Document: Oral Statement
Date: 24 February 2005
Document codes: WT/DS257/RW
Complainant: Canada
Respondent: U.S.
Third parties: China, EU, India, Japan
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 10, 11, 32, 1, 2, 12, 14, 19, 22  Subsidies and Countervailing Measures (SCM)Art. VI, X:3  GATT 1994Art. 21  Subsidies and Countervailing Measures (SCM)

ANNEX A

Submissions of Canada

Contents Page
Annex A-1 First Written Submission of Canada – 24 February 2005 A-2
Annex A-2 Second Written Submission of Ca nada: Response of Canada to the
 Request by the United States for Preliminary Rulings and Rebuttal
 Submission of Canada – 31 March 2005
A-33
Annex A-3 Oral Statement of Canada – 21 April 2005 A-47

TABLE OF CASES CITED IN THIS SUBMISSION

Appellate Body Report United States - Final Countervailing Duty Determination with Respect to
Certain Softwood Lumber from Canada , Report of the Appellate Body,
, adopted 17 February 2004.
Panel Report United States – Final Countervailing Duty Determination with Respect
to Certain Softwood Lumber from Canada , Report of the Panel,
, adopted 17 February 2004.
Canada – Aircraft Canada – Measures Affecting the Export of Civilian Aircraft , Report of
the Appellate Body, , adopted 20 August 1999.
US – Canadian Pork United States – Countervailing Duties on Fresh, Chilled and Frozen
Pork from Canada , Report of the Panel, adopted 11 July 1991,
BISD 38S/30.
US – Countervailing Measures
on Certain EC Products
United States – Countervailing Measures Concerning Certain Products
from the European Communities , Report of the Panel, ,
adopted 8 January 2003.
US – Countervailing Measures
on Certain EC Products
United States – Countervailing Measures Concerning Certain Products
from the European Communities , Report of the Appellate Body,
, adopted 8 January 2003.
US – Lead and Bismuth II United States – Imposition of Countervailing Duties on Certain Hot-Rolled
Lead and Bismuth Carbon Steel Products Originating in the United
Kingdom, Report of the Panel, and Corr.2, adopted
7 June 2000.
US – Lead and Bismuth II United States – Imposition of Countervailing Duties on Certain Hot-
Rolled Lead and Bismuth Carbon Steel Products Originating in the
United Kingdom , Report of the Appellate Body, WT/DS138/AB/R,
adopted 7 June 2000.
US – Softwood Lumber III US – Preliminary Determinations with Respect to Softwood Lumber ,
Report of the Panel, WT/DS236/R, adopted 2 November 2002.

TABLE OF ABBREVIATIONS USED IN THIS SUBMISSION

Alberta 21 May 2004 Pass-Through
Questionnaire Response
Response of the Government of Alberta to the Department’s
14 April 2004 Questionnaire Concerning Pass Through of
Alleged Benefits (May 21, 2004) (Exhibit CDA-13).
Alberta 15 September 2004 Supp.Pass-
Through Questionnaire Response
Response of the Government of Alberta to the Department’s
17 August 2004 Supplemental Questionnaire Concerning
Pass Through of Alleged Benefits (15 September 2004)
(Exhibit CDA-14).
Alberta 12 November 2003 AR
Questionnaire Response
Response of the Government of Alberta to the Department’s
12 September 2003 Questionnaire (12 November 2003)
(Exhibit CDA-38).
B.C. 15 September 2004 Supp. Pass-
Through Questionnaire Response
Response of the Government of British Columbia to the
Department’s 17 August 2004 Supplemental Questionnaire
Concerning Pass Through of Alleged Benefits
(15 September 2004) (Exhibit CDA-32).
B.C. 12 November 2003 AR Questionnaire
Response
Response of the Government of British Columbia to the
Department’s 12 September 2003 Questionnaire
12 (November 2003) (Exhibit CDA-33).
Draft Section 129 Determination USDOC Me morandum from J. Jochum to J. May, Draft
Decision Memorandum, 12 9 Proceeding for the WTO
Appellate Body finding in the Final Countervailing Duty
Determination, Certain Softwood Lumber from Canada
(19 November 2004) (Exhibit CDA-6).
DSB Dispute Settlement Body
DSU Understanding on Rules and Procedures Governing the
Settlement of Disputes
Final AR Determination Issues and Decision Memorandum: Final Results of
Administrative Review: Certain Softwood Lumber from
Canada, C-122-839 (13 December 2004) (Exhibit CDA-11).
Final AR Determination Notice Notice of Final Results of Countervailing Duty
Administrative Review and Rescission of Certain Company-
Specific Reviews: Certain Softwood Lumber Products from
Canada, 69 Fed. Reg. 75,917 (Dep’t Commerce,
20 December 2004) (Exhibit CDA-8).
Final Section 129 Determination USDOC Memorandum from J. Jochum to B. Tillman,
Section 129 Determination: Final Countervailing Duty
Determination, Certain Softwood Lumber from Canada
(6 December 2004) (Exhibit CDA-5).
GATT 1994 General Agreement on Tariffs and Trade 1994
Kalt 2004a J.P. Kalt and D. Reishus, Statement for the First
Administrative Review, Attachment 1 to Letter from British
Columbia Lumber Trade Council to USDOC
(15 March 2004) (Exhibit CDA-21).
Kalt 2004d J.P. Kalt and D. Reishus, Economics of Arms’s Length
Transactions and Subsidy Pass-Through , submitted as
Response of the Government of British Columbia to the
Department’s 17 August 2004 Supplemental Questionnaire
Concerning Pass Through of Alleged Benefits
(15 September 2004), Exhibit BC-PT-39 (Exhibit CDA-20).
Manitoba 21 May 2004 Pass-Through
Questionnaire Response
Response of the Government of Manitoba to the
Department’s 14 April 2004 Questionnaire Concerning Pass
Through of Alleged Benefits (May 21, 2004) (Exhibit CDA-
43).

Manitoba 12 November 2003 AR
Questionnaire Response
Response of the Government of Manitoba to the
Department’s 12 September 2003 Questionnaire
(12 November 2003) (Exhibit CDA-47).
Norcon A Response of the Government of British Columbia to the
Department’s April 14, 2004 Questionnaire Concerning Pass
Through of Alleged Benefits (21 May 2004), Exhibit BC-PT-
18 (Letter from Steptoe & Johnson to Akin, Gump, Strauss,
Hauer & Feld (20 May 2004) attaching Survey of Primary
Sawmills’ Arm’s Length Log Purchases In the Province of
British Columbia (21 December 2001), filed with Letter from
Steptoe & Johnson to USDOC (21 December 2001)) (Exhibit
CDA-30).
Norcon B Response of the Government of British Columbia to the
Department’s 17 August 2004 Supplemental Questionnaire
Concerning Pass Through of Alleged Benefits
(15 September 2004), Exhibit BC-PT-40 ( Supplemental
Report on Survey of Primary Sawmills’ Arm’s Length Log
Purchases In the Province of British Columbia
(14 September 2004)) (Exhibit CDA-15).
Norcon C Norcon Forestry Ltd., Survey of Primary Sawmills’ Arm’s
Length Log Purchases in British Columbia (15 March 2004),
submitted with Letter from Steptoe & Johnson to USDOC
(15 March 2004) (Exhibit CDA-31).
OFIA/OLMA 15 September 2004 Supp.
Questionnaire Response
Response of the Ontario Forest Industries Association and
the Ontario Lumber Manufacturers Association on behalf of
their members to the Department’s 17 August 2004
Questionnaire Concerning Pass Through of Alleged Benefits
(16 September 2004) (Exhibit CDA-49).
OFIA/OLMA 25 October 2004 Supp.
Questionnaire Response
Response of the Ontario Forest Industries Association and
the Ontario Lumber Manufacturers Association on behalf of
their members to the Department’s 5 October 2004 2
nd
Supplemental Questionnaire Concerning Pass Through of
Alleged Benefits (26 October 2004) (Exhibit CDA-50).
Ontario 21 May 2004 Pass-Through
Questionnaire Response
Response of the Government of Ontario to the Department’s
14 April 2004 Questionnaire Concerning Pass Through of
Alleged Benefits (21 May 2004) (Exhibit CDA-48).
Preliminary AR Determination Notice of Preliminary Results of Countervailing Duty
Administrative Review: Certain Softwood Lumber from
Canada, 69 Fed. Reg. 33,204 (Dep’t Commerce,
14 June 2004) (Exhibit CDA-10).
SAA “Statement of Administrative Action” in Message from the
President of the United States Transmitting the Uruguay
Round Agreements, Texts of Agreements Implementing Bill,
Statement of Administrative Action and Required Supporting
Statements, H.R. Doc. No. 103-316, vol. 1 at 656 (Exhibit
CDA-1).
Saskatchewan 21 May 2004 Pass-Through
Questionnaire Response
Response of the Government of Saskatchewan to the
Department’s 14 April 2004 Questionnaire Concerning Pass
Through of Alleged Benefits (May 21, 2004) (Exhibit CDA-
39).
Saskatchewan 12 November 2003 AR
Questionnaire Response
Response of the Government of Saskatchwan to the
Department’s 12 September 2003 Questionnaire
(12 November 2003) (Exhibit CDA-42).
SCM Agreement Agreement on Subsidies and Countervailing Measures
USDOC United States Department of Commerce

