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Dispute Settlement

U.S. Trade Remedy Law: The Canadian Experience

V. United States Countervailing Duty Investigations regarding Imports from Canada: Case Histories, 1991–1999

Softwood Lumber II

2.1 Summary

2.2 Case History

2.3 Key Issues

2.4 Programs Determined to Confer Subsidies

2.5 Programs Determined Not to Confer Subsidies

2.6 Programs Determined Not to be Used

2.7 Programs for which Commerce Needed Additional Information

2.8 Programs Preliminarily Determined Not to Exist

2.1 Summary

On May 19, 1986, Commerce initiated a second countervailing duty investigation on imports of softwood lumber from Canada. Unlike in Softwood I, softwood fence and softwood shakes and shingles were not subject to investigation. As in Softwood I, the main programs under investigation were the stumpage systems maintained by four provinces: Alberta, British Columbia, Ontario and Quebec. In this investigation, the petitioners presented new evidence indicating that the use of stumpage may have been limited by certain government policies. In addition, petitioners contended that there had been an evolution in Commerce’s interpretation of both the specificity and preferentiality tests since Softwood I.

In its preliminary determination of October 22, 1986, Commerce found that the government exercised considerable discretion in allocating stumpage rights. Accordingly, Commerce found stumpage to be specific and therefore countervailable. Furthermore, unlike its finding in Softwood I, Commerce found that certain industries did not in fact have stumpage rights (e.g., furniture producers) and that, since lumber and pulp and paper producers tended to be horizontally integrated into single enterprises, they could not be used to show that stumpage was not limited to one group of industries. A preliminary countervailing duty rate of 15.0% was calculated for stumpage.

Prior to the final determination, Canada and the United States entered into a memorandum of understanding (MOU) in which Canada agreed to collect a 15% charge on lumber exports; the charge could be reduced or eliminated for provinces initiating replacement measures (i.e. increasing stumpage). On December 30, 1986, the petition was withdrawn and the investigation terminated.

2.2 Case History

On May 19, 1986, a petition was filed by the Coalition for Fair Lumber Imports, a group composed of U.S. trade associations and producers of softwood lumber products. The scope of investigation was softwood lumber, rough, dressed or worked (including softwood flooring classified as lumber).

On July 16, 1986, the ITC released an affirmative preliminary injury determination, finding a reasonable indication that the domestic industry was materially injured by reason of allegedly subsidized imports from Canada.

The preliminary Commerce determination was postponed to October 16, 1986, because the investigation was deemed to be extraordinarily complicated as a result of the large number of Canadian producers and the broad range and complex nature of the alleged subsidy practices.

On October 22, 1986, Commerce preliminarily determined that countervailable benefits were being provided to manufacturers, producers or exporters in Canada of certain softwood lumber products. Twenty Canadian exporters were excluded from the order because Commerce was satisfied that the firms either did not participate, or only participated at a de minimis level, in all programs under investigation. The estimated net subsidy was calculated to be 15% ad valorem.

On December 30, 1986, Canada and the United States signed the Softwood Lumber Memorandum of Understanding, under which Canada imposed a temporary export tax of 15% on certain softwood lumber entering into the United States from Canada. The agreement retained the export charge revenues in Canada rather than sending them to the United States in the form of countervailing duties. The charge could be reduced or eliminated for lumber from provinces that instituted replacement measures increasing stumpage or other charges on the harvest of timber. The Commerce final determination was to be issued on Decembere 31, 1986. In a letter dated December 30, 1986, the petitioner withdrew its petition as filed on May 19, 1986. Based on the withdrawal, Commerce terminated the investigation effective January 5, 1987.

2.3 Key Issues

The significant value of Canadian softwood lumber exports to the United States (approximately $3 billion) and the fact that Softwood I had resulted in a de minimis finding again gave this investigation a heightened public profile. The key element in the investigation was the decision to investigate a Canadian natural resource management program (i.e. provincial stumpage) as potentially countervailable for the second time in four years.

