The U.S.-Canada softwood lumber dispute is so long running that interested parties rely on dynastic nomenclature to catalog the sordid details. The present reign, “Lumber IV,” began in April 2001 when the U.S. government initiated antidumping and countervailing duty investigations of Canadian imports. Final duties were imposed in May 2002.
After nearly three and a half years, duties approaching $5 billion have been collected. During the same period, a series of rebukes, remands, redeterminations, more rebukes, more remands, and more redeterminations from dispute settlement panels under the North American Free Trade Agreement were issued, finding the measures violative of U.S. law. Concurrently, the dispute settlement body of the World Trade Organization found those same measures to contravene U.S. international trade commitments. Yet the measures persist and, despite having exhausted its appeals under NAFTA, U.S. authorities have proclaimed that they will not repeal or refund the duties.
“This is nonsense,” remarked Canadian prime minister Paul Martin in a speech before the Economic Club of New York. “More than that, it’s a breach of faith. Countries must live up to their agreements. The duties must be refunded.” 1 Our Canadian neighbors are rightly outraged by the U.S. position, as they consider retaliation and the propriety of Canada’s future in NAFTA.
There is a familiar and meritorious economic argument against restricting trade in the first place. The wisdom of that argument is particularly obvious when the subject is a raw material that was already in short supply before a major hurricane, and the massive reconstruction it portends, exacerbated the gap between supply and demand. The fact that lumber‐using industries account for a far greater share of U.S. economic output and employ about 25 workers for every one employed in lumber production further supports the argument for unfettered lumber trade. 2
But the lumber dispute now transcends economics. Nothing less than America’s credibility–a crucial asset to U.S. trade and foreign policy–is on the line. Even those inclined to believe that antidumping or antisubsidy protectionism has its place in trade policy must acknowledge the implications of U.S. intransigence on this particular issue.
The United States coauthored the rules of trade that govern NAFTA and the WTO. The United States has been found in violation of those rules as well as its own laws. The United States must comply with the NAFTA panels’ instructions to repeal the measures and refund the duties collected if it expects the rules‐based system of trade to function properly. Continued U.S. intransigence on lumber may prove to be the catalyst for a global retreat from the liberalization of trade that has characterized the post‐WWII period. Nothing less is at stake.
Background (Lumber I-III)
Lumber trade between Canada and the United States has been a source of tension for many decades. But the primary issues at play in the current dispute trace back to 1982 (the beginning of “Lumber I”), when U.S. producers of softwood lumber sought to limit Canadian imports through countervailing duty measures. The focus of U.S. producers’ complaints at that time and today has been the forest management practices of certain Canadian provinces. According to the U.S. industry, the fees charged by the Canadian national and provincial governments to harvest timber on government‐owned lands–so-called stumpage fees–fall below market rates and thus bestow unfair subsidies on Canadian lumber producers. Other programs, such as log export controls in certain provinces, have been challenged as unfair subsidies by artificially inflating the supply and reducing the price of timber to Canadian mills.
The U.S. industry’s first effort to convince the government to impose countervailing duties failed in May 1983, when the U.S. Department of Commerce (DOC) concluded that stumpage did not confer a countervailable subsidy to Canadian lumber producers. Thus ended Lumber I.
“Lumber II” commenced in 1986, when the U.S. industry again petitioned the government for countervailing duties. This time DOC changed its tune. It found that the Canadian stumpage system conferred a subsidy to lumber producers averaging about 15 percent. But in lieu of imposing the duties, the two governments entered into a Memorandum of Understanding (MOU), which required that the Canadian government collect an export tax of 15 percent. A stipulation was included to allow for reduction of that rate if the stumpage fees or other provincial charges increased. The forest management policies of some provinces did change, and as a result their mandated export charges were reduced. But Canada terminated the MOU in September 1991, marking the conclusion of Lumber II.
The following month, October 1991, “Lumber III” began when DOC initiated a new countervailing duty investigation, which produced a finding that stumpage and log export controls conferred a subsidy of 6.51 percent on Canadian producers in all but the Atlantic provinces. After an affirmative determination by the U.S. International Trade Commission (ITC) that the U.S. industry was injured by subsidized Canadian imports, duties were imposed in July 1992.
