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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 III

3.1 Summary

3.2 Case History

3.3 Canada–U.S. Free Trade Agreement Chapter 19 Panel (Commerce)

3.4 Canada–U.S. Free Trade Agreement: Extraordinary Challenge

3.5 Canada–U.S. Free Trade Agreement Chapter 19 Panel (ITC)

3.6 Final Determination—Programs Investigated

3.1 Summary

On October 31, 1991, Commerce initiated a third countervailing duty investigation after Canada notified the United States that it was terminating the Softwood Memorandum of Understanding. In December 1991, U.S. petitioners added Canadian log export restrictions as an alleged countervailable subsidy. On March 5, 1992, Commerce issued its preliminary subsidy determination, in which it found stumpage in Alberta, British Columbia, Ontario and Quebec to confer a subsidy of 6.25%, and log export restrictions in British Columbia to confer a subsidy of 8.23%. A preliminary subsidy rate of 14.48% was applied to lumber from all provinces except the Atlantic Provinces. Commerce abandoned the cost‑revenue comparison methodology used in Softwood II and instead found that stumpage prices were below market prices, providing a subsidy that was passed to the lumber producers. It also found that stumpage programs were, in fact, limited to a group of industries.

On May 28, 1992, Commerce published its final determination, reducing the rate for stumpage to 2.91% and the rate for export restrictions to 3.60%. A final subsidy rate of 6.51% was then applied to lumber from all provinces except the Atlantic Provinces. On July 15, 1992, the ITC released an affirmative final injury determination. The ITC found injury primarily on the basis that Canadian lumber imports consistently accounted for a very large share of apparent U.S. consumption. Subsidized Canadian lumber, and spruce‑pine‑fir in particular, was found to have caused price depression in the U.S. market. On July 29, 1992, a panel was convened under Chapter 19 of the Canada–U.S. Free Trade Agreement to review Commerce’s final determination. On May 6, 1993, the panel issued remand instructions to Commerce. On September 17, 1993, Commerce issued its determination on remand, in which it affirmed its previous determinations and increased the rate from 6.51% to 11.54%.

On May 17, 1993, the panel issued its decision on remand. It concluded that Commerce had failed to provide a rational basis for its finding that stumpage was specific, and remanded the issue back to Commerce for a determination that stumpage was not provided to a specific enterprise or industry. The panel further concluded that Commerce had not empirically shown that the stumpage programs produced market distortions (i.e. it had not performed an effects test).

With respect to log export restrictions, the panel found that Commerce had failed to determine precisely the beneficiaries of the export restrictions, and therefore rejected Commerce’s specificity finding. With a panel remand to make determinations that both stumpage and log export restrictions were not specific and therefore not countervailable, Commerce terminated the order.1

3.2 Case History

On September 3, 1991, the Government of Canada announced its intention to terminate the Canada–U.S. Memorandum of Understanding on Softwood, effective October 4, 1991. On October 4, 1991, the U.S. Trade Representative initiated a “Section 301”2 investigation of Canadian softwood lumber exports. The USTR determined to withhold or extend liquidation of entries of imports of softwood lumber until the completion of a countervailing duty investigation by Commerce.

To that end, Canadian softwood lumber was made subject to duties of up to 15% ad valorem, depending on the province of origin. The imposition of such duties was made contingent upon an affirmative final subsidy and injury determination in the countervailing duty investigation, and applied to entries filed on or after October 4, 1991.

Also, on October 4, 1991, Commerce self‑initiated a countervailing duty investigation. Commerce stated that it undertook this action because Canada had unilaterally breached the terms of the MOU, and affirmed that it possessed information regarding the extent of Canadian subsidies and the likelihood of injury. Companies located in the Maritime Provinces had been exempt from payment of the export charge since 1988, and were thus exempted from this investigation.

On December 20, 1991, the ITC released an affirmative preliminary determination, finding a reasonable indication that the domestic industry was threatened with material injury by reason of allegedly subsidized imports from Canada.

On March 12, 1992, Commerce issued its preliminary subsidy determination. Alberta, British Columbia, Ontario and Quebec were found to maintain stumpage programs conferring countervailable subsidies.

Commerce calculated a country‑wide rate for stumpage programs of 6.25%, multiplying the rates for the four provinces by their relative share of total Canadian softwood lumber exports to the United States during the period of investigation.

In addition, British Columbia was found to maintain log export restrictions that conferred a countervailable subsidy. Commerce calculated a country‑wide rate for log export restrictions of 8.23%, multiplying the rate for British Columbia by that province’s relative share of total Canadian softwood lumber exports to the United States during the period of investigation. Taken together, a preliminary subsidy rate of 14.48% was applied to lumber from all provinces except the Atlantic Provinces. Six companies that used only U.S.‑origin logs in their production were also excluded from the investigation.

On May 28, 1992, Commerce published its final determination. Weight‑averaging each province’s rate (Alberta, 1.25%; British Columbia, 3.30%; Ontario, 5.95%; Quebec, 0.01%) by the province’s share of exports to the United States, it calculated a country‑wide rate of 2.91% for stumpage programs. British Columbia’s log export regulations were found to provide a countervailable subsidy of 4.65%, weight‑averaged for a country‑wide rate of 3.60%. Taken together, a final subsidy rate of 6.51% was applied to lumber from all provinces except the Atlantic Provinces.

