Annex A

**Parties Responses to Questions -- First Meeting of the Panel**

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  **Contents**                                               **Page**

  Annex A-1 Responses of Canada to questions posed in the    A-2
  context of the first substantive meeting of the Panel      

  Annex A-2 Responses of the United States to questions      A-13
  posed in the context of the first substantive meeting of   
  the Panel                                                  
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**ANNEX A-1**

RESPONSES OF CANADA TO QUESTIONS POSED

IN THE CONTEXT OF THE FIRST SUBSTANTIVE MEETING

(21 May 2002)

**1.** *In situ* natural resources are not "goods" within the meaning of
the SCM Agreement. Accordingly, the right of exploitation of such
resources does not come within the meaning of "provision of goods" in
Article 1.1(a)(1)(iii). This does not mean that the consequences flowing
from real property rights in general, and resource exploitation rights
in particular, cannot come within the scope of other parts of Article
1.1.

A land grant, or the grant of a building, may come within Article 1.1.
However, such a grant would not constitute the provision of "goods".
Land, as an asset, is often a source of revenue. A land grant,
therefore, can constitute the foregoing of revenue that the owner might
expect from its rental or sale. Whether a 99-year lease comes within the
terms of Article 1.1 depends on the terms of the lease and, as mentioned
above, the prevailing legal regime for leasing of publicly-owned land.

Finally, for the purpose of Article 1.1, real property rights such as
those in land, leases or *in situ* natural resources are no different
from property rights in patents or copyrights (or other intangibles). It
is not that the "granting" of these rights in each instance can never
amount to a financial contribution, but that such grants do not amount
to the provision of "goods".

**2. (a)** Yes. The term "goods" in Article 1.1(a)(1)(iii) has the same
meaning and scope as "products" used elsewhere in the SCM Agreement and
the WTO Agreement. The ordinary meaning of "goods" is "tangible or
movable personal property other than money; (especially) articles or
items of merchandise (goods or services)".

The context for this term in the SCM Agreement is highly instructive as
to its scope and confirms the ordinary meaning of "goods" as tradable
items with an actual or potential customs classification.

-   First, in Part II, Article 3.1(b) refers to "the use of domestic
    over imported *goods*." Evidently, "goods" refers to tradable items:
    rights to *in situ* natural resources cannot be "imported" or
    "used".

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-   Second, Parts III and V of the SCM Agreement refer to "products".
    There is no indication anywhere in the text that the "product" or
    "imports" referred to in these Parts is different from the "goods"
    referred to in Article 1 or 3.

Other agreements in the WTO Agreement are also particularly useful as
context.

-   First, countervailing measures are provided for in Article VI of the
    GATT 1994, as an exception to Article II. Therefore, the coverage of
    Part V of the SCM Agreement and that of Article II of the GATT 1994
    must be the same.

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-   Second, the interpretative note to Annex 1A of the *Marrakesh
    Agreement* provides a rule of conflict between the GATT 1994 and the
    covered agreements. The logical conclusion of the note is that the
    agreements set out in Annex 1A apply to the same products, or
    "goods" as those subject to the GATT 1994.

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-   Third, Article 1 of the TRIMs Agreement (TRIMS) provides that the
    TRIMs "applies to investment measures related to trade in *goods*
    only." Article 2 requires that, "... no Member shall apply any TRIM
    that is inconsistent with the provisions of Article III or Article
    XI of GATT 1994." The unambiguous implication is that the "goods"
    referred to in Article 1 of the TRIMs are the same as the "products"
    covered by Articles III and XI of the GATT 1994.

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-   Fourth, the *Agreement on Implementation of Article VII of the GATT
    1994* refers to imported or exported "goods". There is no indication
    that the term has a different meaning in this agreement than the
    same word in other agreements in Annex 1A, or indeed the term
    "product" in the GATT 1994.

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-   Fifth, the *Agreement on Rules of Origin* also refers to "goods" in
    the context of Articles I, II, III, XI and XIII of the GATT 1994.

Finally, nothing in the object and purpose of the SCM Agreement suggests
that the term "goods" in Article 1.1 should be read as anything other
than tradable items with an actual or potential customs classification.
To the extent that there is a concern that certain forms of government
largesse may not be captured by definition of "goods", the Panel may
consider the following:

-   First, as the panel in *United States -- Export Restraints* noted,
    Article 1.1(a)(1) does not cover *all* government actions that may
    affect the market, but only those that fall within the definition of
    "subsidy".

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-   Second, land or lease grants may well be covered by other provisions
    in Article 1.1(a)(1). It is not, however, necessary for this Panel
    to define the precise scope of that Article to arrive at the
    conclusion that real property rights are not "goods".

The Spanish and French versions of the WTO Agreement are useful in
confirming the meaning of the term "goods". In both texts, the word
"goods" is translated into both "bienes" and "productos" as well as
"biens" and "produits" in the Spanish and French versions, respectively.
For the purposes of the other two official versions of the SCM
Agreement, the term "goods" in Article 1.1 has the same meaning and
scope as "products".

The Appellate Body also uses the terms "goods" and "products"
interchangeably as reflected in their decisions in both EC -- Bananas
(para. 221) and Canada -- Autos (para. 140).

**(b)** No. A building that is affixed to the land is not "goods" for
the purposes of Article 1.1 of the SCM Agreement. Such a building would
be real property.

**(c)** Heading 0602 covers "live trees ... of a kind commonly supplied
by nursery gardeners or florists for planting or for ornamental use."
Live firs of small dimensions that are fully transportable are properly
considered as goods since they fall under the Harmonized System.
Fully-grown live firs in the form of standing timber are not "goods" for
the purposes of the WTO Agreement.

**(d)** The fact that "services" are mentioned in the first half of
Article 1.1(a)(1)(iii) does not in any way affect the scope of "goods".
Goods are those tradable items that come or may come under the coverage
of the GATT 1994, while services are those economic activities that
would fall within the scope of the GATS. Other assets or property --
such as intellectual property rights -- do not fall within Article
1.1(a)(1)(iii) at all.

**3.** Where a private party produces a product from natural resources
in which it has property interests, the "goods" so produced are
[not]{.underline} provided by government. Where, however, a lorry-full
of iron-ore is delivered by the government to a processor, this
constitutes the provision of goods. If the government produces the iron
ore and offers it to a steel producer willing to load and haul the ore
to its mill the government would also be providing goods. However,
granting exploitation rights to a resource that is part of the land and
that cannot be traded, does not constitute the provision of goods.

**4.** Under the Canadian constitution, provinces have title to the
majority of public property and exercise exclusive jurisdiction to
legislate in relation to the development, conservation, and management
of non-renewable natural resources and forestry resources.

**5.** Yes. The text of Article 14(d) unambiguously requires that a
Member determine the adequacy of remuneration "in relation to prevailing
market conditions for the good or service in question in the country of
provision". The ordinary meaning of "prevail", read in context, is
"exist". The reference to "prevailing market conditions" is, therefore,
to conditions that actually exist in the country of provision. There is
nothing in the context, object and purpose or the negotiating history of
Article 14 that would permit reading this as "in another country".