Weyerhaeuser 16 September 2004 Supp.
Pass-Through Questionnaire Response
Response of Weyerhaeuser Company to the Department’s
14 April 2004 Questionnaire Concerning Pass Through of
Alleged Benefits (September 16, 2004) (Exhibit CDA-40).
Weyerhaeuser 26 October 2004 Supp.
Pass-Through Questionnaire Response
Response of Weyerhaeuser Company to the Department’s
Second WTO Supplemental Pass-Through Questionnaire
(26 October 2004) (Exhibit CDA-41).

I. INTRODUCTION
1. This case is about the failure of the Unite d States to implement the recommendations and
rulings of the DSB in respect of its obligation to demonstrate whether, and to what extent, an input
subsidy passes through arm’s-length sales of input products. Article VI:3 of the GATT 1994 and
Articles 10 and 32.1 of the SCM Agreement require the United States to demonstrate such a “pass
through” as a precondition to imposing counterva iling duties on downstream products produced from
those inputs. The original panel and the Appellate Body in this dispute found that where the
United States presumes, rather than demonstr ates, a pass-through, it impermissibly imposes
countervailing duties where no subsidy has been determined to exist.

2. On the facts of this dispute, the alleged input subsidy is the provision of goods – standing
timber – by Canadian provincial governments for less than adequate remuneration. The input product
is a log, which is produced from standing timber harvested from public lands (Crown logs). The
downstream processed product is softwood lumber, which is produced from Crown logs.

3. The United States is imposing countervailing du ties on imports of Canadian softwood lumber
products. Accordingly, it must demonstrate how, and to what extent, any subsidy to Crown logs is
also an indirect subsidy to softwood lumber in every instance where, on the facts of this dispute, the
producer of the Crown log and the producer of the softwood lumber are unrelated.

4. The USDOC has failed to make any such dem onstration. Despite the recommendations and
rulings of the DSB requiring a demonstration of pass-through, the USDOC continues to presume that
pass-through occurred for virtually all arm’s-lengt h transactions. Based on this presumption, the
USDOC included the subsidy amount attributable to the production of the log in its calculation of the
amount of the subsidy attributable to the production of softwood lumber , thereby significantly
inflating the overall amount of the countervailing duty imposed on softwood lumber.

5. A pass-through analysis in this dispute would involve comparisons of log input sale prices to
a market benchmark price, to establish whether, and to what extent, a benefit within the meaning of
Article 1.1(b) of the SCM Agreement is conferred upon the recipients that used the inputs in the
production of softwood lumber. Because the USDOC fa iled to consider virtually all of the arm’s-
length log transactions at issue, it did not make such comparisons. The USDOC therefore presumed
that log producers lowered the price of logs by th e full amount of the alleged input subsidy in their
sales to unrelated softwood lumber producers.

6. The USDOC failed to consider arm’s-le ngth log transactions for three reasons.

7. First, it refused to collect or analyze record evidence pertaining to log transactions between
tenured sawmills.

8. Second, the USDOC ignored record evidence concerning pricing submitted by the Canadian
respondents because the information was in aggreg ate form. Although the USDOC used aggregate
data to conduct the softwood lumber investiga tion, and consistently refused throughout the
investigation to consider company-specific inform ation, it nevertheless deemed aggregate data
inappropriate for a pass-through analysis. No ex ception exists in the GATT 1994 or in the SCM
Agreement allowing the USDOC to refuse to con duct the required pass-through analysis on the
grounds that available data are in aggregate form.

9. Third, with respect to the evidence of l og transactions that the USDOC did consider, it
deemed there to have been a full pass-through of th e alleged log subsidy if any of five factors it
identified existed. Nothing in the original panel or Appellate Body reports suggests that these factors
are relevant to a pass-through analysis. Those repo rts confirm that an investigating authority must
establish the existence and amount of a benefit pass- through where a subsidy is received by someone

other than the producer or exporter of the investig ated product; this obligation is without further
qualification. The USDOC reliance on such factors to reject log transactions as being not at arm’s
length also is contrary to generally accepted economic principles.

10. The USDOC applied the results of the limited pass-through analysis that it did conduct to the
countervailing duty rate established in the original investigation, which long before had been
invalidated as a result of judicial review proceedi ngs conducted in accordance with US law. A few
days later, the USDOC imposed a new counterva iling duty rate based on the results of its
administrative review, in which it conducted no pass-through analysis at all.

11. In order to bring its imposition of duties into conformity with US obligations under the GATT
1994 and the SCM Agreement, the USDOC must esta blish, and not presume, whether and to what
extent the benefit from the alleged log subsidy flow s through to the production of softwood lumber
where the parties to the log transaction are unrelat ed. The USDOC has not done so. Instead, it has
claimed that for the vast majority of transactions no such analysis was required. This claim of
compliance has no basis, and Canada asks the Panel to so determine.

12. Canada begins this submissi on with a description of the relevant facts underlying the dispute.
Canada then addresses the US obligations at issu e, the violation of th ese obligations, and the
consequential effect on the US countervailing duties that continue to be imposed.

II. FACTUAL BACKGROUND

 A. Procedural History

13. On 17 February 2004, the DSB adopted the r ecommendations and rulings in the reports of the
original panel and the Appellate Body in United States – Final Countervailing Duty Determination
with Respect to Certain Softwood Lumber from Canada.
1

14. On 5 March 2004, the United States notified the DSB, pursuant to Article 21.3 of the DSU, of
its intention to implement these recommendations and rulings.
2 Canada and the United States agreed
shortly afterward on a ten-month “reasonable peri od of time”, beginning 17 February 2004, for the
United States to implement the recommendations and rulings of the DSB.3

15. At the DSB meeting of 17 December 2004, the United States informed the DSB that it had
complied with its recommendations and rulings. Cana da subsequently requested the establishment of
an Article 21.5 compliance panel.
4

16. The DSB established this Panel at its meeti ng of 14 January 2005, and referred the matter of
suspension of concessions to Article 22.6 arbitration.5

 1 DSB, Minutes of Meeting (17 February and 19 March, 2004) , WT/DSB/M/165, 30 March 2004, at
4(a), para. 49. See also Appellate Body Report and Panel Report.
 2 United States – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber
from Canada, Communication from the United States, WT/DS257/12, 9 March 2004.
 3 United States – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber
from Canada, Agreement under Article 21.3(b) of the DSU, WT/DS257/13, 30 April 2004.
 4 United States – Final Countervailing Duty Determination With Respect to Certain Softwood Lumber
from Canada, Recourse to Article 21.5 of the DSU by Canada, Request for Establishment of a Panel ,
WT/DS257/15, 4 January 2005; and United States – Final Countervailing Duty Determination With Respect to
Certain Softwood Lumber from Canada, Recourse to Article 22.2 of the DSU by Canada, WT/DS257/16,
4 January 2005.

