WT/DS236/R
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ANNEX A
Parties Responses to Questions – First Meeting of the Panel
Contents Page
Annex A-1 Responses of Canada to questions posed in the context of the first
substantive meeting of the PanelA-2
Annex A-2 Responses of the United States to questions posed in the context
of the first substantive meeting of the PanelA-13WT/DS236/R
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ANNEX A-1
RESPONSES OF CANADA TO QUESTIONS POSED
IN THE CONTEXT OF THE FIRST SUBSTANTIVE MEETING
(21 May 2002)
1. In situ  natural resources are not “goods” within the meaning of the SCM Agreement.
Accordingly, the right of exploitation of such  resources does not come within the meaning of
“provision of goods” in Article 1.1(a)(1)(iii).  This does not mean that the consequences flowing from
real property rights in general, and resource exploitation rights in particular, cannot come within thescope of other parts of Article 1.1.
A land grant, or the grant of a building, may come within Article 1.1.  However, such a grant
would not constitute the provision of “goods”.  Land, as an asset, is often a source of revenue.  A land
grant, therefore, can constitute the foregoing of revenue that the owner might expect from its rental or
sale.  Whether a 99-year lease comes within the terms of Article 1.1 depends on the terms of the lease
and, as mentioned above, the prevailing legal regime for leasing of publicly-owned land.
Finally, for the purpose of Article 1.1, real property rights such as those in land, leases or
in situ  natural resources are no different from property rights in patents or copyrights (or other
intangibles).  It is not that the “granting” of th ese rights in each instance can never amount to a
financial contribution, but that such grants  do not amount to the provision of “goods”.
2. (a) Yes.  The term “goods” in Article 1.1(a)(1)(iii) has the same meaning and scope as “products”
used elsewhere in the SCM Agreement and the WTO Agreement.  The ordinary meaning of “goods”
is “tangible or movable personal property other than money; (especially) articles or items of
merchandise (goods or services)”.
The context for this term in the SCM Agreemen t is highly instructive as to its scope and
confirms the ordinary meaning of “goods” as tradable items with an actual or potential customs
classification.
• First, in Part II, Article 3.1(b) refers to “the use of domestic over imported goods .”  Evidently,
“goods” refers to tradable items: rights to in situ  natural resources cannot be “imported” or
“used”.
• Second, Parts III and V of the SCM Agreement refer to “products”.  There is no indication
anywhere in the text that the “product” or “imports” referred to in these Parts is different from the
“goods” referred to in Article 1 or 3.
Other agreements in the WTO Agreement are also particularly useful as context.
• First, countervailing measures are provided for in Article VI of the GATT 1994, as an exception
to Article II.  Therefore, the coverage of Part V of the SCM Agreement and that of Article II of
the GATT 1994 must be the same.
• Second, the interpretative no te to Annex 1A of the Marrakesh Agreement provides a rule of
conflict between the GATT 1994 and the covered agreements.  The logical conclusion of the noteWT/DS236/R
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is that the agreements set out in Annex 1A apply to the same products, or “goods” as those subject
to the GATT 1994.
• Third, Article 1 of the TRIMs Agreement (TRIMS) provides that the TRIMs “applies to
investment measures related to trade in goods  only.” Article 2 requires that, “… no Member shall
apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT1994.”  The unambiguous implication is that the “goods” referred to in Article 1 of the TRIMs are
the same as the “products” covered by Articles III and XI of the GATT 1994.
• Fourth, the Agreement on Implementation of Article VII of the GATT 1994  refers to imported or
exported “goods”.  There is no indication that the term has a different meaning in this agreement
than the same word in other agreements in Annex 1A, or indeed the term “product” in the GATT
1994.
• Fifth, the Agreement on Rules of Origin  also refers to “goods” in the context of Articles I, II, III,
XI and XIII of the GATT 1994.
Finally, nothing in the object and purpose of the SCM Agreement suggests that the term
“goods” in Article 1.1 should be read as anything other than tradable items with an actual or potential
customs classification.  To the extent that there is a concern that certain forms of government largessemay not be captured by definition of “goods”, the Panel may consider the following:
• First, as the panel in United States – Export Restraints  noted, Article 1.1(a)(1) does not cover all
government actions that may affect the market, but only those that fall within the definition of“subsidy”.
• Second, land or lease grants may well be covered by other provisions in Article 1.1(a)(1).  It is
not, however, necessary for this Panel to define the precise scope of that Article to arrive at theconclusion that real property rights are not “goods”.
The Spanish and French versions of the WTO Agreement are useful in confirming the
meaning of the term “goods”.  In both texts, the word “goods” is translated into both “bienes” and“productos” as well as “biens” and “produits” in the Spanish and French versions, respectively.  For
the purposes of the other two official versions of  the SCM Agreement, the term “goods” in Article 1.1
has the same meaning and scope as “products”.
The Appellate Body also uses the terms “goods” and “products” interchangeably as reflected
in their decisions in both EC – Bananas (para. 221) and Canada – Autos (para. 140).
(b) No.  A building that is affixed to the land is not “goods” for the purposes of Article 1.1 of the
SCM Agreement.  Such a building would be real property.
(c) Heading 0602 covers “live trees … of a kind commonly supplied by nursery gardeners or
florists for planting or for ornamental use.”  Live firs of small dimensions that are fully transportable
are properly considered as goods since they fall under the Harmonized System.  Fully-grown live firs
in the form of standing timber are not “goods” for the purposes of the WTO Agreement.
(d) The fact that “services” are mentioned in the first half of Article 1.1(a)(1)(iii) does not in any
way affect the scope of “goods”.  Goods are those tradable items that come or may come under thecoverage of the GATT 1994, while services are those economic activities that would fall within the
scope of the GATS.  Other assets or property – such as intellectual property rights – do not fall within
Article 1.1(a)(1)(iii) at all.WT/DS236/R
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3. Where a private party produces a product from natural resources in which it has property
interests, the “goods” so produced are not provided  by government.  Where, however, a lorry-full of
iron-ore is delivered by the government to a processor, this constitutes the provision of goods.  If the
government produces the iron ore and offers it to a steel producer willing to load and haul the ore toits mill the government would also be providing goods.  However, granting exploitation rights to a
resource that is part of the land and that cannot be traded, does not constitute the provision of goods.
4. Under the Canadian constitution, provinces have title to the majority of public property and
exercise exclusive jurisdiction to legislate in relation to the development, conservation, and
management of non-renewable natural resources and forestry resources.
5. Yes.  The text of Article 14(d) unambiguously requires that a Member determine the
adequacy of remuneration “in relation to prevailing market conditions for the good or service in
question in the country of provision”.  The ordinary meaning of “prevail”, read in context, is “exist”.
The reference to “prevailing market conditions” is, therefore, to conditions that actually exist in the
country of provision.  There is nothing in the context, object and purpose or the negotiating history ofArticle 14 that would permit reading this as “in another country”.
Further contextual evidence may be found in th e Accession Protocol of China.  The Protocol
specifically permits the use of “methodologies for identifying and measuring the subsidy benefit
which take into account the possibility that prevailing terms and conditions in China may not alwaysbe available as appropriate benchmarks.”  If Article 14(d) permitted Members to consider conditions
outside “the country of provision”, this excep tional treatment would not have been necessary.