Further contextual evidence may be found in the Accession Protocol of
China. The Protocol specifically permits the use of "methodologies for
identifying and measuring the subsidy benefit which take into account
the possibility that prevailing terms and conditions in China may not
always be available as appropriate benchmarks." If Article 14(d)
permitted Members to consider conditions outside "the country of
provision", this exceptional treatment would not have been necessary.

Market benchmarks can also still exist where there is a government
monopoly. For instance, if the government's monopoly was over domestic
production of the goods in question then the government price could be
compared to the price of imports of the same good. Even where there are
no imports, remuneration is "adequate" where the government operates on
a market basis. All of the provinces submitted substantial and
unrebutted, factual evidence and economic analyses demonstrating that
they were acting in a manner consistent with market principles.

**6.** The requirements for entering into tenures vary substantially,
but before tenures are granted, provinces will require a demonstration
of forest management expertise and financial capabilities sufficient to
undertake required obligations. Subject to the qualifications, there are
no limitations on who can enter into these agreements.

The responsibilities that a long-term tenure holder must agree to
undertake generally include: sustainable forest management, forest
management, development and operational planning, public consultations,
silviculture prescriptions, construction or maintenance of wood
processing facilities, preparation of forest inventories, pest and
disease control, timber cruises, scaling, firefighting and forest
research activities.

In most cases, tenure holders are free to sell their logs to unrelated
sawmills. There are generally no requirements either by statute or by
the terms of tenures that require tenure holders to sell to specific
mills or to sell at specific prices or under specific terms and
conditions.

**7.** The log price data provided to Commerce prior to the PD is
described by province below. Logs are highly heterogeneous and prices
differ by species, size and quality. As with stumpage rates, any
comparison of average prices must at a minimum include adjustments for
these characteristics. As well, log prices reflect the value of a
delivered good; that is, they include the cost of harvesting and
transporting the good as well as all tenure obligation costs borne by
the harvester. Accordingly, log prices are not the same as stumpage
rates

B.C. is home to the most organized log exchanges in Canada. B.C.'s
information is summarized in the following table:

  ----------------------------- ------------- --------------- -------------
                                **Volume      **Value (\$)**  **Average
                                (m^3^)**                      Value
                                                              (\$/m^3^)**

  Vancouver Log Market          6,559,073     655,366,782     99.92
  (2000/2001)                                                 

  Log transactions in BC        11,309,545    782,088,207     69.15
  Interior (1999)                                             

  Vernon Log Yard (2000/2001)   54,907        3,632,694       66.16

  Revelstoke Log Yard           28,754        3,157,601       109.81
  (2000/2001)                                                 
  ----------------------------- ------------- --------------- -------------

The VLM is an informal arrangement amongst the log supply departments of
various coastal B.C. licencees, the log buyers for small companies or
their agents, and the traders employed by log brokers who buy and sell
logs. The VLM does not distinguish between logs originating from
privately owned, federally owned or provincially owned land.

There is no similarly organized log market in the interior of B.C.. It
consists of a series of small, separate local markets. The Vernon log
yard was established in March 1993 and obtains its logs from timber
sales harvested in local districts from a variety of tenure
arrangements. The Revelstoke log yard is extremely small and the logs
sold through it are mainly high-value cedar sawlogs.

Alberta provided survey information it collects in the ordinary course
of business on average log prices paid by purchasers. The following
table shows the calendar year volume and value (FOB purchasing mill) of
these transactions. This data does not break out private land sourced
logs from logs harvested on provincial lands and also does not provide
information on species type or quality.

Excerpted from Table 32 - Exhibit AB-LER-5 Volume and Value of Domestic
Arm's-length Log Sales from Survey

  ------ ------------- ----------------- ---------------- -----------------
         **Total       **Total           **Percent        **Arm's-length
         Softwood Log  Arm's-length      Arm's-length     logs sales prices
         Harvest m³**  Transaction       Transaction      (FOB purchasing
                       Softwood Log      Softwood Log     mill) \$/m³**
                       Volumes m³**      Volumes**        

  2000   14,168,657    884,552           6.24%            50.40
  ------ ------------- ----------------- ---------------- -----------------

In its initial questionnaire response, Ontario provided Commerce with
the results of a survey and a report done by the independent accounting
firm of KPMG. The first schedule in the survey itemized the costs of SPF
(spruce, jack pine and fir) logs from Crown lands delivered to the mill
gate. KPMG reported that total weighted average costs of delivered SPF
logs cut from Crown land of \$50.42 m^3^. The second schedule in the
survey reported purchases of timber in Ontario by third parties of
timber harvested from several jurisdictions. The prices for these
purchases were established by negotiation between buyer and seller.
Weighted average market prices reported by KPMG ranged from \$47.36 m^3^
for timber harvested from Ontario private land and \$49.15 m^3^ for
timber harvested from Ontario Crown land.

There are two separate and distinct markets for the supply of standing
timber in Québec: the public forest and the private forest. The only
private forest prices obtained by Québec are through annual market
surveys and a tri-annual census. Québec uses these market prices to set
public forest stumpage rates. Québec provided the Department of Commerce
with private stumpage price data for the three years 1998, 1999 and
2000.

**8.** By "arm's-length" prices, Canada means prices of log sales
between a willing seller and a willing buyer that are not related, i.e.
market prices freely negotiated between independent parties. Such sales
include both sales for a specific price and sales transacted by means of
"swapping" a bundle of different types of logs between unrelated tenure
holders.

An estimate of the volume of timber harvested in B.C. by companies
operating at arm's-length from sawmills can be obtained by analysing the
timber harvested under specific licences and permits separately for
companies that have and do not have sawmills. This analysis, based on
information on the record prior to the PD, indicates that 30.09 per cent
of the timber from Crown licences was harvested by companies that do not
have sawmills. In the aggregate (including private land), 33.0 per cent
of timber harvested in the province during the POI was harvested by
entities that did not have sawmills.

Québec's TSFMA tenures require the tenure holder to process the public
timber they harvest. Forest management contracts (FMC) do not require
tenure holders to process timber. Sales from Federal lands are largely
stumpage sales done by sealed bid tender. None of the 40,000 registered
private woodlot owners is required to process timber. The tenure data
submitted prior to the PD shows that up to 27 per cent of the provincial
harvest will be sold through arm's-length transactions from private
lands and FMC tenures. In addition, almost 35 per cent of the total log
supply comes from arm's-length transactions from private lands, FMC
tenures and log imports.

Approximately 30 per cent of the softwood timber harvested from
Ontario's Crown land during Commerce's period of investigation was sold
by tenure holders to third parties who subsequently processed this into
forest products.

Alberta indicated to Commerce that it had survey data (both price and
volumes) on arm's-length transactions in volumes that represented
approximately 6 per cent of the total softwood log harvest in Alberta. A
sample of a substantial portion of the forest industries in Alberta was
used to develop these data. "Arm's-length" transactions in this survey
were defined as transactions entered into freely between totally
unrelated parties. Further, this sample was limited to transactions
where the cash price was the only consideration exchanged.