On July 15, 1992, the ITC released an affirmative final injury determination, thereby confirming a countervailing duty order. Canadian lumber imports consistently accounted for a large share of apparent U.S. consumption during the period of investigation, and increased when measured by value (although they decreased when measured by market share and quantity). The ITC found that prices for spruce‑pine‑fir were a bellwether in the market and that Canadian‑origin imports of these species served to limit potential price increases in the U.S. market. Log costs for Canadian producers did not increase as steeply as log costs in the United States, a fact that the ITC attributed in part to Canadian subsidies. The ITC concluded that U.S. producers’ inability to raise prices commensurate with rising costs clearly demonstrated significant price suppression and was attributable, at least in part, to sales of imported subsidized Canadian lumber.

3.3 Canada–U.S. Free Trade Agreement Chapter 19 Panel (Commerce)

On May 25, 1992, the Government of Canada, the governments of Alberta, British Columbia, Manitoba, Ontario, Saskatchewan, Quebec, the Northwest Territories and the Yukon, and the Canadian Forest Industries Council and affiliated companies requested an FTA Binational Panel Review of Commerce’s final determination.

On July 29, 1992, a panel was convened under Chapter 19 of the Free Trade Agreement to review Commerce’s final determination. On May 6, 1993, the panel unanimously affirmed in part and remanded in part the final determination:

  1. In the case of the stumpage programs, Commerce had found them to be specific on the grounds that the program had a limited number of users. The panel concluded that Commerce was required to consider all four of the specificity elements in its Proposed Regulations, as well as any other relevant record of evidence in making its specificity finding.
  2. Commerce had found that the federal government’s pricing policies for timber‑cutting rights were preferential when measured against benchmark prices charged in alternative markets. Accordingly, the policies were found to convey a subsidy to softwood lumber exporters. Commerce was instructed to consider whether or not the stumpage program did in fact distort the market so as to give a competitive advantage to Canadian exporters (i.e. it was instructed to perform an effects test).
  3. The panel found Commerce’s conclusion that British Columbia’s log export restrictions were de jure specific to be contrary to U.S. law, and it remanded the matter to Commerce for reconsideration because it felt that Commerce should have undertaken a de facto specificity analysis. A panel majority found that Commerce was entitled to treat the restrictions as subsidies. However, Commerce was directed to reconsider and recalculate a number of the economic and statistical methodologies used to determine whether the log export restrictions conferred a benefit upon B.C. softwood producers, entitling the United States to treat lumber imports from that province as countervailable. Two of the panellists found log export restrictions not to be countervailable and therefore dissented from the majority on log export restrictions.

On September 17, 1993, Commerce issued its determination on remand, in which it affirmed its previous determinations and increased the subsidy rate from 6.51% to 11.54%. As requested, Commerce analyzed the four factors identified in its 1989 Proposed Regulations relating to specificity. It re‑affirmed its prior determination that the stumpage programs were countervailable for the reason that the recipients of these benefits were “too few” in number. Commerce agreed with the panel that the log export restrictions were not de jure specific, but after reconsideration it found that they were de facto specific for substantially the same reasons given with respect to the stumpage program. Commerce adhered to its original position that it was not required to perform an analysis of “market distortion.” However, in accordance with the panel’s instructions, Commerce reviewed the record of evidence and concluded that the provincial programs had the effect of distorting the market.

On December 17, 1993, the panel issued its decision on remand. By a majority of 3 to 2, the panel concluded that Commerce had failed to provide a rational basis for its finding that stumpage was specific, and it remanded the issue back to Commerce with instructions to provide a determination that stumpage was not provided to a specific enterprise or industry.

On the question of whether the stumpage programs distorted or otherwise had an effect on markets, the majority took the position that a subsidy cannot be countervailed unless a competitive advantage is conferred upon the object of the subsidy, or unless market distortion flows from the subsidy. The panel concluded that Commerce had not empirically shown that the stumpage programs produced market distortions. With respect to log export restrictions, the panel accepted Commerce’s remand determination that the restrictions had an effect on the price of logs. However, the panel found that Commerce had failed to determine precisely the beneficiaries of the export restrictions; and since the panel believed that they were not necessarily the same as those benefiting from stumpage programs, it rejected Commerce’s specificity finding. Two panel members dissented and concluded that under U.S. principles of judicial review of agency action, the panel gave too little deference to Commerce’s choice of methodologies in determining specificity. With a panel remand to make determinations that both stumpage and log export restrictions were not specific and therefore not countervailable, Commerce was effectively instructed to revoke the order.