Unlike in the previous softwood lumber case, Commerce preliminarily found Canadian stumpage programs countervailable. The stated reasons for this reversal were as follows:

  • The stumpage programs were nominally generally available but, as a result of government discretion in the program design and delivery, the actual or de facto benefits were limited to a specific industry.
  • Stumpage rights were provided at preferential rates as the governments of Alberta, British Columbia, Ontario and Quebec did not recover the costs of providing standing timber to stumpage holders; expenditures directly related to commercial timber harvesting exceeded directly related revenue.

Commerce’s determination of specificity was based upon a change in policy further to the U.S. Court of International Trade’s 1985 decision, Cabot Corp. v. United States.

In that decision, the CIT rejected Commerce’s specificity test and its application in Carbon Black from Mexico (June 27, 1983). The Court stated, “The appropriate standard focuses on the de facto case by case effect of benefits provided to recipients rather than on the nominal availability of benefits.” In its preliminary determination of October 22, 1986, Commerce noted that, based on its experience with the specificity test, it concluded that it had to balance various factors in analyzing the facts of a particular case (i.e. a test to determine “de facto” specificity). These factors included: (1) the extent to which a government acts to limit the availability of a program; (2) the number of enterprises, industries or groups actually using a program (possibly involving the examination of disproportionate or dominant use); and (3) the extent to which government exercises discretion in making programs available.1

To determine whether stumpage rates were provided at preferential rates, Commerce used the Preferentiality Appendix as contained in the Preliminary Results of the Administrative Review of Carbon Black from Mexico (51 FR 13269) (April 18, 1986). Here, Commerce found that the government’s cost of producing the good, i.e. standing timber, exceeded the revenues received through stumpage payments. The benefit was measured by comparing the costs of maintaining timberland and administering stumpage programs (including an imputed cost representing the value of standing timber) with stumpage payments. In Softwood I, the Preferentiality Appendix did not yet exist and Commerce had found that stumpage programs were non‑preferential according to the standard contained in the Tariff Act of 1930.

2.4 Programs Determined to Confer Subsidies

2.4.1  Stumpage Programs of the Alberta, British Columbia, Ontario and Quebec Provincial Governments

Countervailable Net Subsidy: 14.542% ad valorem

In Softwood Lumber I, Commerce had found that these programs were not limited to “a group of enterprises or industries” because: (1) any limitations on use were due to the physical characteristics of the products, and not the actions of the government; and (2) the actual users of stumpage programs spanned a wide range of industries.

In Softwood Lumber II, Commerce found that a re‑examination of the provincial stumpage programs was warranted in view of new evidence presented by the petitioners and an evolution of the interpretation of countervailing duty law with respect to the specificity test and the measure of preferentiality.

Commerce listed three factors it considered when applying the specificity test:

  1. the extent to which a foreign government acts to limit the availability of a program;
  2. the number of enterprises, industries or groups thereof that actually make use of a program (possibly involving examination of disproportionate or dominant users); and
  3. the extent to which the government exercises discretion in making the program available.

Commerce used best information available with respect to the specificity of the provincial stumpage programs because inadequate responses were received from the respondents.

Commerce preliminarily reversed its Softwood I finding and found that the stumpage programs were de facto specific. Commerce concluded that while the stumpage legislation allowed any potential user to apply, the four provincial governments in fact exercised discretion in the allocation of stumpage licences. While the existence of discretion does not per se make a benefit specific, significant evidence indicated that the discretionary allocation of stumpage rights resulted in targeting and distortion of the programs’ benefits. Contrary to the findings in Softwood I, it was concluded that there were not many industries utilizing the programs.

In attempting to determine whether stumpage rights were provided at preferential rates, Commerce concluded that there was no generally available reference price to use as a benchmark. Therefore, the Preferentiality Appendix to the Preliminary Results of the Administrative Review of Carbon Black from Mexico was used. The alternative tests contained in Carbon Black were designed to determine whether a government had provided a good or service at preferential rates for a limited number of users.

The tests, in hierarchical order, were as follows:

  1. prices charged by the government for a similar good or service;
  2. prices charged within the jurisdiction by other sellers of an identical good or service;
  3. the government’s cost of producing that good or service; or
  4. external prices.