In addition to the survey data giving volumes and prices, Alberta also
has data on the volume of logs delivered to mills from sources other
than from their own forestry tenures. Alberta's records show that
volumes of timber traded or swapped for other logs or woodchips and
purchased in cash transactions or in exchange for other consideration
comprised 3,900,000 m^3^ in the period of investigation or slightly more
than 30 per cent of the total softwood sawlog harvest.

Prior to the PD, Canada submitted to Commerce applications for exclusion
from 98 producers who purchased logs or lumber at arm's-length. Of
these, 78 were remanufacturers unrelated to firms with harvesting rights
and at least 8 were primary mills that purchased all of their log inputs
in arm's-length transactions.

**9.** The programmes and policies investigated by Commerce were
provincial stumpage programs, not the sale of logs. Indeed, the US used
state stumpage programmes as benchmarks rather than log sales. There was
a significant amount of information on the record at the time of the PD
regarding a variety of sources of data that might have been used by
Commerce as benchmarks. This information included data on private
stumpage, competitive tenures in certain provinces and other evidence
that provinces operate their stumpage systems on market terms. Three
provinces -- Alberta, Ontario and Québec -- provided extensive evidence
related to private markets operating within their provinces. Alberta
also provided Commerce with data broken out for its competitively sold
tenures. The four primary exporting provinces, representing 96 per cent
of the exports of softwood lumber, provided information demonstrating
that they operated their stumpage systems in a manner consistent with
market principles.

The size of the available in-country benchmark market should not
determine the adequacy of the data. Rather, adequacy should be assessed
taking into account other factors, including the existence of willing
buyers and sellers and other indicia of a viable market. For example,
arbitrage works between different timber supply sources to ensure that
stumpage rates derived from the sale of a relatively small volume of
harvesting rights from one source can represent a valid basis for
comparison with stumpage rates from other sources.

One example of arbitrage is found in Québec, where the majority of
timber on private forestlands is sold as delivered logs; that is, the
owner undertakes the logging himself, or contracts with a logger to do
the harvesting. A smaller portion of Québec's private harvest is sold as
sales of harvesting rights. Both of these sale prices represent valid
competitive market prices because the opportunity for arbitrage between
the private log and private stumpage markets exists.

**10.** The factual determinations by Commerce in the three previous
lumber cases are highly relevant in establishing that cross-border
benchmarks are inherently arbitrary and capricious. In these cases,
Commerce made specific factual findings and concluded that so many
factors affect the comparability of adjacent US and Canadian timber that
valid cross-border comparisons are impossible. The facts underlying
Commerce's findings have not changed since then and the findings still
hold true today, regardless of the change in the legal regime.

Accordingly, Commerce's finding in *Lumber I* that no unified North
American market for stumpage existed is valid today. For example, the
wide differences between the US and Canada in terms of species
composition; size, quality, and density of timber; and terrain and
accessibility, remain unchanged.

As for the factors that can be influenced by government, these also have
remained unchanged. For example, supply of timber from public lands in
the US is still limited, and, as referred to by Commerce in *Lumber
III*, variations in exchange rates and other factors tied to the
existence of the political border between the two countries remain.

In *Lumber III* Commerce relied on private forest surveys in Québec
because it found these surveys accurately reflected market driven prices
in Québec. Québec's system has not changed since. Yet, in *Lumber IV*,
not only did Commerce ignore such surveys that were on the record prior
to the PD, it ignored every other possible in-country benchmark put on
the record by the other provinces.

**11. (a)** No. Under Part V of the SCM Agreement, a Member may impose a
countervailing measure only where it has established that a subsidy
exists in respect of each entity producing or exporting the subject
merchandise subject to the measure. Specifically, the investigating
authority must establish a "financial contribution" by government that
confers a "benefit". Nothing in the SCM Agreement permits an
investigating authority to presume the existence of a subsidy simply
because the original recipient provides inputs to a downstream producer.

Where the subject merchandise is not produced or exported by the
original recipient of an alleged subsidy, the investigating authority
must establish the existence of a subsidy in respect of the downstream
producer. That is, it must establish that a financial contribution by
government has conferred a benefit on that producer. In the absence of a
direct relationship between the downstream producer and the government,
Article 1.1(a)(1)(iv) sets out the criteria for determining when a
government has made an indirect financial contribution to that
downstream producer.

The EC argues that an "effects" test should be incorporated into the
subsidy definition. However, Article 1.1 does not include such a test.
The enquiry under Article 1.1 of the SCM Agreement is whether a
government has made a "financial contribution" that confers a "benefit".
The panel in United States -- Export Restraints summarized this
analysis:

We believe ... that the appropriate way to conceive of "financial
contribution" is purely as a transfer of economic resources by a
government to private entities in the market, without regard to the
*terms* of that transfer. Such a transfer can be effected either by a
government directly (subparagraphs (i)-(iii)) or indirectly through
private bodies (subparagraph (iv)). The question of the terms on which
the transfer is made does not have to do with the existence of a
financial contribution but rather goes to the separate issue of benefit,
as Article 14 makes clear, by providing that to determine whether a
benefit exists, the terms of the financial contribution need to be
compared with the market terms. \[emphasis in original\]

The panel went on to state:

In short, the negotiating history confirms that the introduction of the
two-part definition of subsidy, consisting of "financial contribution"
and "benefit", was intended specifically to prevent the countervailing
of *benefits* from any sort of (formal, enforceable) government
measures, by restricting to a finite list the *kinds* of government
measures that would, if they conferred benefits, constitute subsidies.
The negotiating history confirms that items (i)-(iii) of that list limit
these kinds of measures to the transfer of economic resources from a
government to a private entity. Under subparagraphs (i)-(iii), the
government acting on its own behalf is effecting that transfer by
directly providing something of value -- either money, goods, or
services -- to a private entity. Subparagraph (iv) ensures that the same
kinds of *government* transfers of economic resources, when undertaken
through explicit *delegation of* *those* functions to a private entity,
do not thereby escape disciplines. \[emphasis in original\]

The EC argument does not, therefore, have support in either the text or
in the negotiating history of Article 1. A subsidy exists where there is
a financial contribution by government that confers a benefit. An
investigating authority must always establish both elements of a
"subsidy" as regards a downstream producer.

**(b)** No. In an original investigation an investigating authority may
never assume that any of the requirements of the subsidy definition have
been met. This is true for upstream producers as it is in respect of an
alleged subsidy to downstream producers. Thus a subsidy to upstream
producers cannot be presumed to be passed through to downstream
producers in any circumstances. This is especially the case regarding
arm's-length transactions where, under fundamental principles of
economics, an upstream recipient of a subsidy would not normally
subsidize a downstream producer.

**(c)** Yes. Article 1.1 requires in all instances that for a given
recipient, a subsidy exists only where there has been a financial
contribution and a benefit. In the context of allegations of indirect
subsidies, in order to determine that the downstream producer is
"subsidized", it must be found that: (1) a government entrusts or
directs the original recipient of a financial contribution to itself
make a financial contribution to the downstream producer under
subparagraph (iv); and (2) that such subsequent financial contribution
be made on terms such that it thereby confers a benefit to the
downstream recipient.

**12.** Where the harvester is not free to: process the logs it harvests
itself; sell to whomever it wishes on whatever terms and conditions that
are mutually agreed; swap logs with other timber harvesters; or obtain
permits to export, then a government requirement that the logging
company contract to provide logs to a sawmill for processing may
constitute the government directed provision of logs by the logging
company to the sawmill.

