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Dispute Settlement
U.S. Trade Remedy Law: The Canadian Experience
V. United States Countervailing Duty Investigations regarding Imports from Canada: Case Histories, 1991–1999
Softwood Lumber I
1.1 Summary
1.2 Case History
1.3 Key Issues
1.4 Programs Determined to Confer Subsidies
- 1.4.1 Canadian Federal Programs
- 1.4.2 Federal–Provincial Programs
- 1.4.3 Provincial Programs
1.5 Programs Determined Not to Confer Subsidies
- 1.5.1 Federal and Provincial Stumpage Programs
- 1.5.2 Federal Programs
- 1.5.2.1 Deductible Inventory Allowance
- 1.5.2.2 Capital Cost Allowance (CCA)
- 1.5.2.3 Export Development Corporation (EDC) (now Export Development Canada)
- 1.5.2.4 Federal Employment Programs
- 1.5.2.5 Regional Development Incentives Program (RDIP)—Loan Guarantees
- 1.5.2.6 Enterprise Development Program (EDP)
- 1.5.2.7 Transportation Programs
- 1.5.3 Joint Federal–Provincial Programs
- 1.5.4 Provincial Programs
1.6 Programs Determined Not to be Used
1.1 Summary
On October 7, 1982, three countervailing duty petitions were filed alleging that imports from Canada of the following products were injuriously subsidized: softwood lumber; softwood shakes and shingles; and softwood fence. The main programs alleged to provide subsidies were the stumpage systems maintained by the federal and several provincial governments. The investigation was terminated when, in its final determination of May 31, 1983, Commerce found stumpage programs to be generally available and therefore not countervailable. In support of its finding, Commerce determined that the only limitation as to type of industry using stumpage was the inherent characteristic of the resource itself and the current level of technology. Furthermore, Commerce found that current limitations on use of stumpage were not due to any government action.
1.2 Case History
On October 7, 1982, the ITC and Commerce accepted three petitions filed on behalf of the United States Coalition for Fair Canadian Lumber Imports, a group composed of eight trade associations and more than 350 U.S. producers of softwood lumber products. The scope of the investigation was as follows: softwood lumber; softwood shakes and shingles; and softwood fence (picket, stockade and rail). On December 1, 1982, the ITC released a preliminary affirmative determination of injury, finding a reasonable indication that the domestic industry was threatened with material injury by reason of allegedly subsidized imports from Canada. The ITC found that Canadian spruce‑pine‑fir products competed with American yellow pine products despite differences in sizes, shapes and preferred applications. While the ITC acknowledged that the steep decline in consumption of softwood products was due in large part to the drop in residential housing construction, it found a reasonable indication that allegedly subsidized Canadian imports had caused or had threatened to cause injury. The absolute volume of Canadian imports had declined, while the percentage of the U.S. market held by imports had increased slightly.
On March 11, 1983, Commerce released a preliminary negative countervailing duty determination, in which the estimated net subsidy rates for each of the three investigated products were found to be de minimis.
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.32% |
| Softwood shakes and shingles | 0.24% |
| Softwood fence | 0.29% |
On May 31, 1983, Commerce released a final negative countervailing duty determination as follows. Again, estimated net subsidy rates for each of the three investigated products were found to be de minimis.
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.349% |
| Softwood shakes and shingles | 0.260% |
| Softwood fence | 0.304% |
1.3 Key Issues
The high value of Canadian softwood lumber exports to the United States (approximately $3.0 billion) gave this case an unprecedented political profile. Furthermore, a key element in the case was the decision to investigate a Canadian natural resource management program (stumpage programs) as potentially countervailable. Commerce determined that stumpage programs “were not provided to a specific enterprise or industry [or group thereof] and did not entail the provision of goods at preferential rates.”