Market benchmarks can also still exist where there is a government monopoly.  For instance,
if the government’s monopoly was over domestic production of the goods in question then the
government price could be compared to the price of  imports of the same good.  Even where there are
no imports, remuneration is “adequate” where the government operates on a market basis.  All of the
provinces submitted substantial and unrebutted, factual evidence and economic analyses
demonstrating that they were acting in a manner consistent with market principles.
6. The requirements for entering into tenures vary substantially, but before tenures are granted,
provinces will require a demonstration of forest management expertise and financial capabilitiessufficient to undertake required obligations.  Subject to the qualifications, there are no limitations on
who can enter into these agreements.
The responsibilities that a long-term tenure holder must agree to undertake generally include:
sustainable forest management, forest management, development and operational planning, publicconsultations, silviculture prescriptions, construction or maintenance of wood processing facilities,
preparation of forest inventories, pest and disease control, timber cruises, scaling, firefighting and
forest research activities.
In most cases, tenure holders are free to sell their logs to unrelated sawmills. There are
generally no requirements either by statute or by the terms of tenures that require tenure holders to sell
to specific mills or to sell at specific prices or under specific terms and conditions.
7. The log price data provided to Commerce prior to the PD is described by province below.
Logs are highly heterogeneous and prices differ by species, size and quality.  As with stumpage rates,any comparison of average prices must at a minimum include adjustments for these characteristics.
As well, log prices reflect the value of a delivered good; that is, they include the cost of harvesting
and transporting the good as well as all tenure obligation costs borne by the harvester.  Accordingly,
log prices are not the same as stumpage ratesWT/DS236/R
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B.C. is home to the most organized log exchanges in Canada. B.C.’s information is
summarized in the following table:
Volume (m3) Value ($) Average
Value ($/m3)
Vancouver Log Market (2000/2001) 6,559,073 655,366,782 99.92
Log transactions in BC Interior (1999) 11,309,545 782,088,207 69.15
Vernon Log Yard (2000/2001) 54,907 3,632,694 66.16
Revelstoke Log Yard (2000/2001) 28,754 3,157,601 109.81
The VLM is an informal arrangement amongst the log supply departments of various coastal
B.C. licencees, the log buyers for small companies or  their agents, and the traders employed by log
brokers who buy and sell logs.  The VLM does not distinguish between logs originating from
privately owned, federally owned or provincially owned land.
There is no similarly organized log market in the interior of B.C..  It consists of a series of
small, separate local markets.  The Vernon log yard was established in March 1993 and obtains its
logs from timber sales harvested in local districts from a variety of tenure arrangements.  The
Revelstoke log yard is extremely small and the logs sold through it are mainly high-value cedar
sawlogs.
Alberta provided survey information it collects in the ordinary course of business on average
log prices paid by purchasers.  The following ta ble shows the calendar year volume and value (FOB
purchasing mill) of these transactions.  This data does not break out private land sourced logs from
logs harvested on provincial lands and also does not provide information on species type or quality.
Excerpted from Table 32 - Exhibit AB-LER-5 Volume and Value of Domestic Arm’s-length
Log Sales from Survey
Total Softwood
Log Harvest m³Total Arm’s-length
Transaction Softwood
Log Volumes m³Percent Arm’s-length
Transaction
Softwood Log
VolumesArm’s-length logs sales
prices (FOB
purchasing mill) $/m³
2000 14,168,657 884,552 6.24% 50.40
In its  initial questionnaire response, Ontario provided Commerce with the results of a survey
and a report done by the independent accounting firm of KPMG.  The first schedule in the survey
itemized the costs of SPF (spruce, jack pine and fir) logs from Crown lands delivered to the mill gate.
KPMG reported that total weighted average costs of delivered SPF logs cut from Crown land of
$50.42 m3.  The second schedule in the survey reported purchases of timber in Ontario by third parties
of timber harvested from several jurisdictions.  The prices for these purchases were established bynegotiation between buyer and seller.  Weighted average market prices reported by KPMG ranged
from $47.36 m
3 for timber harvested from Ontario private land and $49.15 m3 for timber harvested
from Ontario Crown land.
There are two separate and distinct markets for the supply of standing timber in Québec: the
public forest and the private forest.  The only private forest prices obtained by Québec are through
annual market surveys and a tri-annual census.  Québec uses these market prices to set public forest
stumpage rates.  Québec provided the Department of Commerce with private stumpage price data for
the three years 1998, 1999 and 2000.WT/DS236/R
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8. By “arm’s-length” prices, Canada means prices of log sales between a willing seller and a
willing buyer that are not related, i.e. market prices freely negotiated between independent parties.
Such sales include both sales for a specific price and sales transacted by means of “swapping” a
bundle of different types of logs between unrelated tenure holders.
An estimate of the volume of timber harvested in B.C.  by companies operating at arm’s-
length from sawmills can be obtained by analysing the timber harvested under specific licences and
permits separately for companies that have and do not have sawmills.  This analysis, based on
information on the record prior to the PD, indi cates that 30.09 per cent of the timber from Crown
licences was harvested by companies that do not have sawmills.  In the aggregate (including private
land), 33.0 per cent of timber harvested in the province during the POI was harvested by entities that
did not have sawmills.
Québec’s TSFMA tenures require the tenure holder to process the public timber they harvest.
Forest management contracts (FMC) do not require tenure holders to process timber.  Sales from
Federal lands are largely stumpage sales done by sealed bid tender.  None of the 40,000 registered
private woodlot owners is required to process timber.  The tenure data submitted prior to the  PDshows that up to 27 per cent of the provincial harvest will be sold through arm’s-length transactions
from private lands and FMC tenures.  In addition, almost 35 per cent of the total log supply comes
from arm’s-length transactions from private lands, FMC tenures and log imports.
Approximately 30 per cent of the softwood ti mber harvested from Ontario’s Crown land
during Commerce’s period of investigation was sold by tenure holders to third parties who
subsequently processed this into forest products.
Alberta  indicated to Commerce that it had survey data (both price and volumes) on arm’s-
length transactions in volumes that represented approximately 6 per cent of the total softwood logharvest in Alberta.  A sample of a substantial portion of the forest industries in Alberta was used to
develop these data. “Arm’s-length” transactions in this survey were defined as transactions entered
into freely between totally unrelated parties.  Furt her, this sample was limited to transactions where
the cash price was the only consideration exchanged.
In addition to the survey data giving volumes and prices, Alberta also has data on the volume
of logs delivered to mills from sources other than from their own forestry tenures.  Alberta’s recordsshow that volumes of timber traded or swapped fo r other logs or woodchips and purchased in cash
transactions or in exchange for other consideration comprised 3,900,000 m
3 in the period of
investigation or slightly more than 30 per cent of the total softwood sawlog harvest.
Prior to the PD, Canada submitted to Commerce applications for exclusion from 98 producers
who purchased logs or lumber at arm’s-length.  Of these, 78 were remanufacturers unrelated to firms
with harvesting rights and at least 8 were primary mills that purchased all of their log inputs in arm’s-
length transactions.
