WORLD TRADE ORGANIZATION

In dispute between Canada and United States on its imposition of countervailing duties on imported Canadian softwood lumber, WTO Appellate Body concludes that U.S. Department of Commerce (DOC)'s failure to conduct pass-through analysis as to upstream lumber transactions did not comport with either SCM Agreement or GATT 1994; whereas neither DOC's finding that provincial stumpage programs amounted to financial contribution nor its determination of amount of benefits involved clashed with SCM Agreement

On May 22, 2002, the U.S. Department of Commerce (DOC) published a countervailing duty order regarding softwood lumber from Canada. The DOC had determined that Canadian softwood benefited from countervailable subsidies as a result of certain government support programs.

According to the DOC, by conferring rights to harvest timber through "stumpage"� [i.e., the value of standing timber] programs, certain provincial governments provided goods to lumber producers at less than adequate recompense and thus conferred a benefit. Also, these subsidies were specific to an industry or group of industries (namely the Canadian lumber industry).

Canada brought a complaint against the United States before the World Trade Organization (WTO). It contended that the DOC's final countervailing duty determination was inconsistent with U.S. obligations under the Agreement on Subsidies and Countervailing Measures (SCM Agreement), and Article VI:3 of the General Agreement on Tariffs and Trade 1994 (GATT 1994).

In the Report of August 29, 2003 (WT/DS257/R), the Dispute Settlement Panel concluded that the DOC's determination that stumpage constituted a financial contribution in the form of goods was not inconsistent with the SCM Agreement. On the other hand, the determination of the amount of benefit to the Canadian lumber industry did conflict with the SCM Agreement. Also, the DOC should have conducted a "pass-through"� analysis regarding upstream transactions for log and lumber products among unrelated entities. See 2002 International Law Update 173. Both the U.S. and Canada appealed.

The Appellate Body upholds the Panel's finding that DOC's "[d]etermination that the Canadian provinces are providing a financial contribution in the form of ... timber to the timber harvesters through the stumpage programmes"� is not inconsistent with Article 1.1(a)(1)(iii) of the SCM Agreement. In contrast, it reverses the Panel's finding regarding the interpretation of Article 14(d) of the SCM Agreement. Instead it finds that an investigating authority may use benchmarks other than private prices in the country of provision if the investigating authority (a) has established that private prices are distorted, and (b) ensures that the alternative benchmark relates or refers to, or is connected with, prevailing market conditions in the country of provision (such as price, quality, availability, marketability).

In addition, the Body Reverses the Panel's finding that the U.S. had acted inconsistently with Articles 10, 14, 14(d) and 32.1 of the SCM Agreement with respect to the DOC's determination of the existence and amount of benefit in the underlying countervailing duty investigation. In the Appellate Body's view, there is an insufficient basis to determine whether Article 14(d) of the SCM Agreement justified the DOC in using a benchmark other than private prices in Canada, and whether such benchmarks relate or refer to, or are connected with, prevailing market conditions in Canada. Thus, the Appellate Body does not decide these issues.

Finally, the Appellate Body upholds the Panel's finding that the DOC's failure to conduct a pass-through analysis as to arms-length sales of logs by harvesters/sawmills to unrelated parties is inconsistent with Articles 10 and 32.1 of the SCM Agreement and Article VI:3 of GATT 1994. It concludes that the DOC should have undertaken such an analysis. Therefore, the Appellate Body recommends that the U.S. bring its inconsistent measures into compliance with the SCM Agreement and GATT 1994.

[Editorial Note: In a related matter, a NAFTA panel recently examined the same U.S. countervailing duty order and decided that the U.S. must reconsider it. See 2003 International Law Update 143.]

Citation: United States - Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada (AB-2003-6, WT/DS257/AB/R) (19 January 2004); U.S. Trade Representative press release (January 19, 2004). [WTO Appellate Body report is available on its website “www.wto.org.]”

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