**13.** With few exceptions, tenure agreements do not contain
requirements that tenure holders have contracts with unrelated sawmills.

**14.** Canada does not wish, at this point, to add to its submissions
on this subject.

**15.** The issue of liquidation of entries is a red herring, because in
the US the entries in the 90 days prior to a PD would rarely if ever be
liquidated before a final determination (including, if appropriate, a
final critical circumstances determination) was made. At that point,
once there is a critical circumstances finding, the liquidation of
unliquidated entries may be suspended.

Under US Customs regulations, entries are to be liquidated within one
year after entry, but Customs may extend that period by an additional
two years. In practice, if the period is not extended, an entry will be
liquidated on the 314th day after it was made. Thus entries potentially
subject to retroactive application of definitive duties would not be
liquidated by the time Commerce is required to complete an
investigation.

**16.** Canada implemented its obligations under the SCM Agreement in
the Special Import Measures Act (SIMA) and related regulations. In the
Canadian system two investigating authorities are involved in
decision-making. Dumping and subsidy determinations are made by the
Commissioner of the Canada Customs and Revenue Agency (CCRA). Injury
decisions are made by the Canadian International Trade Tribunal (CITT).

Under section 41(1)(a)(iv)(C), in a final determination, the
Commissioner makes a finding as to whether a particular investigation
involves a prohibited subsidy. Where there is a finding of a prohibited
subsidy or "specification", then in making its final injury inquiry
under section 42, the CITT is directed, to determine whether the
remaining criteria of Article 20.6 are satisfied. Where the CITT makes a
positive determination under section 42(1)(c) (as reflected in section
6(a)), the Commissioner is directed by section 6(b) to assess "a
countervailing duty in the amount equal to such of the amount of the
subsidy on imported goods as is a prohibited subsidy". Consistent with
Article 20.6, which allows for the retroactive assessment of "definitive
countervailing duties", this provision is under the definitive
"Antidumping and Countervailing Duty" heading of the Act (i.e., sections
3-7).

Pursuant to section 37.11 of the SIMA, imports considered would be those
imported within a representative period within the period of
investigation beginning ninety days before the date of initiation and
ending on the date of the Commissioner's PD, which were "massive"
relative to a preceding representative period of comparable duration
also within the POI.

The retroactive application of final duties would be effected through a
determination by a designated CCRA officer under section 55 of the SIMA.
This determination is subject to re-determination by the Commissioner
under section 59(1) of the Act. While the goods that these duties would
be applied to would have been released (or in the US sense,
"liquidated"), the record of their entry would still be in the CCRA
records system and thus could be retrieved as necessary.

**17.** There is no basis in the SCM Agreement for the application of
provisional measures pursuant to a PD of critical circumstances.
Accordingly, no Member may take an action or impose a measure in respect
of "critical circumstances" on a provisional basis. In this sense
"suspension of liquidation" is no different than a bonding requirement.

**18. (a)** The relevant data for Canada as a whole is set out in
Commerce's PD. There , based on a comparison of the three months
preceding and the three months following initiation of the
investigation, Commerce states that it found an increase in import
levels of 23.34 per cent using import statistics net of the Maritime
provinces, and found an increase of 19.02 per cent when it included
imports from the Maritime provinces. Commerce decided that the "massive
imports" element of Article 20.6 of the SCM Agreement had been satisfied
since both rates of increase were above the regulatory 15 per cent
threshold under US law. If Commerce had considered other comparison
periods or approaches to seasonality adjustments, as Canada had argued
were necessary to an objective assessment of "massive imports", the
inclusion of Maritime shipments would have demonstrated an increase in
shipments below the 15 per cent threshold.

**(b)** Québec\'s exports of softwood lumber to the US in FY 2000/2001
amounted to 21 per cent, or approximately one-fifth of total Canadian
exports of softwood lumber to the US. Thus, in order for exports from
Québec to have accounted for a 15 per cent increase in Canada-wide
exports, exports from Québec would have had to increase by five times
the 15 per cent amount, or by 75 per cent. There is nothing in the
record indicating that exports from Québec followed any pattern
different than exports from the rest of Canada.

However, since at most three Québec producers may have benefited from
the alleged prohibited subsidy during the POI, any exports from these
producers would have been minute relative to total exports from Canada
(or even from Québec) and would not have resulted in a "massive
imports".

**19.** The Canada-US Softwood Lumber Agreement (SLA) provides the
background against which the US should have conducted its "massive
imports" analysis. The CVD investigation was timed to coincide with the
economic and trade consequences of the expiration of the SLA. A period
of investigation adjusted for such consequences would have found normal
trade patterns, rather than "massive imports".

In 1996, Canada implemented the SLA through quota-based export fees. The
SLA expired on 31 March 2001. In anticipation of this expiration, and
the consequent removal of the fees, Canadian exporters and US importers
and purchasers of softwood lumber made a number of rational business
decisions. Importers stopped purchasing Canadian lumber. This resulted
in a drop in prices throughout March. Exporters, deterred by low prices
and SLA fees alike, deferred exports to April. Placed in this context,
it is hardly coincidental that exports to the US in April 2001 increased
by 463 million board feet over total exports in the month of April 2000.

**To Both Parties**

**1.** When a timber harvester cuts down a tree, it produces goods --
logs. The harvester may then use the goods as input into its own
sawmill, pulp mill or other mill, if it has one; it may sell the goods
in question to other users of logs; or export them. Goods are,
accordingly, provided in the sense of Article 1.1 of the SCM Agreement
where logs are given or sold from one party to another.

**2.** There is no "international market price" for softwood lumber,
even though it is bought and sold internationally. Unlike commodities
such as oil or minerals, softwood lumber is priced to specific domestic
or regional markets. As well, because of the huge differences between
different sorts of lumber, lumber prices vary depending on the species,
dimension and grade of the lumber, whether the lumber has been air or
kiln-dried, and whether the lumber has been mechanically stress-rated.
Different markets would have different requirements, thus making it
difficult to have a single "international market price" for lumber.

**3.** Article 15(b) of the Accession Protocol of China establishes that
under Article 14(d) of the SCM Agreement cross-border price comparisons
are not permitted. If Article 14(d) permitted Members to consider
conditions outside of China there would have been no reason to negotiate
this provision. Article 15, unlike the other provisions, introduces
special and additional rules. This is apparent from the following:

-   the chapeau, which requires the SCM Agreement to be applied
    "consistent with the following listed considerations". If this were
    a reintroduction of the SCM Agreement into the Protocol, the form of
    wording would not be needed;

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-   Article 15(b) states that, "the relevant provisions of the SCM
    Agreement shall apply; *however* \..." This demonstrates that what
    follows the "however" is outside the normal rules, and that the
    subordinate clause provides for additional rules;

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-   when Members use the methodologies set out in 15(a) (antidumping)
    and 15(b) (CVD), they are required to notify the WTO. If these
    methodologies were the norm, no such notification would be required;
    and

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-   15(a) expires once a market economy is established in China.
    However, Members realized that it would not be necessary to require
    15(b) to expire, because once there is a market economy, there would
    be no "special difficulty" in establishing a market benchmark.

