ARTICLE 1904

BINATIONAL PANEL REVIEW

UNDER THE

NORTH AMERICAN FREE TRADE AGREEMENT

IN THE MATTER OF

CERTAIN SOFTWOOD LUMBER PRODUCTS FROM CANADA.

FINAL AFFIRMATIVE COUNTERVAILING DUTY DETERMINATION

FILE USA-CDA-2002-1904-03

**DECISION OF THE PANEL**

> August 13, 2003

Daniel A. Pinkus, Chair

> William E. Code

#### Germain Denis {#germain-denis .unnumbered}

> Judge Milton Milkes
>
> Professor Daniel G. Partan[^1]

Appearances:

> M. Jean Anderson, Gregory Husisian, John M. Ryan, Melanie A. Frank,
> Timothy J. Hruby, Jahna M. Hartwig, Alicia Cate, Weil, Gotshal &
> Manges, LLP on behalf of The Government of Canada and the Governments
> of the Northwest Territories and the Yukon Territory.
>
> Michele D. Lynch, Elizabeth C. Seastrum, Marguerite E. Trossevin,
> Peter G. Kirchgaber, Mark A. Barnett, William J. Kovatch, Scott D.
> McBride, Barbara J. Tsai, John D. McInerney, Philip J. Curtin,
> Christine J. Sohar on behalf of the United States Department of
> Commerce.
>
> John A. Ragosta, Harry L. Clark, John W. Bohn, Navin Joneja, Nathaniel
> Friends, David A. Yocis, Brent L. Bartlett, Economist, Dewey
> Ballantine LLP on behalf of the Coalition for Fair Lumber Imports
> Executive Committee.
>
> Claire E. Reade, Lawrence A. Schneider, Michele T. Dunlop, Arnold &
> Porter on behalf of The Government of Alberta.
>
> Spencer S. Griffith, Karen Bland Toliver, Bernd G. Janzen, Thea D.
> Rozman, Akin, Gump, Strauss, Hauer & Feld, LLP on behalf of The
> Government of British Columbia.
>
> Michele Sherman Davenport, Dennis James, Jr., Cameron & Hornbostel
> LLP, on behalf of the Governments of Manitoba and Saskatchewan.
>
> Mark S. McConell, Lynn G. Kamarck, Christopher S. Stokes, Deen Kaplan,
> Ajay Kuntamukkala, Behnaz Kibria, Johnathan T. Stoel, Hogan & Hartson,
> LLP on behalf of The Government of Ontario.
>
> Matthew J. Clark, Keith R. Marino, F. Alexander Amrein, Christina
> Benson, Nancy A. Noonan, Arent, Fox, Kintner, Plotkin, & Kahn on
> behalf of The Gouvernement du Québec.
>
> W. George Grandison, John R. Labovitz, Anthony C. Epstein, Mark A.
> Moran, Matthew S. Yeo, Mary T. Mitchell, Asron R. Hutman, Steptoe &
> Johnson; Brian R. Canfield, Farris, Vaughn, Wills & Murphy on behalf
> of the British Columbia Lumber Trade Council.
>
> Elliot J. Feldman, John J. Burke, Arland M. DiGirolamo, Michael S.
> Snarr, Baker & Hostetler LLP on behalf of Tembec Inc., the Ontario
> Forest Industries Association and the Ontario Lumber Manufacturers
> Association.
>
> Robert C. Cassidy, Jr., Wilmer Cutler & Pickering on behalf of the
> Québec Lumber Manufacturers Association.
>
> John E. Corette, III, Piper Rudnick LLP; Michael A. Hertzberg, Howrey
> Simon Arnold & White LLP, on behalf of the Maritime Lumber Bureau, The
> Maritime Provinces, and the producers located in the Maritime
> Provinces.

Stephen S. Spraitzar , Law Offices of George R. Tuttle, on behalf of
Anderson

> Wholesale, Inc.

Veronique Lanthier, O'Melveny & Myers on behalf of Bowater Incorporated.

> Jamie M. Wilks, McMillan Binch on behalf of the Canadian Lumber
> Remanufacturers' Alliance.
>
> Julie C. Mendoza, Donald B. Cameron, Kaye Scholer LLP on behalf of
> Canfor Corporation.
>
> Charles Owen Verrill, Wiley Rein & Fielding LLP, on behalf of Doman
> Industries and Enyeart Cedar Products, LLC.
>
> Harvey M. Applebaum, Covington & Burling on behalf of Domtar
> Industries Inc., and Domtar Inc.
>
> Livingston Wernecke, Betts, Patterson & Mines, P.S. on behalf of Fred
> Tebb Sons, Inc.

Mark R. Sandstrom, Thompson Hine LLP, on behalf of Goodfellow Inc.

Robert B. Luce on behalf of Idaho Timber Corporation.

> William D. Kramer, Verner, Lipfert, Bernhard, McPherson and Hand on
> behalf of J.D. Irving, Limited.

Kenneth G. Weigel, Kirkland & Ellis on behalf of Lindal Cedar Homes,
Inc.

C. Charles Lumbert on behalf of Moose River Lumber Company.

Susan Casey-Lefkowitz on behalf of the Natural Resources Defense
Council.

> Charles M. Gastle, Shibley Righton LLP on behalf of NorSask Forest
> Products, Inc., and the Meadow Lake Tribal Council.

Richard Bennett on behalf of Shearer Lumber Products.

Charles Thomason behalf of Shuqualak Lumber Company.

Thomas Peele, Baker & Mckenzie on behalf of Slocan Forest Products, Ltd.

Jeffrey E. Livingston, Holland & Knight on behalf of Tolko Industries,
Ltd.

W.J. Rusty Wood on behalf of Tolleson Lumber Company, Inc.

> Sam Kalen, Van Ness Feldman on behalf of the U.S. Red Cedar
> Manufacturers Association.
>
> William Silverman, Hunton & Williams on behalf of Weldwood of Canada
> Limited.
>
> Gracia Berg, Lisa A. Murray, Gibson, Dunn & Crutcher, LLP on behalf of
> West Fraser Mills, Ltd.

Matthew M. Nolan, Miller & Chevalier on behalf of Weyerhauser Company.

**TABLE OF CONTENTS**

I. INTRODUCTION [5](#i.-introduction)

II\. BACKGROUND [5](#background)

III\. PROCEDURAL HISTORY [8](#procedural-history)

IV\. PANEL JURISDICTION AND THE STANDARD OF REVIEW
[11](#panel-jurisdiction-and-the-standard-of-review)

V. SUFFICIENCY OF PETITION [14](#sufficiency-of-petition)

VI\. FINANCIAL CONTRIBUTION [17](#financial-contribution)

VII\. BENEFIT/ADEQUACY OF REMUNERATION
[20](#benefitadequacy-of-remuneration)

**A.** **Actual Market Transactions**
[22](#a.-actual-market-transactions)

**B.** **World Market Prices** [27](#b.-world-market-prices)

VIII\. SPECIFICITY [35](#specificity)

IX\. SCOPE DETERMINATIONS AND "CLASS OR KIND" ISSUES
[39](#scope-determinations-and-class-or-kind-issues)

**A.** **Due Process in the Department's Consideration of Scope Issues**
[40](#a.-due-process-in-the-departments-consideration-of-scope-issues)

**B.** **The Role of the Petition and the Department's Discretion in
Making Scope Determinations: Defining "Class or Kind"**
[41](#b.-the-role-of-the-petition-and-the-departments-discretion-in-making-scope-determinations-defining-class-or-kind)

**C.** **The Statutory Requirement of Industry Support for Each "Class
or Kind" of Merchandise Included in the Petition**
[43](#c.-the-statutory-requirement-of-industry-support-for-each-class-or-kind-of-merchandise-included-in-the-petition)

**D.** **The Panel's Standard of Review of the Department's Scope and
"Class or Kind" Determinations**
[44](#d.-the-panels-standard-of-review-of-the-departments-scope-and-class-or-kind-determinations)

**E.** **Whether Evidence on the Record Supports the Department's
Rejection of Separate "Class or Kind" Status for Contested Species and
Contested Products**
[48](#e.-whether-evidence-on-the-record-supports-the-departments-rejection-of-separate-class-or-kind-status-for-contested-species-and-contested-products)

1\. Western Red Cedar and Eastern White Pine
[48](#western-red-cedar-and-eastern-white-pine)

2\. Finger-Jointed Flangestock [49](#finger-jointed-flangestock)

3\. Square End Bed Frame Components and Box-Spring Bed Frame Kits
[52](#square-end-bed-frame-components-and-box-spring-bed-frame-kits)

**F.** **Product Exclusions** [54](#f.-product-exclusions)

1\. Reprocessed Maritimes-Origin Lumber
[54](#reprocessed-maritimes-origin-lumber)

2\. Used Railroad Ties [56](#used-railroad-ties)

X. UPSTREAM SUBSIDIES [58](#upstream-subsidies)

XI\. COMPANY EXCLUSIONS AND COMPANY-SPECIFIC DUTY RATES
[65](#company-exclusions-and-company-specific-duty-rates)

**A.** **Company Exclusions** [65](#a.-company-exclusions)

1\. Goodfellow [70](#goodfellow)

2\. MLTC/NorSask [71](#mltcnorsask)

**B.** **Company-Specific Duty Rates**
[72](#b.-company-specific-duty-rates)

XII\. CALCULATIONS [74](#calculations)

XIII\. COALITION ISSUES [90](#coalition-issues)

XIV\. COMMERCE'S REQUEST FOR A REMAND
[91](#commerces-request-for-a-remand)

XV\. CONCLUSION [91](#conclusion)

# **I. INTRODUCTION** {#i.-introduction .unnumbered}

This Panel was constituted pursuant to the North American Free Trade
Agreement ("NAFTA") to review challenges to the final affirmative
countervailing duty determination issued by the U.S. Department of
Commerce ("Commerce" or "the Department") relating to certain softwood
lumber products from Canada. *Notice of Final Affirmative Countervailing
Duty Determination and Final Negative Critical Circumstances
Determination: Certain Softwood Lumber Products from Canada*, 67 Fed.
Reg. 15545 (April 2, 2002) ("Final Determination"). In the Final
Determination, Commerce concluded that provincial stumpage programs
under which Canadian provinces confer rights to harvest standing timber
on government owned forestlands are subsidies to producers of softwood
lumber which are countervailable under United States law.

This Panel considers challenges made to the Final Determination by the
Government of Canada, the Government of Alberta, the Government of
British Columbia, the Government of Manitoba, the Government of the
Northwest Territories, the Government of Ontario, the Gouvernement du
Québec, the Government of Saskatchewan, the Government of the Yukon
Territory, the British Columbia Lumber Trade Council, the Ontario Forest
Industries Association, the Ontario Lumber Manufacturers Association and
the Québec Lumber Manufacturers Association (collectively referred to as
the "Canadian Joint Parties" or the "Canadian Parties"). Consideration
is also given to challenges made by the Coalition for Fair Lumber
Imports Executive Committee (the "Coalition") and by various private
parties. Following extensive briefing, oral argument in this matter was
held in Washington, D.C. on April 15, 16 and 17, 2003.

Set out below are highlights of the background and procedural history to
this review and thereafter the Panel's analysis of the issues raised by
the parties.

# **BACKGROUND**

Historically, most of the timberlands in Canada have been owned by the
Crown, and management, including the harvesting of timber, has been
administered by the provincial governments. This administration is done
through provincial stumpage programs, pursuant to which private
companies enter into tenure arrangements to harvest standing timber.
Although there are various types of tenure arrangements, in general, the
provinces grant long term harvesting rights to individuals and
companies, which involve obligations as well as the right to cut timber.
Access to the ability to cut standing timber is accomplished through the
payment of stumpage fees and various in-kind payments. The provincial
governments require license holders to assume responsibility for, *inter
alia*, roadbuilding and maintenance, reforestation of harvested or
damaged areas, and resource planning.

Agreements to operate sawmills or process certain volumes of harvested
timber are sometimes incorporated into tenure agreements, as are minimum
cut requirements and requirements to use specific sawmills. In many
cases the tenure holders own and operate sawmills which process all of
the logs they harvest, although there is evidence in the record to
indicate that some tenure holders are independent harvesters that do not
operate sawmills and sell their logs to unrelated mills.

Under the stumpage programs, the harvesting of timber creates the
obligation to pay to the provincial government a fee ("stumpage")
calculated with reference to the volume of timber cut.

This is the fourth U.S. countervailing duty investigation of Canadian
softwood lumber imports. In 1982, a petition was filed by the U.S.
Coalition for Fair Canadian Lumber Imports alleging that certain
provincial stumpage programs and other federal and provincial programs
constituted countervailable subsidies. The Department's investigation
resulted in a negative finding. *Certain Softwood Products from Canada,*
48 Fed. Reg. 24159 (May 31, 1983) ("Lumber I"). Specifically, the
investigation found that stumpage rights were not provided to a
"specific enterprise or industry, or group of enterprises or industries"
within the meaning of 19 U.S.C. § 1677(5)(B)(ii) and that stumpage did
not constitute the "provision of goods or services at preferential
rates." 19 U.S.C. § 1677(5). Under the preferentiality standard, the law
required Commerce to determine whether a good or service had been
provided at a preferential rate using benchmarks that included the price
the government charged other parties for identical or similar goods, the
price charged by other sellers within the same political jurisdiction,
the cost of providing the good or service, and the price paid for the
good outside the country under investigation.

A new petition, filed in 1986 by the Coalition for Fair Lumber Imports,
again alleged that certain provincial stumpage systems constituted
countervailable subsidies. In this case, the Department reversed its
previous position and issued a preliminary affirmative determination.
*Certain Softwood Lumber Products from Canada*, 51 Fed. Reg. 37453
(1986) ("Lumber II"). The Investigating Authority found in this case,
unlike in Lumber I, that the provincial stumpage programs were
"specific" under the same statutory scheme. The change in position was
stated to have resulted both from a new factual record and a revised
interpretation of the law. In addition, the Preliminary Determination
concluded that the "preferentiality" test was met, and consequently, a
subsidy was found.

The Lumber II investigation was terminated when Canada and the United
States entered into a Memorandum of Understanding ("MOU") in December,
1986. Pursuant to the MOU, Canada agreed to collect a charge on exports
of softwood lumber to the United States in an amount which was then
about equal to that which had been calculated in the Preliminary
Determination. Under the terms of the MOU this tax could be reduced or
eliminated for provinces that instituted "replacement measures", e.g.,
increases in the amount of stumpage fees, or other charges. In exchange
for this assessment, the petition was withdrawn and the investigation
was terminated.

As a consequence of changes in their practices, pursuant to the terms of
the MOU, the export charges for British Columbia and Québec were, in
time, eliminated or substantially eliminated. Certain Atlantic provinces
were also subsequently exempted. Canada then elected to terminate the
MOU in September, 1991.

The Department promptly self-initiated a third investigation in October
1991. The result of this investigation, in May of 1992, was an
affirmative subsidy determination in which it found that provincial
stumpage programs and log export restraints in British Columbia
conferred countervailable subsidies. *Certain Softwood Lumber Products
from Canada,* 57 Fed. Reg. 22570 (May 28, 1992) ("Lumber III"). This
determination was appealed to a binational panel under the Canada-United
States Free Trade Agreement ("FTA"). The panel concluded that Commerce's
determination that the export restraints were "specific" was unsupported
by substantial evidence. The panel remanded to Commerce on this and
other issues. *Softwood Lumber from Canada*, USA-92-1904-01, Panel
Decision (May 6, 1993).

Upon remand, the Department again found a countervailable subsidy, and
once more upon review of the remand determination, the binational panel
held that Commerce had inadequately addressed certain issues, including
specificity. *Softwood Lumber from Canada*, USA-92-1904-01, Panel
Decision on Remand (Dec. 17, 1993). The panel ordered Commerce to
rescind the countervailing duty order, which it did on January 6, 1994.
*See* *Certain Softwood Lumber Products from Canada,* 59 Fed. Reg. 12584
(March 17, 1994). The Department subsequently published an order
revoking the countervailing duty order. *Certain Softwood Lumber
Products from Canada*, 59 Fed. Reg. 42029 (Aug. 16, 1994).[^2]

Negotiations conducted in 1995 resulted in the Softwood Lumber Agreement
Between the Government of the United States of America and the
Government of Canada (the "SLA"). Under the SLA, Canada agreed to impose
fees on exports of softwood lumber from certain provinces to the United
States. In return, the U.S. agreed not to initiate any action and to
dismiss any petition filed. The SLA expired on April 1, 2001.

# **PROCEDURAL HISTORY**

On April 2, 2001, a new petition was filed with Commerce requesting
initiation of a countervailing duty investigation to determine whether
manufacturers, producers or exporters of certain softwood lumber
products from Canada were receiving countervailable subsidies. The
petitioners were listed as the Coalition for Fair Lumber Imports
Executive Committee (hereinafter, "the Coalition"), the United
Brotherhood of Carpenters and Joiners, and the Paper, Allied-Industrial,
Chemical and Energy Workers International Union. The petition was
amended on April 20, 2001 to add four lumber producers, Moose River
Lumber Co., Shearer Lumber Products, Shuqualak Lumber Co. and Tolleson
Lumber Co., Inc., as petitioners. The petition complained that the
Government of Canada and provincial governments were providing
countervailable subsidies with respect to the export, manufacture and
production of softwood lumber.

On April 30, 2001, the Department commenced the investigation. *Notice
of Initiation of Countervailing Duty Investigation: Certain Softwood
Lumber Products from Canada*, 66 Fed. Reg. 21332 (April 30, 2001). The
Notice of Initiation listed as potentially countervailable subsidies,
federal and provincial timber management systems and other federal and
provincial programs. The scope of the investigation was identified as
softwood lumber, flooring and siding including all products classified
under subheadings 4407.1000, 4409.1010, 4409.1090 and 4409.1020 of the
Harmonized Tariff Schedules of the United States, and any softwood
lumber, flooring and siding described below:

> Coniferous wood, sawn or chipped lengthwise, sliced or peeled, whether
> or not planed, sanded or finger-jointed, of a thickness exceeding six
> millimeters;
>
> Coniferous wood siding . . . continuously shaped . . . along any of
> its edges or faces, whether or not planed, sanded or finger-jointed;
>
> Other coniferous wood . . . continuously shaped along any of its edges
> or faced . . . whether or not planed, sanded or finger-jointed; and
>
> Coniferous wood flooring . . . continuously shaped . . . along any of
> its edges or faces . . . whether or not planed, sanded or
> finger-jointed.

In the Notice of Initiation, Commerce stated that, due to the large
number of Canadian producers, it intended to conduct the investigation
on an aggregate basis. The Notice of Initiation also stated that
Commerce would seek the cooperation of the Canadian and provincial
governments in implementing a system to review applications for company
exclusions from any order that might issue.

On May 1, 2001, the Department issued countervailing duty questionnaires
to the Government of Canada and requested that it provide copies to the
provincial governments. The Government of Canada and the provinces
submitted responses to these questionnaires on June 28, 2001. Additional
information was filed by the Canadian Parties on numerous occasions
after submitting the questionnaire responses. On July 25, 2001, Commerce
issued supplemental questionnaires to the Government of Canada and the
provinces. Responses were received on August 3, 2001. The Investigating
Authority issued further supplemental questionnaires to certain
provinces and the federal government in November and December 2001.
Canada and the provincial governments submitted additional materials in
response on December 17, 2001.

On May 8, 2001, the Government of Canada filed a proposal with Commerce
setting forth a process by which to review requests for company
exclusions.

On May 23, 2001, the International Trade Commission ("ITC") published
its preliminary determination, finding that there was a reasonable
indication that an industry in the United States was being threatened
with material injury by reason of imports from Canada of the subject
merchandise.

In a letter dated July 31, 2001, the Government of Canada requested a
province-specific rate for Québec producers of softwood lumber. In
separate matters, two Canadian companies submitted requests for
company-specific rates.

On August 2, 2001, Commerce amended the Notice of Initiation to exempt
certain softwood lumber products harvested and produced in the provinces
of New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland
(the "Maritime Provinces") from the investigation. *Amendment to the
Notice of Initiation of Countervailing Duty Investigation: Certain
Softwood Lumber Products from Canada*, 66 Fed. Reg. 40228 (Aug. 2,
2001). The Maritime Provinces were exempted because of unique
circumstances associated with the Maritime Provinces and because the
petitioners did not allege that any countervailable subsidies were
received by producers in the Maritime Provinces. The exemption does not
apply to softwood lumber products produced in the Maritime Provinces
from Crown timber harvested in any other province.

On August 17, 2001, the Department published its Preliminary
Determination. *Notice of Preliminary Affirmative Countervailing Duty
Determination, Preliminary Affirmative Critical Circumstances
Determination, and Alignment of Final Countervailing Duty Determination
with Final Antidumping Duty Determination: Certain Softwood Lumber
Products from Canada*, 66 Fed. Reg. 43186 (Aug. 17, 2001). Commerce
preliminarily found that the provincial stumpage programs and certain
non-stumpage programs were countervailable subsidies, and imposed
provisional measures at 19.31% *ad valorem.* One company was
preliminarily excluded. Following the issuance of the Preliminary
Determination, the Canadian Parties filed additional factual information
and analyses with Commerce.

In January and February 2002, Commerce verified the factual information
submitted by the Government of Canada and the provinces, and issued
verification reports on February 15, 2002.

On February 20, 2002, Commerce determined that it was impracticable to
conduct examination and verification for each of the 351 applicants for
company exclusions that were received. The Department determined that it
was practicable for it to examine and consider a limited group of
exclusion requests, from primary mills that produce lumber of U.S. or
Maritime origin or from timber harvested on private Canadian land.
Commerce did not act on the other applications on the grounds that the
volume of applicants and documents submitted and the large number of
groups and companies involved rendered the task impracticable.

On March 12, 2002, Commerce issued a preliminary determination on issues
related to the scope of the order. Commerce required parties to submit
briefs on this issue by March 15, 2002 and rebuttal briefs by noon on
March 18, 2002. A hearing was held on scope issues on March 19, 2002.

The Final Determination was announced by the Department on March 21,
2002 and issued on March 25, 2002. The Final Determination incorporated
an Issues and Decision Memorandum (hereinafter, the "Decision Memo"),
which was also issued on March 25, 2002. In the Final Determination,
Commerce reached the following conclusions:

> It concluded that provincial stumpage programs are the "provision of a
> good," constituting the requisite finding under the statute of a
> "financial contribution."
>
> In determining whether an alleged benefit had been conferred and
> whether the provincial governments received adequate remuneration for
> the purposes of the statute, Commerce rejected potential benchmarks in
> Canada and rejected assertions that the stumpage programs are operated
> on a market-consistent basis. Instead it employed benchmarks based on
> U.S. prices for short-term timber harvesting rights on state, federal
> and private lands in the United States.
>
> Commerce found the stumpage programs to be *de facto* specific,
> stating that the users of such programs are limited in number.
>
> It determined that an upstream subsidy analysis was not required on
> the ground that the alleged subsidy was a direct subsidy to lumber
> producers.
>
> In calculating the benefit attributable to softwood lumber, Commerce
> determined that the numerator should be calculated based on the volume
> of timber harvested from Crown lands that entered sawmills, and
> included in the calculation of the denominator all products resulting
> from the lumber production process.
>
> The Department stated that it had no authority to consider company
> specific rates in the context of a country-wide case.
>
> Commerce determined that the products under investigation constituted
> a single class or kind of merchandise, although it excluded from the
> scope of the investigation softwood lumber products further processed
> from U.S.-origin lumber, when such processing is limited to planing,
> sanding or kiln-drying.[^3]

Commerce denied the request to provide a province-specific rate for
Québec.

> Commerce excluded 20 companies from the investigation, having
> determined that those companies received either a zero or *de minimus*
> benefit during the period of investigation ("POI").

On May 16, 2002, the ITC issued its final determination that the
industry in the U.S. producing softwood lumber products was threatened
with material injury by reason of imports of the subject merchandise
from Canada.

On May 22, 2002, Commerce published an amended countervailing duty order
on softwood lumber products from Canada, which contained an amended net
countervailable subsidy rate of 18.79 percent *ad valorem*. *Notice of
Amended Final Affirmative Countervailing Duty Determination and Notice
of Countervailing Duty Order: Certain Softwood Lumber Products from
Canada*, 67 Fed. Reg. 36070 (May 22, 2002).

# **PANEL JURISDICTION AND THE STANDARD OF REVIEW**

This Panel\'s authority derives from Chapter 19 of the NAFTA. Article
1904(1) of the NAFTA provides that \"each Party shall replace judicial
review of final antidumping and countervailing duty determinations with
binational panel review.\" Article 1904(2) directs the Panel to assess
whether a final countervailing duty or antidumping duty determination is
in accordance with the laws of the importing country, in this case, the
United States. The laws consist of the "relevant statutes, legislative
history, regulations, administrative practice and judicial precedents to
the extent that a court of the importing Party would rely on such
materials in reviewing a final determination of the competent
investigating authority.\" NAFTA, Chapter 19, Article 1904(2).

Pursuant to Article 1904(3) and Annex 1911 of the NAFTA, the Panel is
required to apply the standard of review specified in Section
516A(b)(1)(B) of the Tariff Act of 1930, 19 U.S.C. § 1516a(b)(1)(B).
That section states that "\[t\]he Court shall hold unlawful any
determination, finding, or conclusion, found . . . to be unsupported by
substantial evidence on the record, or otherwise not in accordance with
law." Under this standard, the Panel does not engage in *de novo* review
and must restrict its review to the administrative record.

In reviewing Commerce's interpretations of the governing statute, the
Panel follows the two-stage approach adopted by the U.S. Supreme Court
in *Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc.* 467
U.S. 837 (1984). When reviewing an agency's construction of the statute
which it administers, court is confronted with two questions:

> First, always, is the question whether Congress has directly spoken to
> the precise question at issue. If the intent of Congress is clear,
> that is the end of the matter; for the court, as well as the agency,
> must give effect to the unambiguously expressed intent of Congress.
> If, however, the court determines Congress has not directly addressed
> the precise question at issue, the court does not simply impose its
> own construction on the statute, as would be necessary in the absence
> of an administrative interpretation. Rather, if the statute is silent
> or ambiguous with respect to the specific issue, the question for the
> court is whether the agency's answer is based on a permissible
> construction of the statute."

Id. at 842-43.