9. The programmes and policies investigated by Commerce were provincial stumpage programs,
not the sale of logs. Indeed, the US used state stumpage programmes as benchmarks rather than log
sales. There was a significant amount of information on the record at the time of the PD regarding a
variety of sources of data that might have been used by Commerce as benchmarks. This information
included data on private stumpage, competitive tenures in certain provinces and other evidence that
provinces operate their stumpage systems on market terms. Three provinces – Alberta, Ontario andQuébec – provided extensive evidence related to private markets operating within their provinces.
Alberta also provided Commerce with data broken out for its competitively sold tenures.  The four
primary exporting provinces, representing 96 per ce nt of the exports of softwood lumber, providedWT/DS236/R
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information demonstrating that they operated their stumpage systems in a manner consistent with
market principles.
The size of the available in-country benchmark market should not determine the adequacy of
the data. Rather, adequacy should be assessed taking into account other factors, including theexistence of willing buyers and sellers and other indicia of a viable market.  For example, arbitrage
works between different timber supply sources to ensure that stumpage rates derived from the sale of
a relatively small volume of harvesting rights from one source can represent a valid basis for
comparison with stumpage rates from other sources.
One example of arbitrage is found in Québec, where the majority of timber on private
forestlands is sold as delivered logs; that is, the owner undertakes the logging himself, or contractswith a logger to do the harvesting.  A smaller portion of Québec’s private harvest is sold as sales of
harvesting rights.  Both of these sale prices represent valid competitive market prices because the
opportunity for arbitrage between the private log and private stumpage markets exists.
10. The factual determinations by Commerce in the three previous lumber cases are highly
relevant in establishing that cross-border benchmarks are inherently arbitrary and capricious.  In these
cases, Commerce made specific factual findings and concluded that so many factors affect the
comparability of adjacent US and Canadian timber that valid cross-border comparisons are
impossible.  The facts underlying Commerce’s findin gs have not changed since then and the findings
still hold true today, regardless of the change in the legal regime.
Accordingly, Commerce’s finding in Lumber I  that no unified North American market for
stumpage existed is valid today.  For example, the wide differences between the US and Canada in
terms of species composition; size, quality, and density of timber; and terrain and accessibility, remain
unchanged.
As for the factors that can be influenced by government, these also have remained unchanged.
For example, supply of timber from public lands in the US is still limited, and, as referred to by
Commerce in Lumber III , variations in exchange rates and other factors tied to the existence of the
political border between the two countries remain.
In Lumber III  Commerce relied on private forest surveys in Québec because it found these
surveys accurately reflected market driven prices in Québec.  Québec’s system has not changed since.
Yet, in Lumber IV , not only did Commerce ignore such surveys that were on the record prior to the
PD, it ignored every other possible in-country benchmark put on the record by the other provinces.
11. (a) No.  Under Part V of the SCM Agreement, a Member may impose a countervailing measure
only where it has established that a subsidy exists in respect of each entity producing or exporting the
subject merchandise subject to the measure.  Specif ically, the investigating authority must establish a
“financial contribution” by government that confers a “benefit”.  Nothing in the SCM Agreement
permits an investigating authority to presume the existence of a subsidy simply because the original
recipient provides inputs to a downstream producer.
Where the subject merchandise is not produced or exported by the original recipient of an
alleged subsidy, the investigating authority must esta blish the existence of a subsidy in respect of the
downstream producer.  That is, it must establish that a financial contribution by government has
conferred a benefit on that producer.  In the absence of a direct relationship between the downstreamproducer and the government, Article 1.1(a)(1)(iv) sets out the criteria for determining when a
government has made an indirect financial contribution to that downstream producer.WT/DS236/R
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The EC argues that an “effects” test should be incorporated into the subsidy definition.
However, Article 1.1 does not include such a test.  The enquiry under Article 1.1 of the SCM
Agreement is whether a government has made a “financial contribution” that confers a “benefit”.   The
panel in United States – Export Restraints summarized this analysis:
We believe … that the appropriate way to conceive of “financial contribution” is
purely as a transfer of economic resources by a government to private entities in the
market, without regard to the terms  of that transfer.  Such a transfer can be effected
either by a government directly (subparagraphs (i)-(iii)) or indirectly through private
bodies (subparagraph (iv)).  The question of the terms on which the transfer is made
does not have to do with the existence of a financial contribution but rather goes to
the separate issue of benefit, as Article 14 makes clear, by providing that to determinewhether a benefit exists, the terms of the financial contribution need to be compared
with the market terms. [emphasis in original]
The panel went on to state:
In short, the negotiating history confirms that the introduction of the two-part
definition of subsidy, consisting of “financial contribution” and “benefit”, was
intended specifically to prevent the countervailing of benefits  from any sort of
(formal, enforceable) government measures, by restricting to a finite list the kinds  of
government measures that would, if they conferred benefits, constitute subsidies.  The
negotiating history confirms that items (i)-(iii) of that list limit these kinds ofmeasures to the transfer of economic resources from a government to a private entity.
Under subparagraphs (i)-(iii), the governme nt acting on its own behalf is effecting
that transfer by directly providing something of value – either money, goods, or
services – to a private entity.  Subparagraph (iv) ensures that the same kinds of
government  transfers of economic resources, when undertaken through explicit
delegation of  those functions to a private entity, do not thereby escape disciplines.
[emphasis in original]
The EC argument does not, therefore, have support in either the text or in the negotiating history of
Article 1.  A subsidy exists where there is a financial contribution by government that confers a
benefit.  An investigating authority must always establish both elements of a “subsidy” as regards a
downstream producer.
(b) No.  In an original investigation an investigat ing authority may never assume that any of the
requirements of the subsidy definition have been met.  This is true for upstream producers as it is in
respect of an alleged subsidy to downstream producers.  Thus a subsidy to upstream producers cannot
be presumed to be passed through to downstream producers in any circumstances.  This is especially
the case regarding arm’s-length transactions where, under fundamental principles of economics, anupstream recipient of a subsidy would not normally subsidize a downstream producer.
(c) Yes.  Article 1.1 requires in all instances that for a given recipient, a subsidy exists only
where there has been a financial contribution and a benefit.  In the context of allegations of indirect
subsidies, in order to determine that the downstream producer is “subsidized”, it must be found that:(1) a government entrusts or directs the original recipient of a financial contribution to itself make a
financial contribution to the downstream producer under subparagraph (iv);  and (2) that such
subsequent financial contribution be made on terms such that it thereby confers a benefit to the
downstream recipient.
12. Where the harvester is not free to: process the logs it harvests itself; sell to whomever it
wishes on whatever terms and conditions that are mutually agreed; swap logs with other timberWT/DS236/R
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harvesters; or obtain permits to export, then a government requirement that the logging company
contract to provide logs to a sawmill for processing may constitute the government directed provision
of logs by the logging company to the sawmill.
13. With few exceptions, tenure agreements do not contain requirements that tenure holders have
contracts with unrelated sawmills.
