Statement by Ambassador Linnet F. Deily
to the WTO Dispute Settlement Body
November 1, 2002

PRELIMINARY DETERMINATIONS WITH RESPECT
TO CERTAIN SOFTWOOD LUMBER FROM CANADA

REPORT OF THE PANEL (WT/DS236)

Mr. Chairman, the United States has decidedly mixed feelings about the Panel's report.

On the positive side, the Panel properly found that the Canadian provincial governments' sale to lumber producers of timber from public lands constitutes a financial contribution that can give rise to a subsidy under the SCM Agreement. This was the most important issue in the case, and the Panel's finding on this issue is a fundamental victory for the United States. Canada has long argued that a government's sale of an in situ natural resource does not fall within the disciplines of the SCM Agreement and therefore cannot be subject to countervailing duties under any circumstances. The Panel conclusively rejected this argument. As a result, there is no longer any question that the United States can impose countervailing duties against softwood lumber imports from Canada. The only question is the amount of the countervailing duties that the United States can impose.

The Panel also applied the well-established mandatory/discretionary distinction and correctly found that U.S. laws governing reviews of countervailing duty orders are not inconsistent with the SCM Agreement. The Panel properly concluded that U.S. laws do not preclude company-specific reviews in cases, like this one, where the United States calculates an aggregate, country-wide rate rather than company-specific rates because of the large number of exporters.

The United States wholly endorses both of these aspects of the Panel's report.

We do, however, strongly disagree with the Panel's findings on the cross-border methodology and the pass-through issues, findings handicapped by the limited nature of the record before the Panel.

Cross-border methodology - In its preliminary determination, the United States used prices for comparable standing timber in contiguous U.S. states as the benchmark to measure whether the government timber prices in Canada are below market value, i.e., provide a subsidy benefit. The United States used this benchmark because it found that private timber prices in Canada were distorted by the overwhelming dominance of the government timber prices in the Canadian market. The Panel rejected the U.S. use of this benchmark, however, and concluded that investigating authorities may never, under any circumstances, use prices outside the country under investigation as a benchmark, even if that country has monopoly power and effectively controls all prices in its domestic market. The United States has great difficulty understanding the Panel's logic that whenever a government subsidizes its domestic industry to such an extent that it dominates the entire market, these subsidies cannot be countervailed to the full extent of the subsidy.

Pass-through - The Panel also found that the United States improperly failed to examine whether subsidies provided to producers of the upstream inputs (i.e., the harvesters who produce logs) benefit "independent" downstream producers (i.e., lumber producers) despite "arm's-length" transactions between the entities.

With regard to arm's length transactions between independent parties where only one of the parties produces the subject merchandise (i.e., log sales between upstream harvesters and downstream sawmills), the United States agrees that the SCM Agreement requires competent authorities to analyze whether the subsidy benefited the downstream producers. In this case, however, the United States reasonably concluded, based on the record of the preliminary investigation, that there were few, if any, actual "arm's-length" transactions between truly "independent" harvesters and sawmills.

With regard to transactions between parties that both produce the subject merchandise (i.e., one sawmill sells logs to another sawmill), it makes no sense to conduct a "pass-through" analysis in an aggregate case such as this one because the total subsidy is allocated over all sales of the subject merchandise. The amount of the benefit received by specific producers is simply not an issue in an aggregate case.

Notwithstanding our strong disagreement with these aspects of the Panel's findings, the United States ultimately decided not to appeal for the following reasons:

First, the measures in question in this dispute no longer exist. The preliminary countervailing duties that Canada challenged in this dispute have already been refunded and the Panel's report has no practical effect on the final countervailing duties that are currently in place. In short, the Panel's findings in this report are moot.

Second, the cross-border methodology and pass-through issues are the subject of ongoing litigation in DS257, Canada's separate challenge to the final countervailing duty determination regarding softwood lumber from Canada. The Panel's report in DS236 was based only on a review of the limited record of the U.S. preliminary determination. In contrast, DS257 will be based on the much fuller and more complete record of the United States' final investigation, which provides ample documentation and support for the U.S. methodologies and decisions. We intend to defend the U.S. measures at issue in DS257 vigorously.
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In conclusion, in light of the fact that the erroneous parts of the Panel's report are the subject of ongoing dispute settlement proceedings and the measures at issue are no longer in existence, the United States is not appealing this report. While we do not support its adoption, we understand that the DSB will do so today.