An agency's statutory interpretation is to be upheld if it is
"sufficiently reasonable," even if it is not "the only reasonable
construction or the one the court would adopt had the question initially
arisen in a judicial proceeding." *American Lamb Co. v. United States*,
785 F.2d 994, 1001 (Fed. Cir. 1986) (citing *Chevron*).

The U.S. Court of Appeals for the Federal Circuit has held that
Commerce's statutory interpretations enunciated in an administrative
determination are "entitled to deference under *Chevron*." *Pesquera
Mares Australes Ltda v. United States*, 266 F.3d 1372, 1382 (Fed. Cir.
2001). Commerce's regulations adopted after notice-and-comment
rulemaking are also entitled to a high level of deference. *See Koyo
Seiko Co. v. United States*, 258 F.3d 1340, 1347 (*Fed*. *Cir.* 2001).
Additionally, "\[w\]e must give substantial deference to an agency's
interpretation of its own regulations." *Thomas Jefferson Univ. v.
Shalala*, 512 U.S. 504, 512 (1994).

Nonetheless, the Panel must "assure that the agency has given reasoned
consideration to all the material facts and issues" and that Commerce
has explained how its legal conclusions follow from the facts in the
record. *Greater Boston Television Corp. v. FCC*, 444 F.2d 841, 851
(D.C. Cir. 1970), *cert. denied*, 403 U.S. 923 (1971). Commerce must
"examine the relevant data and articulate a satisfactory explanation for
its action including a \`rational connection between the facts found and
the choices made.'" *Avesta AB v. United States*, 724 F. Supp. 974, 978
(CIT 1989) (*quoting* *Motor Vehicle Mfrs, Ass'n v. State Farm Mut. Auto
Ins. Co.*, 463 U.S. 29, 43 (1983), *aff'd*, 914 F.2d 233 (Fed. Cir.
1990), *cert. denied*, 111 S. Ct. 1308 (1991)). The reviewing court
"must \`consider whether the decision was based on a consideration of
the relevant factors and whether there has been a clear error of
judgment.'" *Motor Vehicle Mfrs.*, 463 U.S. at 43 (*quoting* *Bowman
Transportation, Inc. v. Arkansas-Best Freight System, Inc.,* 419 U.S.
281, 285 (1974)).

Additionally, if Commerce "intends to depart from a prior position, ...
it must give its reasons for doing so, thereby allowing the Court to
\`understand the basis of the agency's action and ... judge the
consistency of that action with the agency's mandate.'" *Hoogovens Staal
BV v. United States,* 4 F. Supp. 2d 1213, 1217 (*CIT,* 1998) (*quoting*
*Atchison, Topeka & Santa Fe Ry. Co. v. Witchita Bd of Trade,* 412 U.S.
800, 808 (1973)). Furthermore, the substantial evidence standard
requires "more that mere assertion of \`evidence which in and of itself
justified \[the determination\], without taking into account
contradictory evidence or evidence from which conflicting inferences
could be drawn.'" *Gerald Metals, Inc. v. United States,* 132 F.3d 716,
720 (Fed. Cir. 1997) (*quoting* *Suramerica Aleaciones Laminadas, C.A.
v. United States,* 44 F.3d 978, 985 (Fed. Cir. 1994)) (*quoting
Consolidated Edison Co. v. NLRB,* 305 U.S. 197, 229 (1938)).

When an agency does need to fill gaps in a statute, it must act
consistently with the underlying purpose of the law it is charged with
administering. The Panel is to "reject administrative constructions,
whether reached by adjudication or by rulemaking, that are inconsistent
with the statutory mandate or that frustrate the policy Congress sought
to implement." *Hoechst Aktiengesellschaft v. Quigg,* 917 F.2d 522, 526
(Fed. Cir. 1990) (*quoting* *Ethicon, Inc. v. Quigg,* 849 F.2d 1422,
1425 (Fed Cir. 1988) and *FEC v. Democratic Senatorial Campaign Comm.*,
454 U.S. 27, 32 (1981)).

With this guidance, the Panel proceeds to evaluate the issues raised by
the parties.

# **SUFFICIENCY OF PETITION**

The petitioners in this investigation are listed as the Coalition, four
lumber producers, Moose River Lumber Co., Shearer Lumber Products,
Shuqualak Lumber Co. and Tolleson Lumber Co., Inc., and two unions, the
United Brotherhood of Carpenters and Joiners and the Paper,
Allied-Industrial, Chemical and Energy Workers International Union.[^4]

The Canadian Joint Parties assert that Commerce's determination that the
petition was filed on behalf of an "interested party" is contrary to law
and is not supported by substantial evidence. They argue that the
Coalition did not qualify as an interested party because it merely acted
as a representative of the Coalition for Fair Lumber Imports, which was
the true party in interest. The Canadian Parties assert that there was
insufficient information in the record to determine whether the
Coalition for Fair Lumber Imports met the statutory requirements as an
interested party because its members were not identified, nor was the
volume and value of its members' production. They argue that the four
individual companies were not interested parties within the meaning of
the statute because the four companies did not file documents in the
case or otherwise participate in the investigation, and because they
failed to provide the required value information. The two unions did not
qualify as interested parties because neither was representative of the
softwood lumber industry. The Canadian Joint Parties also contend that
Commerce failed to require the petitioner to provide the requisite
information.

The statute requires that Commerce initiate a countervailing duty
proceeding whenever "an interested party described in subparagraph (C),
(D), (E), (F) or (G) of section 771(9)" files a petition that is
accompanied by information reasonably available to the petitioner
alleging the elements necessary for the imposition of duties under
section 701(a) of the Act.[^5] An "interested party" is defined as:

> \(C\) a manufacturer, producer, or wholesaler in the United States of
> a domestic like product,
>
> \(D\) a certified union or recognized union or group of workers which
> is representative of an industry engaged in the manufacture,
> production, or wholesale in the United States of a domestic like
> product,
>
> \(E\) a trade or business association a majority of whose members
> manufacture, produce, or wholesale a domestic like product in the
> United States,
>
> \(F\) an association, a majority of whose members is composed of
> interested parties described in subparagraph (C), (D), or (E) with
> respect to domestic like product, . . ..

19 U.S.C. § 1677(9).

Pursuant to the statute, Commerce also must determine whether the
petition has been filed "by or on behalf of the industry."[^6]
Commerce's regulations provide that a petition must contain
"\[i\]nformation relating to the degree of industry support for the
petition, including: (i) \[t\]he total volume and value of U.S.
production of the domestic like product; and (ii) \[t\]he volume and
value of the domestic like product produced by the petitioner and each
domestic producer identified."[^7] The regulations additionally require
that the petition must contain, "to the extent reasonably available, the
name, address, and telephone number of the petitioner and any person the
petitioner represents."[^8]

The Department determined that the four individual companies were
interested parties within the meaning of section 771(9)(C) of the Act as
manufacturers, producers, or wholesalers in the United States of a
domestic like product. The Department concluded that the Coalition was
an interested party within the meaning of section 771(9)(E) as a trade
or business association, and that the two labor unions were interested
parties pursuant to section 771(9)(D). Commerce also determined that
there was sufficient industry support for the petition.

The question before this Panel is whether the Department's determination
that the petition was sufficient was supported by substantial evidence
or was otherwise in accordance with the law.

The four individual companies submitted along with the petition certain
proprietary documents that contained the companies' production volumes,
indicating that each was a United States softwood lumber producer. We
find no statutory requirement that a qualified interested party
participate in further aspects of the investigation. Thus, Commerce's
decision that the companies were "interested parties" was supported by
substantial evidence and was otherwise in accordance with the law.

Although the statute requires that a petition need only be filed by a
single interested party, the Panel finds the Department's determination
with respect to the Coalition and the two unions also to be proper.

Commerce's determination that the Coalition was an association, defined
as a "gathering of people organized for a common purpose,"[^9] was based
on a reasonable interpretation of the statute. The petition identified
the thirteen members of the Coalition as softwood lumber producers, and
provided the production volume for each producer. The Department's
conclusion that a majority of association members manufacture, produce
or wholesale domestic like product was thus based on substantial
evidence and was not contrary to law.

The two labor unions certified that they represented U.S. softwood
lumber workers. The Panel does not read into the statute a requirement
that the unions represent a certain percentage of the industry.
Commerce's conclusion that they were interested parties because they
represented workers in the softwood lumber industry is consistent with
the statute.

The petitioners also provided the Department with their names,
addresses, telephone numbers and submitted a list of U.S. softwood
lumber producers that documented their support for the petition, in
satisfaction of Commerce's regulations.

In determining whether the petition has been filed "by or behalf of the
industry," the Department has interpreted its regulation to permit a
determination of industry support on either a volume or value basis.
Commerce argues that where industry support is determined on the basis
of production volumes, value data is irrelevant to industry support. The
petition and the amendments thereto contained information demonstrating
that supporters of the petition accounted for 67 percent of total
softwood lumber production. Based on information provided in the
petition and the amendments, the Department determined that the industry
support requirement was fulfilled. The Panel does not find Commerce's
interpretation of its regulation to be in error.

In sum, the Panel concludes that Commerce's determination that the
petition fulfilled the statutory and regulatory requirements was in the
main supported by substantial evidence and was otherwise in accordance
with the law.

# **FINANCIAL CONTRIBUTION**

There are two key elements to a finding of a countervailable subsidy,
namely that a financial contribution is made by a government, and that a
benefit is provided thereby. These two elements will be discussed in
turn.

The statute describes several categories of financial contribution,
including "providing goods or services, other than general
infrastructure." 19 U.S.C. § 1677(5)(D)(iii).

Prior to the Uruguay Round Agreements Act ("URAA"), the statute provided
that the term "subsidy" included "(t)he provision of goods or services
at preferential rates." 19 U.S.C. § 1677(5)(A)(ii). Thus, although the
URAA effected a change in the statutory definition of a countervailable
subsidy, the phrase "goods or services" appears prior and subsequent to
the URAA. The Agreement on Subsidies and Countervailing Measures ("SCM
Agreement") of the World Trade Organization ("WTO") uses the identical
language, i.e., where " a government provides goods or services other
than general infrastructure ...."

The Investigating Authority in this case determined that the provincial
governments, through the tenure and stumpage programs, made a financial
contribution to the harvesters of crown timber. The Department observed
that stumpage might be regarded as the granting of a *right* to harvest
timber, or as the timber itself. Looked at either way, it determined
that the harvesters were "provided" with a good and that "... regardless
of whether the provinces are supplying timber or making it available
through a right of access, they are providing timber within the meaning
of Section 771(5)(B)(iii)." Decision Memo at 5.

Commerce's reasoning regarding the meaning of the term "goods" is based
largely upon lexicographic sources.

In addition, in the Decision Memo, the Department notes the argument by
the Coalition that the legislative history supports the Department's
decision.

The Canadian Parties contest the proposition that standing timber is a
"good." They argue that dictionary definitions of the term refer to
movable property, and do not encompass all property rights. They equate
the term to "movable tangible items that are capable of being traded",
as set forth in Black's Law Dictionary. In addition, reference is made
to the Uniform Commercial Code statement that "\[a\] contract for the
sale... of timber to be cut is a contract for the sale of goods within
this Article whether the subject matter is to be severed by the buyer or
by the seller even though it forms part of the realty at the time of
contracting, and the parties can *by identification* effect a present
sale before severance" (emphasis added). Art. 2-107(1) and (2).

Thus, their argument is based upon the distinction between actual
identifiable property, and the rights granted to harvesters to a *profit
à prendre,* an interest in real property. They cite cases that
distinguish between this kind of property right and the "goods" which
may be obtained through the exercise of such rights.

Second, Canada argues that the term "goods" must be interpreted in
consonance with its use in provisions of other WTO agreements, reports
and the SCM Agreement itself. They suggest that in a number of instances
these authorities embrace "goods" only because they are traded
internationally and equate "goods" with "property."

Lastly, Canada contests the Department's suggestion that if the stumpage
programs do not contribute goods, they may amount to the contribution of
a service. The Panel will not address this issue, as there is no
indication that Commerce seriously advances this argument.

The Panel has examined the legislative history. The Statement of
Administrative Action ("SAA") refers to:

> ... four broad generic categories of government practices that
> constitute a "financial contribution." The examples of particular
> types of practices falling under each of the categories are not
> intended to be exhaustive. The Administration believes that these
> generic categories are sufficiently broad to encompass the types of
> subsidy programs generally countervailed by Commerce in the past,
> although determinations with respect to particular programs will have
> to be made on case-by-case basis.

The SAA, which accompanied the URAA, explicitly states that the
countervailing duty ("CVD") statute is to be interpreted \"sufficiently
broad so as to encompass the types of subsidy programs generally
countervailed by commerce in the past\". The Panel notes that the Act
contains only one explicit exception, and that is one related to general
infrastructure; there is no natural resource exception in the law or in
the CVD regulations. The Panel, therefore, accepts that the statute is
intended to have a comprehensive reach to include any goods or services,
which are provided as a result of a government action in the country
under investigation.

The SAA demonstrates Congress\' support for the Department\'s
determination that provincial stumpage programs constitute a financial
contribution within the meaning of section 771(5)(D)(iii) of the Act.

It is also significant that all parties have acknowledged that timber is
a \'market asset\' and that through tenures the provincial governments
relinquish ownership of those assets to the lumber companies. Regardless
of the form of the transaction between the provincial governments and
those who harvest the timber, in substance it is a sale of timber.

In this connection, it is noted that in each of the previous lumber
cases, neither the Department nor a reviewing panel has specifically
addressed the question at issue. Rather, it is has been assumed that
there is a financial contribution. Therefore, while the legislative
history is far from conclusive, the Panel is of the view that it tends
to support the position of the Investigating Authority and the
Coalition.

While Commerce may never have previously considered the Canadian
challenge to the finding of a financial contribution, the question was
raised in a Canadian complaint before the WTO. The complaint, against
the Preliminary Determination in this case was the subject of a WTO
Panel report. WT/DS236/R, September 27, 2002. This report is not, of
course, binding on this panel. *See Hyundai Electronics Co. Ltd. v.
United States*, 53 F. Supp. 2d 1334 (CIT 1999)**.** Nonetheless, the
Panel finds the reasoning in the report persuasive as to the proper
construction under the SCM Agreement.

In determining whether the provincial stumpage programs "provide goods
or services" to tenure holders, the first question is whether the
provinces "provide" something to the loggers. The WTO Panel concluded,
after examining the tenure and stumpage programs, that "the only way to
supply *standing* timber to harvesting companies is by allowing them to
harvest the timber." Hence, in that Panel's view, "where a government
allows the exercise of harvesting rights, it is providing standing
timber to the harvesting companies." WT/DS236/R at ¶¶7.17-18 (emphasis
in original).

This Panel sees nothing in the statute or in the SCM Agreement which
attaches any special meaning to the word "provides", or which suggests
that because the timber is harvested pursuant to licenses or tenures, it
is not "provided" by the provinces. We therefore concur with the WTO
Panel on this point.

The WTO Panel also addressed the issue of whether standing timber is a
"good", considering the dictionary definitions of the term, Canada's
argument that harvesting rights are different from "goods", and that the
term, under WTO agreements, is limited to "products".

Rather than rely upon the various definitions of the term, the WTO Panel
looked to the overall purpose of the SCM Agreement. The Panel found that
in context the phrase "goods or services other than general
infrastructure" has a more expansive meaning; it refers to "a broad
spectrum of things a government may provide". WT/DS236/R at ¶7.23.
Bearing in mind this purpose, the WTO Panel concluded that:

> ... a *financial* contribution also exists in case *goods* or
> *services* are provided which can be valued and which represent a
> value to the beneficiary in question. The word "goods" in this context
> of "goods and services" is intended to ensure that the term financial
> contribution is not interpreted to mean only a money-transferring
> action, but encompasses as well an in-kind transfer of resources, with
> the exception of general infrastructure. \[WT/DS236/R at ¶7.24
> (emphasis in original).\]

Considering that in relevant respects the language of the countervailing
duty statute mirrors exactly the WTO SCM Agreement, and that the broad
purpose of these provisions is the same, the Panel considers that the
meaning ascribed to the WTO SCM Agreement applies equally to the
parallel provisions of the countervailing duty statute. Therefore, the
Department's finding of a financial contribution in this case is
affirmed.

The Panel notes that, even if provincial stumpage constitutes a
financial contribution for CVD purposes, none of the parties have
questioned the fact that the act of granting timber harvesting rights to
softwood lumber producers, and the establishment of any conditions
attached to the exercise of those rights by provincial governments,
constitutes a legitimate exercise of jurisdictional responsibilities by
the granting authorities concerned.

# **BENEFIT/ADEQUACY OF REMUNERATION**

The statute requires, given a financial contribution, that the
contribution confer a benefit. A benefit is conferred when the good or
service is provided for "less than adequate remuneration." 19 U.S.C. §
1677(5)(E). That section further states that "the adequacy of
remuneration shall be determined in relation to prevailing market
conditions for the good or service being purchased in the country which
is subject to the investigation or review." The section requires the
government to take into account the "\[p\]revailing market conditions
includ\[ing\] price, quality, availability, marketability,
transportation and other conditions of purchase or sale." 

This language parallels the language set forth in Article 14(d) of the
SCM Agreement. Article 14(d) provides that "\[t\]he adequacy of
remuneration shall be determined in relation to prevailing market
conditions for the good or service in question in the country of
provision or purchase (including price, quality, availability,
marketability, transportation and other conditions of purchase or
sale)."

Following the adoption of the URAA and the SAA that accompanied it, the
Department issued interim regulations in 1995 regarding certain
procedural matters, deferring the consideration of regulations
interpreting the substance of the changes in the law. In November 1998,
it issued its final regulation concerning the term "adequacy of
remuneration." 63 Fed. Reg. 65348, et seq. (Nov. 25, 1998). That
section, 351.511(a)(2), defines "adequate remuneration" as follows:

> \(i\) In general. The Secretary will normally seek to measure the
> adequacy of remuneration by comparing the government price to a
> market-determined price for the good or service resulting from actual
> market transactions in the country in question. Such a price could
> include prices stemming from actual transactions between private
> parties, actual imports, or, in certain circumstances, actual sales
> from competitively run government auctions. In choosing such
> transactions or sales, the Secretary will consider product similarity;
> quantities sold, imported or auctioned; and other factors affecting
> comparability.
>
> \(ii\) Actual market-determined price unavailable. If there is no
> useable market-determined price with which to make the comparison
> under paragraph (a)(2)(i) of this section, the Secretary will seek to
> measure the adequacy of remuneration by comparing the government price
> to a world market price where it is reasonable to conclude that such
> price would be available to purchasers in the country in question.
> Where there is more than one commercially available world market
> price, the Secretary will average such prices to the extent
> practicable, making due allowance for factors affecting comparability.
>
> \(iii\) World market price unavailable. If there is no world market
> price available to purchasers in the country in question, the
> Secretary will normally measure the adequacy of remuneration by
> assessing whether the government price is consistent with market
> principles. . . .

In connection with the publication of the new regulations, the
Department noted that prior to the URAA amendments, the law provided
that a subsidy was found if the goods or services were provided "at
preferential rates." (*See e.g.*, Lumber III). In view of the change in
the standard, Commerce undertook to furnish guidance on how the new
provision would be applied. This guidance has been referred to in the
Commerce brief as the Preamble to the regulations, and the panel will
adopt this term as well. Two items in the Preamble are particularly
significant to this case. The first relates to the treatment of market
distortion caused by the participation of a government in the market,
and the other relates to the application of a "world market price" to
measure the extent of a benefit. These comments will be discussed in
turn.

## **A. Actual Market Transactions** {#a.-actual-market-transactions .unnumbered}

In its Decision Memo, the Investigating Authority declined to use the
first benchmark set forth in the regulations, on the ground that there
are no useable market-determined prices between Canadian buyers and
sellers within the meaning of the regulations.

Commerce stated that "\[w\]here the market for a particular good or
service is so dominated by the presence of the government, the remaining
private prices in the country in question cannot be considered to be
independent of the government price." Decision Memo at 37. It reasoned
that "\[a\] large government presence in the market will tend to make
much smaller private suppliers price-takers," and that "the government
dominated market will distort the market as a whole if the government
itself does not sell at market-determined prices." Id. Commerce
concluded that "\[i\]n such a situation, true market prices may not
exist in the country, or it may be difficult to find a market price that
is independent of the distortions caused by the government's action."
Id.

The Department determined that provincial stumpage fees are not set to
reflect market prices, but with a view toward traditional economic
policy goals, such as job creation. Commerce also concluded that minimum
cut requirements on public lands distort timber supplies and depress
prices, and that the stumpage market is driven by the government's
control of the total softwood timber harvest. In Commerce's view,
substantial evidence exists to support the conclusion that stumpage fees
on public lands are the price driver for the stumpage market in those
provinces and that stumpage fees are largely derivative of the public
land prices.

In arriving at its determination, Commerce relied heavily upon language
found in the Preamble to the regulations, which in pertinent part
states:

> \[w\]e normally do not intend to adjust such prices to account for
> government distortion of the market. While we recognize that
> government involvement in a market may have some impact on the price
> of the good or service in the market, such distortion will normally be
> minimal unless the government provider constitutes a majority or, in
> certain circumstances, a substantial portion of the market. Where it
> is reasonable to conclude that actual transaction prices are
> significantly distorted as a result of the government's involvement in
> the market, we will resort to the new alternative in the hierarchy.

63 Fed. Reg. 65377.

With respect to individual provinces, Commerce stated in the Decision
Memo that the information submitted on private prices was inadequate,
based on, among other things, differences in bidding or tendering
process, the lack of market-based transactions or a failure to
adequately break down the prices submitted. The Department also
concluded that detailed import prices were unavailable and that prices
from the Maritime Provinces could not be used due to insufficient
information.

The Canadian Parties and the provinces argue that Commerce acted
inconsistently with the statute and the regulations, which require it to
use in-country market transactions, in rejecting record evidence
indicating that market-determined prices exist in various provinces.

Specifically, the Canadian Parties argue that in Ontario, large numbers
of private landowners export logs to the U.S. and that Commerce was
provided with a survey of private timber sales transactions that
indicate that private sellers sell private timber at prices above and
below Crown rates. The Government of Québec maintains that it submitted
substantial record evidence indicating that its private forest is a
large and open market, free of government interference, and that the
methodology employed by the province to set public stumpage rates has
not changed significantly since Commerce validated Québec's system in
Lumber III. Thus, Québec maintains, its prices are an appropriate
benchmark for reviewing the adequacy of remuneration. Alberta claims
that it provided market values, known as timber damage assessments
("TDAs"), for standing timber that were developed by the private sector
for arm's length business purposes. TDAs represent compensation for
damage by mineral rights extractors and, although they do not represent
sales, Alberta claims they represent fair market value. British Columbia
also states that it provided Commerce with information on competitive
sales of stumpage in British Columbia through the Small Business Forest
Enterprise Program.

The Canadian Parties argue that Commerce failed to give reasoned
consideration to any of this evidence. They also argue that it ignored a
study by Resource Information Systems, Inc. ("RISI"), which found the
timber market in Ontario to be competitive and that timber prices sold
in the private market were not distorted by government involvement in
the market. There was also a study by Charles River Associates ("CRA")
that concluded that the price for the supply of private timber in
Ontario set the market price for softwood timber and that there was a
competitive market for timber in Ontario. The Canadian Parties also
point to a study by Dr. William Nordhaus that demonstrated that
provincial stumpage charges do not lower the price of logs or lumber in
comparison with an undistorted competitive market. Finally, the Canadian
Parties take issue with Commerce's rejection of the Maritime Provinces
as a source of benchmarks.

The Department argues that, based upon record evidence, it was
reasonable to conclude that private prices in the provinces were related
to the dominant Crown stumpage prices, and that there were no other
competitive market prices available to use as a comparison. Thus, it
claims, it properly turned to the second tier of its regulatory
hierarchy to determine the adequacy of remuneration.

Specifically, Commerce asserts that Québec's stumpage program does not
reflect "fair market values." Rather than acting like a commercial actor
intent upon maximizing commercial revenue, Québec instead uses its
stumpage program to implement policy objectives including creating and
maintaining jobs. The Department asserts that Québec controls every
aspect related to the Crown forests, including limiting the eligibility
of parties entitled to harvest Crown timber, imposing appurtenancy
requirements, maintaining annual allowable cut requirements, and
imposing restrictions upon the transferability of harvesting rights. As
a consequence of these restrictions, it claims that stumpage prices
artificially established by Québec do not reflect competitive prices.

Commerce adds that, although Québec has a private timber harvest,
evidence on the record indicated that it was reasonable for the
Department to conclude that those private sales were not based upon an
open market with free competition. In its Decision Memo, it points to
largely anecdotal evidence, including statements made by a Ministere des
Ressources Naturelles and an official from the Québec private wood lot
owners' association. Commerce also states that it found unpersuasive a
report presented by Québec that it argues demonstrated that private
stumpage prices in Québec were slightly higher than prices in Maine.
Commerce concluded that the study submitted by Québec relied upon a 75
percent quality premium for Maine trees, but that the quality premium
adjustment was not reliable. In Commerce's view, given the dominance of
Crown stumpage in Québec, [i.e.]{.underline}, 83 percent, and compelling
record evidence demonstrating that the province's private prices were
influenced by the Crown stumpage prices, it reasonably concluded that
those private prices were not useable as benchmarks under the first
regulatory tier.

With respect to British Columbia, Commerce argues that the province
controls the participants in the market, the volume available for
harvesting, and imposes actual harvest requirements. Through these
methods, the department asserts, British Columbia promotes job creation
and retention while effectively eliminating the forces that would drive
a competitive market.

Commerce states that British Columbia offered during the investigation
two sources of potentially market driven private prices for use in
measuring the adequacy of remuneration, but that neither source provided
market prices that were appropriate because no underlying data
concerning the transactions were provided and because it was not
provided with information to determine whether the private prices were
established consistent with market principles. As a result of the lack
of useable, fair market private prices in British Columbia, and evidence
demonstrating that the government dominated the market
([i.e.]{.underline}, 90% of timber harvested during the period of
investigation), Commerce claims that it properly resorted to the second
tier of its regulatory hierarchy.