5 United States – Final Countervailing Duty Determination With Respect to Certain Softwood Lumber
from Canada, Recourse by Canada to Article 21.5 of the DSU, Constitution of the Panel , WT/DS257/19,
14 February 2005; and United States – Final Countervailing Duty Determination With Respect to Certain

 B. DSB Recommendations and Rulings Co ncerning the US Failure to Demonstrate
Pass-Through

17. The United States imposes countervailing duties on imports of certain Canadian softwood
lumber products based on the USDOC determination that Canadian provincial stumpage programmes
subsidize the production of softwood lumber. Stum page programmes impose obligations such as the
payment of fees, road construction and maintenan ce requirements, and fire protection and insect and
disease control, in exchange for right s to harvest standing timber on public lands. Standing timber is
harvested and processed into logs.
6 Logs may then serve as inputs for further processing in, inter alia,
sawmills and pulp mills to produce a wide variety of forest products, including softwood lumber.
These facts, as confirmed by the original panel a nd the Appellate Body, as well as by the panel in US
– Softwood Lumber III , have not changed since the initia tion of the US countervailing duty
investigation.7

18. On the basis of these facts, the original pa nel found that the USDOC was required to conduct
subsidy “pass-through” analysis where:

• tenured timber harvesters who do not produce softwood lumber provide logs to unrelated
downstream lumber producers (“independent harvester” transactions);

• tenured timber harvester/lumber producers provide logs to other unrelated lumber producers
(“sawmill-to-sawmill” transactions); and

• tenured timber harvester/lumber producers sell lumber to unrelated downstream lumber re-
manufacturers (“re-manufacturer” transactions).
8

19. The panel concluded:

that the USDOC's failure to conduct a pass- through analysis in respect of upstream
transactions for log and lumber inputs be tween unrelated entitie s was inconsistent
with Article 10 SCM Agreement and Article VI:3 of GATT 1994, and we therefore
uphold Canada's claim that the United States' imposition of countervailing duties in
respect of such transactions was inconsistent with Articles 10 and 32.1 SCM
Agreement and Article VI:3 of GATT 1994 (…).
9

Softwood Lumber from Canada, Recourse by the United St ates to Article 22.6 of the DSU, Constitution of the
Arbitrator, WT/DS257/20, 14 February 2005.
 6 These obligations are imposed through complex tenure and licensing agreements.
 7 Panel Report, at para. 7.84 (“In considering Canada's pass-through claim in detail, we recall that
countervailing measures are applied to imports of certain products (the subject merchandise), which in the
countervailing duty investigation in dispute before us comprises softwood lumber products produced by
sawmills from logs, and re-manufactured softwood lumber products produced by re-manufacturers from lumber
obtained from sawmills.”); Appellate Body Report, at para. 124 (“We found above that the stumpage
programmes of Canadian provinces at the heart of this case provide standing timber to timber harvesters,
allegedly conferring a benefit. The standing timber eventually becomes felled trees or logs, which are processed
into softwood lumber as well as remanufactured lumber products. USDOC defined the product subject to the
investigation at issue as ‘certain softwood lumber’, which includes ‘primary’ lu mber and ‘remanufactured’
lumber. The United States imposed countervailing duties on imports of these softwood lumber products from
Canada.”). See also US – Softwood Lumber III, at paras. 7.68-7.69.

8 Panel Report, at para. 7.99.
 9 Panel Report, at para. 8.1(c) [emphasis in original].

20. On appeal, the United States accepted th ese findings and conclusions, as applied to
independent harvester transactions.
10 However, the United States asked the Appellate Body to reverse
the panel’s findings regarding sawmill-to-sawmill transactions and re-manufacturer transactions. The
Appellate Body reversed the panel’s findings on re-manufacturer transactions 11, but upheld the
panel’s findings on sawmill-to-sawmill transactions:

[T]he Appellate Body… upholds the Panel’s finding, in paragraph 7.99 of the Panel
Report, that USDOC's failure to conduct a pass-through analysis in respect of arm's
length sales of logs by tenured harvesters/sawmills to unrelated sawmills is
inconsistent with Articles 10 and 32.1 of the SCM Agreement and Article VI:3 of the
GATT 1994.12
21. The DSB subsequently adopted the Appe llate Body report and the panel report and
recommended that the United States bring its measure into conformity with its obligations under the
SCM Agreement and the GATT 1994.13

 C. US Action Taken to Address Pass-Th rough Subsequent to the Recommendations
and Rulings of the DSB

 1. Section 129 Determination

22. The United States has enacted legislation that provides for proceedings to address DSB
recommendations and rulings concerning a US counterv ailing duty measure. Section 129(b) of the
Uruguay Round Agreements Act authorizes the USDOC to “issue a second determination … to
respond to the recommendations in a WTO panel or Appellate Body report.”
14 Section 129
proceedings may involve the issuance of new ques tionnaires and application of new methodologies.
The section 129 process represents one way in which the United States may bring the imposition of its
countervailing duties into conformity with its obligations.

23. As a result of the DSB recommendations and rulings concerning the US failure to
demonstrate a pass-through for independent harv ester and sawmill-to-sawmill transactions, the
USDOC initiated section 129 proceedings.

24. In questionnaires issued by the USDOC, the Canadian respondents were requested to identify
the volume of Crown timber purchased by sawmills in independent harvester transactions. With
respect to sawmill-to-sawmill transactions, the USDO C request for information was limited to only a
small subset of such transactions.
15 The Canadian respondents replied to these questionnaires,
providing a detailed breakdown of the volume of inde pendent harvester transactions and, in many

 10 Appellate Body Report, at para. 127, and footnote 154. (“The United States notes that it ‘does not
appeal the Panel's finding that, where the subs idy is received by independent harvesters, i.e., entities that do not
produce [softwood lumber] product[s] under investigation and operate at arm's length, a pass through analysis
would be required to determine if the subsidy received by the independent harvesters was indirectly bestowed
on production of softwood lumber’.”[emphasis in original])

11 Appellate Body Report, at paras. 165, 167(f).
 12 Appellate Body Report, at para. 167(e) [emphasis in original].
 13 DSB, Minutes of Meeting (17 February and 19 March, 2004) , WT/DSB/M/165, 30 March 2004, at
4(a), para. 49.
 14 SAA, at 1022 (Exhibit CDA-1) . See also Uruguay Round Agreements Act , Pub. L. No. 103-465, §
129(b), 108 Stat. 4838, codified at 19 U.S.C. § 3538(b) (2000) (Exhibit CDA-2).
 15 Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada :
WTO “Pass-Through” Questionnaire (14 April 2004), Question 2, at 11 (Exhibit CDA-3). (“Of the total volume
of Crown timber entering sawmills reported by the province, what portion does the province claim was sold in
arm’s length transactions by tenured timber sawmills to sawmills that do not have a tenure and, therefore,
requires an analysis to determine if the purchaser received a subsidy benefit?”)

cases, comprehensive data on saw mill-to-sawmill transaction volumes.16 Annex I contains a detailed
explanation of the volumes of record eviden ce submitted by Canadian provinces and industry
associations. For example, British Columbia provide d the USDOC with a survey demonstrating that
11.6 per cent of Crown logs consumed in B.C. sawmills were purchased from unrelated non-lumber-
producing tenure holders. 17 The survey also demonstrated that an additional 6.2 per cent of Crown
logs consumed in B.C. sawmills were purchased in arm’s-length transactions from unrelated lumber-
producing tenure holders.18

25. The USDOC also requested company- or tran saction-specific information for each individual
log transaction, such as copies of the applicable log purchase agreements and confirmation of which
party paid the stumpage fee.
19 In many instances, the Canadian respondents provided sample data,
explaining that much of the information was im possible to collect as it involved hundreds of
thousands of arm’s-length transactions by thou sands of companies in Canada. The USDOC
nevertheless refused to provide reasonable alternativ es even after Canadian respondents explained the
impossibility of the USDOC request both in writing and in meetings with USDOC officials, and
rejected all information provided in aggregate form.20

26. The USDOC then eliminated from consideration most of the transactions for which individual
company data were provided on a transaction-by-tra nsaction basis, claiming that “… a significant
portion of the transactions included in the claims by Alberta, British Columbia, Manitoba, Ontario and
Saskatchewan are not arm’s-length sales.”
21 The USDOC found that transactions between unrelated
parties were not at “arm’s length” if any of th e following factors existed in the province:
(1) limitations on log sales in Crown tenure contract s; (2) wood supply commitment letters; (3) the
payment of stumpage fees by the downstream log purchaser; (4) log purchase agreements of a certain
structure; or (5) fibre exchange agreements be tween tenured sawmills. Where any of these “factors”
existed, the USDOC did not undertake any price co mparisons to establish the pass-through of the log
subsidy benefit or its amount.
22 These factors eliminated the vast majority of log transactions
remaining after the USDOC had already excluded all aggregate data reported on the record, including
all transactions in British Columbia and roughly 90 per cent of the transactions in Alberta.