By using alternative (3) and determining that the government expenditures involved did not recover the costs of providing standing timber to stumpage rights holders, Commerce found that these programs did provide goods at preferential rates. As the measure of the net subsidy, Commerce used the difference between provincial government expenditures in providing stumpage rights and the revenues directly derived from stumpage payments, divided by lumber sales.

2.4.2 Federal Programs
2.4.2.1 Certain Types of Investment Tax Credits

Countervailable Net Subsidy: 0.047% ad valorem

For investment in “qualified property” (i.e. new plant and equipment used in processing) the basic Investment Tax Credit was 7%, with an additional 3% or 13% for qualified property in certain designated regions. For investment in “certified property” (i.e. property in regions characterized by high unemployment and low per capita income), the Investment Tax Credit rate was 50%.

For expenditures on “scientific research” (i.e. cost of capital equipment used for scientific research and expenses related to scientific research) the basic Investment Tax Credit rate was 20%. The rate was 35% for small Canadian companies and 30% for expenditures made in designated regions.

A “research and development” Investment Tax Credit of 10% was available to all companies in Canada (20% for small businesses).

Commerce found that the basic Investment Tax Credit rates were not limited to a specific enterprise or industry, and hence were non‑countervailable. However, the Investment Tax Credit rates limited to specific regions were found to be specific and thus countervailable.

2.4.2.2 Program for Export Market Development (PEMD)

Countervailable Net Subsidy: less than 0.001% ad valorem

PEMD was a program administered by the Department of External Affairs. It facilitated the development of export markets for Canadian products by providing assistance for project bidding, market identification, export consortia, sustained export market development, participation in foreign trade fairs, and bringing in foreign buyers. PEMD assistance was in the form of interest‑free loans with repayment terms dependent upon the success of the export promotion activity. Since PEMD loans were provided for export activities at preferential rates, Commerce found them to be interest‑free loans specifically for export promotion, and therefore countervailable.

2.4.2.3 Regional Development Incentives Program (RDIP)—Grants

Countervailable Net Subsidy: 0.048% ad valorem

This program provided development incentives (grants or loan guarantees) to attract capital investments to designated regions where employment and economic opportunity were chronically low. Although the program was terminated in 1983, RDIP grants were provided through 1985. Commerce found this program countervailable because its benefits were limited to companies located within specific regions.

2.4.2.4 Industrial and Regional Development Program (IRDP)

Countervailable Net Subsidy: 0.145% ad valorem

IRDP was established in 1983 as the successor to RDIP. The goal of the program was to increase industrial development through the provision of grants to encourage the development of new and/or more productive industrial processes and products in less developed areas. The program classified each of Canada’s 260 census districts into one of four tiers. Tier IV districts were the most economically disadvantaged regions, and were eligible for the highest share of assistance under IRDP. Tier I districts were the most economically developed regions, and were therefore eligible for a lesser share of IRDP assistance. Commerce concluded that while benefits available in the Tier I region were not countervailable because of their general availability, benefits provided above and beyond Tier I (i.e. benefits available in Tiers II to IV) were countervailable because of regional specificity.

2.4.2.5 Community‑Based Industrial Adjustment Program (CIAP)

Countervailable Net Subsidy: 0.002% ad valorem

CIAP, which existed between 1981 and 1984, provided grants to promote business investments in communities affected by serious industrial dislocations.

2.4.3 Federal–Provincial Programs

The following programs were found to be limited to specific enterprises and industries or specific regions, and thus countervailable.

2.4.3.1 Agricultural and Rural Development Agreements (ARDA)

Countervailable Net Subsidy: 0.003% ad valorem

The ARDA was designed to promote economic development and alleviate social and economic disadvantages in certain rural regions through the provision of grants funded jointly by the federal and provincial governments. The focus of the programs was alternative land use, soil and water conservation, and economic development. The ARDAs signed with Manitoba, British Columbia, the Yukon and the Northwest Territories provided benefits to the softwood industry. The assistance was found to be specific because it was limited to rural areas.