14. Canada does not wish, at this point, to add to its submissions on this subject.
15. The issue of liquidation of entries is a red herring, because in the US the entries in the 90 days
prior to a PD would rarely if ever be liquidated before a final determination (including, if appropriate,
a final critical circumstances determination) was made.  At that point, once there is a criticalcircumstances finding, the liquidation of unliquidated entries may be suspended.
Under US Customs regulations, entries are to be liquidated within one year after entry, but
Customs may extend that period by an additional two years.  In practice, if the period is not extended,
an entry will be liquidated on the 314th day after it was made.  Thus entries potentially subject toretroactive application of definitive duties would not be liquidated by the time Commerce is required
to complete an investigation.
16. Canada implemented its obligations under the SCM Agreement in the Special Import
Measures Act (SIMA)
 and related regulations.  In the Canadian system two investigating authorities
are involved in decision-making.  Dumping and subsidy determinations are made by the
Commissioner of the Canada Customs and Revenue Agency (CCRA).  Injury decisions are made by
the Canadian International Trade Tribunal (CITT).
Under section 41(1)(a)(iv)(C), in a final determination, the Commissioner makes a finding as
to whether a particular investigation involves a prohibited subsidy.  Where there is a finding of a
prohibited subsidy or “specification”, then in making its final injury inquiry under section 42, the
CITT is directed, to determine whether the remaining criteria of Article 20.6 are satisfied.  Where the
CITT makes a positive determination under section 42(1)(c) (as reflected in section 6(a)), the
Commissioner is directed by section 6(b) to assess  “a countervailing duty in the amount equal to such
of the amount of the subsidy on imported goods as is a prohibited subsidy”.  Consistent with
Article 20.6, which allows for the retroactive assessment of “definitive countervailing duties”, thisprovision is under the definitive “Antidumping and Countervailing Duty” heading of the Act (i.e.,
sections 3-7).
Pursuant to section 37.11 of the SIMA, imports considered would be those imported within a
representative period within the period of investigation beginning ninety days before the date ofinitiation and ending on the date of the Commissioner’s PD, which were “massive” relative to a
preceding representative period of comparable duration also within the POI.
The retroactive application of final duties would be effected through a determination by a
designated CCRA officer under section 55 of the SIMA.  This determination is subject to re-determination by the Commissioner under section 59(1) of the Act.  While the goods that these duties
would be applied to would have been released (or in  the US sense, “liquidated”), the record of their
entry would still be in the CCRA records syst em and thus could be retrieved as necessary.
17. There is no basis in the SCM Agreement for the application of provisional measures pursuant
to a PD of critical circumstances.  Accordingly, no Member may take an action or impose a measure
in respect of “critical circumstances” on a provisional basis.  In this sense “suspension of liquidation”
is no different than a bonding requirement.WT/DS236/R
Page A-10
18. (a) The relevant data for Canada as a whole is set out in Commerce’s PD.  There , based on a
comparison of the three months preceding and the three months following initiation of the
investigation, Commerce states that it found an increase in import levels of 23.34 per cent using
import statistics net of the Maritime provinces, and found an increase of 19.02 per cent when it
included imports from the Maritime provinces.  Commerce decided that the “massive imports”element of Article 20.6 of the SCM Agreement had been satisfied since both rates of increase were
above the regulatory 15 per cent threshold under US law.  If Commerce had considered other
comparison periods or approaches to seasonality adjustments, as Canada had argued were necessary
to an objective assessment of “massive imports”, the inclusion of Maritime shipments would have
demonstrated an increase in shipments below the 15 per cent threshold.
(b) Québec's exports of softwood lumber to the US in FY 2000/2001 amounted to 21 per cent, or
approximately one-fifth of total Canadian exports of softwood lumber to the US.  Thus, in order for
exports from Québec to have accounted for a 15 per cent increase in Canada-wide exports, exports
from Québec would have had to increase by five times the 15 per cent amount, or by 75 per cent.
There is nothing in the record indicating that exports from Québec followed any pattern different than
exports from the rest of Canada.
However, since at most three Québec producers may have benefited from the alleged
prohibited subsidy during the POI, any exports from these producers would have been minute relative
to total exports from Canada (or even from Québ ec) and would not have resulted in a “massive
imports”.
19. The Canada-US Softwood Lumber Agreement (SLA) provides the background against which
the US should have conducted its “massive imports” analysis.  The CVD investigation was timed to
coincide with the economic and trade consequences of the expiration of the SLA.  A period of
investigation adjusted for such consequences would have found normal trade patterns, rather than“massive imports”.
In 1996, Canada implemented the SLA through quot a-based export fees.  The SLA expired on
31 March 2001.  In anticipation of this expiration, and the consequent removal of the fees, Canadian
exporters and US importers and purchasers of softwood lumber made a number of rational business
decisions.  Importers stopped purchasing Canadian lumber.  This resulted in a drop in prices
throughout March.  Exporters, deterred by low prices and SLA fees alike, deferred exports to April.Placed in this context, it is hardly coincidental that exports to the US in April 2001 increased by 463
million board feet over total exports in the month of April 2000.
To Both Parties
1. When a timber harvester cuts down a tree, it produces goods – logs.  The harvester may then
use the goods as input into its own sawmill, pulp mill or other mill, if it has one; it may sell the goods
in question to other users of logs; or export them.  Goods are, accordingly, provided in the sense of
Article 1.1 of the SCM Agreement where logs are given or sold from one party to another.
2. There is no “international market price” for softwood lumber, even though it is bought and
sold internationally.  Unlike commodities such as  oil or minerals, softwood lumber is priced to
specific domestic or regional markets.  As well, because of the huge differences between different
sorts of lumber, lumber prices vary depending on the species, dimension and grade of the lumber,
whether the lumber has been air or kiln-dried, and whether the lumber has been mechanically stress-rated.  Different markets would have different requirements, thus making it difficult to have a single
“international market price” for lumber.WT/DS236/R
Page A-11
3. Article 15(b) of the Accession Protocol of China establishes that under Article 14(d) of the
SCM Agreement cross-border price comparisons are not permitted. If Article 14(d) permitted
Members to consider conditions outside of China there would have been no reason to negotiate this
provision.  Article 15, unlike the other provisions, introduces special and additional rules.  This is
apparent from the following:
• the chapeau, which requires the SCM Agreement to be applied “consistent with the following
listed considerations”.  If this were a reintroduction of the SCM Agreement into the Protocol, the
form of wording would not be needed;
• Article 15(b) states that, “the relevant pr ovisions of the SCM Agreement shall apply; however  ...”
This demonstrates that what follows the “however” is outside the normal rules, and that thesubordinate clause provides for additional rules;
• when Members use the methodologies set out in 15(a) (antidumping) and 15(b) (CVD), they are
required to notify the WTO.  If these methodologies were the norm, no such notification would berequired; and
• 15(a) expires once a market economy is established in China.  However, Members realized that it
would not be necessary to require 15(b) to expire, because once there is a market economy, there
would be no “special difficulty” in establishing a market benchmark.
4. Attached as Exhibits CDA-63 to CDA-70 please fi nd provincial forest tenure agreements and
the relevant underlying legislation from B.C. and Alberta.