27. The USDOC maintained that a pass-through an alysis was therefore required for only a small
fraction of the log transactions occurring between unrelated parties.
23 This analysis led to a reduction

 16 The “Canadian respondents” comprise the Government of Canada, the Canadian provincial
governments, the industry associations and certain Canadian lumber producers.
 18 Ibid.
 19 Ibid., at para. 75.
 20 See Letter from Weil, Gotshal & Manges to USDOC (16 September 2004), at 2 (Exhibit CDA-4).
See also Final Section 129 Determination, at 3-4 (Exhib it CDA-5) (“For sales not co nducted at arm’s length or
for which respondents failed to provide sufficient data to determine whether they were conducted at arm’s
length, we did not conduct any further pass-through analysis and the volume of these sales was not removed
from the numerator of the subsidy calculations.”); and Comment 8, at 12-13 (“Although the surveys and sample
data provided by the Canadian parties are sufficient fo r certain analyses undertak en in the context of the
aggregate case, such data is not sufficient for the purposes of our pass-through analysis.”).

21 Final Section 129 Determination, at 6 (Exhibit C DA-5). See also Draft Section 129 Determination,
at 7 (Exhibit CDA-6).

22 Final Section 129 Determination, at 4 (Exhibit CDA-5) (“[W]here we determined that any of the
sales reported by the Canadian parties were affected by one or several of the five factors listed above, we
concluded that transactions were not conducted at arm’s length.”); and at 6-7 (“If, based on the evidence on the
record, we were unable to ascertain that the amount qualified as an arm’s-length transaction or that the stumpage
for the log was paid by the harvester, we did not compare the price per cubic meter with the benchmark input
price and the numerator was not reduced by that volume.”). See also Draft Section 129 Determination, at 5, 7-8
(Exhibit CDA-6).
 23 Final Section 129 Determination at 7 (Exhibit CD A-5). (“We determine that the evidence on the
record sufficiently demonstrates that, during the POI, there were some arm’s-length log sales between sawmills

in the amount of the countervailing duty imposed by 0.17 percentage points ( i.e., from 18.79 per cent
to 18.62 per cent), which came into force on 10 December 2004.
24

28. On 13 December 2004, the USDOC released the final results of its administrative review,
which contained no pass-through analysis despite arguments and evidence supplied by Canadian
respondents that would have enabled the USDOC to conduct one. The revised countervailing duty
amount resulting from the administrative review came into force on 20 December 2004.
25
Accordingly, ten days after the final section 129 dete rmination came into force, subsequent action of
the USDOC rendered moot the minor pass-through adjustment resulting from it.

 2. The Administrative Review

29. The United States uses a “retrospective” dut y assessment system to periodically review the
amount of any countervailing duty imposed as a r esult of an original final countervailing duty
determination. Where no administrative review is requested by an “interested party”, final assessment
occurs at the amount of the countervailing duty estab lished in the original determination. Where an
administrative review is conducted, the USDOC revi ews data for a period of approximately one year
from the date of first imposition of final duties (the “period of review”). The revised amount of the
countervailing duty established through an admini strative review applies, for final assessment
purposes, to imports made during that period of review.
26 The revised amount also serves as the
amount of duties imposed on imports made after the r esults of the review come into force, and takes
the form of a cash deposit required pending final assessment.

30. As they did for the section 129 proceeding, the Canadian respondents provided the USDOC
with all the information necessary to conduct a pass -through analysis in the administrative review.
Annex I contains a detailed explan ation of this record evidence, which confirmed that a significant
volume of log transactions required a pass-through analysis. Here, the USDOC’s request for
information was limited exclusively to independent harvester transactions.
27

31. On 14 June 2004, nearly four months afte r the adoption of the recommendations and rulings
of the DSB, the USDOC published the preliminary results of its administrative review.
28

32. The USDOC’s preliminary results did not cont ain a pass-through analysis for any of the log
volumes in question. Instead, the USDOC rejected all record evidence provided by the Canadian
respondents for reasons similar to those in its se ction 129 determination. For example, the USDOC
rejected record evidence from Alberta, Britis h Columbia and Ontario because, in some log

and tenured harvesters/sawmills in Alberta, Manito ba, Ontario and Saskatchewan. … The result of these
calculations is that only a small portion of the Crown harvest volume originally included in the numerator is
excluded from the numerator of our revised subsidy calculations.”)

24 Notice of Implementation under Section 129 of th e Uruguay Round Agreements Act; Countervailing
Measures concerning Certain Softwood Lumber Products from Canada , 69 Fed. Reg. 75,305, at 75,306 (Dept.
Commerce, 16 December 2004) (Exhibit CDA-7).
 25 Final AR Determination Notice, 69 Fed. Reg. at 75,919-75,920 (Exhibit CDA-8).
 26 The amount of duty applies only to those imports that represent merchandise entered or withdrawn
from warehouse for consumption during this period. See, e.g., Final AR Determination Notice, 69 Fed. Reg. at
75,919-75,920 (Exhibit CDA-8).

27 See Annex I at para. 77. See e.g., Letter from USDOC to Embassy of Canada, Countervailing Duty
Administrative Review: Certain Softwood Lumber Products from Canada (12 September 2003), Questionnaire
for the Province of Alberta, Question III (J) at III-6 (Exhibit CDA-9) (“Did the Government of Alberta (GOA)
permit any person or company that did not own or operate a sawmill and was not affiliated with a sawmill to
harvest Crown timber during the [period of review]?”).
 28 Preliminary AR Determination, 69 Fed. Reg. 33,204 (Exhibit CDA-10).

transactions, the purchasing sawmill paid the gove rnment stumpage charge rather than the
independent harvester.29

33. The USDOC issued the final results of its administrative review on 13 December 2004.
30 In
its final results, the USDOC mirrored the approach it took in its final section 129 determination and
reproduced its discussion of the same five “factor s” as the basis for not conducting a pass-through
analysis for any of the transactions in question. 31 It applied these factors to reject all record evidence
provided by the Canadian respondents, and determined that each province “failed to substantiate its
claim that logs entering sawmills during the [per iod of review] included logs purchased in arm’s-
length transactions.”
32
34. As mentioned, the amount of the counterva iling duty established in the administrative review
superseded the amount adjusted as a result of its section 129 determination te n days after the latter
came into force, thereby rendering any purporte d “prompt compliance with recommendations or
rulings of the DSB” under Article 21.1 of the DSU of no effect.

III. LEGAL ARGUMENT

35. The United States continues to violate its obligations under Article VI:3 of the GATT 1994
and Articles 10 and 32.1 of the SCM Agreement on three fronts.

36. First, the USDOC failed in both the 129 de termination and the final results of the
administrative review to collect or analyze reco rd evidence pertaining to log transactions between
tenured sawmills. It offered no explanation in its de terminations or questionnaires for its disregard of
the DSB recommendations and rulings in this respect.