2.4.3.2 General Development Agreements (GDAs)

Countervailable Net Subsidy: 0.002% ad valorem

GDAs were umbrella development agreements between the federal and provincial governments, designed to encourage regional development. Only the GDA subsidiary agreement on Manitoba Northern Development provided assistance to the softwood lumber industry.

2.4.3.3 Economic and Regional Development Agreements (ERDAs)

Countervailable Net Subsidy: 0.001% ad valorem

ERDAs were essentially continuations of the GDAs. The Saskatchewan Northern Development Subsidiary Agreement provided grants to the softwood lumber industry.

2.4.3.4 Sawmill Improvement Program (SIP)

Countervailable Net Subsidy: 0.002% ad valorem

SIP was conducted by Forintek, a private not‑for‑profit entity incorporated as Canada’s “Wood Products Research Institute.” Forintek derived its operating funds from membership fees from member companies, contracts, and contributions from the federal and provincial governments. Forintek members accounted for about 75% of Canada’s lumber production. Under SIP, Forintek conducted confidential studies of the efficiency of mill operations. Commerce found the government’s funding of Forintek’s studies countervailable as this research was confidential and benefited specific enterprises.

2.4.4 Provincial Programs

The following programs were found to be limited to specific enterprises and industries or specific regions, and thus countervailable.

2.4.4.1 British Columbia
2.4.4.1.1 British Columbia Critical Industries Act

Countervailable Net Subsidy: 0.006% ad valorem

This program provided various forms of assistance to industries designated as “critical” by the provincial government. “Critical” could refer to either the economic conditions facing that industry or the importance of the industry to the economy. As the designation of “critical” was left to the government’s discretion and the government had not provided any objective criteria for such a designation, the program was found to be specific.

2.4.4.1.2 British Columbia Low‑Interest Loan Assistance

Countervailable Net Subsidy: less than 0.001% ad valorem

Loans received by softwood lumber producers in 1978 and 1979 were found to be countervailable because their availability was limited to specific regions within British Columbia. Commerce determined that the terms of the loans were inconsistent with commercial considerations.

2.4.4.2 Quebec
2.4.4.2.1 Quebec Tax Abatement Program

Countervailable Net Subsidy: 0.001% ad valorem

This program, which was terminated in 1981, permitted manufacturing enterprises located in any part of the province outside of Montreal to deduct from taxes payable 25% of the value of allowable capital investments.

2.4.4.2.2 Aide à la promotion des exportations (APEX)

Countervailable Net Subsidy: less than 0.001% ad valorem

In 1985, this program was split into two. APEX‑Prospection provided grants to companies to facilitate the initial phases of exporting outside Quebec. APEX Marketing was designed to enable firms that had identified a promising export market to analyze the market and develop a marketing plan. Because assistance was provided to promote exports of subject goods to the United States, Commerce found the program to be a countervailable export subsidy.

2.4.4.2.3 Forest Salvage, Management and Development Corporation of Quebec (REXFOR)

Countervailable Net Subsidy: 0.173% ad valorem

REXFOR was a provincial Crown corporation funded by the Ministère des Finances du Québec; it owned sawmills and pulp and paper mills producing the softwood products under investigation. REXFOR received funding from the Quebec and federal governments, and in turn funded the Quebec forestry industry through loans and equity transfusions. REXFOR’s funding included a significant equity transfusion to Bois de l’Est du Québec (BEQ, an affiliate of REXFOR) for the purchase and reorganization of six sawmills. Commerce found this program countervailable because the benefits were limited to a specific enterprise on terms inconsistent with commercial considerations.

2.4.4.2.4 Quebec Industrial Development Corporation (SDI)— Export Expansion Program

Countervailable Net Subsidy: 0.012% ad valorem

The SDI was a Crown corporation acting as an investment corporation and development program administrator on behalf of the Government of Quebec. Commerce concluded that the SDI’s financing assistance and development assistance programs were neither regionally specific nor inconsistent with commercial considerations. However, the export expansion program, which offered interest cost reimbursements contingent on export performance, was found to be a countervailable export subsidy.