5. Commerce did not request any information related to the pass-through issue. Instead,
Commerce simply presumed that any subsidy provided on the upstream input logs was automatically
passed through in the arm’s-length sale of those logs.
In its submissions, Canada demonstrated that it was impermissible for Commerce to presume
benefits to subject merchandise without conducting an upstream subsidy analysis.  Canada alsodemonstrated that in many instances any allege d subsidization would not be passed through from
harvesters to arm’s-length lumber producers.  These submissions were also consistent with
Commerce’s pass-through determination in Lumber III.
Canada also submitted applications for ex clusion from many producers who had purchased
lumber at arm’s-length from unrelated suppliers.  It many instances, these producers were also
independent remanufacturers (i.e., completely unrelated to firms with harvesting rights).
B.C. provided information on the purchase and sale of logs in the province.  That information,
set out in Question 7 above, included the volume and value of logs sold in each log market within the
province, as well as detailed information describing the functioning and operation of each log market.
Furthermore, the B.C. log sales information contained sufficient detail to establish the total
volume of softwood logs sold domestically to unr elated purchasers on the coast and in the interior.
B.C.'s initial questionnaire response stated that, over the past three years, between 26 and 30 per cent
of the timber harvested on the Coast was sold through the VLM.  This response also demonstrated
that between 22 and 25 per cent of the timber harvested in the interior was sold domestically ratherthan internally consumed by integrated companies.
Alberta stated unequivocally in its’ Questionnaire Response to Commerce that it did not
interfere in the disposition of logs harvested from Crown land.  Alberta also stated that, “The ProvinceWT/DS236/R
Page A-12
of Alberta has no policies, regulations or statutes that require, encourage or discourage companies to
produce certain products.  The expectation is just that operators should make efficient use of the wood
fibre.”  Alberta also provided extensive data on arm’s-length log sales.
Ontario informed Commerce in its initial questionnaire response that timber is often obtained
through an arm’s-length purchase from the private party that acquired it from the Crown (resale).
Ontario also provided Commerce with a report pr epared by KPMG concerning Crown timber resold
at arm’s-length in an after-market.  This report demonstrated that approximately 30 per cent of the
softwood timber harvested from Crown land was sold by tenure holders to independent third parties
who subsequently processed it into forest products.WT/DS236/R
Page A-13
ANNEX A-2
RESPONSES OF THE UNITED STATES TO
QUESTIONS POSED IN THE CONTEXT OF THE
FIRST SUBSTANTIVE MEETING OF THE PANEL
(21 May 2002)
Questions to the United States
1. Q1: At the time of the Preliminary Determination, the Commerce Department had
extensive evidence on the record indicating that the vast majority of government timber in Canada
was provided directly to tenure holders that owned sawmills or other wood processing facilities.Specifically, the laws and regulations of each Canadian province (with the partial exception of
Ontario) generally require that tenure holders be sawmills.  The evidence described below for each
province consisted primarily of provincial legislation, sample tenure contracts and statistical data
provided by the provincial governments.
2. More than 83 per cent of the B.C. Crown softwood timber harvest is provided to holders of
four types of B.C. tenures.  Each of these tenures requires  the tenure holder to own a processing
facility (for these purposes, a sawmill) and process the harvested timber (or an equivalent volume) in
its own mill.  The remaining B.C. Crown timber is provided under licences that are normally reserved
to entities not owning timber processing facilities.  However, the B.C. Forest Act requires that alltimber harvested from Crown lands be processed in B.C.  In addition, other legal restrictions apply to
these forms of B.C. tenure, which indicate that transactions for the timber covered by these tenures are
not at arm’s-length.
3. Quebec ensures that only sawmills are permitted to harvest the vast majority of Crown
softwood timber.  For example, section 37 of the Quebec Forest Act states that “[n]o one except a
person authorized under Title IV to construct or operate a wood processing plant is qualified to enter
into” a Timber Supply and Forest Management Agreement, the virtually exclusive form of tenure in
Quebec (covering 99 per cent of the Crown harvest).
4. In its questionnaire response, Ontario stated that “[g]enerally, in order to obtain any type of
licence, an applicant must either own a forest resource processing facility (e.g., a sawmill, pulpmill,veneer mill, etc.) or must have a market to supply wood to some type of forest resource processing
facility.”  Alberta stated that “[a]ll forms of commercial tenure own and operate sawmills”.
5. In Saskatchewan, 86 per cent of softwood sa wlogs were harvested by Forest Management
Agreement holders, all of whom own sawmills and process their own timber.  The remainder of theharvest was provided to smaller licencees under Forest Product Permits, some of whom have their
own sawmills.
6. In Manitoba,  49 per cent of softwood sawlogs were provided to holders of Forest
Management Licences, who by law are required to own timber processing facilities.  Virtually all ofthe remaining 51 per cent of softwood sawlogs were provided under Timber Sales Agreements
(“TSA”).  The volume of softwood harvested by TSA holders owning sawmills amounted to 46 perWT/DS236/R
Page A-14
cent of the total softwood sawlog harvest.  Thus, approximately 95 per cent of softwood sawlogs were
provided directly to sawmills in Manitoba.
7. With respect to the obligations undertaken by the tenure holders, the Commerce Department
examined the obligations that tenure holders we re legally obligated to assume in Canada and
compared them to those assumed by harvesters of the benchmark timber.  The Commerce Department
calculated a per-unit amount for each category of Canadian obligations that was above and beyond
obligations incurred by parties paying stumpage charges in the United States.  The Commerce
Department used the values for each obligation provided by the Canadian provincial governments in
their questionnaire responses, and considered the per-unit cost of these obligations as a form of “in-
kind” payment, which it added to the stumpage fee.
8. Q2(a):   Article 14(d) sets forth guidelines for determining whether the government has
provided a good, within the meaning of Article 1.1 (a)(1)(iii), for less than adequate remuneration.
There should be no doubt that, through timber tenures, the provincial governments provide a good –
timber – to lumber producers.  Canada’s claims to the contrary are contradicted by ordinary dictionary
definitions and Canada’s own laws.  Because the provincial governments are unquestionablyproviding a good within the meaning of Article 1.1(a)(1)(iii), Article 14(d) provides the appropriate
guidelines for determining the benefit.
9. Q2(b):  The phrase “in relation to prevailing market conditions for the good . . . in the country
of provision” in Article 14(d) does not restrict th e authority to using only prices between buyers and
sellers in the country under investigation.  The concept of commercial availability is expressly
incorporated in Article 14(d), which defines “prevailing market conditions for the good” to include,
inter alia , availability.  Prevailing market conditions in the country of provision may therefore
encompass prices commercially available on the world market to purchasers in the country under
investigation.  The flexibility to use commercially available world market prices in Article 14(d) isreflected in item (d) of the Illustrative List of Export Subsidies, and was confirmed by the panel and
the Appellate Body in Canada Dairy.
10. The use of world market prices commercially available to producers in the country under
investigation is therefore not per se  inconsistent with Article 14(d).  Canada has, in fact, conceded that
world market prices can constitute an appropriate benchmark in certain situations.  An obvious
example of when commercially available world market prices may be an appropriate benchmark iswhere the government is the sole provider of the i nput in the country under investigation.  The facts of
this case present an analogous situation.  Specif ically, only two provinces provided any information
on private stumpage prices, and that limited information was inadequate to serve as a benchmark for
those provinces.  Moreover, the evidence indicates that the Canadian provincial governments so
dominate the market for timber that below-market government prices suppress prices in the smallmarket for private timber in Canada.
