RESTRICTEDWORLD TRADE
ORGANIZATIONWT/DSB/M/135
30 January 2003
(03-0615)
Dispute Settlement Body
1 November 2002
MINUTES OF MEETING
Held in the Centre William Rappard
on 1 November 2002
Chairman:  Mr. Carlos Pérez del Castillo (Uruguay)
1. United States – Preliminary determinations  with respect to certain softwood lumber
from Canada
(a) Report of the Panel (WT/DS236/R)
1. The Chairman recalled that at its meeting on 5 December 2001, the DSB had established a
panel to examine the complaint by Canada.  The Re port of the Panel contained in WT/DS236/R had
been circulated on 27 September 2002, as an unrestricted document pursuant to the Procedures for the
Circulation and Derestriction of WTO Documents co ntained in WT/L/452.  He noted that the Panel
Report was before the DSB for adoption at the request of Canada.  He said that this adoption
procedure was without prejudice to the right of Members to express their views on the Panel Report.
2. The representative of Canada said that his country welcomed the Panel Report and was
requesting its adoption.  As an initial matter, he wished to provide context to this dispute for Members
that were not familiar with the history of trade in  softwood lumber between tw o of the world's leading
trading nations.  In April 2001, the US Department of Commerce had initiated its fourth
countervailing duty investigation on Canadian softwood lumber in 20 years.  The United States had
never succeeded in having independent adjudicators conclude that Canadian exports of softwood
lumber to the United States were subsidized.  On 9 August 2001, the United States had made apreliminary determination that Canadian softwood lumber exports to the United States were
subsidized and had imposed a 19.31 per cent provisional countervailing duty on these exports.  The
United States had also made a preliminary critical circumstances determination and had applied those
provisional measures retroactively.  Canada challenged these determinations and was pleased with the
Panel Report for several reasons.  He said that the Panel had agreed with Canada that the UnitedStates had violated the SCM Agreement in finding that Canada's forest management practices were
subsidies.  Specifically, the United States had illegally compared Canadian stumpage rates to
stumpage prices in the United States.  Such a comparison was not "in relation to the prevailing market
conditions in the country of provision", as provided for in Article 14(d) and was, therefore, illegal.
The Panel had also agreed with Canada that the United States had breached the SCM Agreement byassuming, rather than establishing, that downst ream purchasers of log and lumber inputs were
subsidized through the exercise of timber harvesting rights by other upstream entities.  The Panel had
further agreed with Canada that the United States violated the SCM Agreement in applying
provisional measures retroactively because the SCM Agreement did not permit the retroactive
application of such measures under any circumstances.  Finally, while Canada was pleased with thePanel Report overall, it was, however, concerned with the Panel's decision on the "financial
contribution" requirement of the SCM Agreement.  The Panel had found that standing timber
constituted a "good" under Article 1.1(a)(iii).  Canada was concerned with the breadth of the Panel's
interpretation of the word "good".WT/DSB/M/135
Page 2
3. The representative of the United States said that her country had decidedly mixed feelings
about the Panel Report.  On the positive side, the Panel had properly found that the Canadian
provincial governments' sale to lumber producers of timber from public lands constituted a financial
contribution that could 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 was a fundamental victory for the United States.Canada had long argued that a government's sale of an in situ  natural resource did not fall within the
disciplines of the SCM Agreement and, therefore, could not be subject to countervailing duties under
any circumstances.  The Panel had conclusively rejected this argument.  As a result, there was no
longer any question that the United States could impose countervailing duties against softwood
lumber imports from Canada.  The only question was the amount of the countervailing duties that the
United States could impose.
4. The Panel had also applied the well-established mandatory/discretionary distinction and had
correctly found that US laws governing reviews of countervailing duty orders were not inconsistent
with the SCM Agreement.  The Panel had properly concluded that US laws did not preclude
company-specific reviews in cases, like this one, where the United States calculated an aggregate,
country-wide rate rather than company-specific rates because of the large number of exporters.  The
United States wholly endorsed both of these aspects of the Panel Report.
5. The United States, however, strongly disagreed 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.  On cross-border methodology, sh e said that in its preliminary determination, the
United States had used prices for comparable standing timber in contiguous US states as the
benchmark to measure whether the government timber prices in Canada were below market value;i.e. provide a subsidy benefit.  The United States used this benchmark because it had found that
private timber prices in Canada were distorte d by the overwhelming dominance of the government
timber prices in the Canadian market.  The Panel had rejected the use by the United States of this
benchmark, however, and had concluded that investigating authorities might never, under any
circumstances, use prices outside the country under investigation as a benchmark, even if that countryhad monopoly power and effectively controlled all prices in its domestic market.  The United States
had great difficulty understanding the Panel's logic that whenever a government subsidized its
domestic industry to such an extent that it dominated the entire market, these subsidies could not be
countervailed to the full extent of the subsidy.
6. With regard to pass-through, she noted that the Panel had also found that the United States
had improperly failed to examine whether subsidies provided to producers of the upstream inputs (i.e.
the harvesters who produce logs) benefit "indepen dent" 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 produced the subject merchandise (i.e. log
sales between upstream harvesters and downstream sawmills), the United States agreed that the SCM
Agreement required competent authorities to analyse whether the subsidy benefitted the downstream
producers.  In this case, however, the United States had reasonably concluded, based on the record ofthe 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 made no sense to
conduct a "pass-through" analysis in an aggregate case such as this one because the total subsidy was
allocated over all sales of the subject merchandise.  The amount of the benefit received by specificproducers was simply not an issue in an aggregate case.
7. Notwithstanding its strong disagreement with these aspects of the Panel's findings, the United
States had ultimately decided not to appeal for the following reasons.  First, the measures in question
in this dispute no longer existed.  The preliminary countervailing duties that Canada had challenged in
this dispute had already been refunded and the Panel Report had no practical effect on the finalcountervailing duties that were currently in place.  In short, the Panel's findings in this report wereWT/DSB/M/135
Page 3
moot.  Second, the cross-border methodology and pa ss-through issues were the subject of ongoing
litigation in DS257, Canada's separate challenge to the final countervailing duty determination
regarding softwood lumber from Canada.  The Panel Report in this case was based only on a review
of the limited record of the US preliminary determination.  In contrast, the case DS257 would be
based on the much fuller and more complete record of the United States' final investigation, whichprovided ample documentation and support for the US methodologies and decisions.  Her country
intended to defend the US measures at issue in DS257 vigorously.  Finally, she said that in light of the
fact that the erroneous parts of the Panel Report were the subject of ongoing dispute settlement
proceedings and the measures at issue were no longer in existence, the United States was not
appealing this Report.  While the United States did not support its adoption, it understood that the
DSB would do so at the present meeting.
8. The representative of the European Communitie s said that the EC wished to thank the
members of the Panel for their Report which had adequately addressed all of the important and
complex legal questions raised by the parties in this  dispute.  The EC would continue to follow with
interest the softwood lumber dispute as a third pa rty in the ongoing case brought by Canada against
the final determination by the US Department of Commerce in the very same countervailing duty
investigation like the one under consideration.
9. The DSB took note of the statements and adopted  the Panel Report contained in document
WT/DS236/R.
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