Similarly, it argues that Ontario's stumpage program does not reflect
"fair market values." According to Commerce, Ontario charges fees that
are administratively set and establishes appurtenancy requirements that
require tenure holders to own mills or have commitment letters for
processing an annual allowable cut. These measures, Commerce argues,
allow Ontario to implement policy objectives such as the creation and
retention of jobs. According to Commerce, the provincial price for
timber on Crown lands is comprised of four component charges, the
minimum charge, the forest renewal charge, the forestry futures charge,
and the residual value charge. Commerce claims that the minimum charge
is set administratively every year depending on the species and the
destination of the harvested timber and that Ontario has stated that the
primary reason for this charge is to generate a secure source of revenue
regardless of market conditions. For the Department, Ontario's
appurtenancy requirements and administered fee structure indicate that
the province is not acting to maximize revenue from its timber resource,
but to administer its stumpage program to pursue policy objectives.

Commerce claims that it reasonably determined that Ontario's private
prices were not useable in its adequacy of remuneration analysis. The
record established that the percentages of provincial, federal, and
private timber harvested by Ontario during the POI were: 92 percent
provincial, 1 percent federal and 7 percent private. Commerce relies on
a study placed on the record by the petitioners conducted by Economists,
Inc. ("Economists"), which concluded that administered stumpage prices
have a distortive effect on private prices. Commerce states that it
considered the two studies submitted by Ontario, the RISI study and the
CRA study, but that it found the Economists study to be more persuasive.
According to Commerce, record information, including survey responses,
demonstrated that private timber sales and private land holders are not
independent from the provincial stumpage system. It claims that it
reasonably concluded that private prices in Ontario, which represented
only 7 percent of the total harvest during the POI, could be distorted
by Ontario's administered stumpage prices, which constituted 92 percent
of the harvest.

With respect to the remaining provinces, Commerce contends the record
contains no suitable private price transaction information, but that the
record contains evidence demonstrating that the volume of Crown stumpage
was overwhelmingly larger than the private harvest during the POI.

The Panel discusses the arguments raised by the parties in accordance
with the standard of review set forth above.

Clearly, the law prefers market-based, actual transactions that occur in
the country of export. Commerce itself has stated that "\[t\]he most
direct means of determining whether the government required adequate
remuneration is by comparison with private transactions for a comparable
good or service in the country. The preferred benchmark in the hierarchy
is an observed market price for the good, in the country under
investigation, from a private supplier (or, in some cases, from a
competitive government auction) located either within the country, or
outside the country . . .." Decision Memo at 36.

The Panel notes that the Canadian Parties do not appear to contest the
validity of the regulation, which contemplates that there may be
instances in which actual, market-based transactions are not available.
Thus, it seems, all parties agree that there may be circumstances under
which it is not possible to judge the adequacy of remuneration based on
actual, market-based transactions in the exporting country and that
there may be circumstances under which rejection of the first tier in
the regulations is appropriate.

The Panel rejects the notion that significant involvement by the
government in the market, by itself, serves as a basis for rejecting the
first regulatory tier, without sufficient analysis of whether and how
such involvement has distorted actual transaction prices. It is
unreasonable to conclude, without further support, that where the
government is a majority provider, private prices may not be used as a
benchmark. However, the Panel finds that, with adequate support and
analysis, it could be reasonable to conclude that significant
involvement by the government may lead to market distortion.

Commerce states that it has based its conclusion on record evidence
indicating that the government controls every aspect of Crown forests,
as indicated in certain provinces by limited eligibility of parties
entitled to harvest, appurtenancy requirements, cut requirements,
restrictions on transferability and administered fee structures, and
that such control is aimed at policy objectives rather than market
principles. Commerce pointed to survey responses and a study by
Economists, Inc., which indicated that private timber sales were not
independent from the provincial stumpage system, to support its
position. Commerce also maintains in some instances that information
submitted on private prices was insufficient to determine whether such
prices were determined in accordance with market principles. Based on
such evidence, Commerce claims it was reasonable to conclude that
private prices were related to stumpage prices and that there were
therefore no market-based prices available to use as a comparison.

Although the Panel finds Commerce's analysis to be minimal and its
reliance in some instances on anecdotal evidence to be weak, the Panel
is of the view that, even though it may not agree with the Department's
weighing of the evidence, it cannot say that substantial evidence in the
record is lacking. In accordance with the standard of review which the
Panel applies in this case, the Panel defers to the conclusions reached
by Commerce and does not find its determination to be unlawful.

The Panel notes that Commerce concluded in Lumber III that prices in
Québec are determined in accordance with market forces. As stated by
Commerce, ". . . we determine that the private prices provide a reliable
benchmark for comparison purposes." Lumber III, 57 Fed. Reg. at 22597.
Although the Lumber III investigation was conducted under the
"preferentiality" standard, instead of the current "adequacy of
remuneration" standard, in both cases Commerce sought a reliable,
market-based benchmark. Moreover, mills in Québec import significant
quantities of logs from the U.S., and if prices in Québec were
artificially low, it would not make economic sense to import. At the
hearing, Commerce is also on the record as stating that in the situation
where logs moved freely between Canada and the United States, the
Canadian lumber industry concerned was operating under open and
competitive market conditions.

The Panel finds Commerce's determination to be of a factual nature.
Given the standard of review applicable to this case, and in light of
the record evidence, the Panel agrees to defer to Commerce's decision to
reject private prices in Québec and the other provinces as inadequate
benchmarks for the purpose of the first regulatory tier. Although the
Panel may have reached a different conclusion, and despite serious
reservations, it does not find the Department's determination to be
inconsistent with the law or to be unsupported by substantial evidence
on the record.

## **B. World Market Prices** {#b.-world-market-prices .unnumbered}

After rejecting the first benchmark established in the regulations,
namely actual market transactions in Canada, Commerce concluded that
"world market prices" were available that could be used to determine
whether the provincial stumpage programs provide a good or service to
softwood lumber producers for less than adequate remuneration pursuant
to the second regulatory benchmark.[^10] The Department concluded that
stumpage prices from the United States qualify as commercially available
world market prices because it is reasonable to conclude that U.S.
stumpage would be available to softwood lumber producers in Canada and
because they are based on actual observed transactions within a
competitive market.

Underpinning the Commerce determination is the supposed proximity of
similar Canadian and U.S. forests, generally composed of the same
species mix of trees. The Department determined that stumpage in the
U.S. is comparable to stumpage in Canada with respect to "overall price,
quality, availability, marketability, transportation and other
conditions of sale." Decision Memo at 33-34. In the Preliminary
Determination, the Department had indicated that prices from locations
other than the United States could not be used because of the expense
that would be incurred in transporting logs from other countries, and
thus, only U.S. prices were considered. Nothing in the Final
Determination indicates a change in this position.

For each province, Commerce compared the stumpage price with certain
cross-border stumpage benchmark prices, making various adjustments in an
attempt to create a comparable price. Adjustments were made for items
such as road construction and maintenance costs, silviculture costs,
fire protection and insect management costs, and forest planning
expenses. Commerce's chosen benchmarks with respect to each province at
issue are summarized as follows:

> Québec: Commerce concluded that Maine price data obtained from the
> Maine Forestry Service serve as the most comparable benchmark.
>
> British Columbia: Commerce relied on prices from the Washington
> Department of Natural Resources ("WDNR"), United States Forest Service
> ("USFS") prices from Washington, Idaho and Montana, prices from the
> Idaho Department of Lands, and prices from the Montana Department of
> Natural Resources and Conservation.
>
> Ontario: For its cross-border benchmark, Commerce used prices from
> Michigan and Minnesota, using the Minnesota 2000 Corrected Public
> Stumpage Price Review, data from the Michigan Department of Natural
> Resources, and the USFS Timber Cut and Sold Report.
>
> Alberta, Manitoba and Saskatchewan: Basing its benchmark on Minnesota,
> Commerce looked to the Minnesota 2000 Corrected Public Stumpage Price
> Review and the Price Index published by the Minnesota Department of
> Natural Resources.

The Canadian Parties challenge the agency's determination on the
following grounds: (1) that Commerce's construction of the relevant
statutory and regulatory sections to permit the use of an out-of-country
benchmark is contrary to law: (2) that stumpage prices in the U.S. do
not constitute a valid "world market price" and that consequently
Commerce's use of such prices is contrary to law; (3) that Commerce is
bound to its prior determinations that cross-border comparisons are
arbitrary and capricious; and (4) that the Department's use of
cross-border benchmarks is unsupported by substantial evidence. Similar
arguments are raised individually by the provinces.

Although agreeing that the agency properly made its determination
pursuant to the statutory mandate and the regulations, and thus
supporting the determination, the Coalition also raises several issues
relating to the agency's attempts to adjust for market conditions in
Canada.

Commerce contends that its use of a world market price is consistent
with the regulations and is supported by substantial evidence because:
(1) there are world market prices for timber; (2) U.S. timber prices
would be commercially available to Canadian lumber producers; (3) the
benchmarks were calculated using the most comparable timber in the U.S.;
and (4) proper adjustments were made for differences in market
conditions in Canada.

As an initial matter, and as discussed above, Commerce's regulations are
entitled to a high level of deference. *See Koyo Seiko*, 258 F.3d at
1347. Under *Chevron*, assuming that Congress has not spoken directly to
the question at issue, the question is whether the agency's construction
of the statute is permissible. The Panel is to "reject administrative
constructions,...that are inconsistent with the statutory mandate or
that frustrate the policy Congress sought to implement." *Hoechst
Aktiengesellschaft*, 917 F.2d at 526.

Both the Coalition and Commerce point out that the Canadian Parties do
not contest the validity of the regulation. Nevertheless, it could be
argued that, on its face, the regulation is inconsistent with the
statute and thus should not be read to permit a benchmark based upon
market conditions for the good or service other than within the country
providing it. The WTO Panel report in *United States -- Preliminary
Determinations with Respect to Certain Softwood Lumber from Canada*
(September 27, 2002), found that SCM Article 14(d) is "very clear: the
adequacy of remuneration is to be determined in relation to *prevailing
market conditions* for the good or service in question *in the country
of provision or service. ...* \[T\]he ordinary meaning of \[this
provision\] excludes an analysis based on market conditions other than
those in the country of provision of the goods, i.e., Canada."
WT/DS236/R at ¶7.44. However, the panel feels that it does not have to
address this argument in order to dispose of the case.

The regulation provides in part, that a "world market price" may be used
where "it is reasonable to conclude that such price would be available
to purchasers in the country in question." 19 C.F.R. §
351.511(a)(2)(ii). The Canadian Parties argue that U.S. stumpage is not
available in Canada because trees growing in the U.S. can only be
harvested in the U.S. This argument is not without appeal. The
Department has found a subsidy to exist with regard to the granting of
tenures and the stumpage programs. If the subsidy was found to apply to
lumber, or even to logs, of course, it would make more sense to say that
the U.S. benchmark product might be available in Canada, as lumber and
logs are movable. In fact, in its brief, Commerce does, at times,
identify the subject goods as logs, and attempts to argue around the
fact that in some cases the export of logs from the U.S. is restricted.
(In this connection, the record establishes that during the period of
investigation, Washington State restricted the export of logs harvested
on state-owned lands, as did Idaho and Montana.[^11] )

In addition, the Department seems, in its brief, to attach significance
to the fact that some Canadian companies own private lands in the United
States, can and do bid at auction on U.S. stumpage, and can and do
import U.S. logs. There is considerable evidence, for instance, that
U.S. logs are routinely imported into Québec, and at the hearing
Commerce stated that where logs move across the Canada-U.S. border the
Canadian lumber industry then operates under open and competitive market
conditions. However, the Panel fails to understand the significance of
whether or not U.S. stumpage can be acquired by Canadian companies. The
nationality of the purchaser of the rights to harvest timber cannot make
the goods any more or less "available" in Canada.

Consequently, the Panel has difficulty with the notion that U.S.
standing timber is "available" in Canada. Nevertheless, the Panel is not
making a finding on this point, as there is a more fundamental reason
for rejecting the use of a cross-border benchmark in this case.

As indicated previously, in the Preamble to the regulations, the
Department addressed the use of "world market prices" as a measure of
the adequacy of remuneration. The Preamble states that the Department
will:

> consider whether the market conditions in the country are such that it
> is reasonable to conclude that a purchaser in the country could obtain
> the good or service on the world market. For example, a European price
> for electricity normally would not be an acceptable comparison price
> for electricity provided by a Latin American government, because
> electricity from Europe in all likelihood would not be available to
> consumers in Latin America. However, as another example, the world
> market price for commodity products, such as certain metals and ores,
> or certain industrial and electronic goods commonly traded across
> borders, could be an acceptable comparison price for a
> government-provided good, provided that it is reasonable to conclude
> from record evidence that the purchaser would have access to such
> internationally traded goods.

63 Fed. Reg. 65377.

The Panel considers this policy statement to be a defensible
construction of the regulation (notwithstanding that it is not to be
accorded the same level of deference to which the regulation itself is
entitled) if the facts permit it. However, at the heart of this case is
that the facts here do not permit application of the stated policy.

First, the reasoning of the Preamble, by its own terms, would seem to
require that the goods or service at issue possess a set of unifying
characteristics that would enable one to determine whether or not there
is a "world market price." Particular note is taken of the examples
given in the preamble, and the reference to "internationally traded
goods."

The determination in *Final Negative Countervailing Duty Determination:
Live Cattle from Canada*, 64 Fed. Reg. 57040 (Oct. 22, 1999), is the
only instance in which the Department has ever applied the second tier
benchmark and attempted to find a "world market price" in a
countervailing duty investigation. In that case, the Department examined
whether the Canadian Wheat Board provided a benefit to producers of live
cattle by subsidizing the price of feed barley. Commerce compared the
price of barley in the United States (the "world price") with the
alleged subsidized Canadian price, and concluded that the U.S. price was
not higher than the Canadian price. Thus, it found no countervailable
subsidy. Notably, the product involved, feed barley, is a commodity, and
thus the determination fits nicely into the Preamble description of
goods for which a "world market price" of "internationally traded goods"
might be found.

However, the *Live Cattle* precedent is a far cry from the finding that
standing timber is such a product. It is neither a commodity, nor is it
a good which is commonly traded across borders. Indeed, it is hard to
imagine any such product which meets the Department's definition that is
not subject to description in terms of objective standards and
specifications. Thus, it is possible to imagine a standard price for
other commodities such as crude oil, or even manufactured goods such as
semiconductors, or even conceivably television receivers of standard
specifications. However, the Panel is of the view that timber is not
such a good or service, and that there is not a world market price for
timber that meets the terms of the Preamble or of the statutory and
regulatory requirements.

The Canadian Parties have submitted for the record a list of Factors
That Affect Stumpage Prices compiled by the New York State, Division of
Lands, Department of Environmental Conservation, which is illustrative
of the inherent problems in attempting to contrive a single price for
timber. They are: timber quality, volume to be cut by acre, logging
terrain, market demand, distance to market, season of the year, distance
to public roads, labor costs, size of the average tree, type of logging
equipment, percentage of timber species in the area, end product of
manufacturing, landowner requirements, landowner knowledge of market
value, property taxes, performance bond requirements, and insurance
costs. Further, the comment is made that "\[c\]omparisons among
different jurisdictions and locations tend to increase the number and
potential magnitude of the factors affecting stumpage value relative to
a single jurisdiction, such as New York State." When you try to make
comparisons from country to country, you of course can add to these
factors such things as differing tax regimes, environmental regulations,
and currency exchange.

The Department has recognized the difficulties which such factors
present. In fact, in Lumber I Commerce noted that "...there is not a
unified price for stumpage, because each individual stand of timber is
unique due to a variety of factors, such as species combination,
density, quality, size, age, accessibility, and terrain and climate."
*Certain Softwood Lumber Products from Canada*, 48 Fed. Reg. 24159,
24168 (May 31, 1983). Commerce further stated that "\[w\]e believe that
a comparison of Canadian stumpage prices with U.S. prices would be
arbitrary and capricious...." Id.

Similarly, in Lumber III , the Department noted that "\[w\]e find that
other factors which could adversely affect the comparability of adjacent
U.S. and Canadian timber (e.g., exchange rate fluctuations) merely
underscore the appropriateness of remaining within the relevant
jurisdictions." *Certain Softwood Lumber Products from Canada*, 57 Fed.
Reg. 22507 (May 8, 1992).

Commerce has not presented substantial evidence to support that market
conditions in Canada and the United States are comparable, nor that its
attempted adjustments adequately account for such conditions. Stumpage
prices vary widely within and between locales, even within the United
States. Commerce's use of different U.S. prices as benchmarks for
different provinces demonstrates that there is not even a single U.S.
price, let alone a world price.[^12]

Commerce asserts that the above-quoted statements were made in the
context of a different legal framework and that it is not bound by its
prior determinations. Clearly Commerce is not necessarily "bound" by its
prior determinations and must address factual issues on a case-by-case
basis. *Yamaha Motor Corp. v. United States*, 910 F. Supp. 679, 684 (CIT
1995). Each determination is based on a separate administrative record,
and this Panel must restrict its examination of the facts to the
administrative record. However, if Commerce "intends to depart from a
prior position, . . . it must give its reasons for doing so, thereby
allowing the Court to understand the basis of the agency's action and .
. . judge the consistency of that action with the agency's mandate.'"
*Hoogovens Staal BV*, 4 F. Supp. 2d at 1217.

Most of the reasons listed by Commerce for rejecting cross-border
comparisons in the prior lumber determinations are factual in nature.
Most of the factual differences exist today and, as discussed in this
opinion, are present in the administrative record in this case. Although
not necessarily bound by its prior determinations, the opinions
expressed by Commerce in those decisions indicate the difficulties
inherent in comparing timber harvested in the U.S. with that harvested
in Canada. In the Panel's view, Commerce has not offered an adequate
explanation for its reversal of its earlier position and does not offer
new factual circumstances that would now make cross-border comparisons
any more reasonable. It is disingenuous for the Department to suggest
that a new statutory regime could justify the use of what it already has
described as an arbitrary and capricious exercise.

Without burdening this opinion with all the instances of Commerce's
heroic effort to divine and then adjust U.S. stumpage prices, a few of
the more problematic issues deserve mention. First, the auctions on
which the Department bases many of its U.S. prices are for short-term
harvesting rights and, in most cases, for mixed species forests, and the
harvests were over several years. The Canadian harvests are from land
subject to long-term tenure rights, the stumpage is calculated based
upon actual harvests of known species, and were done during the period
of investigation.

Indicative of the kind of problems encountered by the Department in
making its comparisons is that of its use of Washington state benchmarks
for British Columbia. In the Preliminary Determination, Commerce
indicated that it could not use public (WDNR) auction prices for timber
sales, because of log export restrictions imposed by the WDNR. However,
in the Final Determination, having insufficient data on private timber
prices, it decided to use the WDNR prices as a proxy for private sales.
However, there is nothing in the record to support the speculation that
the two are comparable.

With respect to the use of Minnesota as a benchmark for Alberta and
Saskatchewan, the notion of comparable forests is not supported by
substantial evidence. There is no common border between either province
and Minnesota. Alberta's major forests are 370 to 750 miles north, and
600 miles east of Minnesota. In addition, there is a significantly
different species mix between the two, different climatic conditions
resulting in significantly different size trees, and transportation
costs to mill are dramatically different.

Likewise, the predominant species in the Boreal forest region, where the
vast majority of timber destined for Ontario sawmills is harvested, are
softwood trees, especially black spruce and jack pine. Commerce verified
that nearly 76% of the standing timber in the Boreal forest is softwood
trees. Michigan and Minnesota (benchmarks for Ontario), however, are
dominated by hardwoods, which constitute approximately 75% and 69% of
the standing timber in the forests of Michigan and Minnesota,
respectively. Significant differences in stumpage arrangements,
including the rights and obligations of tenure holders, are also
present.

In the Preliminary Determination, the Department declined to use USFS
auction prices because there appeared to be a lack of credible evidence
that the data available yielded reliable open market values. Yet, in the
Final Determination, on the same evidence, USFS prices were used to
create benchmarks.

Great difficulties were encountered when trying to equate bid prices for
tracts of forest in western Washington because of the species mix. Due
to the high value of Western Red Cedar, a common tree in coastal
Washington forests, compared with the low value of other species, the
parties recognized that using WDNR auction prices for the whole area to
be cut, resulted in substantially undervaluing the cedar compared to the
other trees. Commerce's attempt to isolate the cedar prices through a
regression analysis seems problematic, and in any event, necessarily
only an approximation.

Canadian stumpage fees are determined with reference to the cubic metric
volume of timber harvested. The U.S. timber harvests are measured in
board feet. Commerce, in its Decision Memo, indicates that it tried to
arrive at a figure which would convert board feet into cubic meters, and
finally arrived at two conversion factors, one for western Washington,
and another for the rest of the U.S. The difficulties in arriving at a
factor to be used across a broad variety of tree sizes, different
scaling techniques, different tree characteristics, taper and other
factors made this exercise very problematic. In the end the Department
did not develop its own conversion factor, but rather used a study by
the ITC from 1983. Reading the Decision Memo suggests that Commerce
based the adoption of this factor more as a matter of convenience than
following a rigorous analysis of its accuracy. The Panel does not
suggest that it would, or even could, substitute its judgment for that
of the Department and find a different conversion factor. However, it is
difficult for us to say that the adoption of the Department's final
position is supported by substantial evidence.

The previous examples of inconsistencies, approximations, assumptions,
and compromises demonstrate that it is not possible to conclude that
there is a "world market price" for timber.

The Panel is of the opinion that the statute requires an analysis based
on market conditions in Canada. By basing its price comparison on prices
in the U.S., adjusted inadequately to account for differences in
Canadian market conditions, Commerce has construed the statute in a
manner that is contrary to law. Pursuant to the Supreme Court's
*Chevron* ruling, the Panel owes no deference to Department
interpretations of a statute where those interpretations do not reflect
a permissible construction of the statute.

There is another point to be made. In Lumber I, the Department commented
as follows:

> It is not the DOC's policy to use cross-border comparisons in
> establishing commercial benchmarks *because such comparisons fail to
> account for differences in comparative advantage between countries.*
> Furthermore, such comparisons would be particularly inappropriate in
> these investigations because of differences in such factors as species
> combination, density, quality, size, age, accessibility, terrain and
> climate..

48 Fed. Reg. at 24182 (emphasis added).

In other words, as noted in the Canadian Parties' brief, by attempting
to value Canadian timber at U.S. prices whether or not adjusted for
supposed market conditions, the Commerce methodology turns the law of
comparative advantage into a law of comparative disadvantage. No country
would negotiate a trade agreement with such an intended result.

In sum, the Panel finds that Commerce's determination with respect to
the use of cross-border benchmarks under the authority of Part
351.511(a)(2)(ii) of the Regulations is unsupported by substantial
evidence and is contrary to law. The Panel remands this determination to
Commerce for further analysis under the statute and regulations in light
of the Panel's decision.

In their briefs and in oral argument before the Panel, both the
Coalition and the Department suggested that an appropriate measure of
adequacy of remuneration would be "fair market value," or what the
sellers of timber would receive absent the involvement of the
government. Suffice it to say that these standards are not the law as
reflected in the statute, the regulations, or even in the Preamble which
speaks to actual market transactions as the preferred standard. The
Panel rejects this argument.

# **SPECIFICITY**

In order to find a countervailable subsidy there is another requirement
to be met, namely that the subsidy be specific within the meaning of
statute. The relevant statutory provision is as follows:

> In determining whether a subsidy ...is a specific subsidy, in law or
> in fact, to an enterprise or industry within the jurisdiction of the
> authority providing the subsidy, the following guidelines shall apply:
> . . .
>
> \(iii\) Where there are reasons to believe that a subsidy may be
> specific as a matter of fact, the subsidy is specific if one or more
> of the following factors exist:
>
> \(I\) The actual recipients of the subsidy, whether considered on an
> enterprise or industry basis are limited in number.
>
> \(II\) An enterprise or industry is a predominant user of the subsidy.
>
> \(III\) An enterprise or industry receives a disproportionately large
> amount of the subsidy.
>
> \(IV\) The manner in which the authority providing the subsidy has
> exercised discretion in the decision to grant the subsidy indicates
> that an enterprise or industry is favored over others.
>
> In evaluating the factors set forth in subclauses (I),(II), (III), and
> (IV), the administering authority shall take into account the extent
> of diversification of economic activities within the jurisdiction of
> the authority providing the subsidy, and the length of time during
> which the subsidy program has been in operation.

19 U.S.C. § 1677(5A)(D).

The Department found the provincial stumpage programs to be specific
under the statute, stating that stumpage programs are "... limited to
those companies and individuals specifically authorized to cut timber on
crown lands" and that \[t\]hese companies are pulp and paper mills and
the saw mills and the remanufacturers which are producing the subject
merchandise." Decision Memo at 52. Thus, according to Commerce, the
users of provincial stumpage programs are "limited in number" within the
meaning of 19 U.S.C. § 1677(5A)(D)(iii)(I).

Commerce argues that it is only required to undertake the specificity
test "as an initial screening mechanism to winnow out only those foreign
subsidies which truly are broadly available and widely used throughout
an economy." SAA to the URAA at 4242. It cites, as examples of subsidies
that are broadly available and widely used, roads, bridges, schools,
police and fire protection. In contrast, the Department points out that
the actual recipients of stumpage benefits are a group of wood products
industries, including saw, pulp, and paper mills-both primary mills and
remanufacturers.

The Department points out that in applying the statute it need not be
concerned about *why* the recipients are limited in number, but rather
it is only required to determine *whether* the actual recipients were
limited in number.

Commerce asserts that it has broad discretion to interpret the Act and
regulations. Because its *de facto* specificity findings are evidentiary
in nature, the Department's specificity finding must be upheld unless
the interpretation is precluded by the statute. Commerce also contends
that there is no record evidence that provincial stumpage tenures were
widely available to industries beyond the timber processing sector and,
taking into account the diversity of the Canadian economy, stumpage
programs are not broadly available or widely used.

The Canadian Joint Parties argue that: (1) Commerce is required to
conduct a case-specific inquiry into whether the stumpage programs are
provided to a specific class of users; (2) Commerce's conclusion that
stumpage programs are not broadly available and widely used is contrary
to law; (3) Commerce's determination that it need not consider which
industries actually use stumpage is contrary to law; and (4) Commerce's
conclusion ignores evidence that enterprises in more than 23 classes of
industries use stumpage programs and is therefore unsupported by
substantial evidence.