With respect to stumpage programs, Commerce determined that any limitations on their use were “not due to the actions of the Canadian governments” and that “the actual users of stumpage spanned a wide range of industries.” Furthermore, the programs were found not to constitute a domestic subsidy because they did not provide goods at preferential rates to softwood producers. As a result, stumpage programs were not found countervailable.
1.4 Programs Determined to Confer Subsidies
While the following programs were determined to be subsidies and were therefore countervailable under U.S. trade law, the total estimated net subsidy for each product under investigation was found to be de minimis (i.e. less than 0.5% of the value of the production).
1.4.1 Canadian Federal Programs
1.4.1.1 Investment Tax Credit
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.030% ad valorem |
| Softwood shakes and shingles | 0.030% ad valorem |
| Softwood fence | 0.018% ad valorem |
The Investment Tax Credit incentive was available to all secondary industries purchasing new buildings, machinery and equipment for use in manufacturing and processing activities. For qualified property, the basic Investment Tax Credit was 7%, with an additional 3% or 13% for qualified property in certain economically depressed regions. For “certified property” (i.e. qualified property in regions characterized with high unemployment and low per capita income), the Investment Tax Credit rate reached 50%. Since Investment Tax Credits of up to 7% were available to all companies on equal terms, Commerce determined that such credits did not confer a subsidy. However, credits over 7% were limited to companies in specific regions, and therefore were found to confer a subsidy. Commerce allocated the benefits offered by the Investment Tax Credit program according to capital investment information pertaining to the sawmill, planing mill and wood products industries, and their production volumes.
1.4.1.2 Program for Export Market Development (PEMD)
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.001% ad valorem |
| Softwood shakes and shingles | 0.000% ad valorem |
| Softwood fence | 0.009% ad valorem |
PEMD was a program administered by the Department of External Affairs. It facilitated the development of export markets for Canadian products by sharing with exporters the costs of travel and promotional activities. PEMD assistance was in the form of interest‑free loans with forgivable repayment terms. Two small projects were funded to develop U.S. market opportunities for softwood fence and lumber. Commerce found that the sole purpose of PEMD was to stimulate exports; the assistance provided under the program thus conferred benefits that constituted export subsidies and that therefore were automatically deemed specific.
Accordingly, a specificity analysis and finding was not necessary. The funds disbursed were treated as grants and expensed in the year of their receipt.
1.4.1.3 Forest Industry Renewable Energy Program (FIRE)
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.003% ad valorem |
| Softwood shakes and shingles | 0.003% ad valorem |
| Softwood fence | 0.003% ad valorem |
The FIRE program was administered by the Department of Energy, Mines and Resources, and was intended to encourage the substitution of biomass energy sources for fossil fuels by companies that would otherwise have no incentive to take such action. The program provided taxable grants tied to the purchase of capital equipment. Prior to April 1, 1981, the benefits of this program were determined to be limited to “forest industry firms” and thus countervailable.
1.4.1.4 Regional Development Incentives Program (RDIP)
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.180% ad valorem |
| Softwood shakes and shingles | 0.070% ad valorem |
| Softwood fence | 0.151% ad valorem |
This program provided development incentives (grants or loan guarantees) to attract capital investments to designated regions where employment and economic opportunity were chronically low. Commerce found this program countervailable because its benefits were limited to companies located within specific regions.
1.4.1.5 Federal Employment Program—Community Based Industrial Adjustment Program (CIAP)
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.001% ad valorem |
| Softwood shakes and shingles | 0.000% ad valorem |
| Softwood fence | 0.000% ad valorem |
This program was designed to alleviate the distress caused in designated communities by large‑scale permanent industry dislocation in a given sector. Commerce determined that the list of depressed communities eligible for CIAP assistance was designated at the discretion of the federal government. One softwood producer received a small grant in 1982 under this program. The program was found to be limited to companies in specific regions, and therefore countervailable.