2.4.4.2.5 Quebec Lumber Industry Consolidation and Expansion (LICEP) Program

Countervailable Net Subsidy: 0.012% ad valorem

Under this program, the Government of Quebec provided 60% to 95% of the costs of engineering and management consulting related to wood processing facilities. The Government of Quebec also paid for 50% of the salary of personnel with expertise in production management or engineering, and 25% of the costs of feasibility studies for computer systems and the cost of purchasing and installing computer systems. The program was found to be specific to a particular industry.

2.5 Programs Determined Not to Confer Subsidies

2.5.1 Joint Federal–Provincial Programs

2.5.1.1 Forestry Development Agreements for Improvement of Crown Land

Under GDAs, ERDAs and ARDAs, agreements had been signed between the federal and provincial governments to develop forest land held by the Crown and by private owners. Commerce determined that the benefits of the silviculture, reforestation, forest management and administrative support elements of this program accrued to the Crown as owner of the lands, and not to the producers of the goods under investigation; accordingly it found these benefits not countervailable. Furthermore, as the resulting research was available to the public, and the benefits were available to all private landowners, Commerce found the program to be non‑countervailable.

2.5.1.2 Newfoundland Rural Development Agreement

This program was designed to promote the small industrial sector in rural Newfoundland. As this GDA subsidiary agreement was not limited to a specific industry or locale within Newfoundland, it was found non‑countervailable.

2.5.1.3 Rail Transportation Facilities for Lumber Industry

Commerce found that there were no instances in which Canadian railroads provided preferential benefits to, or facilities for, the softwood lumber industry. The rail services provided were not found to be limited to a specific industry or region.

2.5.1.4 Newfoundland Rural Development Subsidiary Agreement

This program was designed to promote manufacturing operations in a wide range of Newfoundland industries. As this ERDA subsidiary agreement was not limited to a specific industry or locale within Newfoundland, it was found non‑countervailable.

2.5.1.5 Forintek Research and Development

Forintek was a private, non‑profit entity dedicated to assisting the Canadian forest product industry. While some of Forintek’s research activities were funded by the federal government, the results were made publicly available, and benefits therefore were not specific to an industry.

2.5.2 Provincial Programs

2.5.2.1 Quebec Industrial Development Financing and Development Assistance Program

Commerce concluded that the grant, loan, loan guarantee and equity protection programs administered by this overall program were neither regionally specific nor limited to a specific enterprise or region.

2.5.2.2 British Columbia Forest Stand Management Program

This program assisted individuals on welfare in acquiring forestry management skills. The program did not relieve timber licensees of any obligations or responsibilities, nor did it provide benefits to producers of the subject merchandise.

2.5.2.3 British Columbia Small Business Venture Capital Program

This program provided incentives for investment in equity capital of small businesses in British Columbia. The eligibility requirements for the program did not limit its benefits to a specific industry or enterprise.

2.5.2.4 Alberta Research Projects for the Forest Industry

Commerce found that the results of research funded by the Alberta government were publicly available and therefore not countervailable.

2.6 Programs Determined Not to be Used

2.6.1 Federal Programs

  • Special Areas Act
  • Forest Industry Renewable Energy Program

2.6.2 Joint Federal–Provincial Programs

  • Prince Edward Island Comprehensive Development Plan

2.6.3 Provincial Programs

  • British Columbia Preferential Rail Rates
  • British Columbia Market Development Assistance
  • Quebec Industrial Development Corporation Program to Promote the Export of Products and Services
  • Quebec Laws Concerning Forest Credit
  • Quebec Reimbursement of Real Estate Taxes
  • British Columbia Income Tax Holidays
  • British Columbia Development Corporation Industrial Parks
  • Alberta Timber Salvage Program

2.7 Programs for which Commerce Needed Additional Information

Fort Nelson Extension in British Columbia

2.8 Programs Preliminarily Determined Not to Exist

Quebec Office of Planning and Development Exports Assistance Program

1Current law provides for a finding of "de facto" specificity if one or more of the following factors is present: (1) actual recipients are limited in number when measured by either enterprise or industry; (2) one enterprise or industry is a predominant user; (3) an enterprise or industry receives a disproportionally large amount; or (4) the authority providing the subsidy exercises discretion in granting the subsidy.

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