ASIL Insights

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Recently, Canada announced its intention to challenge in the World Trade Organization (WTO) the preliminary decision of the U.S. Department of Commerce that would impose countervailing duties of the order of 19% on softwood lumber imported into the United States from Quebec, Ontario, British Columbia, Alberta, Manitoba and Saskatchewan. [1]   On March 22, 2002, the U.S. Department of Commerce announced its final, positive determination.  This means that if the U.S.  International Trade Commission determines in May that injury has occurred to the U.S. lumber industry, the final countervailing duties will be applied on or about May 13, 2002.  The initial U.S. decision has led to negotiations toward a bilateral agreement on softwood lumber between Canada and the United States.  In the context of these negotiations, each party has the potential WTO ruling very much in mind.  It is thus important to predict what kind of ruling could emerge from a WTO panel.

The countervailing duties would be based on the allegedly below-market fees charged by the Canadian provinces for stumpage rights granted to Canadian softwood lumber producers on public lands.  Stumpage is the right to cut standing timber.  The central question before the WTO panel would be whether the United States may, in light of its WTO international obligations, consider the allegedly low Canadian stumpage fees as a countervailable subsidy.

According to WTO texts, a practice is a subsidy if it satisfies three criteria. First, it must be "specific," namely granted selectively in law or in fact to a group of enterprises.  If it is generally available for all the sectors of the economy, it is not specific and therefore not a subsidy.  Second, the practice must entail a governmental "financial contribution," and third, it must confer a "benefit" to its recipient. Canada can successfully challenge the countervailing duties only if it demonstrates that one or more of these criteria are not satisfied in this case.

With regard to the specificity criterion, the U.S. Department of Commerce determined that "there are only two industries, sawmills and pulp mills, that use provincial stumpage programs, [so] we preliminarily determine that the provincial stumpage programs are specific." [2] It is unlikely that Canada could successfully challenge this determination.

Regarding the "financial contribution" criterion, WTO texts say that a governmental financial contribution exists not only when it provides outright financial assistance, but also in the case where "a government provides goods or services other than general infrastructure." [3] The U.S. Department of Commerce determined that the softwood lumber case was an instance of such a financial contribution since the provision of stumpage rights by provincial governments constitutes the provision of a good or of services. Since WTO texts relating to the governmental "financial contribution" criterion are clear, Canada is unlikely to prevail by arguing that granting stumpage rights could not be a financial contribution.

Canada's remaining line of defense would be based on the "benefit" criterion. The vagueness of WTO texts relating to this criterion provides Canada with its strongest argument. Previous cases suggest that the WTO panel may be receptive to the Canadian position.  The WTO Appellate Body in the Canada Aircraft case determined that a benefit exists when the governmental financial contribution "makes the recipient 'better off' than it would otherwise have been, absent that contribution.  In our view, the marketplace provides an appropriate basis for comparison in determining whether a 'benefit' has been 'conferred' .." [4]   This definition is sufficient in simple cases where the "market" is easily identifiable. For example, if a Canadian firm receives a governmental loan at an interest rate that is lower than the rate charged by Canadian private banks, a benefit will have been conferred upon the recipient firm.  However, this definition becomes less certain when the free market to which it implicitly refers as a benchmark for comparison is not easily identifiable.

In the softwood lumber case the U.S. Department of Commerce determined that 70 to 90 percent of the softwood harvest in the Canadian provinces comes from public lands.  The Commerce Department also said that minimum cut requirements on public lands have the potential to depress prices.  The Department then said, "Since stumpage fees on [Canadian] public lands are the price driver for the stumpage market in those Provinces, we conclude that the stumpage fees on [Canadian] private lands are largely derivative of the [Canadian] public land prices and are therefore distorted." [5]  Thus, the Department inferred that it could not use as a benchmark the stumpage fees on Canadian private lands, as the Canadian provincial governments would have preferred.  In other words, the Department of Commerce decided that stumpage fees on Canadian private lands could not be regarded as a valid indication of free market forces in Canada and thus were not a valid benchmark.  Instead, the Department  decided to use as a benchmark the prices prevailing in U.S. private lands near the Canadian border. According to the Department, these prices constitute an adequate benchmark since "it is reasonable to conclude that U.S. stumpage would be available to softwood lumber producers in Canada at the same prices available to U.S. lumber producers." [6]   After comparing U.S. private stumpage fees to stumpage fees on public lands in Canada, the Department had no trouble finding that a benefit was conferred to Canadian softwood lumber producers. The Department's method in finding a "benefit" is open to question.

Canada might argue that this difference in prices is normal since the cost of lumber on Canadian public lands is intrinsically lower than the cost of lumber on U.S. private lands, with the result that Canadian stumpage fees correspond to no more than the "net cost" of lumber for provincial governments.  Canada used this kind of reasoning in the Canada Aircraft case, however, and it failed. The WTO panel will not be interested in the "net cost" argument.  It will be interested first and foremost in knowing if Canadian lumber producers are placed in a more advantageous position than would have been the case but for the allegedly low provincial stumpage fees. However, the argument relating to the intrinsic difference in production costs could be decisive if Canada convinces the WTO panel that stumpage fees on private lands in Canada are lower than stumpage fees on private lands in the United States because of an intrinsic difference in production costs between the two countries, and not because of a supposed distortion regarding fees on Canadian private lands.  It is unlikely that a WTO panel would accept the benchmark selected by the U.S. Department of Commerce if it is convinced that lower stumpage fees on Canadian private lands do not result from a distortion.  But if Canada fails to make this showing, Canada's position would be weakened somewhat, since the WTO panel will find itself in a situation that does not fall exactly within any WTO precedent.