1.4.2 Federal–Provincial Programs
1.4.2.1 Agricultural and Rural Development Agreements (ARDA)
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.005% ad valorem |
| Softwood shakes and shingles | 0.005% ad valorem |
| Softwood fence | 0.005% ad valorem |
The ARDA resulted from joint determinations by the federal and provincial governments that action was needed to promote economic development and alleviate conditions of economic and social disadvantages in certain rural areas. Of the six programs under ARDA, only the Alternative Income and Employment Opportunities in Rural Development Region program was relevant to this investigation. The program provided grants in Ontario and British Columbia to establish, expand or modernize production facilities. The Special ARDA program provided funds aimed at improving employment and income opportunities for people of Native ancestry in rural areas. As this program was limited to companies in specific rural areas, both the provincial and federal benefits provided by the program were found to be countervailable.
1.4.2.2 General Development Agreements GDAs)
The GDAs were comprehensive development agreements between the federal and provincial governments aimed at spurring regional development. Within each GDA, specific subsidiary agreements were negotiated with individual provinces. These mainly funded general planning, infrastructure and community development, although some assistance was provided to individual companies. Both the federal and provincial benefits provided under the GDAs were countervailed as eligibility for funds was limited to areas within a province.
1.4.2.2.1 British Columbia: Assistance to Small Enterprise Program (ASEP)
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.002% ad valorem |
| Softwood shakes and shingles | 0.044% ad valorem |
| Softwood fence | 0.010% ad valorem |
ASEP offered interest‑free, forgivable loans to companies in the manufacturing and processing sector with annual revenue of less than $500,000. The program was found to be specific because it was limited to companies located outside the Lower Mainland and Southern Vancouver Island.
1.4.2.2.2 New Brunswick: Northeast, Kent and Industrial Development Agreements
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | 0.001% ad valorem |
| Softwood shakes and shingles | 0.008% ad valorem |
| Softwood fence | 0.007% ad valorem |
These programs offered interest-free, forgivable loans to companies located within specific regions with average sales of less than $1 million. The amount of the funding provided could not exceed 50% of the cost of new manufacturing or processing facilities, or 30% for modernization or expansion of such facilities. Loans were dispersed pursuant to this program between 1978 and 1981. Since the programs were limited to companies located in specific regions, they were determined to be specific and therefore countervailable.
1.4.2.2.3 Canada–Nova Scotia Forestry Subsidiary Agreement—Grants
| Product | Total Estimated Net Subsidy |
|---|---|
| All products | 0.008% ad valorem |
The sawmill improvement component of this program provided grants of up to $5,000 per mill to encourage the adoption of improved sawmilling technology, better safety and improved conditions. The program was found to confer a subsidy on softwood lumber producers because eligibility was limited to sawmills.
1.4.3 Provincial Programs
1.4.3.1 Alberta: Stumpage Payment Deferral
| Product | Total Estimated Net Subsidy |
|---|---|
| All products | 0.003% ad valorem |
In 1982, the Government of Alberta deferred the payment of stumpage dues for one year without interest charges. Commerce concluded that the program was countervailable because the government restricted the program of payment deferral to a specific industry or group.
1.4.3.2 British Columbia
1.4.3.2.1 Low Interest Loan Assistance (LILA)
| Product | Total Estimated Net Subsidy |
|---|---|
| All products | less than 0.001% ad valorem |
Loans received by softwood producers between 1978 and 1979 were found countervailable because their availability was limited to specific regions within British Columbia. Commerce determined that the terms of the loans were inconsistent with commercial considerations.
1.4.3.2.2 Stumpage Payment Deferral
| Product | Total Estimated Net Subsidy |
|---|---|
| All products | less than 0.001% ad valorem |
As logging in the Fort Nelson swamplands could be undertaken only in winter, the B.C. government allowed a deferral of the stumpage payments without interest charges until that period. The program was found to be regionally specific and inconsistent with commercial considerations.