3.4 Canada–U.S. Free Trade Agreement: Extraordinary Challenge

On April 6, 1994, the USTR filed a Request for an Extraordinary Challenge Committee to review the findings made by the Binational Panel that reviewed Commerce’s final determination and its determination on remand. The request for the extraordinary challenge stated that two members of the panel materially violated the FTA Rules of Conduct by failing to disclose information that revealed at least the appearance of partiality or bias and, in the case of one of the panellists, that indicated a serious conflict of interest. Moreover, the panel manifestly exceeded its powers, authority and jurisdiction by ignoring the Chapter 19 standard of review, including substantive law and the facts, in overturning Commerce’s finding that the subsidies at issue were provided to a specific industry or group of industries and inventing a legal requirement that Commerce examine whether subsidies distorted the market (i.e. that it perform an effects test). The request stated that these actions materially affected the panel’s decision and threatened the integrity of the Binational Panel Review process.

On August 3, 1994, by a majority of 2 to 1, the Extraordinary Challenge Committee upheld the earlier findings of the Binational Panel. The majority found that the panel followed an appropriate standard of review and properly interpreted U.S. law3 when it ruled that Commerce, in this unique situation, was required to assess whether or not there was any competitive advantage or market distortion created by the Canadian stumpage systems or the B.C. log export restrictions before determining whether or not a countervailable subsidy existed.

The majority found that the panel had articulated the proper standard of review and had conscientiously applied the appropriate law with respect to its reversal of Commerce’s specificity findings, based on the agency’s failure to consider all of the enumerated factors.

The minority held that since the Softwood III decision, the U.S. Federal Circuit’s decision in Daewoo Electrics v. International Union of Electric 6 F. 3d 1511 (Fed. Cir. 1993) required greater deference to Commerce’s specificity methodology and its decision that market distortion is not a required element. The panel majority seems to have agreed with the Canadian position that the decision in Daewoo was not relevant and did not add to what had been laid down in earlier judicial decisions. Moreover, Justice Hart found that when Canada and the United States replaced domestic judicial review with panel review, they must have realized that such panels would exhibit less deference to administering agencies than would domestic courts.

With respect to the allegation of bias and gross misconduct lodged against two of the Canadian panel members, the majority found that the standard of gross misconduct, bias, serious conflict of interest or material violation of the rules of conduct had not been met. While Judge Morgan found that the two panellists had been remiss in not disclosing certain advice given and services rendered to various interested parties on unrelated issues, there had been no material violation of the rules of conduct. Justice Hart found that there was no intentional refusal to reveal any matter that would justify their removal, and that any omission had been inadvertent. The majority also noted that the concerns about the two panellists were not raised until after the second remand determination. In dissent, Judge Wilkey found that it was inappropriate for the Extraordinary Challenge Committee to speculate on the significance of the undisclosed conflicts of interest, and that new panellists should accordingly be chosen.

Judge Wilkey also asserted that the Extraordinary Challenge Committee was to operate in a manner equivalent to the U.S. Federal Circuit in terms of its review of panel decisions—namely, to determine whether the panel had manifestly exceeded its powers, authority or jurisdiction so as to threaten the integrity of the Binational Panel process. Furthermore, Judge Wilkey found that the panel had not shown sufficient deference to the expertise of the U.S. agency, and had substituted its theories and beliefs for those of the agency. Finally, he questioned the entire rationale of having independent “experts” reviewing agency decisions and the feasibility of educating Canadians about U.S. law.

In light of the Extraordinary Challenge Committee’s affirmation of the Binational Panel’s order, the countervailing duty order on certain softwood lumber products from Canada was revoked on August 16, 1994.

3.5 Canada–U.S. Free Trade Agreement Chapter 19 Panel (ITC)

On July 24, 1992, the Government of Canada, the governments of Alberta, British Columbia, Manitoba, Ontario and Quebec, the Canadian Forest Industries Council and affiliated companies, and the Quebec Lumber Manufacturers’ Association and its individual member companies requested a panel review of the ITC’s final injury determination.

On July 27, 1993, the panel found that the ITC’s determination was not supported by substantial evidence on the record, and it directed the ITC to make a determination about causation of material injury. The panel found that substantial evidence supported the ITC’s finding that the subject goods from Canada and the United States were highly substitutable and that the volume of Canadian imports during the period of investigation was “significant.” However, in the absence of increases in quantities or shares, or other indicia, the mere presence of a significant volume of unfairly traded imports is insufficient to support an affirmative injury determination.

The panel instructed the ITC that if price suppression was the basis of a new affirmative determination, the ITC should have indicated the actual price‑suppressing effect of the subject goods. The ITC should have also addressed the “to a significant degree” requirement of 19 U.S.C. sec. 1677 (7) (C) (ii). The panel further found that should the ITC on remand decide to rely on a cross‑sectoral comparison, it must explain the statutory and other bases permitting such a comparison. An appropriate methodology must also be established, defined and explained. Finally, the ITC was instructed to provide an adequate explanation of the basis for its findings that imports of softwood lumber from Quebec were not entitled to a separate injury determination.

The ITC released its determination on remand on October 25, 1993, again finding material injury by reason of Canadian softwood lumber imports. The ITC found that U.S. price increases had been less than they otherwise would have been and that this price suppression was caused in a significant part by Canadian imports.

