CASE NUMBER: 75
CASE MNEMONIC: USCANADA
CASE NAME: US-Canada Softwood Lumber Dispute
Following 14 years of formal dispute, the United States and Canada in April, 1996 reached agreement regarding alleged Canadian subsidy of that nation s softwood lumber industry. After first rejecting a 1982 petition from U.S. lumber companies charging the Canadian government with subsidizing its softwood lumber industry, the U.S. Department of Commerce (DOC) subsequently accepted a second identical petition filed by U.S. lumber companies four years later. Following negotiations, the DOC and the Canadian government reached an agreement whereby the Canadian government would impose a tax on softwood lumber exports and attempt to transform its forestry programs. However, in September, 1991 Canada decided to terminate the tax claiming it was no longer needed.
The United States disagreed and pursued a legal case with the U.S. International Trade Commission (ITC). In July, 1992 the ITC ruled in favor of the United States. Canada is pursuing the case via the Free Trade Agreement and GATT. Four years have passed since the disagreement. As of April, 1996 a new agreement has been reached between Canada and the U.S. Canada has agreed to limit its softwood lumber shipments to the U.S.in exchange that the U.S. would not launch any new trade action against Canadian softwood producers for five years.
On three separate occasions, the Canadian federal and provincial governments have been charged with subsidizing the softwood lumber industry. The U.S.-based Coalition for Fair Lumber Imports first filed a petition in 1982. It claimed that the Canadian government's timber programs offered lumber to the Canadian softwood industry at a price 27 percent lower than the U.S. rate. However, in May, 1983 the DOC rejected those allegations and the petition was denied. Commerce based its rejection on U.S. law which defined a subsidy as government assistance provided to a single industry or group of industries.
Stumpage programs are available within Canada on similar terms regardless of the industry or enterprise of the recipient. The only limitations as to the type of industries that use stumpage reflect the inherent characteristics of this natural resource and the current level of technology. As technological advances have increased the potential users of standing timber, stumpage has been made available to the new user. Any current limitations on use are not due to activities of the Canadian government.
In other words, the Canadian government program did not offer assistance to just one industry or a group of industries, but to a number of different industries. Without filing an appeal, a lumber group filed a second petition in May, 1986 repeating the same allegation. Although there had been no material changes in the Canadian forestry program since 1984, Commerce accepted its petition. The department found that the federal and provincial governments provided a 15 percent subsidy to a single industry: the softwood industry. Once Commerce determined this rate, it threatened to impose a 15 percent countervailing duty to counteract the alleged subsidy. Canada chose to avoid the implementation of the tax by negotiating a Memorandum of Understanding (MOU). Although this agreement also forced Canada to impose a 15 percent tax on softwood lumber exports, it was more beneficial for Canada than a 15 percent countervailing duty charge, which would have lined U.S. coffers.
First, it gave the federal and provincial governments the necessary time to transform their forestry programs. According to the agreement the provinces intended to decrease their stumpage fees and transfer their management costs to industries. Once their policies were significantly altered, these taxes were reduced or eliminated. For example, while all the lumber from British Columbia (BC) became exempt from the tax, only 24 percent of these exports were exempt in Quebec. The remaining 76 percent had a tax that was reduced to 3.1 percent. On the other hand, Alberta did not change its program and continued to pay the full export tax.
Second, this agreement allowed Canada to maintain control over its forest management program and to receive the revenue from the tax. If the United States had imposed the 15 percent countervailing tax, the U.S. government would have intervened to ensure that Canada changed its policies.
On September 3, 1991, Canada terminated the MOU with 3- days notice. Canada claimed the agreement was no longer needed. Most of the provincial governments had transformed their policies, eliminating the export tax on 76.3 percent of Canadian softwood lumber. However, the DOC disagreed and claimed that the subsidies still existed. Termination of the MOU would allow provinces to return to their original programs. Therefore, the DOC self- initiated the case and placed an interim-bonding measure on all exports entering the United States after the 4th of October. It also added a second allegation concerning BC log export restrictions, claiming that the BC government only allowed logs to be exported if the needs of the domestic industries had been meet. Because its domestic supply was adequate, log prices remained low, and therefore, the lumber was subsidized.
These actions diverged from prior procedure. First, Commerce did not require a petition from the allegedly affected U.S. industry, as it had in all previous countervailing duty cases. Second, it re-opened a case that had already received a negative judgement. Finally, imposing an interim-bonding measure was not consistent with U.S. countervailing duty law.
