World Trade Organization

• Author: International Law Group

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...