The U.S.-Canada Softwood Lumber Dispute Reaches a Climax

Joost Pauwelyn
November 30, 2005
With the Doha round in trouble, the so-called "spaghetti bowl" of multilateral trade rules and proliferating regional trade deals is, once again, prominently on the radar screen of the international trade community. A perfect example of this image is the US-Canada softwood lumber dispute. This longstanding trade spat, extensively litigated in the dispute-settlement procedures of both the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO), is close to reaching a climax. Fueling the suspense is the possibility that the WTO and NAFTA may reach different results.
On November 15, 2005, a WTO panel accepted a US finding that Canadian imports of softwood lumber threaten to cause material injury to US competitors.[1] On August 10, 2005, however, a NAFTA Extraordinary Challenge Committee confirmed an earlier NAFTA (Chapter 19) panel conclusion that the evidence on record does not support a finding of threat of material injury.[2] With NAFTA finding in favor of Canada -- that is, no threat of material injury, hence no US right to either antidumping or countervailing duties -- and the WTO finding in favor of the United States, what is next? Can the United States maintain its extra duties on Canadian lumber (averaging roughly 21%) or must the duties be withdrawn and/or repaid? If the latter, must the United Sates refund in full, or only part of, the amount of what so far adds up to over US $4.2 billion?
Further complicating the picture is the fact that three Canadian lumber companies (Canfor, Tembec and Terminal) have, in their capacities as investors in the United States, invoked the investor-state dispute mechanism of NAFTA Chapter 11. They claim, inter alia, that US treatment of Canadian lumber imports is discriminatory and constitutes "indirect expropriation." Together, they seek a total of US $540 million in compensation from the US government. Avoiding further risk of inconsistent rulings (this time within Chapter 11 of NAFTA), on September 7, 2005, a NAFTA panel consolidated these three requests in one single proceeding.[3]
What if this NAFTA Chapter 11 tribunal finds one thing and the WTO (or, for that matter, a tribunal operating under NAFTA Chapter 19), finds another?
The short term answer to these questions is that Canada is sure to appeal the November WTO panel decision to the WTO Appellate Body. The result of this appeal can be expected somewhere around April 2006.
The long term answer is more complicated. Although clearly dealing with the same broader dispute on lumber, the different rulings out of NAFTA and/or the WTO are not, strictly speaking, in conflict. Traditionally, for the principle of res judicata to apply and, therefore, for two rulings to be genuinely in conflict, the overlapping proceedings must involve (1) the same parties, (2) the same subject matter, and (3) the same legal claims.
Most obviously, as concerns the first requirement ("same parties"), the NAFTA Chapter 11 cases are between private Canadian investors and the US government. In contrast, the WTO and NAFTA Chapter 19 disputes are between Canada and the United States as states (although Chapter 19 also involves private parties).
Considering the second requirement ("same subject matter"), the NAFTA panel rejecting a US finding of threat of material injury was made with reference to a US determination of May 2002. In contrast, the WTO panel accepting a US finding of threat of material injury relates to a December 2004 re-determination concerning the same period of investigation but made on the basis of a different (i.e., reopened) record.
Finally, the different proceedings do not exactly involve the same legal claims (the third requirement for res judicata). WTO panels examine claims of violation of WTO rules. NAFTA Chapter 11 tribunals examine claims of violation of NAFTA. Crucially, while the WTO panel accepting a US finding of threat of material injury did so pursuant to WTO rules, the NAFTA Chapter 19 panel rejecting a US finding of threat of material injury did so pursuant to the United States' own trade laws. Indeed, the applicable law under NAFTA Chapter 19 is not NAFTA but the domestic law of the defending country.
Nonetheless, the absence of res judicata should not lead one tribunal to completely ignore the work of the other.
First, WTO panels must carefully examine whether NAFTA proceedings do not preclude the WTO's jurisdiction (and vice versa). As far as normal trade panels under NAFTA Chapter 20 are concerned, for example, (to be distinguished from NAFTA Chapter 19, dealing exclusively with dumping and subsidies), Article 2005 explicitly provides that "disputes" regarding a "matter" arising under both NAFTA and the WTO can be brought to either forum. However, once "procedures have been initiated" at either forum, the forum selected shall be used "to the exclusion of the other."