1.4.3.3 Ontario
1.4.3.3.1 Stumpage Prices for Non-Integrated Licensees
| Product | Total Estimated Net Subsidy |
|---|---|
| All products | 0.015% ad valorem |
Integrated licensees were stumpage users who also owned or operated pulp mills. The stumpage fees for non‑integrated licensees were found to be 90% of those for integrated licensees. Commerce found that there was insufficient evidence to explain this differential. Consequently, the price charged to non‑integrated licensees was found to be specific and to constitute preferential treatment, and was therefore countervailable.
1.4.3.3.2 Stumpage Payment Deferral
| Product | Total Estimated Net Subsidy |
|---|---|
| All products | 0.005% ad valorem |
In 1982, the Government of Ontario deferred stumpage payments for one year. Commerce concluded that the benefits of this program were limited to sawmill operators and were inconsistent with commercial considerations, and thus countervailable.
1.4.3.4 Quebec
1.4.3.4.1 Stumpage Pricing on Timber Limits
| Product | Total Estimated Net Subsidy |
|---|---|
| All products | 0.061% |
Commerce determined that there was a price differential between government charges for stumpage rights on “timber limits” and general pulpwood rights. It found that the lower timber limits prices were specific and conferred a preferential benefit, and hence were a countervailable subsidy.
1.4.3.4.2 Aide à la promotion des exportations (APEX)
| Product | Total Estimated Net Subsidy |
|---|---|
| Softwood lumber | less than 0.001% |
| Softwood shakes and shingles | less than 0.001% |
| Softwood fence | 0.002% |
Under APEX, grants were awarded to companies for the promotion of Quebec goods and services outside Canada. Commerce concluded that APEX was a countervailable export subsidy, and that the products under investigation had benefited from this program.
1.4.3.4.3 Société de récupération, d’exploitation et de développement forestiers du Québec (REXFOR) (Forest Salvage, Management and Development Corporation of Quebec)
REXFOR was a provincial Crown corporation funded by the Ministère des Finances du Québec; it owned sawmills and pulp and paper mills producing the softwood products under investigation. As any funds provided by the government were directed toward a specific industry, Commerce found them countervailable.
Commerce calculated REXFOR’s net subsidies to be as follows:
| Loans and loan guarantees | All products under investigation: | 0.001% |
|---|---|---|
| Grants | All products under investigation: | 0.001% |
| Loss coverage | Softwood lumber: Softwood shakes and shingles, and softwood fence: | 0.017% 0.014% |
| Equity purchases | All products under investigation: | 0.005% |
| Tax abatement program | All products under investigation: | 0.005% |
| Export expansion program | Softwood lumber: | 0.019% |
1.5 Programs Determined Not to Confer Subsidies
1.5.1 Federal and Provincial Stumpage Programs
Commerce determined that since access to stumpage programs was not contingent upon export performance, they could not be found to be export subsidies. It indicated that the mere fact that significant quantities of softwood were exported did not mean that stumpage programs conferred an export subsidy. Commerce also found that stumpage programs did not confer a domestic subsidy because they were not provided to a specific enterprise or industry, or group of enterprises or industries. It found that the only limitations as to the types of industries that used stumpage reflected the inherent characteristics of the natural resource and the current level of technology. Commerce noted that several different Canadian industries utilized stumpage programs. These included producers of lumber, wood products, veneer, plywood, pulp and paper, furniture, turpentine processors, charcoal, wood alcohol, and even food additives.
Commerce also found that even if stumpage programs were being provided to a “specific group of industries,” they would not confer a domestic subsidy because they did not provide goods at preferential rates—the standard required by the Tariff Act of 1930 for a finding of preferentiality. Furthermore, the stumpage programs “do not assume a cost of producing the goods under investigations.” “Assumption” was statutorily defined as the relief from a pre‑existing statutory or contractual obligation.
In addition, Commerce rejected the petitioner’s request to conduct cross‑border price comparisons to establish commercial benchmarks. It had been Commerce’s policy not to use such comparisons. In addition, it was found that there was not a unified North American market and that there was not a unified price for stumpage.