**4.** Attached as Exhibits CDA-63 to CDA-70 please find provincial
forest tenure agreements and the relevant underlying legislation from
B.C. and Alberta.

**5.** Commerce did not request any information related to the
pass-through issue. Instead, Commerce simply presumed that any subsidy
provided on the upstream input logs was automatically passed through in
the arm's-length sale of those logs.

In its submissions, Canada demonstrated that it was impermissible for
Commerce to presume benefits to subject merchandise without conducting
an upstream subsidy analysis. Canada also demonstrated that in many
instances any alleged subsidization would not be passed through from
harvesters to arm's-length lumber producers. These submissions were also
consistent with Commerce's pass-through determination in Lumber III.

Canada also submitted applications for exclusion from many producers who
had purchased lumber at arm's-length from unrelated suppliers. It many
instances, these producers were also independent remanufacturers (i.e.,
completely unrelated to firms with harvesting rights).

B.C. provided information on the purchase and sale of logs in the
province. That information, set out in Question 7 above, included the
volume and value of logs sold in each log market within the province, as
well as detailed information describing the functioning and operation of
each log market.

Furthermore, the B.C. log sales information contained sufficient detail
to establish the total volume of softwood logs sold domestically to
unrelated purchasers on the coast and in the interior. B.C.\'s initial
questionnaire response stated that, over the past three years, between
26 and 30 per cent of the timber harvested on the Coast was sold through
the VLM. This response also demonstrated that between 22 and 25 per cent
of the timber harvested in the interior was sold domestically rather
than internally consumed by integrated companies.

Alberta stated unequivocally in its' Questionnaire Response to Commerce
that it did not interfere in the disposition of logs harvested from
Crown land. Alberta also stated that, "The Province of Alberta has no
policies, regulations or statutes that require, encourage or discourage
companies to produce certain products. The expectation is just that
operators should make efficient use of the wood fibre." Alberta also
provided extensive data on arm's-length log sales.

Ontario informed Commerce in its initial questionnaire response that
timber is often obtained through an arm's-length purchase from the
private party that acquired it from the Crown (resale). Ontario also
provided Commerce with a report prepared by KPMG concerning Crown timber
resold at arm's-length in an after-market. This report demonstrated that
approximately 30 per cent of the softwood timber harvested from Crown
land was sold by tenure holders to independent third parties who
subsequently processed it into forest products.

Annex A-2

RESPONSES OF THE UNITED STATES TO

QUESTIONS POSED IN THE CONTEXT OF THE

FIRST SUBSTANTIVE MEETING OF THE PANEL

(21 May 2002)

[Questions to the United States]{.underline}

1\. **Q1:** At the time of the Preliminary Determination, the Commerce
Department had extensive evidence on the record indicating that the vast
majority of government timber in Canada was provided directly to tenure
holders that owned sawmills or other wood processing facilities.
Specifically, the laws and regulations of each Canadian province (with
the partial exception of Ontario) generally require that tenure holders
be sawmills. The evidence described below for each province consisted
primarily of provincial legislation, sample tenure contracts and
statistical data provided by the provincial governments.

2\. More than 83 per cent of the B.C. Crown softwood timber harvest is
provided to holders of four types of B.C. tenures. Each of these tenures
*requires* the tenure holder to own a processing facility (for these
purposes, a sawmill) and process the harvested timber (or an equivalent
volume) in its own mill. The remaining B.C. Crown timber is provided
under licences that are normally reserved to entities not owning timber
processing facilities. However, the B.C. Forest Act requires that all
timber harvested from Crown lands be processed in B.C. In addition,
other legal restrictions apply to these forms of B.C. tenure, which
indicate that transactions for the timber covered by these tenures are
not at arm's-length.

3\. Quebec ensures that only sawmills are permitted to harvest the vast
majority of Crown softwood timber. For example, section 37 of the Quebec
Forest Act states that "\[n\]o one except a person authorized under
Title IV to construct or operate a wood processing plant is qualified to
enter into" a Timber Supply and Forest Management Agreement, the
virtually exclusive form of tenure in Quebec (covering 99 per cent of
the Crown harvest).

4\. In its questionnaire response, Ontario stated that "\[g\]enerally,
in order to obtain any type of licence, an applicant must either own a
forest resource processing facility (e.g., a sawmill, pulpmill, veneer
mill, etc.) or must have a market to supply wood to some type of forest
resource processing facility." Alberta stated that "\[a\]ll forms of
commercial tenure own and operate sawmills".

5\. In Saskatchewan, 86 per cent of softwood sawlogs were harvested by
Forest Management Agreement holders, all of whom own sawmills and
process their own timber. The remainder of the harvest was provided to
smaller licencees under Forest Product Permits, some of whom have their
own sawmills.

6\. In Manitoba, 49 per cent of softwood sawlogs were provided to
holders of Forest Management Licences, who by law are required to own
timber processing facilities. Virtually all of the remaining 51 per cent
of softwood sawlogs were provided under Timber Sales Agreements ("TSA").
The volume of softwood harvested by TSA holders owning sawmills amounted
to 46 per cent of the total softwood sawlog harvest. Thus, approximately
95 per cent of softwood sawlogs were provided directly to sawmills in
Manitoba.

7\. With respect to the obligations undertaken by the tenure holders,
the Commerce Department examined the obligations that tenure holders
were legally obligated to assume in Canada and compared them to those
assumed by harvesters of the benchmark timber. The Commerce Department
calculated a per-unit amount for each category of Canadian obligations
that was above and beyond obligations incurred by parties paying
stumpage charges in the United States. The Commerce Department used the
values for each obligation provided by the Canadian provincial
governments in their questionnaire responses, and considered the
per-unit cost of these obligations as a form of "in-kind" payment, which
it added to the stumpage fee.

8\. **Q2(a):** Article 14(d) sets forth guidelines for determining
whether the government has provided a good, within the meaning of
Article 1.1(a)(1)(iii), for less than adequate remuneration. There
should be no doubt that, through timber tenures, the provincial
governments provide a good -- timber -- to lumber producers. Canada's
claims to the contrary are contradicted by ordinary dictionary
definitions and Canada's own laws. Because the provincial governments
are unquestionably providing a good within the meaning of Article
1.1(a)(1)(iii), Article 14(d) provides the appropriate guidelines for
determining the benefit.

9\. **Q2(b):** The phrase "in relation to prevailing market conditions
for the good . . . in the country of provision" in Article 14(d) does
not restrict the authority to using only prices between buyers and
sellers in the country under investigation. The concept of commercial
availability is expressly incorporated in Article 14(d), which defines
"prevailing market conditions for the good" to include, *inter alia*,
availability. Prevailing market conditions in the country of provision
may therefore encompass prices commercially available on the world
market to purchasers in the country under investigation. The flexibility
to use commercially available world market prices in Article 14(d) is
reflected in item (d) of the Illustrative List of Export Subsidies, and
was confirmed by the panel and the Appellate Body in *Canada Dairy.*

10\. The use of world market prices commercially available to producers
in the country under investigation is therefore not *per se*
inconsistent with Article 14(d). Canada has, in fact, conceded that
world market prices can constitute an appropriate benchmark in certain
situations. An obvious example of when commercially available world
market prices may be an appropriate benchmark is where the government is
the sole provider of the input in the country under investigation. The
facts of this case present an analogous situation. Specifically, only
two provinces provided any information on private stumpage prices, and
that limited information was inadequate to serve as a benchmark for
those provinces. Moreover, the evidence indicates that the Canadian
provincial governments so dominate the market for timber that
below-market government prices suppress prices in the small market for
private timber in Canada.

