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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

6 Certain Laminated Hardwood Trailer Flooring (LHF) from Canada

6.1 Case History

On March 7, 1996, Commerce and the ITC accepted a petition filed by the Ad Hoc Committee on Laminated Hardwood Trailer Flooring Imports (Anderson-Tully, Havco Wood Products, Inc., Industrial Hardwood Products Inc., Lewisohn Sales Company Inc., and Cloud Corporation / Cloud Oak Corporation) alleging injury to U.S. industry by reason of allegedly subsidized imports of laminated hardwood flooring from Canada. The petition also alleged that critical circumstances existed with respect to imports of the subject merchandise. The scope of the investigation consisted of certain laminated hardwood flooring made of oak, maple or other hardwood lumber.

On May 9, 1996, the ITC released an affirmative preliminary determination, finding a reasonable indication that the domestic industry was threatened with material injury by reason of allegedly subsidized imports from Canada. Based on the combination of declining U.S. demand, the rise in available capacity in the United States and Canada, the rise in subject import volumes and market share, and the evidence of intensifying downward price pressure from subject imports, the ITC found that subject imports were likely to have a significant adverse impact on the condition of the domestic industry, and that these factors provided a reasonable indication of a real and imminent threat of material injury.

On June 7, 1996, Commerce extended the deadline for its preliminary determination in order to investigate the petitioner’s allegations that the Canadian respondent, Nilus Leclerc Inc. and Industries Leclerc Inc. (Leclerc), received upstream subsidies through its purchase of lumber from suppliers who had harvested stumpage from Quebec’s public forests. The allegation provided reasonable grounds for Commerce to believe that stumpage subsidies provided by the Government of Quebec were being passed through to Leclerc pursuant to the purchase of hardwood lumber from suppliers. However, Commerce found that Leclerc purchased lumber from both allegedly subsidized and unsubsidized suppliers, and that the price paid for the allegedly subsidized lumber was generally equal to or more expensive than that for the unsubsidized lumber. Accordingly, Commerce made a preliminary determination that Leclerc did not receive an upstream subsidy.

On November 20, 1996, Commerce released a preliminary negative countervailing duty determination. The total estimated preliminary net countervailable subsidy rate for Leclerc was 0.31%, which was de minimus. Erie Flooring & Wood Products (Erie) and Milner received zero subsidies during the period of investigation (calendar year 1995). The only subsidy received by Industrial Hardwood Products Ltd., located in Ontario, was for consulting services pursuant to the Industrial Research Assistance Program.

Commerce determined without further calculation that even if this assistance constituted a countervailable subsidy, the rate would be de minimis. Hence, Erie, Milner and Industrial Hardwood Products were excluded from the investigation.

Accordingly, the total estimated preliminary net countervailable subsidy rate for Leclerc, the one remaining firm, was 0.31%, a de minimis rate. Nilus Leclerc Inc. was part of a consolidated group, Groupe Bois Leclerc. Nilus Leclerc Inc. and Industries Leclerc Inc. were the only companies in the group directly engaged in the production of LHF. Because of the extent of common ownership, Commerce treated these two LHF producers as a single company.

On February 4, 1997, Commerce released a final negative determination and final negative critical circumstances determination. Based on the four countervailable programs described, the aggregate ad valorem rate set for Leclerc was 0.57%. This rate was de minimis. On February 26, 1997, the investigation was formally terminated by the ITC.

6.2 Key Issues

Petitioners claimed that Nilus Leclerc Inc. (Leclerc) became partners with the Government of Quebec, with the sole objective of taking over the U.S. laminated hardwood flooring market, and that all programs provided to Leclerc should be considered specific because they were provided under a plan that gave Leclerc special treatment. However, evidence of “special treatment” was never provided by the petitioners and so Commerce never considered this argument.

There was also a question of upstream subsidies. Commerce compared the prices paid by Leclerc to its “allegedly subsidized” suppliers with the prices paid to unsubsidized suppliers on a product-by-product and aggregate basis. Commerce found that the price of allegedly subsidized lumber was generally equal to or higher than the price of unsubsidized lumber. Leclerc therefore did not receive a competitive benefit, precluding a finding of an upstream subsidy.