It supported this conclusion with: (1) price trend evidence showing that Canadian prices rose more slowly and fell more rapidly than U.S. prices; (2) evidence that prices of Canadian spruce‑pine‑fur lumber had a dominant impact on prices in the U.S. market; and (3) evidence that U.S. prices were lowest in the Northeast (where Canadian import penetration was highest) and highest in the Southeast (where Canadian import penetration was lowest).

On January 28, 1994, the panel issued its review of the ITC’s first remand determination. The panel upheld the ITC’s determination not to accord Quebec a separate injury determination as the ITC did not have the statutory authority to vary the scope of Commerce’s determination, which in the instant case was a “country‑wide” subsidy finding.

The panel found that the ITC’s price trend data and analysis did not constitute substantial evidence in support of its conclusion that the significant price suppression was caused by imports from Canada. The ITC did not provide sufficient information as to how its conclusions were reached. Furthermore, the panel was concerned about the use of Producer Price Indices, as opposed to actual prices, to establish price trends and determine that subsidized Canadian lumber increased in price more slowly and decreased in price more rapidly than U.S. lumber. If the ITC on remand relied on price trend information to support an affirmative determination, it was instructed to provide a full analysis and explanation of the underlying data and methodology.

On remand, the ITC again found that Canadian imports had a price‑suppressive effect on domestically produced softwood lumber because the price of subsidized Canadian lumber had a dominant impact on lumber prices in the U.S. market. The panel found that there was not sufficient evidence to support the ITC’s finding that the Canadian prices served as a reference point for the pricing of U.S. lumber. Furthermore, even if there was substantial evidence on the record, it would not be sufficient to establish causation. The panel found that the evidence used by the ITC in it regional analysis was insufficient because it was based on data previously rejected and now used without adequate explanation. Moreover, the analysis contained a relatively low level of statistical certainty.

In its second remand determination released on March 14, 1994, the ITC concluded that the panel had rejected any reliance on price trends and so it did not discuss the issue further.

The ITC plurality (two of the three Commissioners who had found injury) re‑affirmed their earlier conclusion: that the U.S. industry was experiencing material injury; that lumber is a competitive, commodity market; that subsidized Canadian imports accounted for over one quarter of the market, and that they were therefore significant and causally linked to the material injury suffered by the U.S. industry; and that although their price effects on U.S. prices were uncertain, no other causes fully explained the injury. The Commissioners’ view of the finding was that imports were significant and that this fact was tantamount to a finding of injury causation.

On July 6, 1994, the panel released its review of the ITC’s second remand determination. The panel stated that the ITC had misunderstood its findings on price trend analysis and the panel had in fact indicated that it would be open to such analysis if conducted appropriately.

The panel rejected as not in accordance with law the ITC assertion that the existence of significant Canadian imports could be presumed to be a cause of material injury to the U.S. industry. Such imports, it maintained, could be viewed only as support for a determination of such causation. The panel remanded the plurality’s determination that no cause other than significant Canadian imports fully explained the losses suffered by the U.S. industry. The panel concluded that this finding was based in part upon the ITC’s cross‑sectoral comparison, a practice which in its first and second review had been remanded to the ITC to address several methodological and statutory concerns. The panel remanded the determination of the third Commissioner, who had offered a separate but concurring finding, so that several methodological concerns relating to the economic model employed could be addressed.

The Panel Review of the ITC decision effectively ended at this point. Further proceedings were stayed initially in light of a constitutional challenge to the panel process in U.S. courts, but were later terminated after the United States revoked the order on August 16, 1994.

3.6 Final Determination—Programs Investigated4

Based upon its analysis of the stumpage and log export programs, Commerce calculated a country‑wide countervailing duty rate of 6.51% ad valorem. In view of the complexity of the investigation, the following detailed analysis is presented.

3.6.1 Programs Determined to Confer Subsidies

3.6.1.1 Provincial Stumpage Programs

To find the provincial stumpage programs countervailable, Commerce had to first determine whether the programs were limited to “a specific enterprise or industry, or group of enterprises or industries.” Second, Commerce had to determine whether the provinces provided “goods or services at preferential rates.”

3.6.1.1.1 The Specificity Test

In Softwood I, Commerce found that stumpage programs were limited to a specific industry because of the “inherent characteristics” of timber. In its preliminary decision in Softwood II and in this decision, Commerce reversed itself and found the stumpage programs to be specific, as they benefited only two industries: the solid wood products industry and the pulp and paper industry.5 Commerce offered two reasons for this reversal: (1) its belief that the 1988 Omnibus Trade and Competitiveness Act was intended to overrule any prior Commerce cases in which programs were found non‑specific based upon the “inherent characteristics” doctrine; and (2) its belief that, even if the 1988 Trade Act did not overrule the “inherent characteristics” doctrine, the act did not adopt the doctrine, leaving Commerce with the discretion to overturn its earlier finding.

Commerce rejected the respondents’ argument that “purposeful government action” to limit a program must be shown for a program to be considered specific. The respondents argued that “purposeful government action” means that the program is restricted or limited by government action to a specific enterprise. Commerce found that use of the “purposeful government action” test would lead to the absurd result of finding all natural resource programs to be non‑specific.