1.5.2 Federal Programs
1.5.2.1 Deductible Inventory Allowance
The Canadian federal Income Tax Act authorized a deduction equal to 3% of the opening value of inventories. Commerce did not find this program countervailable as it was not limited to a specific industry.
1.5.2.2 Capital Cost Allowance (CCA)
The federal income tax regulations allowed a CCA for businesses that purchased assets used in pollution abatement, manufacturing or energy conservation. Commerce did not find this program countervailable as it was not limited to a specific industry.
1.5.2.3 Export Development Corporation (EDC) (now Export Development Canada)
EDC, a Crown corporation, offers financial services to Canadian exporters, including export credit insurance (which was the focus of the petitioners’ allegations). EDC was found to be charging premiums sufficient to cover long‑term operating costs and losses. The export credit insurance was found to be consistent with commercial considerations, and thus was not an export subsidy. The program was also found to be generally available.
1.5.2.4 Federal Employment Programs
1.5.2.4.1 Local Employment Assistance Program (LEAP)
LEAP aimed to increase the self‑sufficiency of chronically unemployed/underemployed persons (e.g., persons with disabilities) through grants for job creation and worker retraining. Commerce found that this program was not limited to any specific industry/industries or region(s).
1.5.2.4.2 Work Sharing Program
This program was designed to avert temporary layoffs during short‑term economic downturns by reducing work weeks, encouraging shared work and providing unemployment benefits when no work was available. Employees of producers of products under investigation received benefits under this program. Commerce found that the program was not limited to any specific industry/industries or region(s).
1.5.2.5 Regional Development Incentives Program (RDIP)—Loan Guarantees
Although RDIP was found countervailable in this investigation, the loan guarantee element of the program was exempted from the net subsidy determination as it was determined to be consistent with commercial considerations.
1.5.2.6 Enterprise Development Program (EDP)
The EDP was developed to promote productivity enhancement. The tools through which it pursued this goal included:
- Loan Insurance
The federal government provided loan insurance to private lenders for loans to companies approved for productivity projects. - EDP Contributions (i.e. grants)
The federal government shared the cost of approved projects with companies.
Commerce found that the loan insurance element of the EDP was fully consistent with commercial considerations, and that neither element was limited to any specific industry/industries or region(s).
1.5.2.7 Transportation Programs
1.5.2.7.1 Rail Freight Rates
Commerce examined the Canadian rail freight charges paid by softwood lumber companies. Commerce concluded that not only was there no countervailable subsidy conferred through these charges, but that the fees paid by lumber companies were markedly higher than those for other commodities. Furthermore, shipping rates were agreed upon after arm’s‑length negotiations between the Canadian railways and the shippers, with no government involvement.
1.5.2.7.2 Currency Exchange Rate Tariff
The currency exchange rate tariff was implemented in 1921 on all rail shipments to the United States, and was intended to adjust for differences in the value of the U.S. and Canadian currencies. Because of currency fluctuations, the railroads agreed that the value of the rail haul taking place in the United States should be reflected in U.S. currency, and the value of the Canadian haul should be reflected in Canadian currency. Since 1977, U.S. currency had been at a premium in relation to Canadian currency. As a result, Canadian shippers were paying a surcharge on exports to the United States.
Because Canadian shippers were paying a surcharge, Commerce found that no benefits were being bestowed through the currency exchange rate tariff on exports of softwood lumber. Furthermore, Commerce found that the tariff was not intended nor did it operate to stimulate exports. Rather, it was a mechanism for maintaining Canadian rail carrier revenue.
1.5.2.7.3 Fuel Tax Refund and Exemption
This program ensured that all U.S. states and Canadian provinces collected taxes equal to the actual fuel consumed by motor carriers operating in their jurisdiction, but purchased from outside that jurisdiction. Commerce found that the program did not relieve shippers of any tax and was not specific to an industry.