37. Second, in its section 129 determination, the USDOC failed to analyze whether, and to what
extent, a subsidy pass-through occurred for the vast majority of independent harvester transactions
identified in the record evidence, and failed to do so for all such transactions in its administrative
review. To justify this failure in its section 129 de termination, the USDOC claimed that such analysis
may only be done on a company-specific, transacti on-by-transaction basis. This claim is without
basis, and fails to take into account the efforts of the Canadian respondents to provide the necessary
information in the context of an aggregate case.

38. The USDOC also justified its failure to c onduct a pass-through analysis in both its section 129
and administrative review determinations by claimi ng that unrelated parties do not operate at “arm’s
length” from each other if any one of five factors ex ternal to the transaction exists. There is no basis
for the USDOC position under the GATT 1994 and the SC M Agreement, or in the findings of either
the original panel or the Appellate Body. Its po sition also contradicts fundamental principles of
economics. The USDOC is required to conduct a pass-through analysis, which involves comparisons
to market benchmarks, where the direct recipient of an alleged benefit – the producer of the input
product (in this case, logs) – is not the same entity as the indirect recipient of the benefit – the
producer of the further processed product (in this case, softwood lumber). The United States may not
now evade this obligation by disregarding transactions as being not at “arm’s length” on the basis of
an unfounded standard.

39. Third, even in the few instances in its section 129 determination where the USDOC
considered log transactions, it nevertheless failed to conduct a proper analysis under Article 1.1(b) of

 29 Ibid., at 33,208-33,209.
 30 Final AR Determination (Exhibit CDA-11).
 31 Compare Final Section 129 Determination, at 5-7 (E xhibit CDA-5) with Final AR Determination, at
46-47 (Exhibit CDA-11).
 32 Final AR Determination, at 7.

the SCM Agreement because most of the benchmar ks it used did not reflect prevailing market
conditions for logs in Canada.

40. Thus, for the vast majority of transactions in its section 129 determination and for all
transactions in its administrative review, the US DOC conducted no pass-through analysis, and where
it purported to conduct such anal ysis, it did so incorrectly. As a result, the USDOC continues
impermissibly to presume a pass-through of the alleged input subsidy. In this dispute, the original
panel and the Appellate Body have already confirmed that such a presumption is a violation of WTO
obligations.

 A. GATT 1994 and the SCM Agreement Prohibit the United States From Imposing
Countervailing Duties To Offset Subsidization That Has Not Been Demonstrated
To Exist

41. In this section, Canada sets out the basic WTO obligations requiring the United States to
demonstrate, rather than presume, the existence a nd amount of a subsidy. Canada also sets out how
these obligations have already been interpreted in this dispute as applying in a pass-through context.

42. A Member must establish that a subsidy ex ists before it may impose countervailing duties,
and it may not impose such duties in an amount greater than the amount of the subsidy demonstrated
to exist. Article VI:3 of the GATT 1994 sets out this fundamental obligation:

No countervailing duty shall be levied on any product of the territory of any
contracting party imported into the territory of another contracting party in excess of
an amount equal to the estimated bounty or s ubsidy determined to have been granted,
directly or indirectly, on the manufacture, production or export of such product ... The
term “countervailing duty” shall be underst ood to mean a special duty levied for the
purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly, upon the
manufacture, production or export of any merchandise. [emphasis added]
43. Under this provision, any countervailing duty levied on a product that has not been
determined to have been subsidized is necessar ily, and fully, “in excess” and there is no lawful
“offset”.
33 The obligation is reaffirmed in Article 10 of the SCM Agreement:

Members shall take all necessary steps to ensure that the imposition of a
countervailing duty
36 on any product of the territory of any Member imported into the
territory of another Member is in accordance with the provisions of Article VI of
GATT 1994 and the terms of this Agreemen t. Countervailing duties may only be
imposed pursuant to investigations initia ted [footnote omitted] and conducted in
accordance with the provisions of this Agreement and the Agreement on Agriculture.
 -------------------------------------------
 36 The term “countervailing duty” shall be understood to mean a special duty levied for the purpose of
offsetting any subsidy bestowed directly or indirectly upon the manufacture, production or export of
any merchandise, as provided for in paragraph 3 of Article VI of GATT 1994.

44. Finally, Article 32.1 of the SCM Agreement c onfirms that the imposition of duties is unlawful
where a Member fails in this obligation. It prov ides that “[n]o specific action against a subsidy of
another Member can be taken ex cept in accordance with the provis ions of GATT 1994, as interpreted
by this Agreement.”

 33 The ordinary meaning of the verb “offset” is “[s]et off as an equivalent against; cancel out by,
balance by something on the other side or of contrary nature; counterbalance, compensate”. See New Shorter
Oxford English Dictionary (Oxford: Clarendon Press, 1993), at 1985 (Exhibit CDA-12) [emphasis added].

45. Nothing in the context or object and purpo se of these provisions alters the fundamental
obligation to demonstrate the existence and the amou nt of a subsidy with respect to a product before
imposing countervailing duties on that product.
34

46. Article 1.1 of the SCM Agreement sets out an exhaustive definition of “subsidy” that applies
to this obligation. 35 Under this provision, there is no “subsidy” when a “benefit” has not been
conferred upon a recipient. 36 The original panel, referring to the findings of the Appellate Body in
Canada – Aircraft , found that the term “benefit” “implies some kind of comparison” and that the
“marketplace” provides a basis for this comparison.37

47. In a pass-through context, the obligation on Members is to compare the transactions in
question to the marketplace to determine whether, and to what extent, a benefit under Article 1.1(b) of
the SCM Agreement is conferred.
38 As explained by the original pa nel, the results of such analysis
may not be presumed:

The heart of the pass-through issue is wh ether, where a subsidy is received by
someone other than the producer or exporter of the product under investigation, the
subsidy nevertheless can be said to have confe rred benefits in respect of that product.
If it is not demonstrated that there has b een such a pass-through of subsidies from the
subsidy recipient to the producer or exporter of the product, then it cannot be said that
subsidization in respect of that product, in the sense of Article 10, footnote 36, and
Article VI:3 of GATT 1994, has been found. Thus, we find that a pass-through
analysis is required by these provisions … where there are such upstream
transactions.
39

 34 See Panel Report, at paras. 7.90-7.91 (“[B]oth of these provisions make explicit that there must be
direct or indirect subsidization in relation to the manufacture, production or export of a product for a
‘countervailing duty’ in the sense of the [SCM] Agreement and GATT Article VI to be imposed on that
product.” [emphasis in original]. See also US – Softwood Lumber III , at paras. 7.75, 8.1(c), and US –
Countervailing Measures on Certain EC Products , Panel Report, at paras. 7.41-7.44, as upheld in
 US –
Countervailing Measures on Certain EC Products , Appellate Body Report, at paras. 139 and 161(a), and US –
Lead and Bismuth II , Panel Report, at para. 6.56, as upheld in US – Lead and Bismuth II , Appellate Body
Report, at para. 63.
 35 The relationship between the definition in Article 1.1 of the SCM Agreement and the obligations
under Article VI:3 of the GATT 1994 and Articles 10 and 32.1 of the SCM Agreement has been explained by
the original panel. See Panel Report, at para. 7.88 (“[Footnote 36 to Article 10 of the SCM Agreement] defines
what a countervailing duty is, and in so doing makes explicit the link between a ‘subsidy’ to a recipient in the
sense of Article 1.1 and the manufacture, production or export of a product that is the subject of a CVD
investigation and ultimately a countervailing duty. [emphasis in original]”).

 37 The original panel considered this issue in detail in the context of other claims in this dispute. See
e.g., Panel Report, at paras. 7.53-54. See also Canada – Aircraft, at para. 157.
 38 That pass-through analysis requ ired pricing analysis had been established as far back as the US –
Canadian Pork dispute. This GATT panel determined that:
[G]iven the existence of separate industries for swine and pork production in Canada
operating at arm’s length, the subsidies granted to swine producers could be considered to be
bestowed on the production of pork only if they had led to a decrease in the level of prices for
Canadian swine paid by Canadian pork producers below the level they have to pay for swine
from other commercially available sources of supply.