Commerce stated that it had considered all of the specificity factors contained in the 1989 Proposed Regulations, and found that one of them—the limited number of users—required a finding of specificity. While conceding that a wide variety of products were produced by covered companies, Commerce employed a broad meaning to the term “industry” so as to include a wide variety of downstream products made from the same base products, i.e. solid wood and pulp.

3.6.1.1.2 The Preferentiality Test

Having determined that the stumpage programs were specific, Commerce addressed the second key issue: whether they provided stumpage at preferential rates. Commerce found the stumpage programs in Alberta, British Columbia, Ontario and Quebec to be preferential and therefore countervailable. Commerce rejected the respondents’ argument that the programs could not be countervailed because they did not cause “market distortion,” i.e. did not cause higher output or lower lumber prices than what would be obtained in a purely competitive market (i.e. they did not meet the effects test).

Commerce also relied upon the legislative history of the “offset” provision concerning the treatment of regional subsidies in support of its finding that Congress did not intend Commerce to consider “market distortion.” Prior to the 1979 Trade Agreements Act, the Treasury Department had a practice of taking into account the effects of government subsidies on the competitive position of subsidy‑receiving firms. In the 1979 act, Congress specifically eliminated this offset practice. Commerce indicated that this reflected Congress’ position that Commerce should not assess the economic effects of a subsidy on recipients in either defining or evaluating a government program.

In support of their position, the respondents relied in part upon several U.S. countervailing duty investigations in which Commerce had performed an effects test. Commerce stated, however, that the cited decisions were of no relevance in this case because they concerned imports from non‑market economies. The cited cases did not indicate that Commerce would necessarily use a market distortion test in countervailing duty cases involving imports from a market economy country. An effects test was necessary in a non‑market economy case because the concept of “subsidy” has no meaning outside the context of a market economy. In a market‑economy case, the existence of a “market distortion” is normally presumed once the receipt of a countervailable subsidy has been established.

The respondents relied on an economic analysis performed by Dr. Nordhaus to advance their argument that the stumpage programs did not have a distortive effect. Commerce not only found the study to be irrelevant given its determination concerning the effects test, but disputed the methodology and conclusion reached by Dr. Nordhaus.

3.6.1.1.2.1 Preferentiality Hierarchy

Commerce had devised a hierarchical methodology for determining and measuring when goods and services are being provided at preferential rates. Commerce stated that it had done so in the interest of maximizing administrative predictability, as the statute did not provide considerable guidance in this area.

Commerce’s preferred test (test one of the Preferentiality Appendix)6 to determine preferentiality is to examine whether the government has provided a good or service at a price that is lower than the prices the government charges to the same or other users of that product within the same political jurisdiction. Commerce used this benchmark for British Columbia, Alberta and Ontario, but it used its first alternative benchmark—private prices charged for the identical good—for Quebec‑origin products.

Where comparisons based on price discrimination within the jurisdiction cannot be reliably made, one of three further hierarchically ranked alternatives are used.7

Commerce indicated that its ranking was not “immutable” but would be followed unless “presented with facts or arguments demonstrating that it is inappropriate, which was not the case here.”

Commerce rejected the respondents’ argument that each province’s revenues exceeded its costs, meaning that the third alternative benchmark—the government’s cost—should be used. Commerce did not use the cost benchmark because it could use higher‑ranked benchmarks in each province. Moreover, Commerce indicated that the cost benchmark raised particular problems when applied to natural resources, and Ontario, Quebec and Alberta had expressed concerns over the use of the cost benchmark in their provinces.

Commerce refused to use a cross‑border comparison between U.S. stumpage charges and Canadian charges because its long‑standing practice has been to measure preferentiality within the foreign jurisdiction. Commerce also noted that it was convinced that too many factors affected the comparability of U.S. and Canadian stumpage charges.

3.6.1.1.3 British Columbia

Commerce determined that British Columbia provided stumpage at preferential prices as administratively set prices were lower than competitively bid prices under section 16 of the Small Business Forest Enterprise Program. Commerce utilized section 16 prices as the benchmark because they were determined solely by competitive market forces and were thus non‑preferential.

Commerce accepted the respondents’ argument that it should use all softwood log prices in calculating both the administratively set price and the competitive benchmark, since sawmills use both sawlogs and pulplogs in their milling operations.

Subsidy Calculation: Commerce found a final countervailing duty rate of 3.30%.8 The rate in Commerce’s preliminary determination was 6.88%.

3.6.1.1.4 Quebec

To determine whether Quebec’s Timber Supply Forest Management Agreement (TSFMA) program, which accounted for over 95% of the stumpage harvested on provincial lands, provided preferential rates, Commerce used its second alternative benchmark—private sales of stumpage.

Commerce found that its preferred benchmark—the government’s price for the identical good on a non‑specific and non‑preferential basis—was not available, and that its first alternative benchmark could not be used since the government did not sell “similar” goods. Based upon its comparison of adjusted TSFMA rates and weight‑averaged private stumpage rates, Commerce found the TSFMA rates to be lower and thus preferential.