11. The Commerce Department’s use of US prices, as opposed to other world market prices, is
supported by ample record evidence indicating that Canadian companies import US logs and bid on
US stumpage.  US timber is therefore “commercially available” to Canadian mills.
12. Q2(c):  The US interpretation of Article 14(d) is consistent with the general meaning of
“benefit” as previously articulated by panels and the Appellate Body, i.e., a benefit is some form of
advantage that would not otherwise be available in the marketplace, absent the financial contribution.
In Canada Aircraft , the panel stated that “[i]n order to determine whether the financial contribution . .
. confers a ‘benefit’, i.e., an advantage, it is necessary to determine whether the financial contribution
places the recipient in a more advantageous position than would have been the case but for  the
financial contribution.  In our view, the only logical basis for determining the position the recipient
would have been in absent the financial contribution is the market.”  (emphasis added).  TheWT/DS236/R
Page A-15
Appellate Body in Canada Aircraft  similarly stated that “there can be no ‘benefit’ to the recipient
unless the ‘financial contribution’ makes the recipient ‘better off’ than it would otherwise have been,
absent the contribution .  In our view, the marketplace provides an appropriate basis for comparison in
determining whether a ‘benefit’ has been ‘conferred’, because the trade-distorting potential of a
‘financial contribution’ can be identified by determining whether the recipient has received a‘financial contribution’ on terms more favourable than those available to the recipient in the market.”
(emphasis added).
13. Q2(d):  The comparison in Article 14(d) is intended to identify the potentially trade-distorting
artificial advantage resulting from the government’s provision of a good.  Commercially available
prices in the country under investigation are normally the most appropriate benchmark.  However,
where the evidence indicates that the governme nt so dominates the market that non-government
domestic prices for the good in question are suppressed by the alleged below-market government
prices for that good, the domestic prices cannot serve as a basis to measure the potential benefit.  In
such cases, other prices commercially available to producers in the country under investigation can
provide an appropriate benchmark.
14. Q2(e):   The purpose of the Article 14(d) comparison is to determine what, if any, advantage
flows from the government’s financial contribu tion at issue, not other government actions.
15. Q2(f):  The only instance in which we might even inquire into whether prices in the country
under investigation are below world market prices would be where there is other evidence indicatingthat the non-government prices in the country under investigation may be distorted by the government
financial contribution at issue.
16. Q2(g)(i),(ii):  In this case, and in the only other case in which the Commerce Department has
addressed this issue, the government’s share of the market was 90 per cent or more.  However, eachcase must be evaluated on the basis of its particular facts.  Normally, where the government
dominates the market for a particular good and there is some evidence that government prices are
suppressing the rest of the market, the non-government prices could not logically serve as a
benchmark.  However, that may not always be the case.  For example, even where the government
dominates the market, if there is an open and competitive auction for some significant portion of the
market, those prices could serve as a benchmark.  There may also be other instances in which the facts
would indicate that the non-government portion of the market was undistorted by the governmentaction.  In such cases, the non-government portion of the market could also serve as a benchmark.
17. Q2(h):  The Commerce Department requested inform ation on private stumpage prices and
prices in the spot market for logs in the Maritime Provinces.  In their questionnaire response, the
Maritime Provinces stated that they had no information on private stumpage prices, that “[t]here is nospot market price for harvested saw logs from Crown land”, that they do “not collect any data
concerning spot market prices for . . . logs harvested from private land”, and that surveys of prices for
logs harvested from private land “appear to be based on limited sampling”.  Given this limited and
inadequate information, the Commerce Department was unable to consider whether Maritime prices
could serve as an appropriate benchmark.
18. Q3:  The Commerce Department asked a series of questions regarding private prices in each
province or territory.  Only the governments of Alberta, Quebec and Ontario provided any
information in response to this request.  And, as described below, only Quebec and Ontario actually
provided private prices.  This limited information was insufficient to form the basis for a benchmarkfor these provinces.  In addition, there was inform ation on the record indicating that these private
stumpage prices were depressed by the government prices.  The largest province in terms of softwood
lumber production, British Columbia (representing approximately 60 per cent of Canada’s softwood
lumber production), did not provide any private prices for stumpage.WT/DS236/R
Page A-16
19. Alberta did not provide private prices.  In its questionnaire response, it stated:  “Alberta does
not track private timber harvesting and does not have any data on any private timber used in mills.”  It
also stated that it “does not collect spot price information for logs from provincial or private lands”
and it therefore was “not providing such spot log price information” to the Commerce Department.The only information Alberta did provide was a two-page excerpt from a KPMG survey, which
contained a single estimated stumpage value derived from some price data for log sales.  No
supporting evidence or source information for the estimate was provided.
20. In its questionnaire response, Quebec stated:  “Private market standing timber prices are
obtained through a market survey of forestry companies that trade standing timber for harvesting
every year in Quebec.”  However, the Commerce Department also had evidence that private stumpageprices in Quebec are suppressed by the administratively-set price for Crown stumpage.
21. Ontario stated that over 10 per cent of the timber consumed in Ontario’s “forest products
industry” is harvested from private lands.  However, that figure covers the entire forest products
industry, including companies that do not produce the subject merchandise (e.g., pulp mills).Moreover, Ontario stated that it does not regulate or monitor the private timber market on an ongoing
basis, and therefore does not collect these data in the course of normal operations. Ontario
commissioned an independent forestry research firm to conduct a survey, but the Commerce
Department found numerous flaws with this study.
22. The record also contained evidence indicating that private stumpage prices were depressed by
the overwhelming majority of government-supplied timber in the market.  For example, a Canadian
forestry expert concluded that “[t]he quasi-monopolistic importance of the State in the supply  of the
industries obligates the small producers to align their prices with those of the public forest ”.
(emphasis added).  Even a provincial forestry official stated in writing that private stumpage priceswere affected by the administratively-set price for public stumpage.
23. Q4:  The statement the Panel refers to pertained to the small private market for stumpage, not
log sales.  The evidence at the time of the Preliminary Determination indicated that Crown and private
stumpage sales were the following percentages of the harvest in each province:
Crown Sales Private Sales
British Columbia: 90 per  cent 10 per cent
Quebec: 83 per cent 17 per cent
Ontario: 92 per cent 8 per cent
Alberta: 98 per cent 2 per centManitoba: 94 per cent 6 per cent
Saskatchewan: 90 per cent 10 per cent
Only two of the provinces provided data on private stumpage prices, and record evidence indicated
that those prices were suppressed by the governments’ administratively-set prices.
24. Q5:  As stated in the chapeau to Article 14, and confirmed by the Appellate Body in Canada
Aircraft , the benefit for purposes of Article 1 is the benefit to the recipient.  It is the artificial
advantage – or benefit –  that the Appellate Body in Canada Aircraft  referred to as the “trade-
distorting potential” of a financial contribution.  It is to that trade-distorting artificial advantage thatthe United States was referring in the passage cited by the Panel.