To determine the allegations, Commerce had to prove that the provincial stumpage programs and British Columbia's log-export restrictions provided a subsidy that damaged the competitiveness of the U.S. softwood industry. If so, the U.S. government could then place a countervailing duty to offset the discrepancies between the U.S. and Canadian markets.
First, Commerce examined the preference equivalents of the stumpage program. It used section 355.44(f) of the Countervailing Duties; Notice of Proposed Rulemaking and Request for Public Comments, 54 FR 23366 May 31, 1989 (Proposed Regulation), to develop a system to determine if the governments of BC, Alberta, Quebec and Ontario provided subsidies. In accordance with this statute, Commerce decided that comparing the provincial programs administratively-set prices for timber with either (1) competitive- bid non-preferential prices for provincial timber or (2) sale prices for private timber within the same jurisdiction would determine a subsidy. However, this type of calculation was not a long-standing practice. Therefore, in accordance with procedure Commerce had to "(1) offer a reasonable and rational explanation" for using this criteria, and (2) demonstrate that the new practice was not inconsistent with the applicable statute."
Commerce stated that the competitive-bid non-preferential prices for provincial timber and prices for private timber were appropriate benchmarks because they both were determined by the market. While the competitive-bid price was set according to the highest bid the industry would pay for timber, the private company harvested its timber according to demand and supply of the market. The government set the prices based on rotation lengths determined by biological criteria. These harvests were often larger than the demand in the market, often forcing the government to reduce the price. Therefore, this method would determine that a subsidy existed if the sale prices from the private land and the competitive-bid prices were higher than the administratively set price.
Commerce found that the dominant recipients of the subsidy were the group of industries that produced softwood products, including manufacturers of logs and paper and pulp. It claimed that this group of industries was specific because both used timber as a primary input. While the wood industry uses timber to produce solid wood products (such as lumber), the pulp- and paper- products industry uses timber to mechanically or chemically produce pulp.
Second, Commerce examined the BC log export restriction program to prove that the BC government provided preferential treatment (a subsidy) to a specific industry. This was a difficult task. First, in accordance with established practice of Commerce, export restrictions generally did not constitute countervailing subsidies. Nevertheless, Commerce explained that the BC restrictions not only affected the export market, but also the lumber sold in the BC market. Therefore, the action was a domestic subsidy as opposed to an export restriction. This also created problems. Nowhere in the domestic subsidy provision 771(5)(A) did it explicitly state this type of preferential treatment provided by a foreign government could result in a countervailing duty determination. Therefore, Commerce continued by presenting section 303 of the Act, 19 U.S.C. 1303, which stated that:
"Whenever any...country shall pay or bestow, directly or indirectly, any bounty or grant upon the manufacture of production or export of any article or merchandise produced in such a country, then upon the importation of such article or merchandise into the United States, there shall be levied and paid, in all such cases, in addition to any duties otherwise imposed, a duty equal to the net amount of such bounty or grant..."
Further, Commerce maintained that the domestic subsidy was countervailing because the domestic subsidy provision stated that a subsidy was similar to a "grant or bounty" which according to section 303 was countervailing. It supported this argument by stating that according to legislative history, Congress intended to incorporate the same "administrative and judicial practices construing the term "bounty or grant" under section 303 into the definition of a subsidy. Commerce illustrated this with a statement made at the 96th session of Congress in 1979. It stated that the term subsidy:
has the same meaning which administrative practice and the courts have ascribed to the term `bounty or grant' under section 303 of the Tariff Act of 1930, unless that practice of interpretation is inconsistent with the bill.
Therefore, Commerce concluded that Congress did not intend to limit the term or the remedies provided under the provision of domestic subsidies. Furthermore, GATT and the GATT subsidy code did not preclude such a connection and a countervailing duty could be imposed.
Canada, however, resisted this argument saying the BC log export restriction was not a domestic subsidy. The BC government did not directly provide assistance, but only implemented export restrictions which indirectly affected timber prices.
In response, Commerce explained that the indirect subsidy was similar to a domestic subsidy because both lowered the prices of timber and reduced the production costs of the softwood lumber industry. It stated that in accordance with the Customs Court's decision in ASG industries Inc. vs. United States, the argument was viable.
