupposes the provision of land on which the harvester exercises its right. As "land" is an "immovable" good, Article 1.1(a)(1)(iii) of the SCM Agreement may apply. The term "good" is commonly defined as, inter alia, "property or possessions; esp. movable property, saleable commodities, merchandise, wares" or "tangible or moveable personal property, other than money; esp., articles of trade or items of merchandise". The French text of the SCM Agreementuses the term "biens", which is defined as, inter alia, "domaine, possession, propriéte". Finally, the Spanish version refers to the word "bienes", which encompasses "inmobiliario" as well as "mobiliario". Therefore, from the ordinary meaning of the word the term "goods" can not only apply to "movable" but also to "immovable" objects, including "land".

5.5.

Contextually, such an understanding is corroborated by Article 1.1(a)(1)(iii) of the SCM Agreement, which refers to "(…) goods or services other than general infrastructure (…)" (emphasis added). According to this wording even streets, railways or channels - which are all immovable objects – are to be considered as a "good" to the extent that they are not "general". It follows a contrario that any "individual" immovable object may also be covered by Article 1.1(a)(1)(iii) of the SCM Agreement.

5.6.

Second, stumpage gives a right to harvest a movable "good", i.e. the log, but it does not provide the object as such. In the EC’s view even a "right to a good" might be sufficient for Article 1.1(a)(1)(iii) of the SCM Agreement because if one were to deny such a possibility Members could easily circumvent the obligations of the Agreement. As the economic consequences would be the same in both instances, the SCM Agreement should apply equally to both cases.

5.7.

In the light of the complex nature of stumpage, the EC cautions that it would be necessary to carefully assess all the rights and obligations related to stumpage in the light of Article 1.1(a)(1)(iii) of the SCM Agreement. This is especially true because each province maintains a specific stumpage system. In this respect, the EC notes that all of the Canadian stumpage programmes appear to provide the beneficiary with the right to cut trees on certain "land". Furthermore, stumpage seems to be closely related to a defined movable good, which is the actual log to be harvested. In that respect, the EC finds it pertinent that, according to the main parties, the stumpage fee is calculated on the basis to the volume of the trees cut down and that applicants for stumpage are usually required to own a wood-processing facility.

5.8.

The starting point for the benefit analysis under Article 14(d) of the SCM Agreement should be the prices in the country of provision, here Canada. This is not contested by the main parties.

5.9.

The term "distortion", which is used by the United States, is not mentioned in Article 14(d) of the SCM Agreement as being relevant to the benefit analysis. The EC considers that much care should be paid in determining the correct benchmark for the existence and amount of a benefit. As Article 14(d) of the SCM Agreement does not set explicitly forth a hierarchy of methodologies, the Panel should refrain from imposing any such hierarchy.

5.10.

Article 14(d) of the SCM Agreement requires investigating authorities to use domestic price information as long as these prices are market-driven and prevailing. The notion of market implies "an opportunity for buying and selling", "a place or group with a demand for a commodity or service or sale as controlled by supply and demand". Indeed, where prices are controlled or imposed by the government and not market-driven, i.e., not freely negotiated between suppliers and purchasers, such prices would not fulfil the key "market" criterion under Article 14(d) of the SCM Agreement. In that respect, the EC would agree with the United States that in case of a state monopoly, there would be no market conditions in the country of provision.

5.11.

Yet, this might be a rather exceptional situation. In the case at hand, the United States has not shown that the price for private stumpage in Canada is not market-driven. The United States has not demonstrated that the prices paid for stumpage rights on private lands, which may amount to 10 – 30 per cent of the provincial markets in Canada, are no longer determined by supply and demand.