25. Q6:  Lead and Bismuth II  concerned subsidies to a government-owned entity, British Steel,
which was subsequently sold to private investors.  The panel stated that the presumption that theWT/DS236/R
Page A-17
benefit flowing from a financial contribution continue s to flow, even after a change in ownership that
created an apparently new and distinct producer, could not be irrebuttable.  The panel found that the
circumstances in that proceeding, in which British Steel’s specialty steels business was first
transferred to the partnership UES and then re-acquired by BSplc, rebutted the presumption that the
benefit to British Steel continued in UES and BSplc.  The panel also found that UES and BSplc weredistinct legal persons which, because they had paid fair market value for the assets of British Steel,
obtained no benefit from the prior subsidies to British Steel.
26. Lead and Bismuth II  addressed circumstances that are not present in this case.  Most
significantly, in the present case the subsidies at issue were bestowed directly on the current producers
of the subject merchandise.  The evidence simply does not support Canada’s claim of a significant
volume of timber harvested by independent loggers who sell at arm’s-length to lumber mills.  Thevast majority of Crown sawtimber is provided to Canadian lumber mills under tenures held directly by
those mills.  Record evidence also indicates that most “independent” loggers are in fact bound by law
or by contract to those very same sawmill/tenure holders.  Thus, the entity receiving the financial
contribution (the provision of timber) and the entity receiving the benefit (below-market stumpage
prices) are generally one and the same.  As discussed below in response to question 7 to theUnited States, the other two situations in this case in which the issue of whether a financial
contribution to one entity confers a benefit on another may arise – logs harvested by one sawmill and
then sold in arm’s-length transactions to other sa wmills, and lumber sold in arm’s-length transactions
to companies that produce remanufactured lumber products – are not relevant in an aggregate case.
27. Q7:  In an aggregate case, the Commerce Department determines the total amount of the
subsidy to producers of the subject merchandise and allocates that amount over all sales of the subject
merchandise.  When all of the alleged recipients of the financial contribution and the benefits are
producers of the subject merchandise, no further analysis is required.  The precise amount of the
benefit received by any specific producer would onl y be determined in a company-specific review.
However, if the government made the fina ncial contribution to an entity that does not produce the
subject merchandise, it would be necessary to analyze whether that financial contribution benefited
another entity that does produce the subject merchandise.  In this case, the only allegation of a
financial contribution to an entity that does not produce the subject merchandise is Canada’s claim
that there is a significant volume of Crown timber that the provincial governments provide to
independent loggers who then sell the timber at arm’ s-length to lumber mills.  However, the evidence
does not support Canada’s claim.
28. Canada also argues that the Commerce Depart ment was required to perform a pass-through
analysis to address two other situations: (1) logs  harvested by one sawmill and then sold in arm’s-
length transactions to other sawmills; and (2) lumber  sold in arm’s-length transactions to companies
that produce remanufactured lumber products.  However, in both of these situations, all of the entitiesinvolved are producers of the subject merchandise.  Therefore, no further analysis is required in an
aggregate case.  Specifically, a separate benefit analysis is not required in an aggregate case for logs
harvested by one sawmill and allegedly sold at arm’s-length to another, as the full benefit is always
enjoyed by a sawmill, i.e., a producer of the subject merchandise.  Likewise, the remanufactured
articles at issue are within the scope of the investigation.  The Commerce Department thereforeproperly matched the total benefit received by producers of the subject merchandise (the numerator)
to the total sales of the subject merchandise, including remanufactured products (the denominator),
without determining any company-specific rates.  If  any individual producer of subject merchandise
believes that it has not received any countervailable benefit, the procedures for review exist.
29. Q8:  There seems to be no question that provisional countervailing duties would constitute a
provisional measure within the meaning of Article 17.  Although Article 17.2 is somewhat
ambiguous, a cash deposit or bond requirement would also appear to constitute a provisional measureWT/DS236/R
Page A-18
within the meaning of Article 17.  While the United States did not impose a provisional duty, it did
require security in the form of cash deposits or bonds.
30. There is no reference in Article 17.2 to withholding of appraisement, which is referred to in
the United States as suspension of liquidation.  Suspension of liquidation is merely a legal status thatenables the assessment of additional duties when all of the issues related to final duty liability are
resolved.  Nevertheless, under the US countervailing duty law, suspension of liquidation is treated as
a provisional measure.
31. Q9:  Under US law, absent suspension of liquidation, final duties are assessed and no
additional duties can be imposed on that entry.  Suspension of liquidation is therefore essential to
preserve the possibility of exercising the right under Article 20.6 to impose duties retroactively.
32. Q10:  Suspension of liquidation would enable the Commerce Department to delay final
determination of total duty liability.  However, if no amount is guaranteed by a cash deposit or bond,
Article 20.3 would, on its face, preclude the collection of duties retroactively.
33. The absence of an analogue in the SCM Agreement to Article 10.7 of the Anti-Dumping
Agreement does not alter this analysis.  Article 10.7 authorizes authorities to take measures even
before there is a preliminary determination of dumping or injury.  In the case concerning Hot-Rolled
Steel from Japan , the panel viewed these special “precautionary measures” as something other than
provisional measures.  Because there is no analogue to Article 10.7 in the SCM Agreement, there isno exception to the requirements of Article 17.1 of the SCM Agreement that would permit early
“precautionary measures”.  However, the Commerce Department did not take such measures in this
case.  Where, as in this case, provisional measures are imposed in accordance with Article 17 (i.e.,
after preliminary determinations of subsidization and injury), Article 20.1 permits a Member to
expand the scope of those provisional measures to encompass entries 90 days prior to the preliminarydetermination if there is sufficient evidence that the circumstances described in Article 20.6 exist.
34. Q11:  Both suspension of liquidation and the posting of bonds or cash deposits are necessary
to ensure the possibility of exercising the right to retroactive relief provided for in Article 20.6.  The
reference to “suspension of liquidation” in the Preliminary Determination is a short form of reference
sometimes used by the Commerce Department when discussing provisional measures generally,
including posting of bonds or cash deposits.
35. Q12:  Article 20.6 requires a finding of “injury which is difficult to repair,” but does not
contain an evidentiary standard for that determination.  However, this issue was addressed by the
panel in Hot-Rolled Steel from Japan , which concerned the evidentiary standard in the US anti-
dumping law for a preliminary critical circumstances finding.  That evidentiary standard is “areasonable basis to believe or suspect” that critical circumstances exist.  That is also the standard in
the US countervailing duty law for a preliminary critical circumstances finding.  The Hot-Rolled Steel
from Japan  panel found that in applying that standard, the Commerce Department has “made
affirmative determinations when sufficient eviden ce was adduced that the conditions of application
were satisfied.”  As the Hot-Rolled Steel from Japan panel noted, “sufficient evidence” refers to the
quantum of evidence necessary to make a determination.  What constitutes “sufficient evidence”
varies depending on the nature of the determination in question.  The approach taken by other panels
“has been to examine whether the evidence before the authority at the time it made its determination
was such that an unbiased and objective investigating authority evaluating that evidence could
properly have made the determination”.