11\. The Commerce Department's use of US prices, as opposed to other
world market prices, is supported by ample record evidence indicating
that Canadian companies import US logs and bid on US stumpage. US timber
is therefore "commercially available" to Canadian mills.

12\. **Q2(c):** The US interpretation of Article 14(d) is consistent
with the general meaning of "benefit" as previously articulated by
panels and the Appellate Body, i.e., a benefit is some form of advantage
that would not otherwise be available in the marketplace, absent the
financial contribution. In *Canada Aircraft*, the panel stated that
"\[i\]n order to determine whether the financial contribution . . .
confers a 'benefit', *i.e.*, an advantage, it is necessary to determine
whether the financial contribution places the recipient in a more
advantageous position than would have been the case *but for* the
financial contribution. In our view, the only logical basis for
determining the position the recipient would have been in absent the
financial contribution is the market." (emphasis added). The Appellate
Body in *Canada Aircraft* similarly stated that "there can be no
'benefit' to the recipient unless the 'financial contribution' makes the
recipient *'better off' than it would otherwise have been, absent the
contribution*. In our view, the marketplace provides an appropriate
basis for comparison in determining whether a 'benefit' has been
'conferred', because the *trade-distorting potential* of a 'financial
contribution' can be identified by determining whether the recipient has
received a 'financial contribution' on terms more favourable than those
available to the recipient in the market." (emphasis added).

13\. **Q2(d):** The comparison in Article 14(d) is intended to identify
the potentially trade-distorting artificial advantage resulting from the
government's provision of a good. Commercially available prices in the
country under investigation are normally the most appropriate benchmark.
However, where the evidence indicates that the government so dominates
the market that non-government domestic prices for the good in question
are suppressed by the alleged below-market government prices for that
good, the domestic prices cannot serve as a basis to measure the
potential benefit. In such cases, other prices commercially available to
producers in the country under investigation can provide an appropriate
benchmark.

14\. **Q2(e):** The purpose of the Article 14(d) comparison is to
determine what, if any, advantage flows from the government's financial
contribution at issue, not other government actions.

15\. **Q2(f):** The only instance in which we might even inquire into
whether prices in the country under investigation are below world market
prices would be where there is other evidence indicating that the
non-government prices in the country under investigation may be
distorted by the government financial contribution at issue.

16\. **Q2(g)(i),(ii):** In this case, and in the only other case in
which the Commerce Department has addressed this issue, the government's
share of the market was 90 per cent or more. However, each case must be
evaluated on the basis of its particular facts. Normally, where the
government dominates the market for a particular good and there is some
evidence that government prices are suppressing the rest of the market,
the non-government prices could not logically serve as a benchmark.
However, that may not always be the case. For example, even where the
government dominates the market, if there is an open and competitive
auction for some significant portion of the market, those prices could
serve as a benchmark. There may also be other instances in which the
facts would indicate that the non-government portion of the market was
undistorted by the government action. In such cases, the non-government
portion of the market could also serve as a benchmark.

17\. **Q2(h):** The Commerce Department requested information on private
stumpage prices and prices in the spot market for logs in the Maritime
Provinces. In their questionnaire response, the Maritime Provinces
stated that they had no information on private stumpage prices, that
"\[t\]here is no spot market price for harvested saw logs from Crown
land", that they do "not collect any data concerning spot market prices
for . . . logs harvested from private land", and that surveys of prices
for logs harvested from private land "appear to be based on limited
sampling". Given this limited and inadequate information, the Commerce
Department was unable to consider whether Maritime prices could serve as
an appropriate benchmark.

18\. **Q3:** The Commerce Department asked a series of questions
regarding private prices in each province or territory. Only the
governments of Alberta, Quebec and Ontario provided any information in
response to this request. And, as described below, only Quebec and
Ontario actually provided private prices. This limited information was
insufficient to form the basis for a benchmark for these provinces. In
addition, there was information on the record indicating that these
private stumpage prices were depressed by the government prices. The
largest province in terms of softwood lumber production, British
Columbia (representing approximately 60 per cent of Canada's softwood
lumber production), did not provide any private prices for stumpage.

19\. Alberta did not provide private prices. In its questionnaire
response, it stated: "Alberta does not track private timber harvesting
and does not have any data on any private timber used in mills." It also
stated that it "does not collect spot price information for logs from
provincial or private lands" and it therefore was "not providing such
spot log price information" to the Commerce Department. The only
information Alberta did provide was a two-page excerpt from a KPMG
survey, which contained a single estimated stumpage value derived from
some price data for log sales. No supporting evidence or source
information for the estimate was provided.

20\. In its questionnaire response, Quebec stated: "Private market
standing timber prices are obtained through a market survey of forestry
companies that trade standing timber for harvesting every year in
Quebec." However, the Commerce Department also had evidence that private
stumpage prices in Quebec are suppressed by the administratively-set
price for Crown stumpage.

21\. Ontario stated that over 10 per cent of the timber consumed in
Ontario's "forest products industry" is harvested from private lands.
However, that figure covers the entire forest products industry,
including companies that do not produce the subject merchandise (e.g.,
pulp mills). Moreover, Ontario stated that it does not regulate or
monitor the private timber market on an ongoing basis, and therefore
does not collect these data in the course of normal operations. Ontario
commissioned an independent forestry research firm to conduct a survey,
but the Commerce Department found numerous flaws with this study.

22\. The record also contained evidence indicating that private stumpage
prices were depressed by the overwhelming majority of
government-supplied timber in the market. For example, a Canadian
forestry expert concluded that "\[t\]he *quasi-monopolistic importance
of the State in the supply* of the industries *obligates the small
producers to align their prices with those of the public forest*".
(emphasis added). Even a provincial forestry official stated in writing
that private stumpage prices were affected by the administratively-set
price for public stumpage.

23\. **Q4:** The statement the Panel refers to pertained to the small
private market for stumpage, not log sales. The evidence at the time of
the Preliminary Determination indicated that Crown and private stumpage
sales were the following percentages of the harvest in each province:

[Crown Sales]{.underline} [Private Sales]{.underline}

British Columbia: 90 per cent 10 per cent

Quebec: 83 per cent 17 per cent

Ontario: 92 per cent 8 per cent

Alberta: 98 per cent 2 per cent

Manitoba: 94 per cent 6 per cent

Saskatchewan: 90 per cent 10 per cent

Only two of the provinces provided data on private stumpage prices, and
record evidence indicated that those prices were suppressed by the
governments' administratively-set prices.

