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.

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.