Subsidy Calculation: Commerce calculated a final countervailing duty rate of 0.01%. The rate in its preliminary determination was 3.78%.

3.6.1.1.5 Ontario

Commerce found that the Ontario government charged non‑integrated mills (i.e. mills not related to pulp/paper mills) lower stumpage rates than those it charged integrated mills. It was determined that the rate charged to integrated mills was non‑preferential and thus provided an appropriate benchmark. Since Ontario’s rates were set only by reference to the end user rather than by the type of timber harvested, no pulplog/sawlog adjustments needed to be made. Commerce made no adjustments to the integrated and non‑integrated rates since both types of users shared the same responsibilities.

Subsidy Calculation: Comparing the integrated and non‑integrated rates, Commerce found a final countervailing duty rate of 5.95%. Commerce had calculated a 5.21% rate for Ontario in its preliminary determination.

3.6.1.1.6 Alberta

Alberta provided timber under three types of tenures: Forest Management Agreements (FMAs); Timber Quota Certificates (TQs); and Commercial Timber Permits (CTPs). Commerce used the FMA pulplog rate as the benchmark to measure the preferentiality of the FMA sawlog rate, since the pulplog rate was found to fluctuate based on published pulp and paper prices. According to Commerce, this fact made the pulplog rates non‑preferential and thus an appropriate basis for comparison. Commerce found the FMA sawlog rate to be countervailable since it was lower than the pulplog rate. Commerce determined that some TQs involved competitive bids, whereas others involved administered prices. Commerce used the competitive TQ bid prices as the benchmark for administered TQs and found a countervailable benefit. By comparing the prices of competitive‑bid CTPs with the administrative prices for other CTPs, Commerce found a countervailable benefit.

Subsidy Calculation: Based upon its analysis of the three tenures, Commerce found a final countervailing duty rate of 1.25%. In its preliminary determination, Commerce calculated a 4.16% rate.

3.6.1.1.7 Manitoba, Saskatchewan, Yukon and Northwest Territories

Commerce also found the stumpage programs in these provinces and territories to be countervailable. However, Commerce decided that, since the calculated rates would have an insignificant impact on the country‑wide countervailing duty rate, it would not separately construct a margin for these jurisdictions. These provinces and territories received the country‑wide rate calculated under Commerce’s analysis of Alberta, British Columbia, Ontario and Quebec.

Country‑wide Rate for Stumpage: For each province, Commerce divided the countervailable benefit calculated above by the total value of that province’s lumber and lumber co‑product (e.g., chips and sawdust) shipments. Commerce then weight‑averaged the resulting provincial rates according to each province’s percentage share of softwood lumber exports to the United States. Commerce calculated a country‑wide stumpage rate of 2.91%.

3.6.1.2 Provincial Log Export Restrictions

Commerce maintained its preliminary determination that B.C. log export restrictions provided countervailable benefits to lumber producers and that regulations in Alberta, Ontario and Quebec did not.

3.6.1.2.1 Market Distortion

As discussed above, Commerce found that the 1979 Trade Act did not require proof of market distortion (i.e. effects test) as a prerequisite to a finding of a subsidy. More specifically, Commerce determined that while the ITC was precluded by statute from measuring benefits on the basis of the net economic effect on the subsidy recipient (i.e. an increase in output or a decrease in price), the ITC was not precluded from identifying and analyzing a subsidy in terms of market distortion (i.e. marginal cost and price changes). Commerce therefore used a supply‑and‑demand analysis for the purposes of the log export restriction issue, because this analysis was found to be the only method by which it could be determined whether B.C. softwood lumber manufacturers received countervailable benefits as a result of the log export restrictions.

Commerce noted that both the stumpage programs and the log export restriction had a net economic effect on the recipient as they decreased the cost of the major raw material input (logs) and thereby lowered the recipient’s marginal cost. Commerce stressed that its analysis of the supply‑and‑demand forces at play in the B.C. log market demonstrated that marginal cost was affected by the export restriction.

3.6.1.2.2 Countervailability of Export Restrictions

Commerce recognized that prior to Leather from Argentina (a 1991 decision in which Commerce countervailed an export restriction on hides), its practice was not to countervail border measures. Commerce noted, however, that it was free to alter its long‑standing practice so long as it provided a reasonable basis for doing so and demonstrated that the new practice was consistent with the statute. Commerce stated that prior to Leather, its decisions—in which border measures, such as the log export restrictions, were found per se to be non‑countervailable— had been erroneous.

While conceding that Congress had not expressly addressed the issue of countervailability of export restrictions, Commerce stated that its review of the historical background, legislative history and statutory language indicated that Congress had intended the terms “subsidy” and “bounty or grant” to be read broadly. Therefore, according to Commerce, had Congress directly confronted this issue, it would have applied the countervailable law as a matter of law to border measures, such as export restrictions.

Commerce also stressed that the illustrative examples of domestic subsidies Congress had included in the Trade Act of 1979 did not constitute an exhaustive list and did not restrict the definition of subsidy. Commerce was free to expand the list in a manner “consistent with the underlying principles implicit in [those] enumerations.”