39 Panel Report, at para. 7.91. The original panel also explained that a Member may not simply
presume whether and to what extent any subsequent “benefit” passed thro ugh an input transaction where the
transacting parties are unrelated. In agreeing with the findings of the GATT panel in US – Canadian Pork, the
panel stated:

48. Accordingly, where a subsidy is received by “someone other than the producer or exporter of
the product under investigation”, a Member must esta blish whether and to what extent the benefit to
an upstream recipient passes to a downstream entity through the purchase of an input product.

49. The Appellate Body agreed. Drawing on the text of Article VI:3 of the GATT 1994, it found
that a Member may not presume that a subsidy passes through transactions where “the producer of the
input is not the same entity as the pr oducer of the processed product”.
40 The Appellate Body also
explained in no uncertain terms that analysis under Article 1.1(b) of the SCM Agreement is required:

Where a subsidy is conferred on input products, and the countervailing duty is
imposed on processed products, the initial reci pient of the subsidy and the producer
of the eventually countervailed product, may not be the same. In su ch a case, there is
a direct recipient of the benefit – the producer of the input product. When the input is
subsequently processed, the producer of the processed product is an indirect recipient
of the benefit – provided it can be establis hed that the benefit flowing from the input
subsidy is passed through, at least in part, to the processed product. Where the input
producers and producers of the processed products operate at arm's length, the pass-
through of input subsidy benefits from the direct recipients to the indirect recipients
downstream cannot simply be presumed; it must be established by the investigating
authority. In the absence of such anal ysis, it cannot be shown that the essential
elements of the subsidy definition in Article 1 are present in respect of the processed
product.
41
50. Despite the clarity of these findings, the United States, in purporting to bring the imposition
of its countervailing duties into conformity with this obligation, ignored this obligation entirely with
respect to some transactions and unilaterally re-d efined the circumstances under which this obligation
arises with respect to all other transactions.

 B. The United States Continues to Im pose Countervailing Duties Based On an
Impermissible Presumption of Subsidization

51. Applied to the two factual situ ations at issue in this dispute, both the original panel and the
Appellate Body have made abundantly clear to the United States that it is required under Article VI:3
of the GATT 1994 and under Articles 10 and 32.1 of the SCM Agreement to perform a benefit
analysis under Article 1.1(b) for both independent harvester and sa wmill-to-sawmill transactions. It
has not done so.

That panel found, as we do, that investigating authorities had the affirmative obligation to
make a determination of subsidization in respect of a product, and could not simply assume
such subsidization where the subsidies were bestowed in respect of a product (the input
product) that was different from the product subject to countervailing duty , and where the
input producers were unrelated to the producers of that subject merchandise. [emphasis in
original]
[at para. 7.92]

40 Appellate Body Report, at paras. 140-141. See also US – Softwood Lumber III, at paras. 7.74-7.75.
 41 Appellate Body Report, at para. 143 [emphasis in original]. See also Panel Report, at para. 7.92.
The United States had even agreed with the original panel. As noted by the Appellate Body:
[T]he United States accepts that a pass-throug h analysis is required where a subsidy is
bestowed indirectly on producers of products subject to the investigation (“subject products”).
Thus, if a subsidy is received directly by an entity other than a producer of subject products,
and that entity subsequently sells inputs to producers of subject products, the investigating
authority is required to determine whether at least some of that subsidy is passed through in
the sale to the producers of such products.
 Appellate Body Report, at para. 129 [emphasis in original], US – Softwood Lumber III, at para. 7.70.

52. Instead, the United States has attempted at ever y turn to avoid its obligations to perform the
required analysis and make the required dem onstration. This non-compliance with the
recommendations and rulings of the DSB has allowed the United States to continue to illegally inflate
the amount of its countervailing duties on softwood lumber.

 1. The United States Failed to Conduct Pass-Through Analysis for Log
Transactions Between Unrelated Parties

53. The USDOC failed to conduct the require d pass-through analysis for three reasons.

54. First, it presumed a full pass-through of the alleged input subsidy for all log transactions
between tenured sawmills. In its section 129 determination, the USDOC restricted its request to the
following information:

Of the total volume of Crown timber entering sawmills reported by the province,
what portion does the province claim was sold in arm’s length transactions by tenured
timber sawmills to sawmills that do not have a tenure and, therefore, requires an
analysis to determine if the purchaser received a subsidy benefit?
42
55. By restricting its request to log purch ases by “sawmills that do not have a tenure”, the
USDOC inexplicably excluded information on tr ansactions in which the purchasing sawmill had
tenure – transactions that constitute the vast major ity of sawmill-to-sawmill transactions in Canada.
Nowhere did the USDOC make any request for info rmation relating to purchases by sawmill owners
that did hold tenure. It simply ignored the findings of the original panel and the Appellate Body with
respect to such sawmill-to-sawmill transactions, which provide no basis for refusing to conduct a
pass-through analysis simply because the purchasing sawmill holds tenure.43

56. The transaction volumes between tenured saw mills were excluded by the USDOC despite
explicit calls for their inclusion. For example, Al berta noted at the outset of an initial questionnaire
response that it believed “that the Department also should be requesting data on arm’s length sales of
logs between tenureholders where both the buyer an d seller are sawmillers” and that it “stands ready
to collect and supply this additional information on an expedited basis”. 44 These calls went
unanswered.

57. In its administrative review, the USDOC fa iled to request information on any sawmill-to-
sawmill transactions. In its only request for info rmation on arm’s-length log transactions, the
USDOC restricted its request in its initial questionna ire to the volume and value of Crown logs sold
by independent harvesters to softwood lumber pr oducers (“by any person or company that did not
own or operate a sawmill” or “by non-mill-owning tenure holders”).45

 42 Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada:
WTO “Pass-Through” Questionnaire (April 14, 2004), Question 2 (Exhibit CDA-3) [emphasis added].
 43 Appellate Body Report, at para. 167(e); Panel Report, at paras. 7.99 and 8.1(c).
 44 Alberta 21 May 2004 Pass-Through Questionnaire Response, at AB-1 (Exhibit CDA-13); See also
Alberta 15 September 2004 Supp. Pass-Through Questionnaire Response, at 1 (Exhibit CDA-14). (“At the
outset, Alberta wishes to note that Alberta’s response to the original questionnaire of 14 April 2004 did not
provide all the relevant data on arm’s length sellers of Crown logs, due to the constraints imposed by the
Department’s narrow questions. Specifically, in the original questionnaire on this subject, the Department told
Alberta to limit our responses to those sellers of softwood logs harvested from provincial lands who did not own
sawmills themselves.”)

45 Letter from USDOC to Embassy of Canada, Countervailing Duty Administrative Review: Certain
Softwood Lumber Products from Canada (September 12, 2003), attaching Questionnaire for the Province of
Alberta, Questions III (J), (K), and (L), at III-6; Questionnaire for the Province of British Columbia, Questions
III (K), (L), and (M), at IV-7; Questionnaire for the Province of Manitoba, Questions III, (D), (E) and (F), at V-
5; Questionnaire for the Province of Ontario, Questions III, (K) and (L), at VI-6; and Questionnaire for the

58. Second, in its section 129 determination, the USDOC disregarded a ll aggregate transaction
and pricing data submitted by the Canadian res pondents. The USDOC considered only information
on a company-specific, transaction-by-transactio n basis knowing that there were hundreds of
thousands of eligible transactions made by thousands of companies.
46 The USDOC disregarded such
evidence even though its investigation was undertak en on an aggregate basi s precisely because there
are thousands of companies involved. 47 The USDOC thus ignored entir ely the original panel’s views
that company-specific data are not necessar ily required to conduct pass-through analysis. 48 T h e
USDOC stated only that, while the aggregate info rmation provided by the Canadian parties is
sufficient for certain analyses undert aken in the context of its aggr egate case, “such data is not
sufficient for the purposes of our pass-through analysis.” 49

59. Third, in both its section 129 and administra tive review determinations, the USDOC applied a
contrived standard to limit the number of Crown log transactions requiring analysis. In the USDOC
view, a log transaction requires analysis only if it is at arm’s length, and a transaction is at arm’s
length only where:

• the transacting parties are unrelated; and

• none of the external factors identified by the USDOC exists.
50

60. While the USDOC did not contest that the Crown log volumes identified by the Canadian
respondents satisfy this first condition, it nevertheless rejected nearly all remaining transactions in its

Province of Saskatchewan, Questions III, (D), (E) and (F), at VIII-4 (Exhibit CDA-9). See also Preliminary AR
Determination, 69 Fed. Reg., at 33,208 (Exhibit CDA-10).
 46 See e.g., B.C. September 15, 2004 Supp. Questionnaire Response, Narrative, at 5 and Norcon B, at 4
(Exhibit CDA-15).