Second, even if different proceedings can advance in parallel (or sequentially), as is the case for WTO and NAFTA Chapter 19 cases, one might still expect a WTO panel to take cognizance of a NAFTA panel's analysis (and vice versa), as well as factor in the risk of inconsistent rulings. Showing no sense of such "judicial comity," the November WTO lumber panel, however, did not make a single reference to the concurrent NAFTA Chapter 19 proceedings.
Where does this leave the Canadian lumber producers, that is, the original complainants in this dispute? Even if the WTO Appellate Body confirms that the December 2004 US re-determination complies with WTO law, the fact remains that the NAFTA Chapter 19 proceedings have determined that the United States violated its very own laws, at least as between May 2002 (date of imposition of the duties) and December 2004 (date of the re-determination), a period during which around US $3 billion were collected. In this context, it is instructive that Article 103 of NAFTA includes a general conflict clause in favor of NAFTA in the event NAFTA provisions are inconsistent with GATT or other agreements to which all NAFTA members are party.
Canada is now suing the United States before the US Court of International Trade to have the duties removed and the deposits returned. In response, the US Coalition for Fair Lumber Imports has challenged the constitutionality of NAFTA Chapter 19 before the US Court of Appeals for the District of Columbia. If the United States refuses to comply with NAFTA Chapter 19 -- that is, its own laws as interpreted by a NAFTA panel -- Canada can request the establishment of a Special Committee under NAFTA Article 1905. If the Special Committee finds against the United States, Canada has the right to suspend any NAFTA benefits vis-à-vis the United States "as appropriate under the circumstances."
Relief for Canadian lumber producers under NAFTA Chapter 19 may, therefore, not be immediate, but it could operate retroactively (at least from 2002 to 2004). The prospective removal of the duties may well require more litigation at both NAFTA and the WTO. Proceedings in both fora are pending, not on injury, but on whether Canada is dumping or subsidizing lumber in the first place. The US determination of subsidy has been condemned five times by a NAFTA Chapter 19 panel and three times by the WTO. As recent as November 22, 2005, the United States, implementing the most recent NAFTA ruling, reduced its determination of subsidy from an original 19% to a 0.8% de minimis level. Nonetheless, the duties of 21% continue to be collected. The US determination of dumping, in turn, has been the subject of three negative NAFTA Chapter 19 rulings and one negative WTO Appellate Body report. US re-determinations, which continue to find dumping (in some cases at higher levels than beforehand), are currently under review in both fora. Under NAFTA Chapter 11, finally, three Canadian companies may obtain retroactive compensation of over US $500 million, if the consolidated NAFTA tribunal overcomes the obstacle in NAFTA Article 1901 that nothing in Chapter 11 "shall be construed as imposing obligations" with respect to US "antidumping law or countervailing duty law." Even if this obstacle were overcome, the question of double recovery - once under Chapter 19, a second time under Chapter 11 -- may arise.
In sum, when it comes to softwood lumber, the WTO-NAFTA spaghetti bowl is very real. Yet only the law firms involved seem to be enjoying the feast. Litigation may soon reach its limits. Finality is likely to depend on a comprehensive political settlement.
About the author
Joost Pauwelyn, an ASIL member, is a former WTO official now teaching international law at Duke Law School. He is the author of "Conflict of Norms in Public International Law," Cambridge University Press, 2003, and, most recently, "The Transformation of World Trade," 104 Michigan Law Review 1 (2005).
[1] Panel Report on United States -- Investigation of the International Trade Commission in Softwood Lumber from Canada, Recourse by Article 21.5 of the DSU by Canada, WT/DS277/RW, circulated on 15 November 2005.
[2] Opinion and Order of the Extraordinary Challenge Committee, In the Matter of Certain Softwood Lumber Products from Canada, Secretariat File No. ECC-2004-1904-01USA, 10 August 2005.
[3] Order of the Consolidation Tribunal, In the Matter of: NAFTA and a Request for Consolidation by the USA of the Claims in Canfor Corporation v. USA and Tembec et al. v. USA and Terminal Forest Products Ltd. V. USA, 7 September 2005.