Canada appealed the DOC subsidy and ITC injury findings to binational dispute settlement panels provided for under the U.S.-Canada Free Trade Agreement in August 1992. The panels agreed with Canada’s claims that the subsidy and injury findings were based on insufficient evidence and had no legal bases and remanded the cases to DOC and ITC, respectively.
After finding the changes in the DOC analysis insufficient, the panel remanded the determination a second time. The panel hearing the injury case had to remand the analysis to ITC three times. Still, the United States was intent on keeping the litigation going. In April 1994, the U.S. government alleged conflicts of interest on the part of two Canadians who were on the panel that reviewed DOC’s subsidy determination, and consequently requested the formation of an Extraordinary Challenge Committee (ECC) provided for under the agreement. Four months later, the ECC ruled against the United States and the CVD order was officially, but grudgingly, revoked.
Having been cleared of countervailable subsidy charges twice at this point, but facing the specter of new investigations and the burden of yet more legal costs, the Canadians entered into an agreement to limit their softwood exports to the United States. The Softwood Lumber Agreement (SLA), which was effectively a tariff rate quota system that allowed in finite imports duty free and then subjected imports above those limits to extremely high tariffs, went into effect in May 1996. It expired in March 2001, ending Lumber III.
Déjà vu (“Lumber IV”)
Two days after expiration of the SLA, the U.S. industry filed a new CVD and an antidumping petition. ITC ruled that the domestic industry was “threatened” with material injury by reason of less than fair value (i.e., dumped) and subsidized Canadian imports of softwood lumber. Final countervailing duties of 18.79 percent and final antidumping duties ranging from 2.18 percent to 12.44 percent were imposed in May 2002.
Canada responded by challenging the legal and analytical propriety of those measures in the dispute settlement systems of NAFTA and the WTO. Under challenge were the threat‐of‐material‐injury determination rendered by ITC, and both DOC’s subsidy and dumping findings. A total of six challenges were launched as all three claims were before NAFTA and the WTO.
The NAFTA panels found each of the U.S. determinations to contravene U.S. law, and the WTO–adopting either the panel report or the report of the Appellate Body–found all three determinations to violate U.S. obligations under the WTO.
Since the original investigation findings in May 2002, the three NAFTA panels have collectively issued 11 remand orders to the U.S. administering authorities: five in the subsidy case and three each in the dumping and injury cases.
At issue in the subsidy case through its five remands has been, not whether subsidies exist, but the proper methodology for calculating the benefits conferred by those subsidies. One thing that is clear is that the CVD rate has declined from the original 18.79 percent through each successive remand determination. It stands currently at 1.21 percent and is expected to become de minimis (less than 1 percent) if DOC follows the panel’s instructions in the fifth remand. 3
The NAFTA panel hearing the dumping case has issued three remands, each containing specific instructions for DOC to incorporate into its revised determinations. In its third remand, issued in June 2005, the panel instructed DOC to render a new determination that revokes the antidumping order with respect to West Fraser Mills, and that recalculates the rates for all the other respondents without relying on “zeroing.” In other words, the DOC practice known as zeroing, which assigns a value of zero to price comparisons that yield negative dumping margins and has been found to violate U.S. WTO commitments, was expressly prohibited by the panel.4
But in July 2005, DOC issued its third remand redetermination, which disregarded the panel’s instructions. Rather than forgo zeroing, DOC opted to change its price comparison methodology to one under which zeroing has not been explicitly rejected. By adopting the new methodology, DOC argues that it can continue to zero.
And under this methodology, the rate for West Fraser Mills increased above de minimis, so DOC refused to revoke the order with respect to this company, as instructed by the panel.
The panel hearing the injury case found the ITC determination to be flawed primarily because it failed to distinguish between the contribution to the threat of injury attributable to dumped or subsidized imports and other factors, such as other Canadian wood products, imports from other countries, domestic competition, and consequences related to past decisions of U.S. producers. The case was remanded to ITC in September 2003 with explicit instructions to consider certain factors and incorporate them into the remand determination.
When ITC’s remand determination was published in December 2003, again finding a threat of material injury, Canada again challenged the finding. The panel concluded that most of the bases for the ITC’s finding were “not supported by substantial evidence” on the record and remanded the case again with instructions to disregard assumptions that were not supported by substantial evidence.5
ITC published its second remand determination in June 2004, which concluded again that the industry was threatened with material injury. Again, Canada challenged the finding. And this time, the panel’s conclusions were quite explicit: