America’s Credibility Goes “Timber!”

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Introduction

The U.S.-Canada softwood lumber dispute is so long running thatinterested parties rely on dynastic nomenclature to catalog thesordid details. The present reign, "Lumber IV," began in April 2001when the U.S. government initiated antidumping and countervailingduty investigations of Canadian imports. Final duties were imposedin May 2002.

After nearly three and a half years, duties approaching $5billion have been collected. During the same period, a series ofrebukes, remands, redeterminations, more rebukes, more remands, andmore redeterminations from dispute settlement panels under theNorth American Free Trade Agreement were issued, finding themeasures violative of U.S. law. Concurrently, the disputesettlement body of the World Trade Organization found those samemeasures to contravene U.S. international trade commitments. Yetthe measures persist and, despite having exhausted its appealsunder NAFTA, U.S. authorities have proclaimed that they will notrepeal or refund the duties.

"This is nonsense," remarked Canadian prime minister Paul Martinin 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 theU.S. position, as they consider retaliation and the propriety ofCanada's future in NAFTA.

There is a familiar and meritorious economic argument againstrestricting trade in the first place. The wisdom of that argumentis particularly obvious when the subject is a raw material that wasalready in short supply before a major hurricane, and the massivereconstruction it portends, exacerbated the gap between supply anddemand. The fact that lumber-using industries account for a fargreater share of U.S. economic output and employ about 25 workersfor every one employed in lumber production further supports theargument for unfettered lumber trade. 2

But the lumber dispute now transcends economics. Nothing lessthan America's credibility--a crucial asset to U.S. trade andforeign policy--is on the line. Even those inclined to believe thatantidumping or antisubsidy protectionism has its place in tradepolicy must acknowledge the implications of U.S. intransigence onthis particular issue.

The United States coauthored the rules of trade that governNAFTA and the WTO. The United States has been found in violation ofthose rules as well as its own laws. The United States must complywith the NAFTA panels' instructions to repeal the measures andrefund the duties collected if it expects the rules-based system oftrade to function properly. Continued U.S. intransigence on lumbermay prove to be the catalyst for a global retreat from theliberalization of trade that has characterized the post-WWIIperiod. Nothing less is at stake.

Background (Lumber I-III)

Lumber trade between Canada and the United States has been asource of tension for many decades. But the primary issues at playin the current dispute trace back to 1982 (the beginning of "LumberI"), when U.S. producers of softwood lumber sought to limitCanadian imports through countervailing duty measures. The focus ofU.S. producers' complaints at that time and today has been theforest management practices of certain Canadian provinces.According to the U.S. industry, the fees charged by the Canadiannational and provincial governments to harvest timber ongovernment-owned lands--so-called stumpage fees--fall below marketrates and thus bestow unfair subsidies on Canadian lumberproducers. Other programs, such as log export controls in certainprovinces, have been challenged as unfair subsidies by artificiallyinflating the supply and reducing the price of timber to Canadianmills.

The U.S. industry's first effort to convince the government toimpose countervailing duties failed in May 1983, when the U.S.Department of Commerce (DOC) concluded that stumpage did not confera countervailable subsidy to Canadian lumber producers. Thus endedLumber I.

"Lumber II" commenced in 1986, when the U.S. industry againpetitioned the government for countervailing duties. This time DOCchanged its tune. It found that the Canadian stumpage systemconferred a subsidy to lumber producers averaging about 15 percent.But in lieu of imposing the duties, the two governments enteredinto a Memorandum of Understanding (MOU), which required that theCanadian government collect an export tax of 15 percent. Astipulation was included to allow for reduction of that rate if thestumpage fees or other provincial charges increased. The forestmanagement policies of some provinces did change, and as a resulttheir mandated export charges were reduced. But Canada terminatedthe MOU in September 1991, marking the conclusion of Lumber II.

The following month, October 1991, "Lumber III" began when DOCinitiated a new countervailing duty investigation, which produced afinding that stumpage and log export controls conferred a subsidyof 6.51 percent on Canadian producers in all but the Atlanticprovinces. After an affirmative determination by the U.S.International Trade Commission (ITC) that the U.S. industry wasinjured by subsidized Canadian imports, duties were imposed in July1992.

Canada appealed the DOC subsidy and ITC injury findings tobinational dispute settlement panels provided for under theU.S.-Canada Free Trade Agreement in August 1992. The panels agreedwith Canada's claims that the subsidy and injury findings werebased on insufficient evidence and had no legal bases and remandedthe cases to DOC and ITC, respectively.

After finding the changes in the DOC analysis insufficient, thepanel remanded the determination a second time. The panel hearingthe injury case had to remand the analysis to ITC three times.Still, the United States was intent on keeping the litigationgoing. In April 1994, the U.S. government alleged conflicts ofinterest on the part of two Canadians who were on the panel thatreviewed DOC's subsidy determination, and consequently requestedthe formation of an Extraordinary Challenge Committee (ECC)provided for under the agreement. Four months later, the ECC ruledagainst the United States and the CVD order was officially, butgrudgingly, revoked.

Having been cleared of countervailable subsidy charges twice atthis point, but facing the specter of new investigations and theburden of yet more legal costs, the Canadians entered into anagreement to limit their softwood exports to the United States. TheSoftwood Lumber Agreement (SLA), which was effectively a tariffrate quota system that allowed in finite imports duty free and thensubjected imports above those limits to extremely high tariffs,went into effect in May 1996. It expired in March 2001, endingLumber III.

Déjà vu ("Lumber IV")

Two days after expiration of the SLA, the U.S. industry filed anew CVD and an antidumping petition. ITC ruled that the domesticindustry was "threatened" with material injury by reason of lessthan fair value (i.e., dumped) and subsidized Canadian imports ofsoftwood lumber. Final countervailing duties of 18.79 percent andfinal antidumping duties ranging from 2.18 percent to 12.44 percentwere imposed in May 2002.

Canada responded by challenging the legal and analyticalpropriety of those measures in the dispute settlement systems ofNAFTA and the WTO. Under challenge were thethreat-of-material-injury determination rendered by ITC, and bothDOC's subsidy and dumping findings. A total of six challenges werelaunched as all three claims were before NAFTA and the WTO.

The NAFTA panels found each of the U.S. determinations tocontravene U.S. law, and the WTO--adopting either the panel reportor the report of the Appellate Body--found all three determinationsto violate U.S. obligations under the WTO.

Since the original investigation findings in May 2002, the threeNAFTA panels have collectively issued 11 remand orders to the U.S.administering authorities: five in the subsidy case and three eachin 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 forcalculating the benefits conferred by those subsidies. One thingthat is clear is that the CVD rate has declined from the original18.79 percent through each successive remand determination. Itstands currently at 1.21 percent and is expected to become deminimis (less than 1 percent) if DOC follows the panel'sinstructions in the fifth remand. 3

The NAFTA panel hearing the dumping case has issued threeremands, each containing specific instructions for DOC toincorporate into its revised determinations. In its third remand,issued in June 2005, the panel instructed DOC to render a newdetermination that revokes the antidumping order with respect toWest Fraser Mills, and that recalculates the rates for all theother respondents without relying on "zeroing." In other words, theDOC practice known as zeroing, which assigns a value of zero toprice comparisons that yield negative dumping margins and has beenfound to violate U.S. WTO commitments, was expressly prohibited bythe panel.4

But in July 2005, DOC issued its third remand redetermination,which disregarded the panel's instructions. Rather than forgozeroing, DOC opted to change its price comparison methodology toone under which zeroing has not been explicitly rejected. Byadopting the new methodology, DOC argues that it can continue tozero.

And under this methodology, the rate for West Fraser Millsincreased above de minimis, so DOC refused to revoke theorder with respect to this company, as instructed by the panel.

The panel hearing the injury case found the ITC determination tobe flawed primarily because it failed to distinguish between thecontribution to the threat of injury attributable to dumped orsubsidized imports and other factors, such as other Canadian woodproducts, imports from other countries, domestic competition, andconsequences related to past decisions of U.S. producers. The casewas remanded to ITC in September 2003 with explicit instructions toconsider certain factors and incorporate them into the remanddetermination.

When ITC's remand determination was published in December 2003,again finding a threat of material injury, Canada again challengedthe finding. The panel concluded that most of the bases for theITC's finding were "not supported by substantial evidence" on therecord and remanded the case again with instructions to disregardassumptions that were not supported by substantialevidence.5

ITC published its second remand determination in June 2004,which concluded again that the industry was threatened withmaterial injury. Again, Canada challenged the finding. And thistime, the panel's conclusions were quite explicit:

In its Second Remand Determination, the Commission has refusedto follow the instructions in the First Panel Remand Decision. TheCommission relies on the same record evidence that this Panel notonce, but twice before, held insufficient as a matter of law tosupport the Commission's affirmative threat finding. By theCommission's so doing, this Panel can reasonably conclude thatthere is no other record evidence to support the Commission'saffirmative threat determination. The Commission has made itabundantly clear to this Panel that it is simply unwilling toaccept this Panel's review authority under Chapter 19 of the NAFTAand has consistently ignored the authority of this Panel in aneffort to preserve its finding of threat of materialinjury.6

Likewise, the panel's instructions for a third remand could nothave been clearer:

This Panel remands this case to the Commission for theCommission to make a determination consistent with the decision ofthis Panel that the evidence on the record does not support afinding of threat of material injury and to make that determinationwithin ten (10) days from the date of this Panel decision.7

In September 2004, pursuant to the panel's instructions, ITCpublished a determination that imports of Canadian lumber do notthreaten injury to the domestic industry, thereby eliminating thejustification for antidumping and countervailing duty measures.

But in November 2004, the United States again alleged a conflictof interest on the part of a panelist and requested the formationof an Extraordinary Challenge Committee. The ECC ruled unanimouslyin Canada's favor in a report issued in August 2005, marking whatshould have been the end of U.S. stalling tactics. Under NAFTArules, the United States is obligated to revoke the dutiesprospectively and refund the duties--close to $5 billion--that havebeen collected in error since 2002.

Instead, the Bush administration announced that the lumberduties would remain in place and that there would be no refunds .U.S. officials cite a revised ITC threat-of-injury analysis, issuedin November 2004 in response to the WTO Appellate Body'sinstructions, as their justification. Although the Appellate Bodyreport has not been officially released to the participants, it issaid to have found U.S. efforts to bring its threat-of-injurydecision into conformity with the WTO Agreements (i.e., theNovember 2004 ITC Injury Redetermination) acceptable. Theadministration now claims that it has complied with the WTO'srequest and produced a new threat-of-injury finding, whichjustifies continuation of the measures.

But that revised analysis is invalid under NAFTA. It wasrendered only after the record was re-opened and new informationconsidered--contravening the NAFTA panel's instructions to render anegative threat-of-injury finding. Furthermore, the ITC's revisedinjury determination has no revised dumping or revised subsidydeterminations from DOC to go with it. Antidumping andcountervailing duties can be imposed only if there is dumping orsubsidization that is causing or threatening material injury. Therehas been no report from the WTO as to whether the DOC'sredeterminations on dumping and subsidization will bring the UnitedStates into conformity with the various agreements. Accordingly,there is no basis for the measures.

Furthermore, it is important to understand the distinctive roleof the two dispute settlement processes. Under NAFTA, disputesettlement is tasked with determining solely "whether the relevantadministrative agency [the ITC and/or the DOC in the case of U.S.actions] applied its national AD/CVD laws correctly."8 The NAFTA panels are availableas "an alternative to judicial review by domestic courts of finaldeterminations in antidumping and countervailing dutycases."9

Under the WTO agreement, however, the dispute settlementmechanism serves a different function. Rather than determinewhether the administering authorities' actions are consistent withthat country's laws, the relevant question is whether those actionsare in conformity with the various WTO agreements.

Whereas the WTO dispute settlement system can put pressure onmembers to bring their offending actions, regulations, or laws intoconformity with the respective agreement, it has no authority toimpose any remedial actions. At most, it can sanction retaliationfrom complainants that are victimized by the action found to beinconsistent with a member's obligations.

In contrast, the NAFTA process provides the equivalent ofdomestic judicial review and, as such, its verdicts are binding onthe administering authorities. In the lumber case, those verdictsare quite clear. Under NAFTA rules, the United States is obligatedto terminate the restrictions and refund the duties.

Polluted Politics

Intransigence on lumber is the latest instance in an emergingpattern of U.S. antipathy for the rules of trade. The United Stateshas failed to comply with several other verdicts of the WTO disputesettlement body in recent years, including a 2003 indictment of theso-called Byrd Amendment.

A little digging reveals a scandalous relationship between theU.S. positions on Byrd and lumber. The Byrd Amendment, formallyknown as the Continued Dumping and Subsidy Offset Act, became lawin 2000.10 Itmandates distribution of antidumping and countervailing dutiescollected at the border to the domestic industries that filed orsupported the original petitions in the underlying cases.Previously, duties collected were commingled with funds in thegeneral treasury.

Byrd was quickly challenged by several trade partners in the WTOand was ultimately found to violate U.S. trade obligations becauseit punishes foreign exporters twice--first, by imposing the dutiesas a remedy to dumping or subsidization (which is acceptable), andthen by using those funds to directly subsidize the U.S. producers(which is not). Despite the ruling, the United States failed torepeal Byrd, and last year the WTO authorized retaliation by thecomplainants. Thus far, Europe, Canada, Japan, and Mexico havebegun or announced that they will begin imposing retaliatorytariffs against various U.S. exports.

Still, Byrd enjoys broad bipartisan support in Congress. And whyshouldn't it? Members have been able to dole out $1 billion totheir corporate constituents between 2001 and 2004 without havingto fight for the disbursements, as the funding is automatic anddoesn't come directly from U.S. taxpayers. According to a recentstudy by the Government Accountability Office, however, most ofthose funds went to a select few companies in a few industries.

That $1 billion is modest relative to the $5 billion at stake inthe lumber case. And there are many companies, geographicallydispersed, lined up to receive Byrd lumber money. If the UnitedStates were to comply with the lumber rulings and refund theduties, Congress would lose the opportunity to bestow those massivesubsidies on its constituents. Thus, U.S. willingness to blatantlyignore the outcomes in two major dispute settlement cases is beingdriven by the crassest of political considerations at the expenseof the global trade rules that the United States coauthored toprotect U.S. national interests.

So intent are some members of Congress to ensure preservation ofthe lumber restrictions that the issue became a central point ofdiscussion in the confirmation hearings of Franklin Lavin, nomineefor undersecretary of commerce, International Trade Administration.Lavin testified before the Senate that he would find a way to keepthe countervailing duties in place, and that officials at DOC haveassured him that there are ways to recalculate the duties toproduce a rate above de minimis.11 About Lavin's assertion there shouldbe little doubt. The DOC has vast discretion to mix and matchmethodologies in order to find or inflate dumping and subsidymargins.12

Likewise, a group of Senators submitted a letter to CommerceSecretary Carlos Gutierrez on October 20 urging him to preserve theduties. Reflecting total disregard for the purpose and legitimacyof the NAFTA dispute settlement system, the Senators opined that"NAFTA panel decisions cannot and should not force the Departmentto deny legitimate relief under U.S. law to the domestic lumberindustry and its workers."13

Conclusion

America's growing disdain for its international tradecommitments is a troubling development. It will now be that mucheasier for U.S. trade partners to break the rules while citing U.S.precedents. Members of Congress who grandstand over "unfair"Chinese trade practices, for example, no longer preach from themoral high ground.

U.S. credibility on trade issues is waning at a time when strongleadership is desperately needed. With the Doha Round of WTO talksfast approaching what experts believe to be a do-or-die meeting inHong Kong in December, U.S. mockery of the rules could not come ata worse time. There was already a perception in many countries thatthe rules of trade are stacked in favor of the larger economies.When the world's largest economy ignores those rules, perceptionscan quickly become entrenched wisdom.


1. Address by PrimeMinister Paul Martin at the Economic Club of New York, October 6,2005 (available at http://pm.gc.ca/eng/news.asp?id=603).

2. Brink Lindsey, Mark A.Groombridge, Prakash Loungani, "Nailing theHomeowner: The Economic Impact of Trade Protection of the SoftwoodLumber Industry," Cato Trade Policy Analysis no. 11, July 6,2000, p. 7.

3. The DOC's fifth remanddetermination is due to be published on October 28.

4. For a detailedexamination of the zeroing methodology, see Dan Ikenson, "Zeroing In: Antidumping's Flawed Methodology UnderFire," Cato Free Trade Bulletin no. 11, April 27, 2004.

5. Remand Decision of thePanel, "Article 1904 Binational Panel Review Pursuant to the NorthAmerican Free Trade Agreement in the matter of Certain SoftwoodLumber Products from Canada," Final Affirmative Threat of InjuryDetermination (Secretariat File No.USA-CDA-2002-1904-07), April 19,2004.

6. Second Remand Decisionof the Panel, "Article 1904 Binational Panel Review Pursuant to theNorth American Free Trade Agreement in the matter of CertainSoftwood Lumber Products from Canada," Final Affirmative Threat ofInjury Determination (Secretariat File No.USA-CDA-2002-1904-07),August 31, 2004.

7. Ibid.

8. Website of the NAFTASecretariat, "Overview of the Dispute Settlement Provisions of theNorth American Free Trade Agreement (NAFTA)," http://www.nafta-sec-alena.org/.

9. Ibid.

10. For a detailed lookat the Byrd Amendment, see Dan Ikenson, "Byrdening Relations: U.S. Trade Policies Continue toFlout the Rules," Cato Free Trade Bulletin no. 5, January 13,2004.

11. "Commerce NomineePledges to Keep Lumber Duties in Place," Inside U.S.Trade, October 21, 2005.

12. For a detailed lookat how the Commerce Department wields its discretion in antidumpingcases, see Daniel Ikenson, "Abuse of Discretion:Time to Fix the Administration of the U.S. Antidumping Law,"Cato Trade Policy Analysis no. 31, October 6, 2005.

13. Letter from 21 U.S.Senators to Commerce Secretary Carlos Gutierrez regarding lumberduties, October 20, 2005, available at http://www.insidetrade.com/secure/htmldata2/wto2005_6284_1.htm.