36. Q13:  Section 351.213(b) of the regulations does not apply to aggregate cases but it does not
restrict the Commerce Department’s authority to conduct reviews.  The inquiry required in
Article 21.2 of the SCM Agreement, on which Cana da’s claim is based, is whether continuedWT/DS236/R
Page A-19
imposition of the duty is necessary to offset subsidization.  Under section 351.213(k) of the
regulations, exporters have the opportunity for a review to determine whether imposition of a duty is
necessary on future entries, i.e., whether their subsidy rate is zero.  If no subsidy is found, the cash
deposit and assessment rate on future entries will be zero, unless the results of a subsequent review
demonstrate that subsidies have recurred.  Section 351.213(k) therefore fulfills the requirements ofArticle 21.2.
Questions to Both Parties
37. Q1:  While some financial contributions take place at a single point in time, that is not always
the case.  The Canadian timber tenures are long-term contracts that provide recurring subsidies.  As
long as the tenure contract remains in force the provincial government is providing the lumberproducer with timber, and the producer receives a benefit each time it pays below-market prices for
the timber.
38. Q2:  While there is no uniform world market pr ice for softwood lumber and softwood logs,
lumber and logs are traded internationally in all regions of the world.  It is possible to calculateaverage unit import values for lumber and logs in various countries based on either import or export
statistics.  However, because these statistics are kept on a broad product category basis, the average
unit import values are not useful for comparison purposes.
39. Q3:  The United States negotiated the language of Article 15(b) of the China Protocol, which
was intended to clarify that Article 14 of the SCM Agreement allows authorities to measure the
benefit on the basis of a benchmark outside the country of investigation when prevailing terms and
conditions in the country of investigation are “not . . . available as appropriate benchmarks.”
Although Article 14 of the SCM Agreement alread y allows Members to use such benchmarks, the
Members incorporated this clarifying language into Article 15(b) of the China Protocol because theywere concerned that prices in China would not be appropriate benchmarks while China was
transitioning to a market economy and they wanted to leave no doubt that Article 14 allowed
authorities to use external benchmarks in such instances.  In addition, because Article 14 only
addresses countervailing duty proceedings under Part  V of the SCM Agreement, they wanted to make
clear that external benchmarks would also remain available were a Member to pursue a WTO
proceeding under Part II or III of the Agreement.
40. Article 15(b) is only one of several provisions of the China Protocol that simply restate and
clarify existing WTO obligations that apply to all Members.  Article 10.1 of the China Protocol, for
example, restates existing obligations in Article 25 of the SCM Agreement.  Several articles of the
China Protocol also restate and clarify existing WTO most-favoured nation and national treatment
obligations.
41. Q4:  This information has been provided in response to question 1 to the United States.
42. Q5:  In an aggregate case, the Commerce Department determines the total amount of the
subsidy to producers of the subject merchandise and allocates that amount over all sales of the subjectmerchandise.  When all of the alleged recipients of the financial contribution and the benefits are
producers of the subject merchandise, no further analysis is required to perform the aggregate
calculation.  Benefits that potentially shift from one producer to another in an arm’s-length transaction
would still be part of the overall numerator, as long as both companies produce subject merchandise.
Therefore, for two of the three categories that Canada claims a pass-through analysis was necessary –logs harvested by one sawmill and then sold to an other, and lumber sold to remanufacturers – the
question of pass-through is moot in an aggreg ate context and the Commerce Department did not
request any information on these types of transactions.WT/DS236/R
Page A-20
43. For the remaining category where Canada claims a pass-through analysis is necessary –
independent loggers selling to sawmills – the Commerce Department asked questions about logs sold
domestically at arm’s-length prices.  In response, Quebec indicated that there were essentially no
arm’s-length transactions involving Crown timber so ld by independent loggers to sawmills.  Ontario
suggested that 30 per cent of Crown timber was sold in arm’s-length transactions, but tenure holderswho do not own a sawmill are limited with respect to where such harvested timber can be sold and
evidence indicated that log swapping was common among large tenure holders.  Alberta’s
questionnaire response suggested that only a small portion of the harvest was characterized by arm’s-
length transactions.  B.C. suggested that as much as 30 per cent of Crown timber was sold in arm’s-
length transactions, but this figure is misleading because loggers operate as employees or contractors
for tenure holders, various requirements serve to narrow the range of purchasers available to any
harvester of Crown timber who is not a mill owner, and log swapping is a major part of the so-calledarm’s-length transactions.  These factors combine to ensure that the great majority of Crown timber is
force-fed to tenure-holding lumber producers.  As such, the evidence does not support Canada’s claim
that a pass-through analysis is necessary or appropriate.
Questions to Canada
44. Q5:  A Member is not always obliged to determine the benefit using as a benchmark market
prices from the country under investigation.  This is confirmed by numerous references in WTO
agreements and prior WTO decisions.  The United States also notes that the Panel’s example of a
government monopoly over the supply of a good is no different in principle from the circumstances ofthe instant case, where the provincial governments control 85 to 95 per cent of the market for timber.
If it is shown that the government supply significantly distorts the market, the benchmark can be
found outside the country, so long as a reasonable effort is made to measure the benefit provided in
the country under investigation.
45. Q8:  Given the ordinary meaning of “arm’s-length,” a so-called independent logger should
only be viewed as operating at “arm’s-length” from lumber producers if the harvester is freely
negotiating, under no outside control or influence and under no compulsion to sell.  The record
establishes that not only are there very few transactions by independent harvesters, but even in such
transactions, the provincial governments impose numerous restrictions and requirements on the
transactions.  In light of this evidence, the only reasonable conclusion is that there are no true arm’s-
length transactions for Crown timber.
46. Q10:  Past determinations by the Commerce Depa rtment, which apply US law on the basis of
different factual records, are of no relevance in determining whether the United States has acted
consistently with its obligations in the present case.  That is particularly true where, as here, the prior
determinations at issue were decided under a different domestic legal standard, as well as differentinternational obligations.  At the time of the Lumber III  determination cited by Canada, under US law
the government provision of a good was deemed to provide a benefit if the good “was provided at
preferential rates”.  That standard is fundamentally different than the current “adequate remuneration”
standard and therefore the issue of an appropriate benchmark is fundamentally different as well.  The
Commerce Department rejected cross-border prices in Lumber III  because it had “sufficient and
reliable non-preferential price data” from within Canada.  Other factors, such as comparability, were
therefore moot and were simply noted in passing to underscore the Commerce Department’s primary
rationale.
47. Q14(b):  The Commerce Department did not investigat e and, therefore, did not conclude that
the Maritime Provinces received no support or that lumber sales from the Maritime Provinces were
not subsidized.WT/DS236/R
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48. Q14(e):  Nothing in the SCM Agreement addresses the calculation of a “country-wide rate”.
The “country-wide rate” at issue is a creature of US law, not the WTO.  Under current US law, the
calculation of the country-wide rate is based on the total amount of the subsidy found to exist with
respect to the subject merchandise , allocated across all sales of the subject merchandise .  Nothing in
US law or practice requires that non-subject merchandise be included in a country-wide ratecalculation.