Dariusz Rosati	President
Robert Arnott	Member
Gonzalo Biggs	Member

US — Softwood Lumber III

Documents of the case

Lawyers, other representatives, expert(s), tribunal’s secretary

Report of the Panel

I. INTRODUCTION

A. COMPLAINT OF CANADA

B. ESTABLISHMENT AND COMPOSITION OF THE PANEL

C. PANEL PROCEEDINGS

II. FACTUAL ASPECTS

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS

A. CANADA

B. UNITED STATES

IV. ARGUMENTS OF THE PARTIES

A. FIRST WRITTEN SUBMISSION OF CANADA

1. The Preliminary Countervailing Duty Determination

2. The Preliminary Critical Circumstances Determination

3. US Law is Inconsistent with US Obligations on Expedited and Administrative Reviews

B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES

1. Introduction

2. Statement of Facts

3. Standard of Review

4. Argument

(a) Canada Bears the Burden of Proving Its Claim

(b) The Preliminary Countervailing Determination Is Consistent With the SCM Agreement

(i) Provincial Stumpage Programmes Constitute a "Financial Contribution"

(ii) Provincial Stumpage Programmes Provide a "Benefit"

(iii) The Calculation Did Not Overstate the Subsidy Found to Exist

(iv) Canada’s "Pass-through" Argument Is Inapposite

(c) The Preliminary Critical Circumstances Finding Is Consistent with the SCM Agreement

(i) Judicial Economy

(ii) Authority to Impose Provisional Measures Retroactively

(iii) Basis for Critical Circumstances Findings

(d) Expedited and Administrative Reviews

(i) Section 777A(e)(2)(A) and (B) of the Tariff Act of 1930

(ii) Expedited Reviews

(iii) Administrative Reviews

C. FIRST ORAL STATEMENT OF CANADA

1. The Preliminary Countervailing Duty Determination

(a) Stumpage is not a "financial contribution"

(b) The USDOC’s use of "cross-border" benchmarks to find and measure "benefit" violates the SCM Agreement

(c) The USDOC impermissibly presumed a pass-through of an alleged benefit

(d) The USDOC impermissibly inflated the subsidy rate by calculating a "weighted-average country-wide rate" based upon only a portion of Canadian production and exports12

(e) The USDOC impermissibly applied provisional measures in excess of the subsidy preliminarily found to exist

2. The Preliminary Critical Circumstances Determination

3. US Law is Inconsistent with US Obligations on Expedited and Administrative Reviews

D. FIRST ORAL STATEMENT OF THE UNITED STATES

1. Preliminary Subsidy Determination

(a) Financial Contribution

(b) Benefit

(c) Cross-Border Benchmark

(d) Benefit Calculation - Indirect Subsidies (Pass-Through)

(e) Benefit Calculation - Denominator

2. Critical Circumstances

3. Reviews

E. SECOND WRITTEN SUBMISSION OF CANADA

1. Introduction

2. The Preliminary Countervailing Duty Determination

(a) "Financial Contribution"

(b) "Benefit"

(c) Pass-Through

(d) First Mill

3. The Preliminary Critical Circumstances Determination

4. US Law On Expedited Reviews And Administrative Reviews

F. SECOND WRITTEN SUBMISSION OF THE UNITED STATES

1. Introduction

2. Argument

(a) The USDOC’s Preliminary Determination that the Canadian Provincial Governments Provide a Good to Lumber Producers Is Consistent with Article 1.1(a)(1)(iii) of the SCM Agreement

(b) The USDOC Properly Measured the Benefit from Provincial Stumpage Systems Under Article 14(d) of the SCM Agreement

(i) The Use of Commercially Available World Market Prices Is, in Appropriate Circumstances, Consistent with Article 14(d) of the SCM Agreement

(ii) There Is No Evidence of a Market Benchmark in Canada

(iii) US Stumpage Prices Are Commercially Available to Canadian Lumber Producers

(c) The USDOC Properly Calculated the Total Amount of the Subsidy to Producers of the Subject Merchandise

(d) The Preliminary Critical Circumstances Finding Is Consistent with the SCM Agreement

(e) US Laws Governing Reviews Are Consistent with the SCM Agreement

3. Conclusion

G. SECOND ORAL STATEMENT OF CANADA

1. Introduction

2. Subsidy

(a) Financial Contribution

(b) Benefit

(d) The USDOC impermissibly inflated the subsidy rate by calculating a "weighted-average country-wide rate" based upon only a portion of Canadian production and exports¹²