6.3 Programs Determined to be Countervailable

6.3.1 Joint Federal–Provincial Programs
6.3.1.1 Canada–Quebec Subsidiary Agreement on Industrial Development(SID)

Under this agreement, the federal and Quebec governments established a program to improve the competitiveness of the Quebec economy by providing financial assistance to companies for major industrial projects.

The long-term interest-free loan received by Leclerc was found to constitute a countervailable subsidy. It was a direct transfer of funds providing a benefit in the amount of the difference between the benchmark interest rate and the zero interest rate paid by Leclerc. Funds paid out under this program were limited to companies in a particular region of Canada (i.e. Quebec), and hence were regionally specific. The net rate found was 0.29%.

6.3.2 Federal Programs
6.3.2.1 Industrial and Regional Development Program (IRDP)

IRDP was created to promote economic development in Canada, especially in regions where opportunities for productive employment were exceptionally inadequate. The program was terminated on June 30, 1988. Under IRDP, each of Canada’s 260 census districts was classified into one of four tiers on the basis of the economic development of the region.

The grants received by Leclerc, which was located in a Tier III district, were determined to constitute a countervailable subsidy as they were a direct transfer of funds from the Government of Canada and conferred a benefit in the amount of the portion of the grant that was in excess of the most favourable, non-specific level of benefits (i.e. Tier I). IRDP grants were also found regionally specific because the preferential levels of benefits were limited to companies in particular regions of Canada. These grants were treated as “non-recurring” subsidies. The net rate found was 0.04%.

6.3.3 Provincial Programs
6.3.3.1 Quebec Industrial Development Corporation (SDI)—Expansion and Modernization Program

Quebec firms could receive funding under this program for projects aimed at markets outside Quebec, or where the target Quebec market was inadequately served by businesses in Quebec and the supported production was expected to replace goods imported into Quebec.

Based on the eligibility criteria, Commerce determined that the program was not de jure specific but was rather de facto specific. In 1993 and 1994, a disproportionate share of assistance was provided to the wood industry in general and to Leclerc in particular. The loans were determined to be a direct transfer of funds providing a benefit in the amount of the difference between the benchmark interest rate and the interest rate paid by Leclerc. In order to account for the value of the subsidy, Commerce estimated a repayment schedule for the SDI loan and compared the amount Leclerc would repay under that schedule with the amount repayable under a comparable commercial loan.

Commerce determined that Leclerc was uncreditworthy in 1995. Although Leclerc received loans through the SDI program, Commerce determined that SDI assumed more risk than commercial banks would have, and that there were significant differences with respect to the extent to which commercial and SDI loans could be recovered in the event of default. Because of these differences, Commerce chose a benchmark interest rate that generally reflected the level of security exhibited by the government loans. Commerce determined that Leclerc had been creditworthy in 1993–1994 as the company had received comparable commercial loans.

With regard to the SDI loans received by Leclerc, Commerce performed a “disproportionality” test on the level of an industry as opposed to an enterprise. In the final determination, Commerce justified this deviation from its normal practice by explaining that it was provided the relevant information on an industry basis and that the statute conferred discretion to determine the appropriate level of aggregation. Commerce also asserted that it had no obligation to take into account the economic factors that might have resulted in disproportionate use of a program by a particular industry. The net rate was 0.24%.

6.3.3.2 Export Promotion Assistance Program (APEX)

Under the APEX program, Quebec shared certain costs incurred by a Quebec company in the penetration of new foreign markets. Such costs included missions to develop new markets, participation in foreign trade fairs, adaptation of products to new export markets, preparation of bids with the assistance of consultants, preparation of marketing studies and strategies to enter foreign markets, and the hiring of international marketing experts.

Because receipt of benefits under this program was contingent upon export performance, Commerce determined that it was an export subsidy. It was also determined that the grants received by Leclerc constituted a countervailable subsidy because they were direct transfers of funds, conferring a benefit to Leclerc in the amount of the face value of the grant. The grant was treated as a non-recurring subsidy and the benefit was allocated over the average useful life of Leclerc’s non-renewable physical assets. The net rate was 0.00%.

6.4 Programs Determined Not to be Countervailable

6.4.1 Federal Programs
6.4.1.1 Export Development Corporation (EDC)

One of EDC’s services was the provision of insurance intended to protect exporters against losses resulting from non-payment relating to commercial and political risks.