24\. **Q5:** As stated in the chapeau to Article 14, and confirmed by
the Appellate Body in *Canada Aircraft*, the benefit for purposes of
Article 1 is the benefit to the recipient. It is the artificial
advantage -- or benefit -- that the Appellate Body in *Canada Aircraft*
referred to as the "trade-distorting potential" of a financial
contribution. It is to that trade-distorting artificial advantage that
the United States was referring in the passage cited by the Panel.

25\. **Q6:** *Lead and Bismuth II* concerned subsidies to a
government-owned entity, British Steel, which was subsequently sold to
private investors. The panel stated that the presumption that the
benefit flowing from a financial contribution continues to flow, even
after a change in ownership that created an apparently new and distinct
producer, could not be irrebuttable. The panel found that the
circumstances in that proceeding, in which British Steel's specialty
steels business was first transferred to the partnership UES and then
re-acquired by BSplc, rebutted the presumption that the benefit to
British Steel continued in UES and BSplc. The panel also found that UES
and BSplc were distinct legal persons which, because they had paid fair
market value for the assets of British Steel, obtained no benefit from
the prior subsidies to British Steel.

26\. *Lead and Bismuth II* addressed circumstances that are not present
in this case. Most significantly, in the present case the subsidies at
issue were bestowed directly on the current producers of the subject
merchandise. The evidence simply does not support Canada's claim of a
significant volume of timber harvested by independent loggers who sell
at arm's-length to lumber mills. The vast majority of Crown sawtimber is
provided to Canadian lumber mills under tenures held directly by those
mills. Record evidence also indicates that most "independent" loggers
are in fact bound by law or by contract to those very same
sawmill/tenure holders. Thus, the entity receiving the financial
contribution (the provision of timber) and the entity receiving the
benefit (below-market stumpage prices) are generally one and the same.
As discussed below in response to question 7 to the United States, the
other two situations in this case in which the issue of whether a
financial contribution to one entity confers a benefit on another may
arise -- logs harvested by one sawmill and then sold in arm's-length
transactions to other sawmills, and lumber sold in arm's-length
transactions to companies that produce remanufactured lumber products --
are not relevant in an aggregate case.

27\. **Q7:** In an aggregate case, the Commerce Department determines
the total amount of the subsidy to producers of the subject merchandise
and allocates that amount over all sales of the subject merchandise.
When all of the alleged recipients of the financial contribution and the
benefits are producers of the subject merchandise, no further analysis
is required. The precise amount of the benefit received by any specific
producer would only be determined in a company-specific review. However,
if the government made the financial contribution to an entity that does
*not* produce the subject merchandise, it would be necessary to analyze
whether that financial contribution benefited another entity that *does*
produce the subject merchandise. In this case, the only allegation of a
financial contribution to an entity that does not produce the subject
merchandise is Canada's claim that there is a significant volume of
Crown timber that the provincial governments provide to independent
loggers who then sell the timber at arm's-length to lumber mills.
However, the evidence does not support Canada's claim.

28\. Canada also argues that the Commerce Department was required to
perform a pass-through analysis to address two other situations: (1)
logs harvested by one sawmill and then sold in arm's-length transactions
to other sawmills; and (2) lumber sold in arm's-length transactions to
companies that produce remanufactured lumber products. However, in both
of these situations, all of the entities involved are producers of the
subject merchandise. Therefore, no further analysis is required in an
aggregate case. Specifically, a separate benefit analysis is not
required in an aggregate case for logs harvested by one sawmill and
allegedly sold at arm's-length to another, as the full benefit is always
enjoyed by a sawmill, i.e., a producer of the subject merchandise.
Likewise, the remanufactured articles at issue are within the scope of
the investigation. The Commerce Department therefore properly matched
the total benefit received by producers of the subject merchandise (the
numerator) to the total sales of the subject merchandise, including
remanufactured products (the denominator), without determining any
company-specific rates. If any individual producer of subject
merchandise believes that it has not received any countervailable
benefit, the procedures for review exist.

29\. **Q8:** There seems to be no question that provisional
countervailing duties would constitute a provisional measure within the
meaning of Article 17. Although Article 17.2 is somewhat ambiguous, a
cash deposit or bond requirement would also appear to constitute a
provisional measure within the meaning of Article 17. While the United
States did not impose a provisional duty, it did require security in the
form of cash deposits or bonds.

30\. There is no reference in Article 17.2 to withholding of
appraisement, which is referred to in the United States as suspension of
liquidation. Suspension of liquidation is merely a legal status that
enables the assessment of additional duties when all of the issues
related to final duty liability are resolved. Nevertheless, under the US
countervailing duty law, suspension of liquidation is treated as a
provisional measure.

31\. **Q9:** Under US law, absent suspension of liquidation, final
duties are assessed and no additional duties can be imposed on that
entry. Suspension of liquidation is therefore essential to preserve the
possibility of exercising the right under Article 20.6 to impose duties
retroactively.

32\. **Q10:** Suspension of liquidation would enable the Commerce
Department to delay final determination of total duty liability.
However, if no amount is guaranteed by a cash deposit or bond, Article
20.3 would, on its face, preclude the collection of duties
retroactively.

33\. The absence of an analogue in the SCM Agreement to Article 10.7 of
the Anti-Dumping Agreement does not alter this analysis. Article 10.7
authorizes authorities to take measures even before there is a
preliminary determination of dumping or injury. In the case concerning
*Hot-Rolled Steel from Japan*, the panel viewed these special
"precautionary measures" as something other than provisional measures.
Because there is no analogue to Article 10.7 in the SCM Agreement, there
is no exception to the requirements of Article 17.1 of the SCM Agreement
that would permit early "precautionary measures". However, the Commerce
Department did not take such measures in this case. Where, as in this
case, provisional measures are imposed in accordance with Article 17
(i.e., after preliminary determinations of subsidization and injury),
Article 20.1 permits a Member to expand the scope of those provisional
measures to encompass entries 90 days prior to the preliminary
determination if there is sufficient evidence that the circumstances
described in Article 20.6 exist.

34\. **Q11:** Both suspension of liquidation and the posting of bonds or
cash deposits are necessary to ensure the possibility of exercising the
right to retroactive relief provided for in Article 20.6. The reference
to "suspension of liquidation" in the Preliminary Determination is a
short form of reference sometimes used by the Commerce Department when
discussing provisional measures generally, including posting of bonds or
cash deposits.

35\. **Q12:** Article 20.6 requires a finding of "injury which is
difficult to repair," but does not contain an evidentiary standard for
that determination. However, this issue was addressed by the panel in
*Hot-Rolled Steel from Japan*, which concerned the evidentiary standard
in the US anti-dumping law for a preliminary critical circumstances
finding. That evidentiary standard is "a reasonable basis to believe or
suspect" that critical circumstances exist. That is also the standard in
the US countervailing duty law for a preliminary critical circumstances
finding. The *Hot-Rolled Steel from Japan* panel found that in applying
that standard, the Commerce Department has "made affirmative
determinations when sufficient evidence was adduced that the conditions
of application were satisfied." As the *Hot-Rolled Steel from Japan*
panel noted, "sufficient evidence" refers to the quantum of evidence
necessary to make a determination. What constitutes "sufficient
evidence" varies depending on the nature of the determination in
question. The approach taken by other panels "has been to examine
whether the evidence before the authority at the time it made its
determination was such that an unbiased and objective investigating
authority evaluating that evidence could properly have made the
determination".