According to Commerce, Congress had intended it to countervail programs having the indirect effect of lowering a foreign producer’s manufacturing cost by limiting the demand for the resource. Commerce found that the B.C. log export restrictions did indirectly lower lumber manufacturers’ marginal costs, while the export restrictions maintained by other provinces did not confer any countervailable benefits.

Relying on the statute’s explicit provision that programs providing “indirect” benefits can be countervailed, Commerce rejected the respondents’ argument that a program must involve some kind of a financial contribution to be countervailable.

3.6.1.2.3 Effect of Export Restrictions on Domestic Log Prices

Having established that export restrictions can be considered domestic subsidies under U.S. law, Commerce next considered whether there was a correlation between the B.C. export restrictions and the domestic price of B.C. logs. Commerce determined that the Margolick and Uhler study9 established that the B.C. program had a “direct and discernible effect” on domestic log prices.

By reducing the demand for B.C. logs that otherwise would exist in the absence of the export restrictions, the B.C. measures had the effect of reducing the price of logs sold in the B.C. market. Commerce noted that, although the study did not establish a correlation with absolute certainty, it provided a “high probability” that B.C. export restrictions were primarily responsible for the price differential that existed between domestic and export log prices. Commerce found the log export restrictions to be de jure limited to a specific group of industries using B.C. logs, namely the solid wood products industry and the pulp and paper industry.

3.6.1.2.4 Measurement of the Benefit

Commerce determined that the B.C. log export restrictions depressed domestic log prices only on the coast and in the tidewater and border interior areas of British Columbia. Only cutting‑right tenure‑holders in these areas could respond to a lifting of the restrictions by increasing log exports. The tenure‑holders located in the north‑central interior of the province could not economically export and would not experience a price effect.

Commerce rejected the respondents’ arguments that any differential between export and domestic log prices could be accounted for by quality and transportation differences. Commerce also found unpersuasive the respondents’ assertion that British Columbia’s log export restrictions were not distortive because they merely offset the distortive effects of Japanese and U.S. policies on the coast and in the tidewater interior of British Columbia. Commerce noted that it was concerned with the effects of a program within the foreign government’s jurisdiction, not the effects of policies in other political jurisdictions.

While conceding that a significant volume of logs were exported from British Columbia, Commerce maintained its preliminary finding that the B.C. regulations effectively restricted exports, which would otherwise be more significant, resulting in an artificially high domestic supply of logs.

3.6.1.2.5 Calculation of the Subsidy

Commerce compared current domestic log prices with what prices would be without the log restrictions. Commerce rejected the petitioner’s request that it use a cross‑border analysis because, as noted with respect to stumpage, Commerce’s methodology focused on circumstances within the political jurisdiction under investigation.

Domestic Price: Commerce calculated prices for coastal log exports based on Vancouver log market prices. It used observed log prices for the tidewater interior and 1989 Statistics Canada information for the border interior. Commerce weight‑averaged the data according to the percentage of the harvest from each area capable of exporting. Commerce made a species/grade adjustment to the domestic prices to account for differences between timber in the interior and coastal areas.

Export Price: Commerce derived export prices from Statistics Canada data. Commerce then adjusted the export prices downwards by a price equilibrium factor to reflect the decrease in export prices that would occur if the log export restrictions were lifted. Commerce also made adjustments to the export price for export‑related costs (i.e. export sort costs).

Integrated Firms: Commerce found that the log export restrictions benefited integrated firms as well as firms that purchased logs. The restrictions served to subsidize lumber production of integrated firms because the firms were discouraged from selling or exporting logs as a result of the reduced prices and the restrictions.

3.6.1.2.6 Country‑wide Rate

Commerce compared the domestic and adjusted export prices. It allocated the benefit to lumber and other products made in the lumber production process based upon the value of shipments. The resulting rate was weight‑averaged based upon British Columbia’s percentage share of exports to the United States. Commerce found a log export subsidy of 3.60%. In its preliminary determination, Commerce had calculated an 8.23% rate.

3.6.1.3 General Calculation Issues
3.6.1.3.1 Country‑wide Rate

Commerce calculated a single country‑wide rate instead of province‑specific rates. Commerce noted that its long‑standing practice was to calculate countrywide, and not province‑specific, rates. Commerce did not calculate any companyspecific rates.

3.6.1.3.2 Inclusion of Value of Remanufactured Products (Remans) in Shipment Values

Commerce determined that the first mill shipment values reported by Statistics Canada, which it used to calculate the subsidy amount, were acceptable even though they included some shipment value for remans made from that lumber. Commerce stated that, in calculating the value of shipments, the overall impact of including reman values was small and not to the clear advantage of either party.

3.6.1.3.3 Allocation of Subsidy Amount to Other Products Made through the Lumber Production Process

Commerce allocated the subsidy amount not only to softwood lumber but also to the other products (e.g., chips and sawdust) that resulted from the lumber production process. Allocation was based upon the value of shipments of those products.