47 USDOC Memorandum from B.T. Carreau to F. Shirzad, Issues and Decision Memorandum: Final
Results of the Countervailing Duty Investigation of Certain Softwood Lumber Products from Canada
(21 March 2001), at 15 (Exhibit CDA-16) (“In the Initiation Notice , we stated that, due to the extraordinarily
large number of Canadian producers, we anticipated that we would conduct this investigation on an aggregate
basis consistent with section 777A(e)(2)(B) of the Act. No parties objected to this. [footnote omitted] For the
purposes of this final determination, we have aggregated the subsidy information on an industry-wide basis.
Specifically, we used the information provided by the [Government of Canada] and the Provincial governments
and calculated one subsidy rate for the Canadian softwo od lumber industry for exports of softwood lumber to
the United States.”).
 See also Final AR Determination, at 47 (Exhibit CDA-11) (“In this procee ding we are examining
subsidies that directly benefit the lumber manufacturing process in Canada on an aggregate basis ” [emphasis
added]).

48 Panel Report, at para. 7.98 (“[W]e are not convinced that the need to conduct a pass-through analysis
for these transactions would necessarily or inevitabl y convert every aggregate case into a company-specific
case.”) and footnote 170 (“For example, inquiry into po ssible relationships between the entities concerned, and
the use of sampling or other statistical techniques in respect of the relevant transactions at issue, might offer
possible approaches to be explored.”).
 49 Final Section 129 Determination, Comment 8, at 12 (Exhibit CDA-5).
 50 Ibid., at 2 (“[T]o determine whether transactions ar e at arm’s-length requires information about the
relationship between the parties to the transaction (e.g. affiliations) and the circumstances surrounding the
transactions.”[emphasis added]). See also Draft Section 129 Determination, at 3 (Exhibit CDA-6).
 Final Section 129 Determination, at 4 (Exhibit CDA-5) (“We first examined whether any of the log
sale transactions at issue were between affiliated parties, as defined by section 771(33) of the Tariff Act of 1930,
as amended. If any of the log sales reported by the Ca nadian parties were determined to have been between
affiliated parties, we concluded that these were no t arm’s-length transactions and no further pass-through
analysis was conducted”). See also Draft Section 129 Determination, at 5 (Exhibit CDA-6).

section 129 determination and did reje ct all transactions in its administrative review based on the
second condition.51

61. The second condition in the USDOC test has no foundation under the GATT 1994 or the
SCM Agreement, nor does it accord with basic economics. Under this condition, the USDOC
excluded from examination any reported independent harvester and sawmill-to-sawmill transactions
that included any of the following five “factors”, chosen arbitrarily as exclusive criteria: (1)
limitations on log sales in Crown tenure contracts; (2) wood supply commitment letters; (3) payment
of the stumpage fees by the downstream lumber producers; (4) the structure of certain log purchase
agreements; or (5) fibre exchange ag reements between Crown tenure holders.
52 The USDOC
concluded, without any demonstrative analysis, that these factors “affect” the outcome of these
transactions.53 The USDOC conclusion has no basis and should be rejected.

62. A transaction between unrelated parties is by definition an arm’s-length transaction.
54
Because the external factors identified by the USDOC do not transform an arm’s-length transaction
into one that is not at arm’s length, the existen ce of any such factors cannot excuse the United States
from its obligation to conduct the required benefit pass-through analysis. As the original panel and
the Appellate Body confirmed, such analysis is re quired in every instance where the subsidized input
producer is unrelated to the producer of the subject merchandise.55 The creation of this new definition
of “arm’s length” by the USDOC is nothing more th an an attempt to resurrect US arguments that
failed before the panel in Canada – Softwood Lumber III.56

63. The USDOC refusal to conduct a pass-through an alysis on the basis of these factors is also
inconsistent with basic economics. Extensive ec onomic evidence placed on the record demonstrated
that none of the factors identified by the USDOC alters the fact that sellers of Crown logs attempt to
obtain the best price available in transactions with unrelated purchasers. 57 These factors do not make

 51 See e.g., Draft Section 129 Determination, at 9 (“The Department accepted the certifications that the
transactions listed in the PWC’s survey results submitte d by the [Government of Alberta] were transactions
between unaffiliated parties.”) and at 10 (“In its 25 October 2004 questionnaire response, the [Government of
British Columbia] explained that the Norcon survey cont rolled for affiliation between the 74 participating mills
and independent harvesters based on the Department’s statutory test, which we accepted.”). The US law
standard that the USDOC directed th e Canadian respondents to rely on to certify that transactions occurred
between unrelated parties was section 771(33) of the Tariff Act of 1930 (19 U.S.C. § 1677(33)). See Exhibit
CDA-17.
 52 The United States relied on the same factors in both its section 129 determination and its
administrative review determination.
 53 Final Section 129 Determination, at 4 (Exhibit CDA-5) (“Evidence on the record indicates that
government-mandated restrictions affect many of the log transactions that Canada reported as arm’s-length
sales.”). See also Final AR Determination, at 47 (Exhibit CDA-11), where the USDOC states, in the absence of
any prior demonstration, that “[t]he government mandates at issue here are conditions that are placed on the
tenure licenses that have a direct impact on the disposition of Crown logs sold by independent harvesters.”

54 See e.g., New Shorter Oxford English Dictionary (Oxford University Press: New York, 1993) at 114
(Exhibit CDA-18) (“at arm’s length… (of dealings) with neither party controlled by the other”); Black’s Law
Dictionary, 6th ed. (St. Paul, Minn.: West, 1990), at 109 (Exhibit CDA-19) (“Arm’s-length transaction… [one
that is] negotiated by unrelated parties, each acting in hi s or her own self interest; the basis for a fair market
value determination.”). The SAA also defines an arm’s length transaction as a transaction between unrelated
parties “or between related parties such that the terms of the transaction are those that would exist if the
transaction had been negotiated between unrelated parties.” See SAA, at 928 (Exhibit CDA-1).
 55 Panel Report, at para. 7.92 (“…where the input producers were unrelated to the producers of that
subject merchandise”); Appellate Body Report, at para. 140 (“Where the producer of the input is not the same
entity as the producer of the pr ocessed product...”). See also US – Softwood Lumber III, at para. 7.74 (“… here
a downstream producer of subject merchandise is unrelated to the allegedly subsidized upstream producer of the
input ...”).

56 See ibid., at paras. 4.289-4.291, and 7.79.
 57 See Kalt 2004d (Exhibit CDA-20). See also Kalt 2004a, at 43-48 (Exhibit CDA-21).

the transacting parties act in accord ance with interests other than their own, nor do they align the
parties’ otherwise opposing objectives regarding the outcome of the transaction.
58 Accordingly, they
do not obviate the need to demonstrate and quantify any alleged log subsidy pass-through.