36\. **Q13:** Section 351.213(b) of the regulations does not apply to
aggregate cases but it does not restrict the Commerce Department's
authority to conduct reviews. The inquiry required in Article 21.2 of
the SCM Agreement, on which Canada's claim is based, is whether
continued imposition of the duty is necessary to offset subsidization.
Under section 351.213(k) of the regulations, exporters have the
opportunity for a review to determine whether imposition of a duty is
necessary on future entries, i.e., whether their subsidy rate is zero.
If no subsidy is found, the cash deposit and assessment rate on future
entries will be zero, unless the results of a subsequent review
demonstrate that subsidies have recurred. Section 351.213(k) therefore
fulfills the requirements of Article 21.2.

[Questions to Both Parties]{.underline}

37\. **Q1:** While some financial contributions take place at a single
point in time, that is not always the case. The Canadian timber tenures
are long-term contracts that provide recurring subsidies. As long as the
tenure contract remains in force the provincial government is providing
the lumber producer with timber, and the producer receives a benefit
each time it pays below-market prices for the timber.

38\. **Q2:** While there is no uniform world market price for softwood
lumber and softwood logs, lumber and logs are traded internationally in
all regions of the world. It is possible to calculate average unit
import values for lumber and logs in various countries based on either
import or export statistics. However, because these statistics are kept
on a broad product category basis, the average unit import values are
not useful for comparison purposes.

39\. **Q3:** The United States negotiated the language of Article 15(b)
of the China Protocol, which was intended to clarify that Article 14 of
the SCM Agreement allows authorities to measure the benefit on the basis
of a benchmark outside the country of investigation when prevailing
terms and conditions in the country of investigation are "not . . .
available as appropriate benchmarks." Although Article 14 of the SCM
Agreement already allows Members to use such benchmarks, the Members
incorporated this clarifying language into Article 15(b) of the China
Protocol because they were concerned that prices in China would not be
appropriate benchmarks while China was transitioning to a market economy
and they wanted to leave no doubt that Article 14 allowed authorities to
use external benchmarks in such instances. In addition, because Article
14 only addresses countervailing duty proceedings under Part V of the
SCM Agreement, they wanted to make clear that external benchmarks would
also remain available were a Member to pursue a WTO proceeding under
Part II or III of the Agreement.

40\. Article 15(b) is only one of several provisions of the China
Protocol that simply restate and clarify existing WTO obligations that
apply to all Members. Article 10.1 of the China Protocol, for example,
restates existing obligations in Article 25 of the SCM Agreement.
Several articles of the China Protocol also restate and clarify existing
WTO most-favoured nation and national treatment obligations.

41\. **Q4:** This information has been provided in response to question
1 to the United States.

42\. **Q5:** In an aggregate case, the Commerce Department determines
the total amount of the subsidy to producers of the subject merchandise
and allocates that amount over all sales of the subject merchandise.
When all of the alleged recipients of the financial contribution and the
benefits are producers of the subject merchandise, no further analysis
is required to perform the aggregate calculation. Benefits that
potentially shift from one producer to another in an arm's-length
transaction would still be part of the overall numerator, as long as
both companies produce subject merchandise. Therefore, for two of the
three categories that Canada claims a pass-through analysis was
necessary -- logs harvested by one sawmill and then sold to another, and
lumber sold to remanufacturers -- the question of pass-through is moot
in an aggregate context and the Commerce Department did not request any
information on these types of transactions.

43\. For the remaining category where Canada claims a pass-through
analysis is necessary -- independent loggers selling to sawmills -- the
Commerce Department asked questions about logs sold domestically at
arm's-length prices. In response, Quebec indicated that there were
essentially no arm's-length transactions involving Crown timber sold by
independent loggers to sawmills. Ontario suggested that 30 per cent of
Crown timber was sold in arm's-length transactions, but tenure holders
who do not own a sawmill are limited with respect to where such
harvested timber can be sold and evidence indicated that log swapping
was common among large tenure holders. Alberta's questionnaire response
suggested that only a small portion of the harvest was characterized by
arm's-length transactions. B.C. suggested that as much as 30 per cent of
Crown timber was sold in arm's-length transactions, but this figure is
misleading because loggers operate as employees or contractors for
tenure holders, various requirements serve to narrow the range of
purchasers available to any harvester of Crown timber who is not a mill
owner, and log swapping is a major part of the so-called arm's-length
transactions. These factors combine to ensure that the great majority of
Crown timber is force-fed to tenure-holding lumber producers. As such,
the evidence does not support Canada's claim that a pass-through
analysis is necessary or appropriate.

[Questions to Canada]{.underline}

44\. **Q5:** A Member is not always obliged to determine the benefit
using as a benchmark market prices from the country under investigation.
This is confirmed by numerous references in WTO agreements and prior WTO
decisions. The United States also notes that the Panel's example of a
government monopoly over the supply of a good is no different in
principle from the circumstances of the instant case, where the
provincial governments control 85 to 95 per cent of the market for
timber. If it is shown that the government supply significantly distorts
the market, the benchmark can be found outside the country, so long as a
reasonable effort is made to measure the benefit provided in the country
under investigation.

45\. **Q8:** Given the ordinary meaning of "arm's-length," a so-called
independent logger should only be viewed as operating at "arm's-length"
from lumber producers if the harvester is freely negotiating, under no
outside control or influence and under no compulsion to sell. The record
establishes that not only are there very few transactions by independent
harvesters, but even in such transactions, the provincial governments
impose numerous restrictions and requirements on the transactions. In
light of this evidence, the only reasonable conclusion is that there are
no true arm's-length transactions for Crown timber.

46\. **Q10:** Past determinations by the Commerce Department, which
apply US law on the basis of different factual records, are of no
relevance in determining whether the United States has acted
consistently with its obligations in the present case. That is
particularly true where, as here, the prior determinations at issue were
decided under a different domestic legal standard, as well as different
international obligations. At the time of the *Lumber III* determination
cited by Canada, under US law the government provision of a good was
deemed to provide a benefit if the good "was provided at preferential
rates". That standard is fundamentally different than the current
"adequate remuneration" standard and therefore the issue of an
appropriate benchmark is fundamentally different as well. The Commerce
Department rejected cross-border prices in *Lumber III* because it had
"sufficient and reliable non-preferential price data" from within
Canada. Other factors, such as comparability, were therefore moot and
were simply noted in passing to underscore the Commerce Department's
primary rationale.

47\. **Q14(b):** The Commerce Department did not investigate and,
therefore, did not conclude that the Maritime Provinces received no
support or that lumber sales from the Maritime Provinces were not
subsidized.

48\. **Q14(e):** Nothing in the SCM Agreement addresses the calculation
of a "country-wide rate". The "country-wide rate" at issue is a creature
of US law, not the WTO. Under current US law, the calculation of the
country-wide rate is based on the total amount of the subsidy found to
exist with respect to the *subject merchandise*, allocated across all
sales of the *subject merchandise*. Nothing in US law or practice
requires that non-subject merchandise be included in a country-wide rate
calculation.