Of particular significance to the Canadian Joint Parties is that, as
noted in their brief, in prior lumber cases, the Department "... found
that the universe of stumpage users did *not* constitute a specific
group." In Lumber I, Commerce concluded that "... in view of its use by
wide-ranging and diverse industries, we determine that stumpage is not
provided to a "specific group of industries." 48 Fed. Reg. at 24167.

Likewise, the reviewing panel in Lumber III rejected the proposition
that the subsidy was specific because it was used by timber processing
industries, concluding that defining the users of the subsidy as a
"group of timber processing industries" was a "... circular (analysis)
... depending on the identification and labelling of the group of
stumpage users, rather than upon a reasoned analysis of the businesses
in which those users were engaged." FTA Panel Decision (December 17,
1993), at 35. The Canadian Parties argue that the facts have not changed
materially since the earlier cases.

Canada has placed upon the record studies that establish that at least
23 separate classes of industries that produce over 200 goods use
stumpage programs. As a result, the Canadian Parties take issue with the
Department's failure to examine the nature of the stumpage programs,
their use, the number of recipients who received the alleged benefits,
the number of products affected and the diversification of economic
activities in the provinces. In addition, they note that by standard
industrial classification, 23 classes of industry utilize stumpage
programs, and that the forest product sector was responsible for 2.3% of
Canada's gross domestic product.

It follows, according to the Canadian Joint Parties, that Commerce must
undertake an analysis to ascertain the actual recipients of the subsidy,
and it should not have looked at those companies or industries which did
not receive the alleged benefit. Further, in order to determine who
receives the benefit, one must first determine what industries are
represented. Since the term "industry" is not defined in the context of
the specificity test, resort should be had to the definition of
"industry" in 19 U.S.C. § 1677(4), which defines the term as "producers
as a whole of a domestic like product."

The Department's rejoinder is that none of this supports the notion that
the alleged subsidy is available beyond the timber industry, and that in
common understanding, the term "industry" should be taken to refer to
the general class of products, rather than to any precise end product.
It cites several decisions that indicate that subsidies may be *de
facto* specific even to an industry that is broadly defined.

Lastly, the Canadian Parties argue that Commerce was mistaken in its
conclusion that the users of stumpage programs are limited to a "group"
of wood product industries, as such a "group" does not share common
characteristics.

The argument posed by the Canadian Joint Parties with respect to
Commerce's findings in the prior Lumber cases is not persuasive. In
Lumber I, Commerce found the Canadian stumpage program not to be
specific, based on the "inherent characteristics" test and under a prior
statutory regime that was subsequently amended by Congress in 1988. The
"inherent characteristics" test was rejected by the CIT in *Cabot Corp.
v. United States*, 620 F. Supp. 722 (CIT 1985) and was then abandoned by
Commerce.

Commerce's determination in Lumber III was based on the 1988 statute and
relied on a factor contained in the 1989 Proposed Regulations. The Panel
in Lumber III ruled that Commerce could not base its decision solely on
evidence of the number of industries represented by program recipients,
but that it must consider other factors. Following the Lumber III
decision, the URAA amended the statute to provide the language set forth
above. The CVD implementing regulations to the URAA clarify that in
"determining whether a subsidy is de facto specific, the Secretary will
examine the factors contained in section 771(5A)(D)(iii) of the Act
sequentially in order of their appearance." 19 C.F.R. §351.502(a). The
regulations further provide that "\[i\]f a single factor warrants a
finding of specificity, the Secretary will not undertake further
analysis." Id.

The SAA to the URAA states, in reference to the definition of
specificity in Paragraph 5A of Section 1677, that Commerce is to seek
and consider information relevant to all of the factors listed and that
the weight to be accorded them will vary from case to case. The SAA adds
that ". . . where the number of enterprises or industries using a
subsidy is not large, the first factor alone \[where access to the
subsidy is 'expressly' limited 'to an enterprise or industry'\] would
justify a finding of specificity . . .. On the other hand, where the
number of users of a subsidy is very large, the predominant use and
disproportionality factors would have to be assessed. . . . Commerce
shall find de facto specificity if one or more of the factors exists."
The URAA clarified that Commerce may base its decision only on the first
factor, *i.e.*, that the number of industries or groups of industries is
limited.

The statute and regulations are clear that, in making its sequential
analysis, the Department need only find one of the four factors listed
in § 1677(5A)(D)(iii). The Panel can find no error in Commerce's
reasoning that the recipients of provincial stumpage were "limited in
number."

Even if the Panel accepts that there are 23 classes of industries, the
number of recipients can still reasonably be considered "limited." (*See
Bethlehem Steel Corp. v. United States*, 223 F. Supp. 2d 1372 (CIT
2002), where Commerce concluded that because 68 of 105 requests for
tariff reductions in one period and 51 of 107 requests in another were
approved, the recipients of tariff reductions were limited in number.)

Finally, Part 351.502(b) of the Regulations states that "\[i\]n
determining whether a subsidy is being provided to a "group" of ...
industries ... the Secretary is not required to determine whether there
are shared characteristics among the ... industries \...." This is
consistent with the Department's approach of examining the universe of
users, as required by the statute, rather than the diversity of products
made with the allegedly subsidized goods to determine if there is
specificity. The Panel notes that the concept of a "steel industry" has
been accepted by the courts (*see, e.g., Bethlehem Steel*), which
produces hundreds of different items and may involve many types of
sub-classes. Thus, consistent with the law and Regulations, the Panel
finds that Commerce need not consider whether there are shared
characteristics among those that receive the alleged benefit.

Under the standard of review which applies to this review, the Panel
finds that the Department's specificity determination is essentially of
a factual nature, and must be afforded deference. The Panel also finds
that the determination is not precluded by the statute and is supported
by substantial evidence.

# **SCOPE DETERMINATIONS AND "CLASS OR KIND" ISSUES**

The countervailing duty statute gives the Department the responsibility
as "administering agency" to determine the scope of a CVD order in terms
of the "class or kind" of imported merchandise to be included in the
order. 19 U.S.C. § 1671(a)(1). The antidumping statute similarly refers
to the "class or kind" of imported merchandise in giving the Department
the responsibility to determine the scope of an antidumping order. 19
U.S.C. § 1673(1). Although neither statute defines the term "class or
kind" and that term is not defined in the Department's regulations, the
general legal framework for the Department's scope determinations seems
straightforward. As was recently stated by the Federal Circuit in
*Duferco Steel, Inc. v. United States*, 296 F.3d 1087, 1096 (Fed. Cir.
2002), which addressed both antidumping and CVD petitions, where an
investigation is commenced by petition, the "purpose of the petition is
to propose an investigation" whereas one "purpose of the investigation
is to determine what merchandise should be included in the final order."
Hence, said the Court, "\[i\]t is the responsibility of the agency, not
those who initiated the proceedings \[the "petitioners"\], to determine
the scope of the final orders." Id., at 1097. Nevertheless the
application of that general legal framework has given rise to numerous
issues in the present proceeding as in other antidumping and
countervailing duty proceedings.

We address the following issues raised by the Department's scope
determinations: (A) the Complainants'[^13] claim of violation of due
process in the Department's consideration of scope issues; (B) the role
of the petition and the Department's discretion in making scope
determinations; (C) the statutory requirement of industry support for
each "class or kind" of merchandise included in the petition; (D) the
scope of Panel review of the Department's scope and "class or kind"
determinations; (E) whether evidence in the record supports the
Department's rejection of separate "class or kind" status for contested
species and contested products, and (F) whether exclusion is warranted
for two other products.

## **A. Due Process in the Department's Consideration of Scope Issues** {#a.-due-process-in-the-departments-consideration-of-scope-issues .unnumbered}

In this proceeding the Department chose to take up issues relating to
the scope of the investigation jointly with the same issues raised in
the concurrent antidumping proceeding. The Department noted in its
Preliminary Determination that it had received scope requests of three
kinds relating to some 50 products: scope clarification requests, scope
exclusion requests, and requests for determinations of separate classes
or kinds. *See Notice of Preliminary Affirmative Countervailing Duty
Determination: Certain Softwood Lumber Products from Canada*, 66 Fed.
Reg. at 43186, 43187 (August 17, 2001). Substantially the same scope
issues were raised in the antidumping proceeding. At that time, August
17, 2001, the Department excluded some products from the scope of the
CVD investigation, but made no findings on requests for separate class
or kind treatment. Thereafter, on March 12, 2002, the Department issued
a preliminary determination on scope issues and called for briefs to be
submitted by March 15, with rebuttal briefs due March 18, and held a
hearing on scope issues on March 19, 2002.

Complainants charge that the Department's truncated process for final
determination of CVD scope issues, which they term the "nine days in
March" amounts to a denial of due process. The Department responds that
it had requested comments on scope issues early in the investigation and
specifically invited additional comments in the Preliminary
Determination issued August 17, 2001. The Department's argument is as
follows:

> \[By means of the submission of such comments,\] all interested
> parties had notice of the alternatives the Department was considering
> for the final determination. That is, the record contained requests by
> some parties to consider certain products as being outside of the
> scope of the investigation. The record also contained requests by some
> parties to classify certain products as a different "class or kind" of
> merchandise. In respect to both types of requests, the record also
> contained the petitioners' comments that a number of these requests be
> denied. Therefore, because these alternatives were on the record, the
> Department was not required to reach a full preliminary determination
> on all scope issues. Rather, because the parties had notice of the
> alternatives being considered, and could address these alternatives in
> their case briefs, the Department provided the parties with sufficient
> notice of these issues under the statutory and regulatory regime.
> \[Department's Response Brief, vol. V, at K-64-65.\]

The Department describes the briefing and hearing scheduled for the
"nine days in March" as discretionary and extraordinary, as it was not
obligated by statute or regulation to request these written arguments or
hold a specific hearing specifically addressing only scope arguments.
The Department argues that the scope issues were adequately addressed by
the opportunity for briefing and the hearing which was held.

The Panel is not persuaded that the Complainants have been denied due
process on consideration of scope issues. Although it would certainly
have been more reasonable, and perhaps more appropriate, to have allowed
for a more leisurely schedule for written comments and for the scope
issue hearing, there seem to the Panel to have been no surprises in the
content or in the outcome of the scope proceeding. Complainants surely
had ample opportunity to submit scope information and arguments in the
period following the August 17, 2001 Preliminary Determination, and
there is no reason to believe that Complainants, or their experts, were
to any significant degree surprised or disadvantaged by the scope
arguments put forward either in writing or at the scope issue hearing
held March 19, 2002.

## **B. The Role of the Petition and the Department's Discretion in Making Scope Determinations: Defining "Class or Kind"** {#b.-the-role-of-the-petition-and-the-departments-discretion-in-making-scope-determinations-defining-class-or-kind .unnumbered}

The threshold substantive issue for the Panel is whether the Department
properly determined that this investigation involves but a single class
or kind of merchandise. The beginning point in this analysis is not in
serious dispute: The Department has the statutory responsibility to
determine the class or kind of merchandise subject to an investigation.
*See* *Duferco Steel*, 296 F.3d at 1097 ("\[i\]t is the responsibility
of \[the Department\], not those who initiated the proceedings \[the
"petitioners"\], to determine the scope of the final orders." *See also
Mitsubishi Elec. Corp. v. United States*, 700 F. Supp. 538, 555 (CIT
1988), *aff'd* 898 F.2d 1577 (Fed. Cir. 1990), and *Torrington Co. v.
United States*, 745 F. Supp. 718, 720-21 (CIT 1990), *aff'd* 938 F.2d
1276 (Fed. Cir. 1991). Indeed, the Complainants "do not challenge
Commerce's definition of scope." Rather the Complainants frame the issue
for Panel review as "whether there are multiple classes or kinds of
merchandise within the investigation's scope, as Commerce defined that
scope". Ibid.

In determining the scope of the investigation, the Department is guided
by, but is not bound by the allegations set forth in the petition. *See*
*Duferco Steel*, 296 F.3d at 1096. As in many other cases, the Court in
*Mitsubishi Electric,* 700 F. Supp. at 555, linked the Department's
authority to the terms of the petition: "The ITA has the authority to
define and/or clarify what constitutes the subject merchandise to be
investigated as set forth in the petition containing the intent of
petitioner expressed in as specific and definite terms, descriptions,
and language as reasonably expected of petitioner\...." Thus, although
the role of the petition is not specified in the statute, the
Department's practice in determining the scope of the final CVD order is
to "reflect\[\] the intent of the petition". *See* *Minebea Co. v.
United States*, 782 F. Supp. 117, 120 (CIT 1992). Indeed, reviewing
courts have said that the Department may give "ample deference" to the
scope as described in the petition by the petitioners. *Torrington Co.
v. U.S.*, 786 F.Supp. 1021, 1026 (CIT 1992), cited with approval in
*Sundstrand Corp. v. U.S.*, 890 F.Supp. 1100, 1103 (CIT 1995).

Nevertheless the Department's definition of the scope of the CVD
investigation and order presents both the "class or kind" issue and the
issue of the extent to which the Department's determination of "class or
kind" is subject to judicial review. As noted above, although the CVD
statute refers to the scope of a CVD proceedings in terms of the "class
or kind" of imported merchandise to be included in the CVD order, the
statutory term "class or kind" is not defined either in the statute or
in the Department's regulations. *See* 19 U.S.C. § 1671(a)(1). Hence,
according to the Department, the matter of "class or kind" is left to
the discretion of the Department, and which is guided by the scope as
set forth in the petition, and the extent of the harm alleged by the
petitioners.

Thus, says the Department:

> \[T\]he scope of an order, as defined by the Department, may appear
> narrow or broad, depending upon the harm alleged by the Domestic
> Industry. This has led to separate orders \[for separate classes or
> kinds of merchandise\], for example, for roasted and unroasted
> pistachios from Iran, on one hand, and \[to a single\] order covering
> a large array of textiles from Argentina, on the other. See, e.g.,
> *Final Affirmative Countervailing Duty Determination and
> Countervailing Duty Order; Roasted In-Shell Pistachios from Iran,* 51
> Fed. Reg. 35679 (Oct. 7, 1986); *Final Affirmative Countervailing Duty
> Determination and Countervailing Duty Order; In-Shell Pistachios from
> Iran*; 51 Fed. Reg. 8344 (March 11, 1986); *Certain Textiles and
> Textile Products from Argentina; Final Countervailing Duty
> Determination*, 43 Fed Reg. 53421 (Nov. 16, 1978). \[DOC Response
> Brief, vol. V, p. K-56.\]

The Department explains that if, for example, the "domestic
fruit-canning industry" were to claim harm by imports of various forms
of fruit, the Department could include in the CVD order both apples and
oranges. But, where the "domestic fresh apple industry" claims injury
resulting from imported apples, the CVD order would include only apples.
.

In the present proceeding the Department relied upon the petition in
determining the overall scope of the CVD investigation as addressing
"various forms of softwood lumber from Canada" as a single "class or
kind" of imported merchandise. While the scope of the harm alleged in
the petition does not necessarily bind the Department to the concept of
"class or kind" embodied in the petition, courts have affirmed that the
Department's discretion extends to determining the scope of the
investigation and order based upon the allegations of harm in the
petition. Accordingly the fact that the Department found but a single
"class or kind" of merchandise across a large spectrum of softwood
lumber products is not in itself a basis for overruling the Department's
determination.

## **C. The Statutory Requirement of Industry Support for Each "Class or Kind" of Merchandise Included in the Petition** {#c.-the-statutory-requirement-of-industry-support-for-each-class-or-kind-of-merchandise-included-in-the-petition .unnumbered}

The examples of scope determinations cited in the previous section point
to a link between "class or kind" issues and the degree of industry
support needed for a CVD petition. The statute requires that a CVD
petition be filed by an "interested party" which the statute defines in
terms of producers of "a domestic like product". *See* 19 U.S.C. §
1671a(b)(1), referring to 19 U.S.C. § 1677(9)(C), (D), (E), (F) & (G).
Complainants argue that "domestic like product" must be defined
separately for each class or kind of merchandise included in the
petition. Hence, according to Complainants, to qualify a petition under
19 U.S.C. § 1677(9)(E), the petitioners (here the Coalition) must show
industry support for each class or kind of merchandise. Thus the
petitioners must show that "a majority of \[its\] members manufacture,
produce or wholesale a domestic like product" in respect of each class
or kind of merchandise included in the petition.

The Department observes that the issue of industry support will arise
only if the Panel finds that separate classes or kinds of merchandise
are in fact included in the investigation. Since the Department, which
found only a single class or kind involved in this proceeding, did not
consider the issue of industry support with respect to the asserted
separate classes or kinds of merchandise, such a finding would require
the Panel to remand to the Department "for further consideration of the
legal and factual arguments" involved in the industry support
determination.

The Panel agrees with the Department's analysis. Accordingly the Panel
need not address the relationship between "class or kind" and industry
support. Should the Panel find that this proceeding involves more than
the single class or kind of imported merchandise, the Panel would remand
the issue of industry support for reconsideration by the Department.

## **D. The Panel's Standard of Review of the Department's Scope and "Class or Kind" Determinations**  {#d.-the-panels-standard-of-review-of-the-departments-scope-and-class-or-kind-determinations .unnumbered}

According to the Department, where there is no "clear consensus" in the
evidence on the record "as to the particular merchandise which should or
should not be covered by the scope \[of the proceeding\], a court must
affirm the Department's ultimate definition of the scope, as long as its
determination is reasonably supported by the record." DOC Response Brief
at K-4. In the present investigation, the Department found that "no
product subject to the order warranted separate class or kind
treatment."

The Department states that it uses the following procedure in
determining whether to include a particular product within the scope of
a CVD investigation and order:

> \[T\]he Department often considers whether or not individual
> merchandise subject to the order *differs from other subject
> merchandise to such a degree, that separate class or kind treatment is
> warranted.* In determining *if products are so distinct and unique* as
> to grant such treatment for countervailing duty purposes, the
> *Department compares the merchandise with all other merchandise
> covered by the scope*. \[DOC Response Brief at K-5 (emphasis
> supplied).\]

In their challenge to the Department's denial of separate "class or
kind" treatment for particular products, Complainants assert that if a
petition identifies a single class of goods that "in reality" includes
more than one class or kind, Commerce is required to subdivide the
merchandise into multiple classes or kinds. Only in this way can the
investigation properly account for each class or kind, including those
which are found not to be properly identified within the Petition. The
issue here is not what to do when a petition classifies as a single
class or kind merchandise that "*in reality*" constitutes more than one
class or kind, it is by what standard the Department is to decide
whether a petition includes one or more than one "class or kind" of
imported merchandise.

Where the Department must address claims that multiple classes or kinds
of merchandise are at issue, Complainants cite *Diversified Products
Corp. v. U.S.,* 572 F. Supp. 883 (CIT 1983), and argue that the
Department is required to apply the *Diversified Products* criteria to
determine if a contested item is a separate class or kind of
merchandise.

*Diversified Products* involved an administrative review of an
antidumping order which the Department construed as applicable to a
product that had not yet been developed at the time of the antidumping
investigation. In determining that the newly developed product belonged
to the same class or kind of merchandise that was included in the final
antidumping order, the Department used the following five broad
criteria: "the general physical characteristics of the merchandise, the
expectation of the ultimate purchasers, the channels of trade in which
the merchandise moves, the ultimate use of the merchandise, and cost."
572 F.Supp. at 889. Reviewing the Department's application of these
criteria, the Court upheld the Department's "class or kind"
determination, finding that it was supported by substantial evidence on
the record.

The Department points out that *Diversified Products* and its progeny
address a "scope ruling" made by the Department in an administrative
review of a final CVD or antidumping order -- and not an initial scope
determination made by the Department in the course of an investigation.
Unlike the initial scope determination, the Department's "scope ruling"
is governed by § 351.225 of the Department's regulations, which provides
a procedure by which parties may request what the Department calls a
"scope ruling" to determine whether a product is covered by an existing
CVD or antidumping order. Subparagraph (k)(1) of § 351.225 directs the
Department to base such "scope rulings" on "\[t\]he descriptions of the
merchandise contained in the petition, the initial investigation, and
the determinations" of the Department. Where those criteria "are not
dispositive," subparagraph (k)(2) of §351.225 directs the Department to
consider the following five criteria:

> \(i\) The physical characteristics of the product;
>
> \(ii\) The expectations of the ultimate purchasers;
>
> \(iii\) The ultimate use of the product;
>
> \(iv\) The channels of trade in which the product is sold; and

\(v\) The manner in which the product is advertised and displayed.

The regulation's "scope rulings" criteria are identical to the
*Diversified Products* criteria, except that the "manner in which the
product is advertised and displayed" is substituted for the cost of the
product.

Since the present proceeding reviews the Department's initial scope
determination and its refusal to exclude certain products from the scope
of the investigation and CVD order, neither the *Diversified Products*
caselaw nor the Department's regulation essentially incorporating that
caselaw applies of its own force.

Nevertheless Complainants assert that the Department "*must apply"* the
*Diversified Products* criteria to determine whether an item is a
separate class or kind of merchandise. Without explicitly abandoning the
"*must apply*" proposition of their Case Brief, Complainants' Reply
Brief cites *Torrington*, 745 F.Supp. at 720-29, for the proposition
that "the *Diversified Products* factors *are applicable* in original
investigations". Complainants' Reply Brief at 4 (emphasis supplied).
While *Torrington* certainly endorses the Department's use of the
*Diversified Products* factors to address class or kind issues raised in
an investigation, *see* *Mitsubishi Electric*, cited in *Torrington*,
718 F.Supp. at 723, *Torrington* does not support the proposition that
the Department "*must apply* the *Diversified Products* criteria" in
making "class or kind" determinations in an original investigation.
Indeed, the Panel has found no authority for that proposition. Hence,
although in the exercise of its discretion the Department may choose to
apply the *Diversified Products* criteria to "class or kind"
determinations in a CVD investigation, the Panel holds that the
Department is not bound by law to do so.

In the present case, although the Department's scope determinations were
not "scope rulings" subject to § 351.225 of the Department's
regulations, the Department "recognize\[ed\] the reasonableness of the
*Diversified Products* factors" and chose to use those factors "to guide
its determination of whether a particular product should be separated,
for purposes of the final order, as a separate 'class or kind.'" In
making such determinations, the Department states that it compared the
contested softwood lumber products "with other merchandise subject to
the order, and although it found each product to contain certain unique
qualities, *none of these products differed to such a degree* from other
merchandise subject to the order *to warrant treatment as a separate
class or kind* under the order." \[DOC Response Brief at K-8 & 10-11
(emphasis supplied).\]

Complainants object to the Department's analysis on grounds of "law and
logic". Complainants assert, first, that the way in which the Department
applied the *Diversified Products* criteria is inconsistent with
*Diversified Products* jurisprudence, and, second, that "logic" dictates
that the Department must either "compare every product to every other
product under the \[*Diversified Products*\] criteria (which is
impractical)", or must "*compare every challenged product to a
benchmark* that represents the same set of core products covered by the
scope" of the investigation. Complainants' Reply Brief at 5 (emphasis
supplied).

On the first of these two arguments, Complainants cite a "scope ruling"
case, *Bohler-Uddeholm Corp. v. U.S.*, 978 F. Supp. 1176, 1183 (CIT
1997), for the proposition that "a proper *Diversified Products*
analysis would compare the products in question to the *entire class or
kind of merchandise*" covered by the final order (emphasis supplied by
Complainants). Complainants' Reply Brief at 5. The passage quoted from
*Bohler-Uddeholm* may accurately state the *Diversified Products* "scope
ruling" methodology. However, the issue here is whether Complainants
have established that the Department is required by law to apply the
*Diversified Products* methodology to the initial scope determination at
issue in the present proceeding. Inasmuch as the Panel has held that
that the law does not require the Department to apply the *Diversified
Products* criteria to initial "class or kind" determinations in a CVD
investigation, the fact that in this proceeding the Department may have
departed from the *Diversified Products* methodology in making the
initial class or kind determination does not invalidate that
determination.

The Complainants' second argument is that the "logic" of class or kind
determinations requires the Department to "*compare every challenged
product to a benchmark".* Whether or not the Complainants' "benchmark"
argument is as logical or persuasive as Complainants contend, their
argument is one that the Panel cannot accept. As the Panel observed at
the outset of this section of the opinion, although the CVD statute
refers to the scope of a CVD order in terms of the "class or kind" of
imported merchandise, neither the statute nor the Department's
regulations defines the term "class or kind". Since the Department has
no statutory or other legal responsibility to apply a "benchmark"
analysis to the determination of "class or kind" issues, the Panel
considers that the Department has discretion to determine how to apply
the "class or kind" concept to carry out the intent of the statute in
the context of the facts of each case.

To summarize the dispute as to the methodology for making initial "class
or kind" determinations, Complainants argue that the fit of any product
within the scope of the final investigation and order must be tested by
the *Diversified Products* criteria and will be subject to judicial
review under the *Diversified Products* jurisprudence. In contrast, the
Department's focus is on the "*degree*" to which a contested product
"*differs from other subject merchandise*" and whether the contested
product is "*so distinct and unique*" as to warrant separate "class or
kind" treatment. *See* DOC Response Brief at K-5 (emphasis supplied).
And, in determining whether contested products are "*distinct and
unique*", the Department examines all other merchandise covered by the
investigation.

In this investigation, the Department, guided by the petition, gave
broad scope to the CVD investigation and order as embracing but a single
"class or kind" of imported merchandise, namely "various forms of
softwood lumber from Canada". The Department's methodology for initial
"class or kind" determinations indicates that the Department treated
this determination as a matter of degree. As explained by the
Department, the Department's task is to compare the contested product
with all other merchandise covered by the CVD investigation to determine
whether the contested product is "so distinct and unique" as to differ
from other subject merchandise -- in which case the contested product
would be given separate "class or kind" treatment.

The Panel recognizes that, owing to the limited scope of judicial review
of expert agency decisions, the Panel is not authorized to second-guess
the Department's expert judgment on such matters of degree. The Panel
must therefore affirm the Department's reasonable interpretations of the
governing statute, and, in this instance, the methodology chosen by the
Department to give effect to the "class or kind" provision of the
statute. The Panel must also affirm factual determinations made by the
Department pursuant to that methodology unless such determinations are
"unsupported by substantial evidence on the record." 19 U.S.C. §
1516a(b)(1)(B). The Panel may not reweigh the evidence or substitute its
own evaluation of the evidence for that made by the Department. \[See
the section on Standard of Review in this opinion.\] Thus, although we
briefly review the record evidence as to the two contested species and
three contested products in the next section, our review is limited to
assessing whether in those instances the Department's denial of separate
"class or kind" status is reasonably supported by evidence on the
record.