Unquestionably, the effect of these programs has been to reduce [the respondent's] cost of producing float glass. And whether the reduction in cost is occasioned by direct cash payment, or by an act of government reducing labor cost, capital costs, or the cost of any other factor of production is of no consequence. For if a benefit or advantage is received in connection with the production of the merchandise, that benefit or advantage is a bounty or grant on production. And to the extent that such bounties [sic] merchandise is exported to the United States, it comes squarely within our countervailing duty law -- section 303.
Commerce uses four categories of the domestic subsidy provision as a guide. The provision states that: "the term 'subsidy' ... includes, but is not limited to, the following ..." The DOC then stated that the BC's export restrictions had common characteristics with the direct domestic subsidy provisions.
Finally, the panel concluded that the BC log export restriction was similar to the domestic subsidy and therefore could be countervailing. To decide if the BC export restrictions were provided to a single group, Commerce used the same rationale it applied in the stumpage decision. It claimed that the subsidy was provided to a specific group composed of the primary timber processing industries which included logs and paper and pulp companies.
After Commerce found that the timber oversight programs of BC, Ontario, Quebec and Alberta, along with the log export restrictions of BC, were countervailing subsidies, the Department determined a country-wide ad valorem tax. This tax was calculated according to the amount Canada lowered lumber prices. DOC found that the stumpage programs provided a net subsidy of 2.91 percent and that the log export restriction granted a 3.60 percent net subsidy, generating a net subsidy of 6.51 percent.
These duties were determined on May 18, 1992, but they could not be implemented until the International Trade Commission (ITC) confirmed that these subsidies materially damaged United States industries. On July 6, ITC made a final affirmative decision and the countervailing duty was imposed.
Specific Wood Case Studies
General Wood Case Studies
(1): Trade Product = WOOD
(2): Bio-geography = TEMPerate
(3): Environmental Problem = DEFORestation
Along with self-initiating this case, the U.S. government began a number of other proceedings that alleged that the Canadian government provided subsidies to other industries (e.g., the automobile, pork and strawberry industries). This dispute has led to tension between the two countries. In fact, the Canadian Ambassador, Derek Burney, already has asked the government to use more aggressive trade actions against U.S. products that are subsidized and sold in Canada, while other critics have been more radical, suggesting that Canada should totally suspend the free trade agreement (see NAFTA case). In fact, a large percent of each country's trade is with the other. In 1990 two-way trade totaled $175 billion, up from $167 billion in 1989.
Finally, this decision has and will continue to force both the Canadian government and the softwood lumber industry to use tremendous amounts of financial resources and time fighting legal battles. The decision of Commerce and the ITC has already taken over a year and it is estimated that it has cost approximately $10 million in legal fees.
Canada must accept the U.S. imposition of the duty, but has two alternate forums in which the case may be reversed. First, the U.S.-Canadian free trade agreement provides Canada with an impartial dispute resolution system through a bi- national panel. Second, Canada has asked that a GATT dispute panel review the decision. If the GATT panel reverses the decision and the judgment is adopted by GATT's Contracting Parties, it will be binding on each of the parties.
a. Geographic Domain: North America [NAMER]
b. Geographic Site: Western North America [WNAMER]
c. Geographic Impact: USA
Part of the controversy rested on the stumpage rates set by the province of British Columbia in Canada.
The measure is a countervailing duty of 6.51 percent, 2.91 percent for stumpage program and 3.60 percent for net log export restrictions.
a. Directly Related to Product: YES, Wood
b. Indirectly Related to Product: YES, Wood Products
c. Not Related to Product: NO
d. Related to Process: YES, Deforestation
With the imposition of the ad valorem tax, Canada's control over its forest management program will be reduced which will decrease the effectiveness of its environmental protection. Currently, its program is based on raising revenue from public forests, encouraging the stable development of forest resources, and preserving the forests for future generations. The federal government meets these goals by allowing the provincial governments to own 90 percent of the national forest in order to closely monitor each company's land use. In addition, these provincial governments provide lower cutting fees to companies in exchange for the development of long-term plans, which include building roads, replanting trees, and general forest maintenance. Therefore, the basis may alter Canada's forest management plan along with its monitoring system and its concept of environmental protection.
Name: Temperate Softwoods
Diversity: 335 higher plants per 10,000 km/sq (Canada)
If the Canadian government loses control over its forest management programs, its goal for long-term preservation will deteriorate. The Canadian government has placed 7 percent of its forests under reserve and it plans to raise this to 12 percent by the year 2000. However, if the economic stability of the softwood lumber industry is affected by the tax, the governments and individual companies may choose to increase the amount of timber they cut.
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