During the period of investigation, Leclerc purchased export credit insurance from EDC that covered sales of the subject merchandise. No claims were made or pay-outs received by Leclerc during this period.

Commerce’s standard methodology for examining government export credit insurance programs was to determine whether the premium charged by the government entity was adequate to cover the long-term operating costs and losses of the program. According to EDC annual reports, the Corporation’s insurance program reported profits from 1991 to 1995. Given that the premium rates charged by EDC had been more than adequate to cover the operating costs and losses of its export insurance program, Commerce determined that the program did not confer a benefit and therefore was not a subsidy.

6.4.2 Provincial Programs
6.4.2.1 Société québécoise de développement de la main-d’oeuvre— Program for the Development of Human Resources

Commerce concluded that this program was neither de facto nor de jure specific, and had not conferred a countervailable subsidy on Leclerc. The program was available to all commercial enterprises, workers’ unions, other worker’s groups and non-profit organizations located in Quebec. Assistance under the program was distributed over a large number and wide variety of users representing virtually every industry in Quebec. Neither Leclerc nor the wood products industry was found to have received a disproportionate share of the benefits.

6.4.2.2 Hydro-Québec Electrotechnology Implementation Program

This program was administered by Hydro-Québec, a public utility wholly owned by the Government of Quebec. The program was designed to reduce dependence on fossil fuels by increasing the consumption of hydro-electric power and promoting research and development on more efficient uses of energy. The program was found not to be de jure specific. With regard to de facto specificity, from 1985 to 1992 assistance under the program was distributed over a large number and wide variety of users, representing a wide cross-section of the Quebec economy. Neither Leclerc nor the wood products industry received a disproportionate share of the program’s benefits. Commerce therefore determined that the program was not specific and had not conferred countervailable subsidies on Leclerc.

6.4.2.3 Société québécoise de développement de la main-d’oeuvre— Decentralized Fund for Job Creation Program

This program was created by an agency of the Government of Quebec in 1994 for the purpose of increasing employment and reducing public expenditures for the unemployed.

By providing a one-time cash grant to qualifying enterprises, the program aimed to induce private enterprises to develop projects to hire the unemployed. The program was found not to be de jure specific. With regard to de factospecificity, from February 1994 to March 1996 assistance under the program was distributed to many sectors representing virtually every industry and commercial sector found in Quebec. Neither Leclerc nor the wood products industry received a disproportionate share of the program’s benefits. Commerce therefore determined that the program was not specific and had not conferred countervailable subsidies on Leclerc.

6.4.2.4 Société de placement dans l’entreprise québécoise (SPEQ)

The SPEQ program provided a tax incentive for owners of business investment companies to make equity investments in eligible small to medium-sized Quebec companies. This program was not found to be de jure specific. With regard to de facto specificity, from 1988 to 1993 assistance under the program was distributed over a large number and wide variety of users, representing a wide crosssection of the Quebec economy. Neither Leclerc nor the wood products industry was a dominant or disproportionate user of the program. Commerce therefore determined that the program was not specific and had not conferred countervailable subsidies on Leclerc.

6.4.2.5 Quebec Industrial Development Corporation—Programme d’appuià la reprise (PREP)

PREP was a temporary program under which SDI provided guarantees on commercial bank loans. The program was active between 1992 and 1995, and was designed to assist small to medium-sized firms in Quebec experiencing liquidity problems as a result of the recession of the early 1990s.

The program was found not to be de jure specific. With regard to de facto specificity, the companies that obtained loan guarantees under PREP represented a large number of different industries. Neither Leclerc nor the wood products industry was a disproportionate user of the program. Commerce therefore determined that the program was not specific and had not conferred countervailable subsidies on Leclerc.

6.5 Programs Determined Not to be Used

Capital Gains Exemptions

Regional Investment Tax Credits

Performance Security Services through Export Development Corporation

Working Capital for Growth from the Business Development Bank of Canada

St. Lawrence Environmental Technology Development Program

Program for Export Market Development

Canada–Quebec Subsidiary Agreement on the Economic Development of Quebec

Quebec Stumpage Program

Programs provided by the Quebec Industrial Development Corporation (SDI)

Article 7 Assistance

Export Assistance Program

Business Financing Program

Research and Innovation Activities Program

Private Forest Development Program

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