## **E. Whether Evidence on the Record Supports the Department's Rejection of Separate "Class or Kind" Status for Contested Species and Contested Products**  {#e.-whether-evidence-on-the-record-supports-the-departments-rejection-of-separate-class-or-kind-status-for-contested-species-and-contested-products .unnumbered}

As indicated above, review has been sought in respect of two species,
namely Western Red Cedar and Eastern White Pine, and three products that
the Department held were covered by the CVD investigation and order:
Finger-Jointed Flangestock, Square End Bed Frame Components, and
Box-Spring "Kits" that are not exported to the United States in
individual packages. With respect to the two contested species and the
first two of the four contested products, that is, Western Red Cedar,
Eastern White Pine, Finger-Jointed Flangestock, and Square End Bed Frame
Components, Complainants argue that each species or product is a
separate class or kind of merchandise and hence falls outside the scope
of the "softwood lumber products" investigation.

In view of the Panel's findings, the Panel's review of record support
for the contested scope determinations is based on the Department's
approach to scope issues. Accordingly our inquiry in each case is
whether substantial evidence on the record supports the Department's
determination that, based on comparisons "*with all other merchandise
covered by the scope*" of the CVD investigation, the contested product
is not "*so distinct and unique*" as to warrant separate "class or kind"
treatment.

With respect to the contested species and the products at issue here,
the Department either provided a detailed analysis under each
*Diversified Products* factor or addressed only the "factors which
arguably distinguished that product from other merchandise covered by
the scope of the investigation." And, in each case, the Department found
that although each species or product had properties unique to its
species or product type, each was still softwood lumber, and was similar
enough under the *Diversified Products* factors with the other scope
merchandise to be included in one class or kind of merchandise.

### Western Red Cedar and Eastern White Pine

###  {#section .unnumbered}

With respect to Western Red Cedar and Eastern White Pine, the Department
analyzed all five *Diversified Products* factors. Although extensive
counter arguments have been made by Complainants, those arguments cannot
overcome the deference owed to the Department on findings of fact and
the application of its methodology for determining whether a contested
product is "so distinct and unique" as to differ from other subject
merchandise. For example, the Department found that many physical
characteristics and end-uses invoked to distinguish these two species
from other species of softwood lumber were in fact shared in varying
degrees with other softwood lumber species. Such characteristics include
attractive appearance, light weight, and natural durability for Western
Red Cedar, and structural strength and ability to take stains, paints,
etc, for Eastern White Pine; and end uses include high-end use for
shingles, paneling, and siding for Western Red Cedar, and millwork,
paneling, and siding for Eastern White Pine. The Department made similar
analyses of characteristics shared between the two contested species and
other species of softwood lumber across the remaining *Diversified
Products* factors, that is, expectations of the purchaser, channels of
trade, and manner of advertising.

Ultimately the question for the Panel is whether substantial evidence on
the record supports the Department's determination to decline to accord
separate class or kind status to Western Red Cedar and Eastern White
Pine. The Department's determination need be supported only by
"substantial evidence", which does not refer either to the weight of the
evidence or to the preponderance of the evidence; and the Panel is not
entitled to reweigh the evidence in reaching its conclusion. By this
standard and in light of the Department's methodology for making class
or kind determinations, the Panel considers that substantial evidence on
the record supports the Department's determination that neither Western
Red Cedar nor Eastern White Pine is "so distinct and unique" as to
warrant separate "class or kind" treatment. Hence the Panel affirms the
Department's determination with respect to Western Red Cedar and Eastern
White Pine.

### 2. Finger-Jointed Flangestock {#finger-jointed-flangestock .unnumbered}

Turning to Finger-Jointed Flangestock (hereinafter "FJF"), it is common
ground between the parties that FJF "*is* a softwood lumber product"
from Canada. DOC Response Brief, at K-30 (emphasis in the original).
Although FJF is an "engineered wood product" with "physical
characteristics which make the product unique", the Department
determined that FJF "was not so unique as to treat it as a different
class or kind of merchandise". DOC Response Brief, at K-30. The
Department states that although it had reached this judgment after
analysis under all five *Diversified Products* factors, it had explained
the judgment in terms of some, but not all, of the *Diversified
Products* factors. The Department states that it "determined that the
merchandise shared common features with other softwood lumber products
and therefore only addressed those *Diversified Products* factors *which
arguably differentiated this product as unique* for purposes of class or
kind treatment." Id. at K-33 (emphasis supplied).

Complainants chiefly rely on two arguments in urging that the
Department's decision to deny separate "class or kind" status to FJF is
contrary to law.

First, Complainants argue that the law requires the Department to apply
the complete *Diversified Products* analysis in making class or kind
determinations in an original investigation. As shown above, the Panel
has rejected this argument on the ground that neither the statute nor
the Department's regulations establish a legal responsibility for the
Department to use the *Diversified Products* analysis in an original
investigation. Hence the Department has discretion to invoke
*Diversified Products* analysis as a guide to its determination, as it
did in the present case.

Second, pointing to the rather brief explanation of the Department's FJF
"class or kind" determination, i.e., the two paragraphs in the Decision
Memo at 165-66. Complainants argue that the determination is not
supported by substantial evidence on the record and that the Department
failed to provide a clear "path of reasoning which led to the final
outcome." *See* *Wheatland Tube Co. v. U.S.*, 161 F.3d 1365, 1369-70
(Fed Cir. 1998).

The Panel notes, however, that there is record evidence of the
uniqueness of FJF, and that the Department's "path of reasoning" shows
very little more than that FJF is a "softwood lumber product from
Canada" having some *Diversified Product* features in common with other
softwood lumber products. Neither element is contested here. What is at
issue is whether FJF is "so unique" as to warrant separate "class or
kind" treatment in this proceeding.

While the Department acknowledges that the "physical characteristics" of
FJF "make the product unique", it asserts that these physical
characteristics are not "in of themselves (sic) sufficient to warrant
separate class or kind treatment". DOC Response Brief at K-30-31. In the
Decision Memo at 165, PR Doc. 863, the Department characterized FJF as
"another lumber product in the *broad field of lumber products with
distinct characteristics and end uses*" (emphasis supplied). The
Department also said: "The particular construction, strength rating,
dimension and end-use of flanges cannot be the sole basis for their
treatment as a separate class or kind." Ibid. These statements seem to
mean that while the Department accepts that FJF has "unique" physical
characteristics and end-uses, a showing of a product's unique physical
characteristics and/or end-uses may not make the product sufficiently
"unique" for separate "class or kind" treatment.

The Department further explained that "FJF's unique length, channel of
trade and manner of advertising potentially differentiated this softwood
lumber product from other products under the scope." DOC Response Brief
at K-33. As to the latter two factors, the Department "recognized" that
it had found that the FJF producer Tembec was able to identify "a
distinct channel of trade (sales to I-beam producers)" and "a
\[distinct\] manner of advertising (none since it sells all of its
flange stock to I-beam producers)", but it "found that this channel and
manner of advertising were not so distinct from 'other lumber specialty
products'." Id. at K-31, quoting from Comment 52, PR Doc. 936. This
refers to the Decision Memo where the Department said: "\[T\]his channel
of trade and this manner of advertising, distinct as they are from most
dimension lumber, are not so distinct from those of other lumber
specialty products." Decision Memo at 165. This seems to mean that a
showing of a product's merely "distinct" channel of trade and/or
advertising will not make the product sufficiently "unique" for separate
"class or kind" treatment where other subject merchandise shares similar
channels of trade and/or advertising.

Putting these statements together as indicating the Department's "path
of reasoning", it seems that a showing of any combination of a product's
"distinct" and/or "unique" physical characteristics, end-uses, channels
of trade, and/or advertising may not make the product sufficiently
"unique" for separate "class or kind" treatment where any other subject
merchandise shares one or more similar characteristics. Nothing is said
about the expectations of purchasers, which is the remaining
*Diversified Products* factor, but, as the Department has said, while it
looks to *Diversified Products* for guidance, it is not obligated to
address every *Diversified Products* factor in an original scope
determination.

On the present record the Panel is able to discern the following "path
of reasoning": First, FJF is undeniably "softwood lumber from Canada".
Second, whereas the physical characteristics and end-uses of FJF are
"unique", FJF channels of trade and advertising are merely "distinct" in
that these channels also exist for other forms of softwood lumber. We
are not clear as to when an "unique" characteristic of a softwood lumber
product will be considered by the Department to be sufficiently unique
to warrant separate "class or kind" treatment. However, on the final
step of evaluating the uniqueness of FJF, the Department appears to
consider that evidence showing that channels of trade and advertising
similar to those used for FJF are used for other forms of softwood
lumber is sufficient to establish that FJF is not "so unique" as to
warrant separate "class or kind" treatment.

In a broad scope investigation (such as softwood lumber), the
Department's reasoning seems to make it virtually impossible for any
specialty product (like FJF) to receive separate "class or kind"
treatment. Although (like FJF) the specialty product may be considered
"unique" by the Department in respect of physical characteristics and
end-uses, and (like FJF) the product is supplied directly to the
end-user and therefore not advertised, the product will not qualify for
separate "class or kind" treatment. This will be true whenever, as here,
the investigation includes a broad array of specialty products some of
which (like FJF) will naturally be supplied directly to the end-user and
not advertised. This was essentially acknowledged by the Department in
the Decision Memo, at 165, in that the Department characterized FJF as
"another lumber product in the broad field of lumber products with
distinct characteristics and end uses", but rejected separate "class or
kind" treatment since other softwood lumber products use the same
channels of trade and advertising.

Nevertheless the Panel considers that the Department has discretion to
adopt such a methodology in its interpretation of the "class or kind"
provision of the CVD statute. The Department is entitled to include in
"the broad field of \[softwood\] lumber products" such specialty
products as Finger-Jointed Flangestock, and to choose to be guided by
*Diversified Products* factors in "class or kind" determinations. Hence
the only question for Panel review is whether substantial evidence on
the record supports the Department's determination that Finger-Jointed
Flangestock is not "so distinct and unique" as to warrant separate
"class or kind" treatment. Since sufficient record evidence supports the
Department's finding that Finger-Jointed Flangestock shares common
features (channels of trade and manner of advertising) with other
softwood lumber products, the Panel affirms the Department's
determination that Finger-Jointed Flangestock does not warrant treatment
as a separate class or kind of merchandise.

### 3. Square End Bed Frame Components and Box-Spring Bed Frame Kits {#square-end-bed-frame-components-and-box-spring-bed-frame-kits .unnumbered}

Separate class or kind treatment for Square End Bed Frame Components
(hereinafter "SEBF Components") presents much the same issue as
Finger-Jointed Flangestock. SEBF Components are undeniably "softwood
lumber products from Canada", and, whereas the physical characteristics
and end-uses of SEBF Components may be "unique", SEBF Component channels
of trade and advertising are merely "distinct" in that these channels
also exist for other forms of softwood lumber. For the reasons stated by
the Panel in the preceding paragraph with respect to the "class or kind"
treatment of Finger-Jointed Flangestock, the Panel considers that
substantial evidence on the record supports the Department's
determination that SEBF Components are not entitled to separate "class
or kind" treatment.

There is, however, one complicating factor: SEBF Components are
"extremely similar" to Radius End Bed Frame Components (hereinafter
"REBF Components"), a softwood lumber product that was excluded from the
scope of the investigation with the support of the petitioners.

Petitioners specifically identified SEBF Components as within the scope
of the petition, but agreed to the exclusion of REBF Components because,
whereas SEBF Components "cannot easily be distinguished from other
softwood lumber products", REBF Components "can visibly be identified by
the unique 'radius cuts' on both ends". DOC Response Brief at K-42,
citing Comment 52, PR Doc. 936. Complainants' object to the disparate
treatment of SEBF Components (included in the investigation) and REBF
Components (excluded from the investigation):

> Square End Bed Frame Components necessarily must belong to the same
> "class or kind" of merchandise as excluded Radius End Bed Frame
> Components. Examination of the *Diversified Products* criteria reveals
> that Square End and Radius End Bed Frame Components are *exactly* the
> same under each of the *Diversified Products* factors, except for the
> obvious fact that the ends of the Radius End components are rounded.
> The radius cut corners on the ends of some bed frame components but
> not others hardly suffice to distinguish the two sets of components.
> ... Square End and Radius End Bed Frame Components are not sold or
> marketed as different articles of commerce, or for different uses, or
> to different users, or through different channels of trade.
> \[Complainants' Case Brief at 71.\]

The Department agreed that "SEBF Components and REBF Components are the
same class or kind of merchandise", but argues that this "does not mean
that SEBF Components should be included in the exclusion from the order"
since:

> It is within the discretion of the Department to exclude products
> which would otherwise be covered by the scope of an investigation. ...
> There is no statutory, regulatory or other legal authority which has
> ever required the Department to broaden an exclusion, because it
> determined that other products were within the same "class or kind" as
> that exclusion. \[DOC Response Brief at K-43.\]

The Panel does not consider that the Department's exclusion of REBF
Components would necessarily require a similar exclusion for SEBF
Components.

Complainants also objected to the Department's treatment of box-spring
bed frame kits. As proposed by the petitioners, the Department
determined that box-spring frame kits should be excluded from the order,
but only if the kits were "individually packaged". Complainants
objected, arguing that "the exclusion should be expanded to include
'kits imported in bulk form' because 'individual bundling' is neither
common in the industry, nor economical." DOC Response Brief at K-38
(citing record documents). The Customs Service confirmed that the
industry-wide practice is "to ship identical bed-frame components
bundled together, not in kits." Id. at K-39. But Customs also said "that
it would be 'problematic to administer and enforce' any exclusion
involving kits, whether or not individually bundled, because no HTS
classification number recognizes these collections of box-spring frame
components." Ibid. With this evidence on the record, the Department
considered that "from an administrative/enforcement perspective any
exclusion of box-spring frame components would be difficult, if not
impossible, to enforce." Id. at K-40.

Nevertheless, since "petitioners offered on the record their belief that
the scope of the order should narrowly exclude box-spring frame
components shipped in individual packages", the Department excluded
individually packaged box-spring bed frame kits from the countervailing
duty order. Ibid. In supporting the exclusion of box-spring frame kits,
petitioners argued that individual packaging was needed "to prevent
manipulation or evasion \[of the CVD order\] as a result of this
exception". Hence petitioners would only support exclusion of "kits
which were bundled in such a way that an 'individual package or bundle'
would make one bed frame." Id. at K-38 (citing record documents).

The Department supports the exclusion order by reference to the broad
discretion enjoyed by the Department in determining the scope of an
investigation. Since the petitioners supported an exclusion limited to
kits shipped in individual packages, and gave reasons on the record in
support of that limitation, the Panel considers that the Department's
determination to exclude only individually packaged box-spring bed frame
kits is supported by substantial evidence on the record.

## **F. Product Exclusions** {#f.-product-exclusions .unnumbered}

In addition to claims for separate "class or kind" status, two types of
claims for exclusion of particular products have been submitted to the
Panel for review in these proceedings. One is a request by the Canadian
Parties to exclude products using lumber that originates in the Maritime
Provinces but is reprocessed in other Canadian provinces. The second is
a claim by Anderson Wholesale, Inc., to exclude used railroad ties from
the scope of the investigation. The Department rejected both claims.

###   {#section-1 .unnumbered}

### 1. Reprocessed Maritimes-Origin Lumber  {#reprocessed-maritimes-origin-lumber .unnumbered}

The Department gave the following reason for rejecting the request to
exclude reprocessed Maritimes-origin lumber:

Once the lumber is processed in a non-Maritimes province, it becomes
indistinguishable from lumber of other origin and may benefit from
subsidies bestowed on the mill. To the extent that a company processing
the Maritimes-origin lumber can demonstrate that it does not receive any
other subsidies, the company can be excluded from the CVD investigation,
and the Maritimes-origin lumber processed in an unsubsidized mill
outside the Maritimes provinces is not subject to CVD duties.[^14]
\[Comment 57 at Exclusion 1, PR Doc. 936; DOC Response Brief at K-69.\]

Since Petitioners did not allege that softwood lumber originating in the
Maritime Provinces is subsidized and should be included in the
investigation, softwood lumber produced in the Maritime Provinces and
exported directly to the United States is not included in the CVD order.
In addition, Petitioners agreed to a Government of Québec request to
exclude U.S.-origin lumber that underwent "minor processing" in Québec
and was then reexported to the United States. The U.S.-origin lumber
exclusion provides:

U.S. Lumber shipped to Canada for minor processing and imported into the
United States is excluded from the scope of the CVD investigation if the
following conditions are met: 1) the processing occurring in Canada is
limited to kiln-drying, planing to create smooth-to-size board, and
sanding, and 2) if the importer establishes to Custom's satisfaction
that the lumber is of U.S. origin. \[Quoted from DOC Response Brief at
K-68 note 15.\]

Nevertheless, Petitioners opposed any exclusion for lumber originating
in the Maritime Provinces and reprocessed in Québec, stating that it is
"virtually impossible to determine whether a shipment of softwood lumber
from a particular company consists *only* of lumber produced from
Maritimes-origin wood, unless that company processes Maritimes-origin
wood *exclusively*." *See* DOC Response Brief at K-68. The Panel
observes, however, that the exclusion of US-origin lumber reprocessed in
Canada does not require that the exporting company process U.S.-origin
wood "*exclusively*."

With apparent reference to the inconsistent treatment of reprocessed
Maritimes-origin lumber as compared to reprocessed U.S.-origin lumber,
the Department asserts that the law does not require it to "treat
merchandise within the scope \[of the investigation\] in a uniform
manner with merchandise outside of the scope." The Department relies
upon its "broad discretion" both to define the scope of the
investigation and to "exclude any merchandise from the scope of an
order, as long as the exclusion does not interfere with the relief
requested in the petition." DOC Response Brief at K-68-69.

The Panel does not agree that the Department's rejection of an exclusion
for reprocessed Maritimes-origin lumber lies within the Department's
discretion. In a CVD proceeding, as in any statutory proceeding, it is
the responsibility of the Department to give effect to the will of
Congress. While the intent of Congress is often difficult to discern,
the CVD statute is designed to impose countervailing duties only on
imported merchandise that benefits from subsidies conferred by the
government of the exporting country. *See* 19 U.S.C. § 1671(a). In
determining the scope of the proceeding, the Department may choose to be
guided by the intent of the petition, but neither the petition nor the
concerns of the Petitioners can give the Department a legal basis to
impose countervailing duties where they are not warranted under the
statute.

The parties agree that neither U.S.-origin nor Maritimes-origin lumber
receives the subsidy at issue in this proceeding. When such lumber is
reprocessed by companies that also process subsidized lumber, there may
be legitimate concern that the resulting product may be
"indistinguishable" from lumber that the reprocessing company produces
from subsidized logs. In such circumstances, the burden will fall upon
the producer/exporter to show that, in fact, a particular shipment is
derived from unsubsidized U.S.-origin or Maritimes-origin lumber. The
U.S.-origin lumber exclusion does exactly that. The Canadian Parties
stress that Maritime-origin lumber must be accompanied by a certificate
from the Maritime Lumber Bureau confirming its origin, which may provide
a basis for distinguishing reprocessed Maritimes-origin lumber from
subsidized lumber. Nothing in the record shows that U.S. imports of
reprocessed Maritimes-origin lumber cannot be handled in a fashion
similar to U.S. reimports of reprocessed U.S.-origin lumber. Such a
procedure would focus the countervailing duties on the subsidized
merchandise and ensure that countervailing duties are not imposed on
Maritimes-origin lumber when it does not in fact benefit from the
subsidies at issue here. The Panel considers that the Department's
blanket refusal to exclude reprocessed Maritimes-origin lumber from the
scope of the order is inconsistent with the intent of the statute and
therefore not authorized by law.

Accordingly the Panel remands the matter of excluding reprocessed
Maritimes-origin lumber to the Department for reconsideration in light
of this opinion.

### 2. Used Railroad Ties  {#used-railroad-ties .unnumbered}

New softwood lumber railroad ties are excluded, but used railroad ties
are included within the scope of the CVD order. The exclusion of new
railroad ties results from the Customs classification of this product
under a Harmonized Tariff System heading (HTSUS 4406) that was not
included in the petition, whereas the subheading that covers used
railroad ties (HTSUS 4407.1000) is included in the petition.
Furthermore, although the petition did not specifically identify used
railroad ties, Petitioners affirmed that their intention was to include
all products covered by HTSUS 4407.1000, including used railroad ties.
Complainant Anderson Wholesale, Inc. (hereinafter "Anderson"), an
importer of used railroad ties, requests that the product be excluded
from the scope of the order.

Anderson asserts that the used railroad ties currently imported from
Canada were manufactured either in the 1950's and 1960's, or even
earlier, in the 1930's and 1940's, and that it is not known whether such
ties consist of softwood or of hardwood lumber, and whether they were
manufactured in the provinces subject to the CVD order in this
proceeding, or elsewhere, such as in the Maritime Provinces or in the
United States. What is known, however, is that imported used railroad
ties are no longer fit to be used as railroad ties; they are used as
landscape timbers.

Anderson argues that used railroad ties must be excluded because new
railroad ties are excluded. However, since Anderson accepts that new and
used railroad ties have totally different uses, and are classified by
the Customs Service under separate HTSUS headings, the Department is
well within its discretion in treating the two as distinct products,
excluding one and including the other within the scope of the
investigation.[^15]

In rejecting Anderson's exclusion request, the Department relied on the
Customs classification and the fact that the petition covers used
railroad ties, and asserted that "even damaged, used and old softwood
lumber products continue to fall under the scope of our investigations."
Comment 52, PR Doc. 936, quoted from DOC Response Brief at K-51. While
the Department's comments may be accurate, they do not address two
threshold issues presented by the exclusion request: First, are the used
railroad ties at issue *softwood lumber* products? And, second, do
currently imported used railroad ties benefit from the subsidies at
issue in this proceeding?

Since Complainant Anderson accepts that its imports of used railroad
ties may be either hardwood or softwood lumber, or both, the Department
has discretion to treat the imports as softwood lumber unless
Complainant can establish otherwise. And, since Complainant offered no
record evidence that its used railroad ties are hardwood lumber,
Complainant cannot obtain an exclusion on that basis. However, as
Petitioners state in their brief, should a specific shipment of used
railroad ties be shown to be of hardwood, that shipment would fall
outside the scope of the CVD order since the order extends only to
imports of softwood lumber products.

On the second question, Anderson presents two distinct claims that
current imports of used railroad ties do not benefit from "stumpage"
subsidies. Anderson's first claim is that currently imported railroad
ties may have been produced in any one of three jurisdictions: in the
United States, in the Maritime Provinces, or in the provinces whose
lumber exports are subject to countervailing duties. Since Anderson
accepts that its railway tie imports may have been produced in the
affected provinces, the Department has discretion to include such
imports in the CVD order unless Anderson can establish that a particular
shipment had been produced elsewhere. As the Panel held with respect to
reprocessed Maritime-origin lumber, where an importer is able to show
that its products have not benefited from the subsidies at issue in this
proceeding, the Department must exclude those imports from the scope of
the CVD order.

Anderson's second claim relevant to receipt of subsidies is that
currently imported railroad ties were produced in the 1950's or 1960's,
or earlier, and hence should not be subject to the current CVD order
even where they were produced in the affected provinces. In response
Petitioners argue that Canadian softwood lumber subsidies "date from the
beginning of the century." Since nothing further was said on this issue
in the Final Determination, the Department apparently relied on the
Petitioners' response in rejecting Anderson's request for exclusion.
*See* Final Determination at 166-67 note 484, PR Doc. 936.

Even assuming that Petitioners' "beginning of the century" reference is
historically accurate, there is no basis in the record to attribute to
imports of used railroad ties the Department's findings that currently
produced softwood lumber products benefit from the current subsidies at
issue here. The railroad ties at issue here were produced forty and
fifty years ago under different subsidies practices that have not been
identified and have not been investigated by the Department in this
proceeding. Accordingly the Panel vacates the Department's rejection of
an exclusion for used railroad ties and remands the matter to the
Department for reconsideration in light of this opinion.[^16]

# **UPSTREAM SUBSIDIES**

An upstream subsidy is a subsidy on an input the benefit of which is
passed through to a downstream product. The provision regarding upstream
subsidies permits the assessment of countervailing duties on the
downstream product notwithstanding that there is no subsidy provided
directly to that product. Conversely, no countervailing duty is to be
assessed on the downstream product if the input is not subsidized.

In its Decision Memo, Commerce states that the statutory provision on
upstream subsidies does not apply because "no reasonable grounds" exist
to believe or suspect that provincial stumpage confers a competitive
benefit on the subject merchandise in the form of an upstream subsidy as
defined in the law. The Department's rationale for this conclusion is,
briefly stated, that both timber (the input) and the downstream products
(lumber and remanufactured lumber products) are subsidized because the
recipient of the subsidy is the producer of the subject goods. Restated,
the manufacturers of the subject lumber and the remanufactured products
and the recipients of the stumpage subsidies, are in each case one and
the same entity. Further, to the extent that there may be producers of
subject goods to whom the subsidy is not passed through, because the
investigation is being conducted on an aggregate basis, no upstream
analysis is required. Rather, any such company is entitled to a
subsequent review to determine a company specific rate. In the case of a
party to whom no benefit is passed through, the company specific rate
would presumably be zero.

According to section 1671(e) of Title 19:

> \[w\]henever the administering authority has reasonable grounds to
> believe or suspect that an upstream subsidy, as defined in section
> 1677-1(a)(1) of this title, is being paid or bestowed, the
> administering authority shall investigate whether an upstream subsidy
> has in fact been paid or bestowed, and if so, shall include the amount
> of the upstream subsidy as provided in section 1677-1(a)(3) of this
> title.

Section 258 of the URAA defines an upstream subsidy as:

> ... any countervailable subsidy, other than an export subsidy, that
> (1) is paid or bestowed by an authority . . . with respect to a
> product (hereafter in this section referred to as an \`input product')
> that is used in the same country as the authority in the manufacture
> or production of merchandise which is the subject of a countervailing
> duty proceeding; (2) in the judgment of the administering authority
> bestows a competitive benefit on the merchandise; and (3) has a
> significant effect on the cost of manufacturing or producing the
> merchandise.
>
> 19 U.S.C. § 1677-1(a)(1).

In determining whether a competitive benefit has been bestowed:

> the administering authority shall decide that a competitive benefit
> has been bestowed when the price for the input product referred to in
> subsection (a)(1) of this section for such use is lower than the price
> that the manufacturer or producer of merchandise which is the subject
> of a countervailing duty proceeding would otherwise pay for the
> product in obtaining it from another seller in an arms-length
> transaction.

19 U.S.C. § 1677-1(b)(1).

Part 351.523 of the Regulations provides the specific requirements for
the initiation of an upstream subsidy investigation. Before
investigating the existence of an upstream subsidy, the Department must
have a reasonable basis to believe or suspect that the following
elements exist: (1) a countervailable subsidy, other than an export
subsidy, is provided with respect to an input product; (2) *inter alia*,
the government sets the price of the input product so as to guarantee
that the benefit provided with respect to the input product is passed
through to producers of the subject merchandise; and, (3) the *ad
valorem* countervailable subsidy rate on the input product is equal to,
or greater than, one percent. 19 C.F.R. § 351.523(a)(1). An "input
product" is defined in the Regulations as "any product used in the
production of the subject merchandise." 19 C.F.R. § 351.523(b).

The Canadian Parties argue that the provincial stumpage programs involve
the harvesting of timber, and result in the production of logs. They
assert that logs themselves are not within the scope of the
investigation, but instead are inputs to the production of the subject
merchandise, i.e., softwood lumber.

The Canadian Parties assert that Section 701 (e) of the Tariff Act is
unambiguous. Congress' intent in passing the upstream subsidy provision
was to address issues such as those found in prior softwood lumber cases
and to require the Department to make specific factual findings showing
that purchasers of inputs receive a countervailable benefit. Canada
asserts that where a subsidy is alleged with respect to an input
product, the allegation must be analyzed under the separate upstream
subsidy provisions of the statute. Where the purported subsidy is
granted to upstream input products \-- products that are used in the
manufacture or production of the merchandise being investigated \-- the
link between the purported subsidy and the subject merchandise is, at
most, indirect. Therefore, the statutory rules require a determination
that the benefit to the original recipient of the subsidy has been
"passed through" to the downstream producer of the subject merchandise.

Where the producer of the allegedly subsidized input product (the timber
harvester) and the producer of the downstream product (the lumber
producer or the remanufacturer) are one and the same entity, the
Canadian Joint Parties agree that Commerce need not do an upstream
analysis as the alleged subsidy is provided directly to a producer of
the subject merchandise. However, it is claimed that Commerce, in this
case, has unlawfully presumed that the two are the same, contrary to the
evidence.

Canada argues that this presumption is in violation of the statute and
that the Department has ignored substantial record evidence establishing
that many lumber producers purchase their log inputs in arm's-length
transactions and thus receive no benefits directly from provincial
stumpage programs. They state that the evidence on the record
establishes that independent harvesters harvest timber, and that
unrelated sawmills often purchase at arms‑length from those independent
harvesters. The Canadian Parties point out that nearly one‑third of the
Crown harvest in several provinces was harvested by harvesters that did
not own sawmills. The Canadian Parties claim that Commerce had conceded
that some of the harvest goes to loggers not owning sawmills, and that
the provinces in their questionnaire responses indicated that these were
arms‑length transactions. The Canadian Parties state that there was also
a request on the record for an upstream subsidies investigation, and
that it was Commerce\'s responsibility to honor that request.

Specifically with respect to remanufacturers, Canada challenges
Commerce's decision not to conduct an upstream analysis to determine
whether all remanufacturers received countervailable benefits, because
some remanufacturers may be stumpage holders and the Department was
conducting its investigation on an aggregate basis. Canada is not
satisfied with Commerce's decision to leave the interests of
remanufacturers, who may not have received countervailable benefits, to
be examined only as part of a subsequent "review" when the proper relief
would be considered.

Finally, the Canadian Parties point out that in Lumber III, which was
also an aggregate case, the Department acknowledged that it was
appropriate to account for arms‑length purchases. The Department's
refusal to do so in Lumber III was based upon the claimed lack of
evidence regarding the extent of such purchases, but the principle is
undisputed. Because the Department did not do so in this case, the
Canadian Parties claim that Commerce's subsidy calculation is invalid
and overstates the amount of benefit received by producers of the
subject merchandise.

Canada specifically requests that the Panel remand the case to the
Department with instructions to exclude arms‑length purchasers from
application of the order and to exclude from the numerator of the
subsidy calculation the benefit attributed to the volume of logs
purchased by sawmills in arms‑length transactions (and the volume of
lumber purchased by remanufacturers in arms-length transactions). In
Canada's view, a remand to Commerce to conduct an upstream subsidy
investigation at this time would not be appropriate nor an effective
remedy.

Commerce responds by pointing out that when it investigates a product
that is upstream to another, but both products are subject merchandise,
both products are investigated without the necessity of a separate
upstream subsidy analysis because neither is upstream to subject
merchandise. Since the scope of this investigation covers both dimension
lumber and remanufactured products, and since both are produced by
stumpage holders who are directly receiving and benefiting from the
countervailable subsidies, an upstream subsidy investigation is not
required.

The Department further states that in an aggregate investigation, an
upstream subsidy investigation is not required for the small minority of
softwood lumber not directly subsidized. Where it is not "practicable"
to determine individual exporter or producer subsidy rates, because of
the large number of exporters or producers involved in the
investigation, Commerce has the option of limiting the examination to a
statistically valid sample of exporters or producers accounting for the
largest volume of subject merchandise that can reasonably be examined,
or determining a \"single country-wide rate.\" According to Commerce, no
upstream subsidy analysis is necessary or appropriate with respect to
lumber under investigation, because the "vast majority" of lumber
producers receive the stumpage subsidies directly (i.e. through input
logs), not indirectly through independent suppliers.

According to the Department, the record demonstrates that the great
majority of producers of subject merchandise are tenure holders and thus
direct recipients of the benefit provided by the stumpage programs. In
British Columbia, for example, 90 percent of the timber harvest
originates from Crown lands. More than 83 percent of this timber is
harvested by tenure holders that are, by the terms of the tenure
agreements, required to own sawmills. Only about nine percent of the
Crown timber has been shown to be harvested by entities that do not own
sawmills. As to the remaining eight percent, the evidence is
inconclusive regarding the requirement of sawmill ownership in the
tenure agreements. Thus, somewhere between nine percent and seventeen
percent of Crown timber in British Columbia is harvested by entities
that do not own sawmills.

In Quebec, the Forest Act explicitly requires that tenures be granted
only to persons authorized to operate a wood processing plant. Similar
requirements are found in Ontario, Alberta, Saskatchewan, and Manitoba.
For these provinces, the Department estimates that about 95% of timber
is harvested by entities that own sawmills.

The Department claims that in spite of the Canadian Parties\' reliance
on the independent logger they fail to identify any such entities or
provide information about the portion of stumpage purchases that may be
attributed to them. According to the Department, there are very few
transactions by independent harvesters. And those transactions that do
occur are restricted by requirements that they sell to mills within the
province. These restrictions hamper the harvesters\' ability to
negotiate freely and force them to sell to specified customers. As the
British Columbia government noted, independent loggers operate as
employees or contractors for holders of private lands or Crown tenures.

Finally, Commerce asserts that when it conducts an investigation on an
aggregate basis, no company-specific rates are determined, except to the
extent it has found it practicable to consider certain company-specific
exclusion requests. For other producers, Commerce states that a review
is the appropriate avenue to determine if there are specific companies
that do not receive countervailable benefits.

The Coalition supports Commerce's views, citing *Delverde v. United
States*, 989 F. Supp. 218, 224 (CIT 1997), to argue that, when Commerce
investigates a product that is upstream to another but both products are
subject merchandise, both products are investigated without the
necessity of a separate upstream subsidy allegation, because "neither is
upstream to subject merchandise." Accordingly, since both first-mill
lumber and remanufactured lumber are subject merchandise, the Department
may properly investigate both without an upstream analysis. Furthermore,
for the Coalition, even if the Department had determined that some
independent loggers provided some logs to lumber producers that required
an upstream analysis, the Canadian Parties had not provided the
Department with the data necessary to conduct such an examination.

The questions which the panel must answer, then, are as follows. First,
there is the factual issue as to whether all buyers of logs are the same
parties who directly benefit from the stumpage programs so that, as a
matter of law, the alleged subsidy can be attributed to the logs which
are made available to such mills or producers (remanufacturers) who are
not direct beneficiaries of the stumpage programs. The second question
is whether it is permissible to avoid the analysis on the basis that the
investigation is conducted on an aggregate basis.[^17]

As a preliminary matter, the Panel observes that there is no need for a
pass-through analysis when both parties in an arm's length transaction
are producers of subject merchandise. The only situation where a
pass-through analysis may be required is where the tenure holder is an
entity that does not produce subject merchandise, or, in other words,
does not own a sawmill.

There is a factual dispute as to the prevalence of independent loggers
in this investigation. While the Canadian Parties assert that
independent loggers represent a significant portion of the market, the
Department has found that overwhelmingly, tenure holders own lumber
processing operations. In spite of these assertions, the Department
concedes in its brief that loggers that do not own sawmills harvest at
least 9 percent of Crown timber in British Columbia. That number is said
by the Department to be 5 percent for Saskatchewan and Manitoba. These
numbers represent a significant portion of the Crown timber harvest as
to which there is uncertainty as to whether the benefit attributable to
stumpage pricing may fairly be included in the benefit calculation.

While the Department thus concedes that some independent loggers exist,
it asserts that sales by such loggers are *de facto* not arms length
sales as the independent loggers are required to sell logs to sawmills
pursuant to certain regulatory and contractual provisions. The effect of
these restrictions is to force independent loggers to pass the benefit
they received by way of their tenures to the purchasing sawmills. The
Department describes several mechanisms that achieve this result. In
British Columbia, for example, the Department acknowledges that between
9 and 17 percent of Crown timber is harvested by entities that do not
own sawmills. Yet the Department found that the British Columbia Forest
Act requires that all timber from B.C. lands be processed in British
Columbia. In addition, the independent loggers in question are small
business operators. These circumstances, taken as a whole, indicate that
sales of logs from independent loggers to sawmills that produce subject
merchandise are not arms length transactions between independent
parties. The Department provided a similar analysis for Quebec, Ontario,
and Alberta. On the other hand, the Department conceded that in
Saskatchewan and Manitoba there are no similar legal requirements to
force harvesters to sell to mills within the province. The Department\'s
decision not to conduct a pass-through analysis for these two provinces
was based solely on the fact that about 95% of Crown timber in both
provinces was harvested by entities that also hold provincial licenses
to operate sawmills.

Factual determinations by the Department must be affirmed if they are
supported by substantial evidence on the record. The Panel does not find
that, with respect to British Columbia, Quebec, Ontario, and Alberta,
there is no substantial evidence to support the Department\'s
determination that sales to sawmills by independent loggers in these
four provinces are *de facto* not arms length transactions. The record
evidence sustains the Department\'s finding that the legal requirements
imposed upon the sale of logs by entities that do not own sawmills
operate to limit their ability to set the price. The Canadian Parties
have not challenged this finding. For these reasons, the Department's
conclusion that producers of subject merchandise in the four provinces
who buy logs from independent loggers have in fact received the stumpage
benefit appears not to be inconsistent with the law or to be
unreasonable. The Panel affirms the Department\'s decision not to
conduct a pass-through analysis with respect to such transactions in
these four provinces.

With respect to Saskatchewan and Manitoba, the evidence in the record is
quite different with respect to the Department's decision not to conduct
a pass-through analysis. The Department has not addressed the fact,
which it accepts, that in both Saskatchewan and Manitoba about 5% of
Crown timber is harvested by independent loggers. The Department also
notes in its brief that independent loggers in these two provinces are
not hampered by requirements regarding domestic processing.

With regard to Saskatchewan, the Department found that about 86% of the
harvest was attributable to four major Forest Management Areas tenure
holders, all of which own sawmills. *See* Decision Memo at 137. The
remaining 14% of the Saskatchewan harvest was conducted pursuant to
Forest Products Permits (FFP). *Id.* However, the Department has not
determined whether FFP holders are required to or in fact own sawmill
operations. *Ibid.*

As to Manitoba, the Department analyzed the various types of license
agreements required to harvest Manitoba timber. *Id.* at 128. As
discussed in the Department\'s brief, the license agreements do not
require domestic processing. *See ibid.*

In short, the evidence on the record does not warrant an assumption that
independent harvesters are limited in their ability to set the sale
price of their logs and thus are not capable of retaining the stumpage
benefit in sales to sawmills. Thus the record lacks a reasoned basis for
the Department\'s decision not to conduct a pass-through analysis for
independent logger transactions in Saskatchewan and Manitoba.
Nevertheless we are mindful that the parties bear the burden of
developing the record in a countervailing duty proceeding. *See
Mannesmannrohren-Werke AG,* 120 F. Supp. 2d 1075, 1087 (CIT 2000). As
set out in the Department's regulations, "The Department obtains most of
its factual information in antidumping and countervailing duty
proceedings from submissions made by interested parties during the
course of the proceeding." 19 C.F.R. § 351.301(a). Since the record
lacks evidence of the extent of arms length transactions in sales by
independent loggers to sawmills in Saskatchewan and Manitoba, the Panel
affirms the determination of the Department not to undertake a
pass-through analysis of such transactions.

# **COMPANY EXCLUSIONS AND COMPANY-SPECIFIC DUTY RATES**

## **A. Company Exclusions** {#a.-company-exclusions .unnumbered}

The Department's regulations allow it to exclude from an aggregate case
an exporter or producer for which it determines an "individual net
countervailable subsidy rate of zero or de minimis." 19 C.F.R. §
351.204(e)(1). The Department uses this mechanism to exclude from a
countervailing duty order parties that receive no subsidy or receive a
subsidy that is *de minimis*.

In the Notice of Initiation, Commerce stated that "it anticipates
creating a system that will allow us to expeditiously process and rule
on these exclusion requests without compromising the integrity of the
CVD law, while, at the same time, ensuring fairness and transparency in
the treatment of the exclusion requests." 66 Fed. Reg. at 21335.
Commerce explicitly sought "the cooperation of the Government of Canada
and the provincial governments in implementing any such system." Id.

In response, the Government of Canada filed a proposal in May 2001
setting forth a process by which Commerce could review company
exclusions. The Government of Canada agreed to collect and file
exclusion requests and certifications, to categorize the applicants and
to provide company-specific data. The Department took no action on the
proposal, but in August 2001, it issued a decision memorandum that
established a system to process exclusion requests. In the memo, the
Department accepted the Canadians' proposal, with certain
clarifications. The Department also stated that it would consider
applications for exclusion prior to the issuance of the preliminary
determination if filed within eight days. Despite the short deadlines,
the Canadian Parties filed 95 applications for exclusion.

In the Preliminary Determination, Commerce stated that, with one
exception, it was not granting any of the exclusion requests because
certain information had not been provided. The Department also stated
that it "intend\[s\] to continue working closely with both individual
requesters and the \[Government of Canada\] on this issue as the
investigation proceeds." 66 Fed. Reg. 43188.

The Canadian Parties claim they then expended significant resources to
revise the company exclusions process to satisfy Commerce. For example,
a specific office was established by the Government of Canada to oversee
the exclusion request process and an independent consulting firm was
retained to ensure quality control. Significant time was spent gathering
the required information and categorizing the applicants into groups.
Ultimately, more than 350 requests for exclusion were filed.

Despite receiving cooperation from the Canadian and provincial
governments, and despite their spending considerable time developing and
implementing a system to submit requests for company exclusions,
Commerce declined to consider the requests submitted on the grounds of
impracticability.

In the Final Determination, the Department stated that it found it
practicable to consider only 30 of the more than 350 company requests
for exclusion it had received. In its Decision Memo, Commerce explained
that its methodology for examining exclusion requests was based on an
"input source" criterion, because this was simple, factual and easily
verifiable. Using an "input source" criterion, Commerce considered
whether the subject logs were sourced from the Maritime provinces, from
private lands or sources other than Crown land. Company exclusion
applications that relied on other bases for exclusion, such as arm's
length transactions, were not considered or granted. This, Commerce
explained, was because such transactional bases for exclusion required
extensive investigation and analysis, which would have been too
difficult to do for each company within the time limits of the Final
Determination. It would also be beyond the scope of the limited exercise
envisioned under the regulations for consideration of company exclusions
in an aggregate case.

Section 777A(e)(2)(b) of the Act gives the Department discretion to
"determine a single country-wide subsidy rate" when "it is not
practicable to determine individual countervailable subsidy rates . . .
because of the large number of exporters or producers involved." 19
U.S.C. § 1677f-1(e)(2).

Commerce's regulations state that it "will exclude from an affirmative
final determination under section 705(a) . . . any exporter or producer
for which the Secretary determines an . . . individual net
countervailable subsidy rate of zero or *de minimis*." 19 C.F.R. §
351.204(e)(4). The Department's regulation vests the agency with the
discretion to "consider and investigate" exclusion requests "to the
extent practicable." 19 C.F.R. § 351.204(e).

The authority to grant exclusions from an aggregate subsidy rate is
conditioned by specific requirements aimed at ensuring that the basis
upon which the request is granted is reliable or verified. Pursuant to
19 C.F.R. § 351.204(e)(4), an exporter or producer that desires
exclusion from an order must submit the following information:

> \(i\) A certification by the exporter or producer that it received
> zero or *de minimis* net countervailable subsidies during the period
> of investigation;
>
> \(ii\) If the exporter or producer received a countervailable subsidy,
> calculations demonstrating that the amount of net countervailable
> subsidies received was *de minimis* during the period of
> investigation;
>
> \(iii\) If the exporter is not the producer of the subject
> merchandise, certifications from the suppliers and producers of the
> subject merchandise that those persons received zero or *de minimis*
> net countervailable subsidies during the period of investigation; and,
>
> \(iv\) A certification from the government of the affected country
> that the government did not provide the exporter (or the exporter's
> supplier) or producer with more than *de minimis* net countervailable
> subsidies during the period of investigation.

The Canadian Parties argue that Commerce's decision to consider only 30
applicants is an abuse of discretion. Although the Canadian Parties
agree that the regulations give the Department some discretion on
exclusions, they assert the discretion is limited. Canada claims that it
is an abuse of discretion to commit to consider applications for
exclusion and then claim impracticability.

According to the Canadian Parties, the statute required Commerce to
conduct an upstream subsidy investigation to determine whether any
alleged subsidy was passed through to downstream purchasers. (*See* the
previous section on upstream subsidies for a discussion of the issue.)
They claim that if the Department had not refused to do so, two-thirds
of the exclusion applicants who applied as arm\'s length purchasers of
logs or lumber would have been found unsubsidized in the upstream
subsidies investigation and would have had no reason to apply for
exclusions. Canada asserts that Commerce cannot lawfully claim that the
number of applicants made its task impracticable, when the number of
exclusion applicants was a direct result of its own failure to abide by
the statute on upstream subsidies.

According to Canada, Commerce\'s claim that it was too complex to
determine affiliation, or to determine whether transactions were at
arm\'s length, show that its line drawing was not reasonable. There were
groups of applicants that had no affiliation with the tenure holder, and
the Department's own "Exclusions Memo" stated that transactions between
unaffiliated parties are deemed to be at arm\'s length. Each of the
company applicants \-- at least those whose applications were submitted
by the Government of Canada and many others \-- was advised on the
definition of affiliation and certified to its affiliates or their
absence. The Canadian Parties assert that Commerce did not adhere to its
own bright line rule of excluding only companies basing their
applications on source, and had abused its discretion in the exclusion
process.

Canada points out that in Lumber III*,* Commerce had recognized that
remanufacturers, who hold no crown stumpage rights, are not affiliated
with crown stumpage holders, and purchase their inputs at arm\'s length,
should be excluded from a countervailing duty order, going well beyond
the regulatory requirements for exclusion. The Department's procedures
for accomplishing this are either through company exclusion requests or
through the investigation and promulgation of company-specific rates.

For its part, Commerce argues that it has ample discretion to decide
whether to consider requests for company exclusion. The Department
states that the statute and regulation make clear that it may consider
requests only to the extent practicable, and that it is not required to
grant all requests for exclusion. Commerce argues that it was within its
discretion to decide the basis for what is practicable, and that it was
reasonable to conclude that considering over 350 company exclusion
requests would not be practicable. The Department considers that, in
administering the law, it has discretion in the choice of methodology as
long as the chosen methodology is reasonable and its conclusions are
supported by substantial evidence on the record.

Commerce also states that it had not received all of the information
required under 19 C.F.R. § 351.204(e)(4)(i)-(iv) at the time of its
decision.

According to Commerce, conclusions reached by the Panel in Lumber III
remain valid, specifically where the Panel:

> upheld the Department's decision not to exclude 334 companies because
> the investigation would be "impracticable";
>
> accepted that when country-wide aggregate rates are assessed, a CVD is
> imposed on the merchandise equal to the amount of the country's net
> subsidy, not the amount of the subsidy in fact received by the
> company; and
>
> recognized that Commerce was not legally required to grant company
> exclusion requests in an aggregate case.

In sum, Commerce asserts that, in investigations conducted on an
aggregate basis, the exclusion of companies is totally within its
discretion. Its decision was consistent with Lumber III, was supported
by substantial evidence on the record and was in accordance with the
law.

The Coalition agrees with Commerce, arguing that neither the statute nor
the regulations require the Department to consider all exclusions in an
aggregate case. At most, the law gives the agency discretion to
determine whether it is practicable to consider and investigate, based
on, *inter alia*, the number of exclusion requests, the complexity of
the issues that must be considered and the overall complexity of the
case. Company exclusion investigations, it is argued, are of secondary
importance to the statutorily mandated issues, such as completing the
aggregate investigation itself. The Department properly balanced the
mandatory tests against the discretionary tests, and made an appropriate
decision in light of its available resources.

The Panel considers the arguments raised by the parties in accordance
with the standard of review set forth above, namely whether Commerce's
decision is reasonable, supported by substantial evidence and is
otherwise in accordance with the law.

The Panel first notes that the language of Section 777A(e)(2) of the Act
and the applicable regulations clearly provides the administering
authority with considerable discretion to decide whether to consider
requests for company exclusion.

The Panel is mindful that the panel in Lumber III concluded that the
"bright line" criterion the Department had chosen in that case to limit
its investigation was reasonable, and that a Panel may not substitute
its own bright line nor remand the decision, unless the decision is an
"abuse of discretion" or a decision that "no reasonable agency could
have made in the circumstances." The Lumber III Panel had also concluded
that it was proper for Commerce to determine a country-wide aggregate
rate and apply it to all companies, even those claiming exclusion based
on zero or *de minimus* subsidies.

Nonetheless, the Panel finds that Commerce failed to properly apply its
own "input source" criterion by failing to grant applications submitted
by all companies that relied on the source of their lumber as the basis
for exclusion. These companies included those that salvage used railroad
ties, barnboard or other "old wood" from demolished buildings,
riverbeds, etc. These applicants submitted letters indicating that they
did not hold Crown stumpage and did not benefit from any subsidy. The
timber harvesting happened decades ago and was clearly not done during
the POI. These applicants could not have benefited from the alleged
subsidy and presented the source of their inputs as the basis of the
application. As Commerce failed to provide a rational basis for not
considering these exclusion applications, especially in the face of its
own policy of considering applications based on "input source," the
Department's determination in this regard is unsupported by substantial
evidence and is contrary to law. The Panel remands this issue to
Commerce for consideration of those additional companies whose
applications were based on input source.

The Panel is troubled that Commerce gave assurances to the Canadian
Parties that their exclusion requests would be seriously considered and
sought their cooperation in establishing a system of review, when it
should have fully anticipated the number of requests it would receive
given the number submitted in past lumber cases. Given that in Lumber
III Commerce received 334 requests for exclusion, the agency should have
allocated the proper amount of resources to adequately consider a
comparable number in this case after it announced its intention to
establish a system to process the requests received. Moreover, it was
the Department's own delay that, at least in part, created the
impracticability.

The Panel believes that by conducting the case on an aggregate basis, as
an exception to the general rule in favor of establishing individual
company CVD rates, the bar has been raised for Commerce to consider
applications for exclusion fairly and to allocate the resources
necessary to do so. This is particularly relevant in instances such as
this where the Department has declined to conduct an upstream subsidy
analysis. The Panel is disappointed that Commerce failed to do so.

Nonetheless, with the exception of the one category of applicants noted
above whose applications were based on input source, the Panel is of the
opinion that the statute and the regulatory grant of discretion is
sufficiently broad so as to permit Commerce to reasonably conclude that
consideration of the more than 350 applications for company exclusion
would be impracticable. Thus, the Panel concludes that Commerce's
decision is supported by substantial evidence and is otherwise in
accordance with the law.

### 1. Goodfellow {#goodfellow .unnumbered}

Goodfellow Inc. ("Goodfellow"), a Canadian softwood manufacturer,
submitted a brief contesting Commerce's failure to consider its request
for a company exclusion on the grounds that it had not received
countervailable subsidies. The company explains that it purchased lumber
for the production of remanufactured products from unaffiliated
suppliers in 'arm's length transactions.' Goodfellow also claims that
lumber purchased for same-condition re-sales was purchased in 'arm's
length transactions' and thus any benefit received from such sales was
*de minimis*. Goodfellow maintains that Commerce's failure to consider
exclusion requests is particularly egregious in light of the agency's
failure to conduct an upstream subsidy analysis.

For the reasons set forth above in relation to arguments raised by the
Canadian Parties, the Panel determines that Commerce was not obligated
to consider or grant Goodfellow's request for a company exclusion and
that the agency's decision in this regard was supported by substantial
evidence and was otherwise in accordance with the law. Nevertheless, the
Panel's disappointment as expressed above is particularly relevant in
this case.

### 2. MLTC/NorSask {#mltcnorsask .unnumbered}

The Meadow Lake Tribal Council ("MLTC") and NorSask Forest Products Inc.
("NorSask") submitted a brief in support of Canada\'s claim that
provincial stumpage did not constitute countervailable subsidies.
MLTC/NorSask specifically argue that the First Nations of Northern
Saskatchewan ("First Nations") cannot be said to benefit from a
countervailable subsidy, because aboriginal rights over their
traditional lands and their treaty rights are \"*sui generis*\" and
constitute a \"unique market characteristic,\" relying on certain
Canadian caselaw which they claim supports such principles.