3.6.1.3.4 Pulplog/Sawlog Adjustment

Commerce rejected the petitioners’ argument that it should adjust for quality differences between sawlogs and pulplogs because the provinces did not use the terms “sawlog” and “pulplog” to distinguish between logs in terms of quality or size. Instead, the terms were used to distinguish the final use of what in reality were often similar logs.

3.6.1.3.5 Exclusion of Logs Sold by Tenure‑Holders

Commerce did not exclude from its subsidy calculation logs sold by tenureholders to unrelated parties because it could not separate out those sales.

3.6.1.4 Exclusion Requests for Specialty Products, Remanufactured Products and Companies
3.6.1.4.1 Specialty Products

Commerce did not exclude from the scope of the investigation products made from Western Red Cedar, Yellow Cypress, Eastern White Cedar, Eastern White and Red Pine, and clear and shop grades of lumber for two main reasons: (1) these species and grades of timber were sold under the same stumpage programs as any other coniferous species; and (2) they could be used to make the same or similar lumber products as those made from other coniferous species.

3.6.1.4.2 Remanufactured Products

Commerce decided not to exclude remanufactured products from the investigation. First, Commerce noted that the investigation covered softwood lumber products, including remans. Second, Commerce noted that it had no precise definition of remans or “reasonable, objective criteria” that it could follow to separate remans from other softwood products in excluding them from the investigation. Third, Commerce found the list of remanufactured products excluded from the MOU to be unpersuasive since the list resulted from a series of negotiations and did not legally define a class of merchandise that should be excluded. Fourth, Commerce determined that stumpage holders produced many reman products; consequently, at least some remanufacturers benefited directly from the stumpage programs. Commerce decided to collect duties based upon the first mill value of the lumber used to make the remans.

3.6.1.4.3 Company Exclusion Requests

Commerce decided that it was impracticable to review all the 334 company exclusion requests. Commerce did exclude 15 companies that used exclusively or primarily U.S.‑origin logs.

Postscript

The Uruguay Round Agreements Act of 1995 made two significant clarifications of U.S. countervailing duty law regarding the issues under review by the panel on softwood lumber. With respect to the two issues—specificity and the so‑called “effects test”—pre‑URAA U.S. law, regulation and procedure were often vague, confusing and contradictory. Commerce applied different tests in different cases. The Statement of Administrative Action to the URAA, and the URAA itself, clarified that in determining de facto specificity, Commerce would stop its analysis if it found that a single factor justified a specificity finding.

Furthermore, the Tariff Act of 1930 was amended to explicitly state that Commerce did not have to perform an “effects test” in order to determine that a subsidy program is countervailable.

According to the SAA, this amendment was made to prevent future misinterpretations of U.S. countervailing duty law, such as those made by the softwood lumber Binational Panel. Much effort was expended by Canada in attempting to persuade the U.S. administration to either eliminate or ameliorate these amendments. It was thought, at least by certain parties, that elimination of the “effects test” in particular would have the result of overturning the softwood lumber panel. These attempts were unsuccessful.

1On January 6, 1994, Commerce issued its second remand determination that stumpage and log export restrictions were not countervailable.The panel accepted the remand on February 23, 1994. On April 6, 1994, the U.S.Trade Representative requested the establishment of an Extraordinary Challenge Committee.On August 3, 1994, the committee affirmed the panel’s order. On August 16, 1994, Commerce revoked the countervailing duty order.

2302(b)(1)(A) of the Trade Act of 1974, as amended.

3Article 1904 (3) of the FTA states that panels must apply the standard of review and "general legal principle" that a U.S. court would apply in its review of a U.S. agency’s determination.

4The following is based in part on analysis provided by Steptoe and Johnson, legal counsel to the Canadian Forest Industries Council, May 29, 1992. Reproduced by permission of the Council.

5Commerce noted that its Proposed Rulemaking of May 1989 identified four factors for determining specificity: (a) the extent to which a government acts to limit the availability of a program; (b) the number of users that actually use the program; (c) whether any user receives benefits of the program in a dominant or disproportionate manner; and (d) whether the government exercises discretion in awarding benefits under the program.

6See Carbon Black from Mexico (51 FR 13269) (April 18, 1986).

7The benchmarks are, in order of preference: (1) the prices charged by the government for the identical good to others in the same political jurisdiction; (2) the price charged by the government for a similar or related good, adjusted for quality differences; (3) the price charged by private sellers in the same political jurisdiction for an identical good; (4) the government’s cost of providing the good; and (5) the price paid for the identical good outside the political jurisdiction.These benchmarks are known as the "Preferentiality Appendix" and first appeared in Commerce’s preliminary determination of its Administrative Review of Carbon Black from Mexico in 1986.

8To calculate the stumpage subsidies, Commerce followed the same general formula in each province.The numerator in each province consisted of the calculated benefit per cubic metre (i.e. the difference between administered rates and the benchmark),multiplied by the softwood sawlog harvest.The denominator consisted of the value of softwood lumber shipments plus the value of lumber co‑products (e.g., chips and sawdust).

9Margolick and Uhler,"The Economic Impact of Removing Log Export Restrictions in British Columbia," April 1986 (Margolick).

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