The panel will have an enormous creative margin since the "market" which could be considered as an adequate benchmark is not precisely defined in WTO texts. It is thus necessary to look for indications in preceding WTO rulings that could reveal how a panel would view the matter.  In the Canada Milk case under the Agreement on Agriculture, Canada was to some extent in a position inverse to its present one since it objected to the use of the Canadian domestic milk price as a benchmark, arguing that this price was distorted. The last WTO panel in charge of this case rejected this argument in a passage that Canada will certainly invoke in the softwood lumber case:  "The only benchmark which is stipulated [in the texts] is the price for the domestic market, independently of  [italics added by the panel] the extent of government intervention in the formation of that price." [7]   Even though the softwood lumber case will not be examined under the terms of the Agreement on Agriculture, this approach is significant because WTO panels are attached to the "ordinary" meaning of texts.

Another indication can be found in the Brazil Aircraft case. Although the legal context of this case is slightly different from the softwood lumber case (the criterion at stake being "material advantage" and not "benefit"), there are similarities between these cases.  Brazil wanted to use export credit terms offered by Canada as a benchmark for determining whether Brazil's export credit terms were conferring a "material advantage."  The Brazil Aircraft panel rejected firmly this position by stressing once again that "nothing in the text[s]...indicates that the examination of material advantage involves a comparison with the export credit terms available with respect to competing products from other Members [italics added by the panel]." [8]   Although the legal provisions relating to the  "material advantage" criterion are somewhat different from those governing the "benefit" criterion, the two criteria are close enough to make the panel's approach in Brazil Aircraft relevant to the softwood lumber case.  Indeed, the position of the United States in the softwood lumber case is reminiscent of Brazil's rejected position for finding a benchmark.

Although the outcome in the softwood lumber case is difficult to predict, Canada seems to have a reasonably strong case.  If the WTO panel is inclined to favor Canada, it may nevertheless reach a compromise result giving each party something that tends to confirm its position.  That could lead to a new war of attrition between Canada and the United States.

About the Author: 
Marc Benitah is Professor of International Law, University of Quebec. Professor Benitah has just published at Kluwer Law International a comprehensive book on the law of subsidies entitled  "The Law of Subsidies under the GATT/WTO System." mbenitah@sympatico.ca.

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Addendum: WTO Panel's Preliminary Ruling Confirms Predicted Outcome on Canadian Softwood Lumber
By Marc Benitah
July 2002

On July 26, 2002, the WTO panel in charge of the Canadian softwood lumber case issued a confidential preliminary ruling. The text has not been made public, but the ruling has been summarized in the BNA WTO Reporter, Monday, July 29, 2002.

In the previous ASIL Insight on this case (March 2002), it was pointed out that Canada would win if it could demonstrate that the Canadian practice did not satisfy one or more of the three criteria defining a subsidy, namely: specificity, financial contribution, and benefit conferred. Specificity does not seem to have been a real issue between the two parties. With regard to "financial contribution," the WTO panel confirmed the view expressed in the previous Insight that, under WTO texts, the provision of goods or services other than general infrastructure would be a financial contribution. Canada claimed that the stumpage programs cannot be equated with the provision of a good under the Uruguay Round Subsidies Agreement since it involved national policy on the management of natural resources. The panel rejected that claim.

As was noted in the previous Insight, Canada's only solid line of defense was that the US Department of Commerce used a flawed method to find that a benefit was conferred. The WTO panel adopted this view and agreed with Canada that the Department of Commerce violated WTO subsidy rules by using cross-border comparisons. The WTO panel agreed with Canada that Article 14(d) of the Uruguay Round Subsidies Agreement required that price comparisons "shall be determined in relation to the prevailing market conditions ... in the country of provision or purchase."

In accordance with past WTO practice, the panel's preliminary ruling is virtually certain to be confirmed in the final ruling in September.

Unless the two countries soon sign a bilateral agreement on softwood lumber, one cannot exclude a new petition by the US lumber industry. The Department of Commerce might then use new methodology to find that the Canadian practice conferred a benefit. This determination would be followed by a Canadian request for a new WTO panel.

For further analysis of the softwood lumber dispute, see Marc Benitah, Softwood Lumber: Exact Significance of the Recent Canadian Victory before the WTO and Prospects in the Context of the Pending Second Lumber Case, online at http://128.233.58.173/estey/.

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Update January 2004

On January 19, 2004 the WTO Appellate Body issued a final countervailing duty determination that does not entirely accept the Panel's findings under article 14(d) of the Uruguay Round Subsidies Agreement. For a summary of the Appellate Body's decision, see International Law in Brief, January 23, 2004.
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ASIL Insights are intended to identify international law issues in order to provide a basis for informed discussion of current events. They are not intended to be definitive, and they do not necessarily reflect the views of all members of The American Society of International Law. The Society itself takes no position on these issues.