Because the unique characteristics of the First Nations had not been
considered by Commerce, MLTC and NorSask ask the Panel to remand to
Commerce with instructions to: a) provide a reasoned analysis as to the
unique characteristics of the aboriginal rights over their traditional
lands; b) determine that exports of softwood lumber into the United
States from MLTC/NorSask are exempt from CVDs; and c) determine that
exports of softwood lumber from First Nations\' forestry operations
constitute a special category of exclusion from the imposition of CVDs.

Commerce argues that MLTC and NorSask fail to show how, under U.S. trade
law, the existence of aboriginal rights in their lands constitutes a
special characteristic that would negate the existence of a benefit.
MLTC/NorSask argued in their exclusion request that, because of their
aboriginal proprietary rights in the land, benefits received do not
amount to a countervailable subsidy. Commerce maintains that this is not
a proper use of company exclusion requests, which are a vehicle for
exporters or producers to demonstrate that they fulfil the minimum
certification requirements for potential exclusion from a CVD order.

The Department further argues that it does not have the authority to
consider the status of aboriginal rights on Canadian lands or matters of
self-government arrangements of the First Nations, which are matters of
Canadian law. These issues are not relevant to its determination or to
its consideration of MLTC/NorSask\'s exclusion request. If
MLTC/NorSask\'s request for exclusion had been rejected, it was because
it had neither provided supporting calculations nor the government
certification required under regulations at 19 C.F.R. § 351.204(e)(4).

Finally, the Department claims it had not received the information it
requires for providing an exemption when it conducts a CVD investigation
on an aggregate country-wide basis. In particular, there must be a
certification that an exporter or producer received zero or *de minimus*
countervailable subsidies. If *de minimis* subsidies are alleged,
supporting calculations must be provided and there must be a government
certification accompanying the exclusion request.

For the reasons set forth above, the Panel finds that Commerce had the
discretion not to consider MLTC/NorSask's exclusion request and that the
agency's decision was supported by substantial evidence and was
otherwise in accordance with the law.

## **B. Company-Specific Duty Rates** {#b.-company-specific-duty-rates .unnumbered}

Two companies, Canfor Corporation ("Canfor") and Tembec Inc. ("Tembec")
requested a company-specific countervailing duty rate.

Canfor claims to be the largest producer in Canada and exporter to the
United States of softwood lumber covered by this investigation. On May
30, 2001, Canfor filed a letter with Commerce requesting that a company
questionnaire be prepared and submitted to Canfor. Commerce did not
respond to the request. In the Final Determination, Commerce stated that
the statute and regulations generally do not provide for voluntary
respondents in aggregate cases.

Tembec filed a request for a company-specific duty rate with Commerce on
December 21, 2001 and re-submitted its request on February 21, 2002. The
December 21 submission contained what Tembec claimed to be the
information required for the calculation of an individual
countervailable subsidy rate. The Department stated in its Decision Memo
that the company had not filed its request for a company-specific
determination within the deadline set in section 782 (a)(1)(B) of the
Tariff Act. Commerce also stated that Tembec had not provided the
necessary certifications required under section 351.204 (e)(4) of the
Act.

Section 777A(e)(2) of the Tariff Act (19 U.S.C. § 1677f-1(e)(2))
provides that, where it is not practicable to determine individual
countervailable subsidy rates under section 777A(e)(1) of the Act
because of the large number of exporters or producers involved in the
investigation or review, the administering authority may:

> \(A\) determine individual countervailable subsidy rates for a
> reasonable number of exporters or producers by limiting its
> examination to (i) a sample of exporters or producers . . ., or (ii)
> exporters and producers accounting for the largest volume of the
> subject merchandise from the exporting country . . .; or,
>
> \(B\) determine a single country-wide subsidy rate to be applied to
> all exporters and producers.

This is an exception to the general rule established in section
777A(e)(1) of the Tariff Act (19 U.S.C. § 1677f-1(e)(1)), which provides
that \"the administering authority shall determine an individual
countervailable subsidy rate for each known exporter or producer of the
subject merchandise."

These provisions were introduced by the URAA of 1994. The SAA of the
URAA explains that:

> \[s\]ection 265 of the implementing bill repeals section 706 (a)(2).
> It eliminates the presumption in favor of a single country-wide CVD
> rate and amends section 777A of the Act to establish a general rule in
> favor of individual CVD rates for each exporter individually
> investigated. In addition, instead of examining a limited number of
> individual exporters and producers, section 777 A (e)(2)(B) would
> permit Commerce to calculate, on the basis of aggregate data, a single
> country-wide subsidy rate to be applied to all exporters and producers
> of the subject merchandise.

Pursuant to 19 U.S.C. § 1677m(a), in any investigation or a review in
which the administering authority has limited the number of exporters or
producers examined, or determined a single-country-wide rate, the
administering authority is to establish an individual countervailable
subsidy rate for the exporters or producers selected for examination,
if:

> such information is so submitted by the date specified: (A) for
> exporters and producers that were initially selected for examination;
> or, (B) for the foreign government, in a CVD case where the
> administering authority has determined a single country-wide rate;
> and,
>
> the number of exporters or producers who have submitted such
> information is not so large that individual examination of such
> exporters or producers would be unduly burdensome and inhibit the
> timely completion of the investigation.

Canfor argues that the only reasonable interpretation of the
countervailing duty statute is that it compels the agency to accept
voluntary responses in aggregate cases unless the number of exporters or
producers who submit such information is so large that individual
examination of them would be unduly burdensome and inhibit the timely
completion of the investigation. Canfor claims that the number of
respondents is not excessive and that Commerce acted unreasonably in not
responding to its request for a questionnaire.

Tembec claims that it provided Commerce with the information necessary
to calculate a company-specific rate three months before the final
determination was due, and two months before Commerce undertook
examination of some 30 companies requesting exclusion. Tembec asserts
that it was the only company to voluntarily submit information to
calculate a company-specific CVD rate and that the number of exporters
seeking individual rates was not so large so as to be unduly burdensome.
Tembec requests that the case be remanded to Commerce with instructions
to calculate a company-specific rate for Tembec based on the evidence of
record.

The Canadian Parties add that, in relation to Tembec and other producers
or exporters who may request a company-specific rate, Commerce had an
obligation under 19 U.S.C. § 1677m(a)(2) to provide company-specific
rates when the number of exporters or producers concerned is not too
large. The Canadian Parties agree with Tembec that its request was
timely and that the Panel should provide relief.

Commerce asserts that in a country-wide aggregate investigation,
calculation of individual rates is not an option. Commerce reasons that,
in an aggregate country-wide countervailing duty investigation, all
exporters or producers are assigned the same countervailing duty rate,
even if some, had they been investigated individually, would have
received higher or lower rates. The very nature of the concept of
aggregate rate investigations inheres in not determining individual
rates because of the extraordinary burden of doing so for a large number
of respondents. The regulation discussing voluntary respondents (19
C.F.R. § 351.204(d)) references other situations where voluntary
responses are applicable, but does not mention its application to
investigations conducted on an aggregate basis.

The Panel is mindful of the standard of review applicable to this case
and states again that an agency's statutory interpretation is to be
upheld if it is "sufficiently reasonable," even if it is not "the only
reasonable construction or the one the court would adopt had the
question initially arisen in a judicial proceeding." *American Lamb*,
*supra*, 785 F.2d at 1001 (citing *Chevron*). The Panel is of the view
that Commerce's interpretation of the statute and its own regulation is
not unreasonable and that it did not have a statutory or regulatory
obligation to consider Canfor and Tembec's request for company-specific
duty rates. Thus, the Panel finds that Commerce's decision to decline to
consider Canfor and Tembec's request for a company-specific rate to be
supported by substantial evidence and to otherwise be in accordance with
the law.

# **CALCULATIONS**

Claim I: The Department failed to determine the exact amount of the
benefit that is attributable to softwood lumber products

The Canadian Parties argue that the Department did not determine the
exact portion of the benefit that can properly be attributed to softwood
lumber. Apart from softwood lumber, processing of logs obtained through
stumpage programs yields co-products such as chips and sawdust that have
commercial value. In their brief, the Canadian Parties cite numbers in
the range from 31-56 as the percentage of the wood volume used to
produce softwood lumber. They contend that by failing to apportion the
appropriate amount of the benefit to co-products and subtract that
amount from the amount apportioned to softwood lumber products, the
Department inflated the benefit received and assessed a duty higher than
the subsidy received. At the hearing, counsel for the Canadian Parties
cited *Kajaria Iron Castings Ltd v. United States*, 156 F.3d 1163 (Fed.
Cir. 1998), as authority that requires the Department to net out the
benefit of the subsidy provided that the necessary data was available.
According to Canadian counsel, the necessary data was available.

The Canadian Parties argue that the Department's calculation methodology
was in violation of §701(a) of the Tariff Act and Article 19.4 of the
SCM Agreement, both of which require that countervailing duties shall
not exceed the value of the subsidy. They claim that as a consequence of
this method of calculation, the CVD rate was increased by 8 percentage
points.

Commerce points out that the statute does not provide specific guidance
on the method of calculating subsidy rates. Consequently, Commerce
claims it has broad discretion to devise a methodology consistent with
the statute. The Department relies on its regulations, specifically 19
C.F.R. § 351.525(a), which provides that in calculating the *ad valorem*
subsidy rate, the total benefit shall be divided by the total sales to
which the benefit applies.

In this case, the Department argues that the subsidy provided is used to
produce both subject and non-subject merchandise. The regulations
address this issue by allocating the benefit to all products to which
the subsidy applies. The Canadian Parties claim that the Department
should have determined what portion of the logs are used to produce
subject merchandise and calculated the benefit based on that volume is
contrary to the Department\'s regulations. Commerce points out that
sawmills must process the entire log in order to produce lumber. Any
unfairness that might result by calculating the benefit based on the
total volume of logs that entered sawmills is eradicated by allocating
the total benefit not solely to sales of subject merchandise but to
sales of all products that originate from processing of logs.

In examining this question, the Panel must assess whether the
Department's method of determining the numerator of the subsidy rate
fraction is consistent with the governing statute. More precisely, the
issue is whether the Department should have calculated the amount of the
benefit by multiplying the price differential by the total volume of
logs that entered sawmills or just the volume of wood fiber that
eventually ended up as subject merchandise.

The calculation of the subsidy rate is governed by the statute and the
regulations promulgated by Commerce. The Panel agrees with Commerce that
the statute does not provide detailed guidance in this matter but
supplies a general principle that the CVD rate should not exceed the
benefit provided. *See* 19 U.S.C. § 1671 (providing that \"there shall
be imposed . . . a countervailing duty, in addition to any other duty
imposed, *equal to the amount of the net countervailable subsidy*)
(emphasis added). The Panel thus turns to the regulations and must
determine whether the Department properly applied its regulations in
this matter. The Panel notes that the Department is entitled to
deference in interpreting its own regulations unless such an
interpretation is clearly erroneous. *Thomas Jefferson, supra,* 512 U.S.
at 512. The Panel concludes that Commerce properly adhered to the
regulations and affirms.

The Department relies on 19 C.F.R. § 351.525(b) for the principle that a
subsidy will be attributed to the products that it would most likely
benefit from it. The nature of the subsidy will in most cases determine
to which products it will be attributed. An export subsidy by its nature
benefits the producer only when it exports its products and thus will
not be attributed to the producer's domestic sales. *See* 19 C.F.R. §
351.525(b)(2). Similarly, subsidies that are conditional on the sale of
products on a certain market will be attributed only to products sold on
that market and not to products sold on other markets. *See* 19 C.F.R. §
351.525(b)(4). Commerce points out that the provision of timber by the
Government of Canada and the provincial governments through stumpage
programs is not tied to any specific product. Thus, any subsidy that
might arise from the operation of these programs must be attributed to
all products that result from the processing of logs that enter
sawmills.

The Canadian Parties do not contest this principle but argue that it is
possible to determine the benefit that is attributable solely to the
subject merchandise. In their view, once this apportioning of the
benefit is carried out, there would be no need to attribute the entire
benefit to all products that result from the processing of logs, but
instead to attribute to the subject merchandise only that portion of the
benefit that is properly attributable to the subject merchandise.
According to the Canadian Parties, this would result in a more accurate
subsidy rate.

As Commerce points out, sawmills purchase logs for the sole reason of
processing them into lumber. The fact that discarded material in the
form of chips and sawdust has some commercial value does not negate the
fact that the value of the log is determined by its conduciveness to be
processed into lumber. Thus, the price of a log is driven by the
ultimate volume of lumber that will be derived from it. If genetic
engineering could produce a log of such shape that nearly 100% of its
volume could be processed into lumber, that log would surely be much
more valuable than a conventional log of the same total volume that can
yield only 40-50% of its volume in lumber.

To illustrate by way of an example with hypothetical values, when a
sawmill pays \$10 for a log that is 10 cubic meters in volume and ends
up with 4 cubic meters in lumber by processing the log, the \$10 initial
sales price is determined to a large extent by the value of 4 cubic
meters of lumber and only to a very small extent by the value of 6 cubic
meters of chips or sawdust. The Canadian Parties' approach would have us
believe that the sawmill paid \$4 for the portion of the log that it
used to make the lumber. This would be true only if the 6 cubic meters
of chips or sawdust were equal in value to 6 cubic meters of lumber.
Even the Canadian Parties concede that this is not the case.

Assume that lumber is valued at \$5 per cubic meter and that by-products
sell at 0.50 cents per cubic meter. The sawmill would thus earn \$20
from the sale of lumber and \$3 from the sale of by-products. To tailor
this analogy to the factual scenario in this investigation, assume that
the same log is sold in the United States for \$15 and that the sawmill
thus receives a \$5 benefit. Under the Department's method, the subsidy
rate would equal 5/23 or 21.7%. The Canadian Parties' proposed
calculation would require that the benefit be discounted at 60% as that
represents the volume of wood fiber that became by-products. The subsidy
rate fraction thus becomes 2/20 or 10% \-- a marked difference. The
Canadian Parties' methodology would result in a government subsidy to
by-products of 100% (\$3 benefit divided by \$3 in sales) \-- a
commercially improbable result.

The Canadian Parties' argument rests on the premise that every cubic
centimeter of wood in a log processed in a sawmill is of equal value. As
counsel for the Department pointed out at oral argument, the subsidy
rate is determined by value and not volume. Even if it were possible to
separate the volumes that went into the production of lumber and
by-products, the correct amount of benefit that was received for the
production of subject merchandise can never be determined by reliance on
volume alone. The relative values of such volumes would have to be
factored into the calculation in order to achieve a proper result.
Keeping with the above hypothetical figures, the total volume of wood
fiber that is used to produce lumber is worth 10 times more than the
volume used to derive by-products. In other words, the 60% of the volume
that ended up as by-products accounted for only 13% (\$3 is 13% of \$23)
of the sales value. If any discounting were to be done, it would have to
reflect the ratio between the sales values of lumber and by-products.
Under this method, the subsidy rate for the lumber would equal 4.35/20
(\$5 benefit discounted at 13% equals 4.35) or 21.7% \-- the same rate
achieved by the Department's calculations.

The Panel notes that the determination of the value of the benefit
cannot be subjected to one principle but will depend on the facts of
each individual case, the nature of the benefit being provided, and the
manner in which the benefit is being provided to the recipient. In the
case relied upon by the Canadian Parties, *Kajaria Iron Castings*, a
complex tax subsidy case, two classes of merchandise were involved: (1)
certain castings (the "subject merchandise") which received tax rebates
termed "CCS rebates", and (2) certain non-subject castings which also
received tax rebates termed "IPRS rebates". Two types of "subsidies"
were claimed: (a) an over-rebate of both types of tax rebates, and (b)
the government's failure to tax the subsidy thus received. Commerce
countervailed both the value of the over-rebates and the value of the
tax that should have been levied on the over-rebate amounts, and did so
both with respect to the "CCS rebates" on the subject merchandise and to
the "IPRS rebates" on the non-subject merchandise. Commerce included the
"IPRS rebates" as countervailable benefits on the theory that these
rebates were an "untied" subsidy that "was not particular to only
specific merchandise (either subject or non-subject merchandise)." 156
F.3d at 1176 (quoting Commerce *Remand Results*). The Federal Circuit
held the latter ruling improper: "The entire benefit received \[in
respect of the IPRS rebates\], i.e., the subsidy and the nontaxation of
the subsidy, was related solely to non-subject castings." Material to
our inquiry here, the Federal Circuit ruled:

> . . . \[W\]hen the party under investigation provides documentation
> that allows Commerce to separate the portion of \[the subsidy\]
> related to non-subject merchandise from the remainder of a
> countervailable \[subsidy\], Commerce should not countervail the
> portion of \[the subsidy\] tied to non-subject merchandise. \[156 F.3d
> at 1176.\]

The Court also held it improper for Commerce to countervail both the
subsidy and the nontaxation of the subsidy as benefits because, in so
doing, Commerce in effect double-counted the over-rebates: "Commerce
imposed a countervailing duty that was not 'equal to the amount of the
net subsidy' in contravention of 19 U.S.C. §1671(a)." 156 F.3d at 1175.

Thus, in *Kajaria Iron Castings*, the apportioning of the benefit to
subject merchandise did not present legal or administrative
difficulties, and the Federal Circuit correctly required the Department
to parcel out the exact amount attributable to the subject merchandise.

The Panel concludes that Commerce's methodology of accounting for the
sales of by-products in the denominator of the subsidy rate calculation
adequately implements the governing statute and the regulations.
Accordingly, the Panel does not find to be unreasonable the manner in
which Commerce determined the numerator of the subsidy rate
calculations.

Claim II: The Department failed to conduct a pass-through analysis

The Canadian Parties argue that the Department was required to conduct a
pass-through analysis as the record evidence indicated that numerous
sawmills purchase logs from independent loggers through arm's length
transactions. Since the stumpage benefit was calculated based on the
volume of all Crown logs entering sawmills, it must be determined that
all of the logs were provided to the sawmills at the subsidized price.
The Canadian parties request that the Panel determine whether the
statute and the regulations require the Department to conduct a
pass-through analysis so as to determine the total benefit used as the
numerator in the subsidy rate calculation.

As discussed above in the Upstream Subsidies section, the Panel affirms
the Department's determination not to conduct an upstream subsidy
analysis. Thus, the Commerce's calculation in this respect will not be
disturbed.

Claim III: The Department failed to include sales of residual products
in the denominator of the subsidy rate calculation

The Canadian Parties claim that the Department should have included the
sales of residual products from logs, such as poles, posts, and railway
ties, in the denominator of the subsidy rate calculation. "Residual
products" are defined as products resulting from production processes
other than the lumber production process. Instead, the Department
included only sales of softwood lumber products and co-products, i.e.,
products that result from the lumber production process.

The Canadian Parties rely on the Department\'s regulation, 19 C.F.R. §
351.525(b)(3), which requires the Department to allocate the benefit of
a subsidy to *all* the products of a firm that produced subject
merchandise. The Canadian Parties assert that sawmills that receive the
benefit of stumpage programs commonly produce residual products as well
as softwood lumber products. Since the Department failed to confine the
numerator of the subsidy calculation to the exact amount of benefit
properly attributable to softwood lumber products and co-products, it
should have included in the denominator all sales of all products that
are made from logs that are included in the numerator.

According to the Canadian Parties, sales of residual products represent
about 12% of all softwood shipments, amounting to a total value of
C\$1,529,051,100. They regard the Department's exclusion of sales of
residual products as an application of the adverse facts available
doctrine, which is properly triggered only when a party fails to
cooperate. The Canadian Parties assert that there was no allegation that
Canada failed to cooperate to the best of its ability, and no
corroborating evidence to show that sales of residual products were
actually \$0.00.

Commerce argues that merchandise that is to be included in the
denominator of the subsidy rate calculation must have resulted from the
processing of subsidized logs. According to Commerce, the Canadian
Parties failed to show that residual products were products of timber
entering sawmills.

The Department relied on information from Statistics Canada
(\"StatCan\") which divides lumber shipments into four categories: (1)
softwood lumber; (2) hardwood lumber; (3) co-products; and (4) residual
products. According to StatCan, residual products are those that do not
fit in the other three categories. The Department examined the products
in this latter category and concluded that it included products, such as
logs, pulpwood that was harvested by sawmills and sold to other
manufacturers, and particle and waferboard, that were not a result of
lumber processing and were never processed by sawmills. Even if the
Statistics Canada residual products category contained some products
that resulted from lumber processing, the Department claims it had no
way of segregating such products due to the failure of the Canadian
Parties to provide the necessary information to enable the Department to
do so. Commerce claims that the burden of production is on the party
with knowledge and control of the information. According to the
Department, the exclusion of residual products from the denominator was
therefore appropriate under the law.

At the outset, the Panel notes inconsistencies in the briefs and oral
argument presented by the Department of Commerce regarding the standard
upon which to base inclusion or exclusion of products in the denominator
of the subsidy calculation. In their brief, the Department argues that
Canadian Parties failed to show that residual products were products of
timber entering sawmills. At a different point in the brief, however,
the Department states that the denominator should include merchandise
that "resulted from the *processing* of subsidized logs". And, at oral
argument, counsel for the Department admitted that products such as
shakes and shingles legitimately belong in the denominator. These
statements imply that as long as a product is derived from logs that
entered sawmills, regardless of what production process is used, the
sales value attributable to the product should be included in the
denominator. This is the position advocated by the Canadian Parties. On
the other hand, the Department's brief faults the Canadian Parties for
submitting a list of residual products during the investigation that
included products "*that did not result from the production of lumber*"
(italics supplied). At oral argument, counsel for the Department claimed
that the Canadian list "included products that were not part of the
lumber-manufacturing process". These statements indicate that the
Department considers only products that result from the
lumber-manufacturing process to be properly part of the denominator.

To add to the confusion, the petitioner claims that the numerator
includes only the logs that were used in the lumber production process
and that, consequently, none of the logs from the numerator were used to
produce residual products. The petitioner asserts that during the period
of investigation, both the Department and the Canadian Parties operated
under the assumption that only logs used to produce lumber would be
considered under the category "all logs entering sawmills" and that the
data that the Canadian Parties provided conformed to this assumption.
The petitioners cite to record evidence that demonstrates that the data
submitted for each province reflected only that portion of the harvest
that was used for the production of lumber. Thus, according to
petitioners, since no logs included in the numerator were used to
produce residuals, there is no need to include any sales of residual
products in the denominator.

In an effort to sort out the various claims, the Panel observes that all
parties at least implicitly recognize that had the numerator included
logs used in the production of residual products, the sales of residual
products should be included in the denominator. This principle was
recognized as valid by the Department in the case of accounting for
sales of co-products. In the Panel's view, the fact that residual
products employ a different production process should not alter the
application of this basic principle. However, both the Department and
the petitioner state in their briefs that the subsidy in this case is
attributable to "all products produced during the softwood lumber
production process". This is in effect a statement that the subsidy is
tied to the softwood lumber production process; as such it directly
contradicts the Department's assertion that this case involves subsidies
that are not tied to lumber production.

The Panel recognizes the deference owed to the Department in the
implementation of its own regulations. However the Department must
support its decision with a reasoned explanation. As the Department has
recognized in its brief:

> While \[a reasoned explanation\] is not formally part of the standard
> of review that this Panel must apply, the statute does require the
> Department to publish a notice supporting its final determination in
> the [Federal Register]{.underline}. This notice must provide "an
> explanation of the basis for its determination that addresses relevant
> arguments . . . concerning the establishment of . . . a
> countervailable subsidy . . . ." \[Citing 19 U.S.C. §
> 1677f(i)(1)&(3)(A).\] With respect to the interested parties' legal
> arguments, the statute merely "requires that issues material to the
> agency's determination be discussed so that the 'path of the agency
> may reasonably be discerned' by a reviewing court." \[Citing the URAA
> Statement of Administrative Action, H.R. Doc. No. 103-316, at 892
> (1994).\] \[DOC Response Brief, vol. II, A-10.\]

In the present case, inconsistent claims advanced by the Department
render it not possible for this Panel to "reasonably . . . discern\[\]"
the "path" followed by the Department. In the view of the Panel, the
Department may not claim that the stumpage subsidy is not tied to lumber
production in the context of explaining its decision to include in the
numerator the timber volume attributable to co-products, while at the
same time it argues the opposite in an effort to exclude from the
denominator all products that did not result from the lumber production
process.

The Canadian Parties' position has its own inconsistencies. At oral
argument, counsel for the Canadian Parties claimed that all of the
products on the list submitted to the Department during the
investigation were derived from logs entering sawmills. In their brief,
however, although not conceding error, the Canadian Parties allow for
the possibility that some of the products on the list to which the
Department objected, such as particle and wafer board, may not in fact
have been processed by sawmills. The Canadian Parties further claim that
a "trifling error" is no reason to exclude the entire category. The
Department, on the other hand, counters that "*many* of the products
contained in the residual products category were never processed by the
sawmills (emphasis supplied)." DOC Br. I-11.

Thus, the Panel is faced with three claims. The petitioner claims that
the logs included in the numerator were not used to produce residual
products. The Department concedes that some residual products on
Canada's list could have been included in the denominator, but refuses
to do so claiming that it received insufficient data from the Canadian
Parties to enable it separate out residual products that qualify for
inclusion in the denominator. The Canadian Parties assert that all
products on the list they provided to the Department are produced by
sawmills and should therefore be included in the denominator.

The Panel finds that the Department did not provide a reasoned
explanation for its decision to categorically exclude all residual
products from the denominator. The Panel is aware that the problem
essentially involves the expertise of the agency; the Panel may not
substitute its judgment for that of the agency provided the agency is
supported by substantial evidence on the record. In this instance,
however, the Department's explanation is inconsistent with its prior
practice in this very investigation. The Department justified its
exclusion of residual products by stating that "they were not the result
of the lumber production process". As discussed above, the Department's
justification implies the premise that the benefit is tied to the lumber
production process -- a premise that the Department itself vigorously
opposed in the context of the numerator calculation. As shown in the
discussion regarding the calculation of the numerator, the Department's
regulations clearly require it to attribute the benefit of a subsidy to
all the products of a firm that receives the subsidy. *See* 19 C.F.R. §
351.525(3) (requiring the Secretary to "attribute a domestic subsidy to
all products sold by a firm"). The benefit in this case was calculated
on the basis of all logs entering sawmills. The Panel notes that
although the Department's explanation indicates an implicit reliance on
this argument, the Department never explicitly adopted the petitioner's
assertion that no logs in the numerator were used to produce residual
products.