1.5.3 Joint Federal–Provincial Programs
1.5.3.1 Forestry Subsidiary Agreements
1.5.3.1.1 Long-Term Forest Management
Funding was provided for long-range resource management on public lands and public infrastructure development (i.e. silviculture camps, tree nurseries).
These activities were conducted by the provinces on provincial land and did not relieve any companies of obligations incurred in their licensing arrangements. Furthermore, the benefits of the program accrued to the government, as owner of the land, and not the short- or medium‑term licensees. Commerce found that federal government payments for the construction of forest access roads did not constitute a subsidy because the roads were open to the public.
1.5.3.1.2 Saskatchewan: Opportunity Identification and Technological Assistance
Commerce concluded that the results of the research and feasibility studies funded by the provincial government under this program were publicly available and thus not countervailable.
1.5.3.1.3 Forestry Job Program—Employment Bridging Assistance Program (EBAP)
EBAP provided funds to qualifying industries to retrain skilled workers during times of recession. The program was not limited to a specific group or industry, and thus was not countervailable.
1.5.3.1.4 Canada–Nova Scotia and Canada–New Brunswick Grants for Private Woodlot Owners
These grants were designed to provide technical assistance in effective management of forest resources. As they were available to all private landowners, the grants were not countervailable.
1.5.4 Provincial Programs
1.5.4.1 Alberta
The following two Alberta programs were found not to be countervailable as they were not limited to a specific enterprise or industry, or group thereof.
- Timber Salvage Incentive Program
This program was designed to provide incentives for the harvesting of timber damaged by forest fires or diseases. - Alberta Opportunity Company
This provincial Crown corporation provided assistance to a variety of processing and manufacturing sectors.
1.5.4.2 British Columbia: Section 88 Roads
Under section 88 of British Columbia’s Forest Act, certain licensee expenditures for constructing approved roads on crown lands were credited against total stumpage dues payable to the province. Commerce found that as the quality of the roads had to be above that required for logging operations and they had to be accessible to the public, the program did not benefit a specific industry.
1.5.4.3 Ontario
The following two Ontario programs did not provide benefits limited to a specific enterprise or industry, or group thereof, and thus were found not countervailable:
- Employment Development Fund (EDF)
This program was designed to promote long‑term employment by providing grants to job‑creating investment projects. - Non-Forestry Subsidiary Agreement Roads
Under this program, the province reimbursed companies building primary and secondary roads on crown lands. Commerce found that as the quality of these roads had to be above that required for logging operations and they had to be accessible to the public, the program did not benefit a specific industry.
1.5.4.4 Quebec
The following five Quebec programs were found not to preferentially benefit a specific enterprise or industry, or group thereof.
- Caisse de dépot et placement du Québec (CDPQ)
Commerce confirmed that the CDPQ managed several pension funds and insurance programs, and invested over a broad range of sectors on commercial terms. - FRI Industrial Incentives Fund for Small and Medium‑Sized Businesses
This program allowed small and medium‑sized businesses to deposit up to half their income tax owed to the province into an escrow fund, from which they could withdraw up to 25% of the cost of approved development projects. - Programme expérimental de création d’emplois communautaires
This program provided cash payments to entrepreneurs to assist them in maintaining and creating jobs for the chronically unemployed. - PME Innovation
This program assisted small and medium‑sized businesses in obtaining capital for production or marketing projects. - Société de développement industriel du Québec (SDI)
Quebec Industrial Development Corporation Programs
Commerce found that the SDI‑administered development grant programs and loan guarantee programs were neither region‑specific nor inconsistent with commercial considerations.
1.6 Programs Determined Not to be Used
1.6.1 Federal Programs
Enterprise Development Program—Loans
1.6.2 Federal–Provincial Programs
Canada–Nova Scotia Forestry Subsidiary Agreement Grants
1.6.3 Provincial Programs
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