Owing to these inconsistencies, the Panel remands the issue of the
inclusion of residual products in the denominator of the subsidy
calculation to the Department for further consideration. Specifically,
the Department should address whether all logs included in the numerator
were used solely to produce softwood lumber products and co-products. If
so, the Department may not include sales of residual products in the
denominator. The Department should clarify the basis for its rejection
of residual products on the list supplied by the Canadian Parties. Did
the Department reject residual products because "many" of such products
did not result from the lumber production process, or because the logs
used were never processed by sawmills? In both its Final Determination
and its brief, the Department relies on both justifications. Since the
Panel considers the two grounds inconsistent, the Department has not
provided the Panel with a clear path of the Department's reasoning. To
the extent that sawmills produce residual products using material from
logs that are included in the numerator, sales of such products should
be included in the denominator, regardless of the process employed in
their production.

The Panel recognizes that agency expertise is involved in this exercise
and affirms that the Department has broad discretion in the application
of its expertise. The Panel also recognizes that inclusion of residual
products in the denominator could pose analytical difficulties. For
example, the Canadian Parties claimed at oral argument that residual
products such as particleboard and fiberboard are made by sawmills from
sawdust. Sales of sawdust, as a co-product, are already included in the
denominator. Using co-products as inputs for residual products may
result in double counting thereby inflating the denominator. In
addition, processes used in the production of residual products may add
considerable value to the product, giving rise to the question of how to
account for that added value and still derive a subsidy rate that
adequately reflects the benefit received.

Claim IV: The Department failed to include sales of excluded companies
and sales from the Maritime Provinces in the denominator

The Canadian Parties argue that it is a "well-established principle"
that the Department must include sales of all producers of subject
merchandise of the country under investigation in the course of
establishing a country-wide rate. They claim that the Department
violated this rule by excluding from the denominator both sales of
excluded companies and exports from the Maritime Provinces.

The Canadian Parties rely on *IPSCO v. United States,* 899 F.2d 1192,
1197 (Fed. Cir. 1990) and *Kajaria Iron Castings, supra,* 156 F.3d.
1163, for the proposition that the proper procedure in determining a
country-wide rate is for the \"ITA to calculate a weighted-average net
subsidy rate by dividing the sum of all benefits provided in subsidy of
the subject goods by the total value of export sales of the goods in the
United States.\"

As far as the sales from the Maritime Provinces are concerned, the
Canadian Parties point out that Maritime timber is not subsidized and
hence companies from the Maritime Provinces should be excluded from the
CVD order. However, they say, exports from all provinces must be
included in the calculation of a country-wide rate. The Department\'s
prior practice affirms this principle: In *Fresh Atlantic Salmon from
Chile,* the Department investigated subsidies from only two regions but
used sales of all salmon from Chile in the subsidy rate denominator.

The Department's response is that the statute allows the Department to
calculate the subsidy rate on a country-wide basis if it determines that
calculation of company-specific rates would be impracticable. Commerce
claims that it properly excluded companies that did not benefit from the
subsidies from the calculation of the country-wide rate as well as sales
of companies from the Maritime Provinces as these provinces provided no
subsidy.

As to the Canadian Parties' claim that sales of these producers should
nevertheless have been included in the denominator, the Department
argues that the Canadian Parties are relying on legal standards that are
no longer in effect. Prior to the URAA, the statute contained a
preference for country-wide rates. In this period, a country-wide rate
was calculated through a weighted average of company-specific rates. The
current law, however, expresses a preference for company-specific rates,
and, when a country-wide rate becomes necessary, the rate is calculated
based on the aggregate use of the subsidies. The Department points to
the statute that now provides that the "estimated country-wide rate . .
. shall be based on industry-wide data regarding the use of subsidies
determined to be countervailable." 19 U.S.C. § 1671d(c)(5)(B).
Therefore, sales of companies that did not receive or use a subsidy, the
Department argues, should not be included in the denominator of the
country-wide subsidy rate calculation.

The Panel must determine whether the statute authorizes the Department
to exclude from the denominator of the subsidy calculation sales of
companies found to be subsidized at a zero or *de minimis* rate. The
relevant section of the governing statute provides that the "estimated
country-wide rate . . . shall be based on industry-wide data regarding
the use of subsidies determined to be countervailable." 19 U.S.C. §
1671d(c)(5)(B).

The Panel notes that the phrase \"industry-wide data regarding the use
of subsidies\" purports to guide the Department in determining the
numerator of the subsidy rate calculation. In other words, it requires
the Department to collect information about the amount of benefit that
is provided to the industry, in this case the lumber manufacturing and
remanufacturing industry, as a whole. This is in contrast to the methods
used to calculate the company-specific and all-others rates as such
rates are based on investigations of individual companies and thus rely
on company-specific data. The problem in this instance, however, is not
the amount in the numerator but rather the correct sales value to which
the numerator should be allocated.

In a paradigm case involving a country-wide investigation, the
numerator, calculated on basis of industry-wide data, would be allocated
to industry-wide sales, and the resulting CVD rate would be applied to
all producers. *See* 19 U.S.C. § 1677f-1(e)(2)(B). The Department\'s
regulations clearly contemplate that individual companies may be
excluded from the CVD order if their company exclusion requests are
granted. *See* 19 C.F.R. § 351.204(e)(4) (providing that in an aggregate
investigation, the Secretary shall consider requests for exclusion to
the extent practicable). Neither the statute nor the regulations address
how the Department should treat sales of excluded companies.

The Panel understands the Department's argument to assert that the
\"use\" language in the statute mandates that sales of companies that
have been found not to use the subsidy must be disregarded in the
denominator. Since the numerator must match the denominator, counting
sales of excluded companies would place these values in the denominator
without the benefit to the companies being present in the numerator.

The Panel is persuaded by this argument. The Panel finds additional
support for this principle in the statutory provision governing the
calculation of the all-others rate. *See* 19 U.S.C. § 1671d(c)(5)(A)(i).
The functional similarity of the all-others and the country-wide rates,
and the fact that the all-others and country-wide rates are always
grouped together and contrasted with the company-specific method in the
governing statute, indicates that principles derived from one of these
two methods are relevant in interpreting the other.

The two methods are juxtaposed against the company-specific method in §
1677f-1(e)(2), where the statute affords the Department a choice between
calculating an all-others rate or a country-wide rate in the event that
the preferred method, the company-specific rate, is not practicable
owing to the large number of producers involved. *See* 19 U.S.C. §
1677f-1(e)(2). Second, the Panel notes that the statute describes both
methods under a common provision entitled \"Methods for determining the
all-others rate and the country-wide subsidy rate\". *See* 19 U.S.C. §
1671d(c)(5). Finally, an additional indication of the two methods\'
functional similarity is the fact that under the pre-URAA statute, the
country-wide rate was calculated in the same way as the all-others rate
is calculated in the present statute. *See IPSCO, supra,* 899 F.2d at
1196.

More specifically, an \"all-others\" rate is a combination of
company-specific rates and the country-wide rate. When many producers
are involved in an investigation, the Department may determine
individual rates for some producers either by relying on a statistically
valid sample or by selecting those producers that account for the
largest volume of exports of subject merchandise. *See* 19 U.S.C. §
1677f-1(e)(2)(A). That means that the selected producers will be
countervailed at company-specific rates. The calculation does not stop
there, however. The Department must calculate an all-others rate which
will be applied, as the name suggests, to all other producers not
individually investigated. The all-others rate is equal to weighted
average of rates established for individually investigated producers.
*See* 19 U.S.C. § 1671d(c)(5)(A)(i). The statute specifically provides
that such an average shall not include any zero or *de minimis* subsidy
rates or rates determined under the "facts available" in situations in
which an interested party fails to cooperate. *Ibid.*; *see also* 19
U.S.C. § 1677e(a)(2)(D) (providing that when an interested party fails
to provide the requested information, the Department may \"use facts
otherwise available in reaching the applicable determination\"). In
other words, where any of the producers that the Department individually
investigates is subsidized at a rate of zero or at a *de minimis* rate,
that rate is not included in the weighted average that produces the
all-others rate.

To use the aid of an example, assume that the Department individually
investigates companies A, B, and C, and determines that company A is
subsidized at a rate of 15%, company B at a rate of 20%, and company C
at a rate of 0%. For purposes of calculating the all-others rate, the
Department would average only the rates for companies A and B, and not
the rates for all three producers. This reflects the principle that only
those producers that use the subsidy may provide the basis for the
all-others rate calculation. This position is further bolstered by the
fact that rates calculated on the basis of adverse facts available are
also not used in calculating the all-others rate. Thus Congress wanted
to arrive at a methodology that would allow the Department to determine
rates that most appropriately reflect the level of subsidization in
investigations in which it is not possible to use the most reliable
method -- the company-specific rate. By excluding zero and *de minimis*
rates, Congress wanted to avoid artificial deflation in the all-others
rate. Similarly, excluding rates based on adverse facts available, which
would most likely exceed the actual level of subsidization, prevents
inflation of the all-others rate.

As the above discussion shows, in the all-others rate provision Congress
has affirmed that the calculation of subsidy rates should be based on
the rates of companies that actually use the subsidy. The Panel notes
the similarities to calculation of all-others and country-wide rates.
The Panel also notes that the calculation of a country-wide rate does
not involve averaging of company-specific rates but rather an allocation
of the industry-wide data on the use of the subsidy to the relevant
sales. Even so, when faced with the problem of how to account for sales
of an excluded company, the Department is faced with essentially the
same problem as when it must average several company-specific rates that
include zero or *de minimis* rates. In both situations, inclusion of the
zero-rate company would deflate the subsidy rate. The Panel finds that
the statute clearly expresses the command that such a deflation is not
authorized.

This approach is reasonable. The basic purpose of countervailing duty
discipline is to reach a CVD rate that will adequately offset the
benefit provided without exceeding the actual level of the benefit
received. The Canadian Parties\' approach could result in a CVD rate
inadequate to implement the statutory purpose. Since unsubsidized
producers are excluded from the numerator, leaving their sales figures
in the denominator could provide an unwarranted reduction in the subsidy
rate calculated for other producers. Producers of subject merchandise
could be assigned a subsidy rate that is less than the benefit they are
receiving.

Application of the methodologies proposed by the parties in this
proceeding may be illustrated as follows. Assume that there are only two
groups of producers of the subject merchandise in an exporting country,
and assume that the government provides a subsidy benefit of \$100.
Assume further that group A receives no benefit while group B receives
the whole \$100. Total sales in the investigating country amount to
\$1,000, of which \$200 are sales by producers in group A, and \$800 are
sales by producers in group B. Thus, group A is subsidized at a rate of
0% while group B is subsidized at a rate of 12.5%. Companies in group A
are granted exclusion orders.

According to the Department\'s approach, sales of group A would be
excluded from the denominator, and thus the country-wide CVD rate would
be set at 12.5%. Group A would pay no countervailing duties while the
Customs Service would collect \$100 in CVD from group B. This procedure
would successfully offset the benefit of the subsidy.

Under the Canadian Parties\' approach, sales of group A would be
included in the denominator, but the products of group B would not be
subject to CVD. The country-wide CVD rate would be set at 10%. Customs
would collects \$80 in countervailing duties on imports from group B and
nothing on imports from group A. Under this approach, group B would
retain \$20 of the \$100 benefit received. In different terms, the
Canadian Parties\' approach would allow group B to remain subsidized at
a rate of 2.5%.

The Panel holds that excluding from the denominator sales of companies
that were found to receive a zero or a *de minimis* subsidy is
consistent with the statue and affirms the Department\'s determination.

Claim V: The Department used unreliable data to calculate final mill
values

The Canadian Parties claim that the Department abandoned its prior
practice that favored the use of first mill data in calculating the
subsidy rate but included final mill data as well. \"First mill\" data
represents sales of lumber coming out of sawmills while \"final mill\"
data refers to sales of remanufactured products.

The main problem with this approach, according to the Canadian Parties,
is the lack of reliable data upon which to determine final mill values.
Canada maintains rigorous and reliable statistics on first mill values,
but not on final mill sales. However, most of the data the Department
required to assess final mill sales is confidential and cannot be
disclosed according to Canadian law. There are two possible sources of
data for final mill sales: the 1997 Statistics Canada report (called
\"Exhibit 36\" in this proceeding) and a report compiled by the Pacific
Forestry Center (\"PFC report\"). Canada worked with economists from the
Pacific Forestry Center to estimate the value that remanufactured
products add to the shipments of softwood lumber. The Canadian Parties
contend that the Department relied on Exhibit 36 although the data used
in Exhibit 36 is far less accurate than the data used in the PFC report.
According to the Canadian Parties, Exhibit 36, prepared in 1997, does
not contain data relating to the period of investigation nor does it
contain price indices that could be used to project "final mill" sales
values to the period of investigation. An additional problem with the
Exhibit 36 data is that it consists of sales of in-scope remanufactured
products that do not originate from sawmills. Finally, the Canadian
Parties assert that Exhibit 36 is based on understated sales figures
from only two provinces, which sales figures the Department used to
extrapolate to a country-wide \"final mill\" value for six other
provinces and territories. Hence the Canadian Parties argue that the
Department\'s constructed value based on Exhibit 36 is not supported by
substantial evidence on the record.

As an illustration of the inaccuracy of the Department\'s constructed
data, the Canadian Parties point to the discrepancy between the PFC
report and Exhibit 36 regarding the value of final mill sales from
British Columbia. According to the PFC report, which the Department
verified, in-scope value-added shipments in British Columbia alone
amount to C\$1,366,109,265. Yet, the value the Department constructed in
the final determination for six provinces and two territories, including
British Columbia, was only C\$272,895,026 -- less than one fifth of the
verified amount for British Columbia alone.

Canada also complains that the Department named new products as subject
merchandise late in the investigation. The data from Exhibit 36 does not
contain the value of shipments for those new products since the
Department did not request that information at the time Exhibit 36 was
provided.

Both the Department and petitioner agree that to arrive at an accurate
final mill shipment value, there can be no double-counting. When
assessing the value of remanufactured products, the Department must
deduct the value of the input lumber that is already counted in the
first mill value. Statistics Canada had no way to perform this deduction
in preparing Exhibit 36.

The Department also conceded that in order to use the 1997 Statistics
Canada data in Exhibit 36, an inflation adjustment should have been
performed. The Department failed to perform the inflation adjustment.

The Canadian Parties argue that, by using the 1997 Statistics Canada
data and rejecting PFC data, the Department in effect applied an
\"adverse inference\". The Department may do this only if the interested
party fails to cooperate. However, the Government of Canada cooperated
fully. Nevertheless, the Department based its adverse inference on the
fact that the lack of data for every province in Exhibit 36 is the
\"direct result of Statistics Canada\'s refusal to provide the data on a
Province-specific basis.\" H-48 (quoting Commerce Decision Memo). But
provincial information on \"final mill\" sales could not be disclosed as
it is illegal to do so under Canadian law that protects competitive
information. The United States has similar laws.

The Canadian Parties argue that the Department\'s final mill values bear
no rational relationship to country-wide sales of remanufactured
products. The Department purported to calculate the rate on final mill
values but effectively did so on first mill data. If the Department
intended to use a final mill calculation, it was required to use an
estimate that reasonably reflects the value of Canadian final mill
sales.

Canada also argues that the Department\'s past practice in Lumber III is
to prefer final mill values unless first mill data is much more reliable
and Canada has made every effort to provide accurate first mill values.
In the latter case the Department will calculate the subsidy rate using
first mill data. U.S. Customs must then collect duties on that value as
well. In the present case, however, the subsidy rate was calculated
using a sawmill shipments denominator (\"first mill\") but that rate was
applied to the total value of shipments by value-added remanufacturers.

The Department argues that since the scope of this investigation
included both lumber and certain remanufactured products, the Department
was correct in using final mill data. This method is in accordance with
the Department\'s practice of using final mill values in the calculation
of subsidy rates. In spite of the preference for final mill values, the
Department will use first mill data if final mill values are not
available or are not reliable.

Commerce points out that the problem in this case is that the U.S.
Customs Service assesses the amount of duty to be paid based the entered
value of a product. Under the Canadian Parties' proposed methodology,
duties should be assessed on the value of the lumber after being
processed only by the first mill. But, this method would ignore the
value added by the remanufacturing process and would depart from the
Department practice of assessing the countervailing duty based on
entered value.

The Department claims that it repeatedly asked the GOC to provide
reliable information on final mill values. The GOC had available
information compiled by Statistics Canada which collects information
through three different procedures: (1) an Annual Survey of
Manufacturers; (2) a Monthly Survey of Manufacturers; and (3) a Monthly
Survey of Sawmills and Planing Mills. The Government of Canada\'s
position had been that the Statistics Canada information was not
reliable. On December 17, 2001, Canada submitted the Statistics Canada
1997 Annual Survey of Manufacturers (\"Exhibit 36\") for British
Columbia and Alberta. As for the remaining provinces, the GOC indicated
that it could not provide the requested information due to
confidentiality restrictions. Then, on January 7, 2002, the GOC
submitted a study from the Pacific Forestry Center (\"PFC\"), which
estimated the total value of remanufactured lumber shipments in British
Columbia.

Commerce claims it uncovered serious flaws in the PFC study and instead
used the information contained in Exhibit 36 to calculate an estimate of
the value of remanufactured products. According to Commerce, it may
reject evidence that is demonstrably inaccurate. Commerce asserts that
the flaws in the PFC report made it impossible for the Department to
establish the reasonableness of the methodology used.

The Department concludes that its estimate of the value of
remanufactured products was a reasonable exercise of administrative
discretion and not an application of adverse facts available, as the
Canadian Parties contend. The Department made a reasonable choice
between two sets of data to use in the construction of this estimate.

Here, the Panel must review a factual determination made by the
Department that the PFC report was not sufficiently reliable. Factual
determinations by the Department must be upheld if they are supported by
substantial evidence on the record. The Panel may not reweigh the
evidence and must affirm the Department\'s finding even if a contrary
result is possible from the record evidence.

The Panel finds that the Department provided a reasoned explanation of
its finding that the PFC report is not reliable. Owing to constraints
imposed by Canadian law on the release of the relevant data, both
studies were limited to data from only one or two provinces. In fact,
Exhibit 36, which the Department relied on, contained data compiled by
official government agencies for two provinces -- British Columbia and
Alberta -- while the PFC report was compiled by a private company and
contained data only for British Columbia. The evidence on the record
indicates that the Department considered the PFC report in detail and
addressed the arguments made by the Canadian Parties. *See* 19 U.S.C.
§1677f(i)(3)(A (3)(A).

The Panel did not consider it necessary or appropriate to examine all
the technical aspects of the questions at issue, but is satisfied that
the Department\'s decision to rely on Exhibit 36 is supported by
substantial evidence. The Panel affirms that decision.

# **COALITION ISSUES**

The Coalition, as noted, on May 5, 2002, filed a complaint in this
action which alleged errors of both law and fact in the Department's
determination.

The legal arguments generally concern the manner in which the Canadian
provinces administer the stumpage programs. In substance, they allege
that timber is sold by the provinces at administered, non-competitive
prices far below market value, thereby providing a subsidy. These issues
are dealt with insofar as they are relevant to the panel's decision,
elsewhere in this opinion.

The Coalition also raises specific factual aspects of the Department's
decision which are claimed to be unsupported by substantial evidence or
otherwise not in accordance with the law. These issues consist of claims
that the Department incorrectly failed to make proper adjustments in
comparing the prices of benchmark timber to subject timber, and issues
concerning the calculation of the subsidy.

With regard to the first set of issues, the Coalition agrees that it was
proper for the Department to adjust the stumpage prices upwards to
account for certain cash payments required by the provinces to be made
as a condition of harvesting timber. These payments represented the
costs of such things as silviculture levies, road building, and payments
to special forestry funds. It is contended that the Department failed,
however, to adjust the prices of benchmark timber to account for similar
payments made by U. S. timber harvesters. In addition, it is claimed
that the Investigating Authority failed to properly value coastal red
cedar, sitka spruce, and cypress in Western Washington. Also complained
of was Commerce's calculation of sawtimber prices in Michigan for
purposes of comparison with Ontario, and the failure to use Montana
timber prices in the benchmark for comparison with the Province of
Alberta. In light of the Panel's conclusions about the use of U.S.
prices as benchmarks by the Department, it concludes that the issues
raised by the Coalition are moot.

The other issues regarding calculations are dealt with in the
"calculations" section of this report.

# **COMMERCE'S REQUEST FOR A REMAND**

The Investigating Authority has requested relief in the form of a remand
to address certain issues. These relate to adjustments regarding
secondary road construction, the reimbursement of silviculture overhead
costs, and forest management and planning costs in Ontario, the
calculation of road construction and maintenance adjustment for
Saskatchewan and Manitoba, and to explain its rationale for not granting
an adjustment for supplemental fire protection costs in Manitoba.

The only objection by the Canadian Parties to remand for these reasons
was raised by the Province of Saskatchewan. As the Panel understands the
issue related to Saskatchewan, the Department allowed as an adjustment
in the final decision, the costs for road building on the basis that the
tenure holders were required to construct roads to access the forests.
However, the adjustment may have included the building of tertiary
roads, while the building of only primary and secondary roads was
mandated by the province. The Panel is satisfied that, to the extent
that this issue survives the remand, the province will have an
opportunity to address this question with the Department. The balance of
the issues appears to have been obviated by our decision.

# **CONCLUSION**

For the reasons set forth in the foregoing opinion, the Panel hereby
remands this matter to Commerce for further proceedings consistent with
this opinion. Commerce is directed to report its Determination on Remand
within sixty (60) days from the date of this decision.

[Daniel A.
Pinkus]{.underline}\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Daniel A. Pinkus, Chair

[William E.
Code]{.underline}\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

William E. Code

[Germain
Denis]{.underline}\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Germain Denis

[Milton
Milkes]{.underline}\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Milton Milkes

[Daniel G.
Partan]{.underline}\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Daniel G. Partan

[^1]: The panelists wish to express their appreciation for the support
    received from Panelist Assistants Sheri Radke, Predrag Rogic and
    Paula Smith.

[^2]: The United States requested the establishment of an Extraordinary
    Challenge Committee under the FTA on the basis of alleged conflict
    of interest by two Canadian panelists. The Extraordinary Challenge
    was rejected.

[^3]: Commerce had previously excluded trusses, I-Joist beams, pallets,
    fence pickets, bed frames, garage doors, certain lumber panels,
    complete door frames, complete window frames, certain furniture, and
    other items if certain requirements were met. *See* Preliminary
    Determination, 66 Fed. Reg. at 43187-88.

[^4]: On April 2, 2001, Commerce received a petition from the Coalition
    and the two unions. The petition was amended on April 10, 19 and 20,
    2001. The amendment submitted on April 20, 2001 added the four
    lumber producers as petitioners.

[^5]: 19 U.S.C. § 1671a(b)(1).

[^6]: 19 U.S.C. § 1671a(c)(1)(A)(ii).

[^7]: 19 C.F.R. § 351.202(b)(3).

[^8]: 19 C.F.R. § 351.202(b)(1).

[^9]: *Black's Law Dictionary* at 119 (7^th^ ed. 1999).

[^10]: As discussed below, the Panel notes that this is the second
    occasion on which Commerce has found a "world market price" under
    the second regulatory benchmark. The first was in *Final Negative
    Countervailing Duty Determination: Live Cattle from Canada* (October
    22, 1999). In two other matters, Commerce arrived at a "world market
    price" in the context of an upstream subsidy analysis conducted
    under 19 U.S.C. § 1677-1. *See Final Affirmative Countervailing Duty
    Determination: Steel Wheels from Brazil* (April 18, 1989); *Final
    Affirmative Countervailing Duty Determination and Countervailing
    Duty Order: Circular Welded Non-Alloy Steel Pipe from Venezuela*
    (September 17, 1992).

[^11]: *See* Decision Memo at 44; Petitioner's February 14 Memo at
    35-36.

[^12]: *See* Canada Cross-Border Report I at 34, 45, 51-66, 136-48.

[^13]: The term "Complainants" refers to the British Columbia Lumber
    Trade Council ("BCLTC"), the Ontario Forest Industries Association
    ("OFIA"), the Ontario Lumber Manufacturers Association ("OLMA"), the
    Québec Lumber Manufacturers Association ("QLMA"), Tembec Inc.,
    Weyerhaeuser Corp., West Fraser Mills, Ltd., and Canfor Corporation.

[^14]: The Canadian Parties charge that this latter statement is
    "disingenuous and belied by the Department's actions, as the
    Department refused to consider company exclusion applications from
    all but 30 applicants, all of which were primary mills and not
    remanufacturers. *See* Commerce Feb. 20 Exclusions Memo at 3-4, P.R.
    750." Canadian Parties Joint Brief at II, 2-3, note 2. The Panel's
    discussion of company exclusions is in part XI *infra.*

[^15]: Indeed the Petitioners call "used railroad ties" a "misnomer",
    referring to the product imported by Anderson as
    "creosote-impregnated landscape timbers. See Petitioners' Brief at
    675-76.

[^16]: The Panel finds no merit in Anderson's additional arguments
    concerning the relevance of classifications made by the Customs
    Service or of provisions of the expired Softwood Lumber Agreement,
    which the Panel agrees has no effect on the Department's
    determination of the scope of the present investigation.

[^17]: The Panel notes a panel constituted under the WTO recently
    concluded that, where there is evidence of sales by independent
    harvesters to unrelated sawmills, and that downstream producers of
    subject merchandise purchase inputs from unrelated sawmills,
    Commerce must conduct a pass-through analysis to determine whether
    the alleged subsidy provided to the tenure holder is passed through
    to the producer of the subject merchandise. The WTO Panel based its
    conclusion on the general language of Article 1.1 of the WTO SCM
    Agreement and reasoned that, if the producers of the subject
    merchandise are not recipients of the alleged subsidy, a
    pass-through analysis must be conducted to confirm whether the
    benefit has been passed along to the finished product. *See* WTO
    Panel Report, *United States -- Preliminary Determinations with
    respect to Certain Softwood Lumber from Canada*, at ¶¶ 7.68-7.79
    (WD/DS236/R, Sept. 27, 2002).