64. In particular, record economic evidence de monstrated that the government regulations
identified by the USDOC do not change the fact that transactions between unrelated parties occur in a
market setting, and that a market absent of any form of government intervention is not a sine qua non
for an arm’s-length transaction.
59 Requirements by the government to supply, for example, say
nothing about the subsequent negotiations and whether the transaction outcome is a market price. The
evidence also demonstrated that the question of who remits the government stumpage fee is
irrelevant; the mere payment of the fee by a down stream purchaser does not mean the upstream seller
reduced the market value of its log by the amount of the stumpage subsidy. 60 This typical business
arrangement, merely guaranteeing payment of base fees, logically has nothing to do with whether a
transaction is at arm’s length. Nor does the presence of non-cash components in a transaction ( e.g.,
payment through exchange of goods or services) im ply that the harvester has accepted anything less
than the market value of the log.
61

65. As a result of its refusal to analyze log transac tions as required by the findings of the original
panel and the Appellate Body and by basic pr inciples of economics, the USDOC impermissibly
presumed that the alleged log input subsidy fully passed through all such transactions.

 2. In the Few Instances Where the United States Did Perform Pass-Through
Analysis, It Used Inappropriate Benchmarks That Produced Results That
Were Subsequently Nullified

66. Even in the few instances in its section 129 determination where the USDOC considered log
transactions, it nevertheless failed to conduct prop er analyses under Article 1.1(b) of the SCM
Agreement.

67. In conducting pass-through analyses in its section 129 determination, the USDOC relied on
benchmarks that do not reflect a comparison to the “marketplace”.
62 The USDOC, for example,
derived its benchmark, in part, from log imports that were: (1) extremely small and highly variable in
volume; (2) largely unrepresentative of the sp ecies harvested in each province; and (3)
extraordinarily high in value and unrepresentative of prices paid in each province for logs used in
softwood lumber production. Accordingly, these pri ces did not reflect market conditions in Canada
during the period of investigation. The Canadian respondents urged the USDOC to correct its use of
benchmarks, but these comments were disregarded.63

68. The marginal decrease the USDOC made to th e amount of its countervailing duties as a result
of this flawed benefit analysis in its section 129 determination was in any event overtaken ten days
later, and after the end of the reasonable period of time to implement, by full re-inflation of the
countervailing duty amount as a result of its admini strative review determination. As explained
above, the United States undertook no pass-through anal ysis for any of the log transactions identified

 58 See e.g., Kalt 2004a, at 43-46.
 59 Ibid., at 48-51; Kalt 2004d, at 9-10 (Exhibit CDA-20).
 60 Kalt 2004d, at 4-7.
 61 Ibid., at 8-9.
 62 See e.g., Panel Report, at para. 7.53-54. See also Canada – Aircraft, at para. 157. The USDOC used
as a benchmark company-specific prices that individual purchasing sawmills paid for other logs it obtained from
private lands or for logs it imported. Where actual co mpany-specific purchase data were not available, the
USDOC used a weighted-average of private log prices and imported log prices. See Final Section 129
Determination, at 6 (Exhibit CDA-5).
 63 See Letter from Weil, Gotshal & Manges to USDOC (26 November 2004), at 5 (Exhibit CDA-22).

in the administrative review. Accordingly, in both its determinations, occurring within days of each
other, the United States failed to conform to its obligations concerning the imposition of
countervailing duties.

 3. As a Result of Its Failure to Conduct the Required Pass-Through Analysis,
the United States Continues Impermissibly to Inflate the Amount of
Countervailing Duties

69. The effect of the failure by the United Stat es to comply with the recommendations and rulings
of the DSB is an impermissible inflation of the amount of its countervailing duties. Because the
USDOC calculated the amount of the subsidy going to the production of softwood lumber based on
the entire volume of the Crown harvest that entered sawmills, either directly or indirectly , it is now
required to do one of two things: either (1) conduct an appropriate pass-through analysis for all Crown
log transactions involving unrelated parties, including through the use of aggregate data; or (2)
exclude from the calculation of the overall ad valorem subsidy rate amounts of subsidy that have been
presumed to pass through such transactions.

70. More particularly, should the USDOC c hoose not to conduct the required pass-through
analysis, it must exclude from the numerator of th e subsidy rate calculation benefit amounts derived
from the following transaction volumes:

• Crown logs purchased in independent harvester transactions; and

• Crown logs purchased in sawmill-to-sawmill transactions.

71. Only by taking these steps will the United States comply with the recommendations and
rulings of the DSB.

IV. REQUEST FOR FINDINGS AND RECOMMENDATIONS

72. The United States failed to implement the reco mmendations and rulings of the DSB in respect
of its obligation to demonstrate whether, and to what extent, a subsidy to the production of Crown
logs passes through transactions between unrelated parties. As such, Canada requests that the Panel:

• Find that the US imposition of countervailing duties in respect of the Crown log transactions
identified in this dispute is incons istent with Article VI:3 of GATT 1994 and Articles 10 and
32.1 of the SCM Agreement;

• Recommend in accordance with Article 19.1 of the DSU that the United States: (1) refund
the amount of the countervailing duties imposed to offset alleged subsidy amounts presumed
to pass through; or, (2) revise its measures to meet the requirements of Article VI:3 GATT
1994 and Articles 10 and 32.1 of the SCM Agreement and refund the duties to the extent that
they exceed the amount of the alleged subsidy demonstrated to have passed through to the
production of softwood lumber;
64 and

• Recommend that the United States bring its measures into conformity with its WTO
obligations.

 64 See US – Canadian Pork, at para. 4.11.

ANNEX I: RECORD EVIDENCE

73. The Canadian respondents provided the USDOC with detailed evidence that could have been
used to properly establish and calculate the amount of any benefit pass-through in both the section
129 proceedings and the administrative review. As expl ained, the United States rejected nearly all of
the record evidence and instead simply presumed a full pass-through.

74. After initiating implementati on proceedings under section 129, the USDOC issued a first
questionnaire on 14 April 2004.
65 The Canadian respondents prov ided responses in accordance with
the USDOC’s directions on 21 May 2004. In pr oviding their responses, th e provinces relied on the
definition of “affiliated person” under US law to certify whether the transacting parties were unrelated
and the USDOC accepted all such certifications.66

75. After receiving responses to its first ques tionnaire, the USDOC issued two supplemental
“pass-through” questionnaires on 17 August and 5 Oc tober 2004, requesting the provinces to collect
large amounts of company-specific data.
67 The USDOC asked the provinces to collect the
government tenure agreements applying to every independent harvester and sawmill involved in
arm’s-length log transactions.68 The USDOC also requested information on all parties related to ( i.e.,
affiliated with) both the independent harvester a nd the purchasing sawmill, on who paid the stumpage
fee related to the log in question, and on the c ontractual terms and pricing of each individual
transaction that required a pass-through analysis.69

 65 Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada:
WTO “Pass-Through” Questionnaire (April 14, 2004) (Exhibit CDA-3).
 66 See e.g., Final 129 Determination, at 9 (Exhibit CDA-5) (“Based on the certifications and
information provided by the relevant companies and the [Government of Alberta], the Department accepted the
data reported to be from unaffiliated parties.”). See al so Draft 129 Determination, at 9 (Exhibit CDA-6) (“The
Department accepted the certifications that the transactio ns listed in the PWC’s survey results submitted by the
[Government of Alberta] were transactions between una ffiliated parties”); at 10 (“In its October 25, 2004
questionnaire response, the [Governmen t of British Columbia] explained that the Norcon survey controlled for
affiliation between the 74 participating mills and independent harvesters based on the Department’s statutory
test, which we accepted.”); at 12 (“The Department acce pts the [Government of Ma nitoba]’s claim that the
transactions were conducted between unaffiliated partie s”); at 13 (“The Department accepts the certifications
that the transactions listed in the [Government of Onta rio]’s breakdowns [are betw een unaffiliated parties]”);
and at 15 (“The Department accepts the [Government of Saskatchewan]’s claim that the transactions were
conducted between unaffiliated parties.”).

67 Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada:
WTO Supplemental “Pass-Through” Questionnaire (17 August 2004) (Exhibit CDA-23); Letter from USDOC
to Embassy of Canada, Certain Softwood Lumber Products from Canada: WTO Second Supplemental “Pass-
Through” Questionnaire (5 October 2004) (Exhibit CDA-24).

68 See Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada:
WTO “Pass-Through” Questionnaire (April 14, 2004), Question 1(c), Question 2(c), at 10-11 (Exhibit CDA-3);
Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada: WTO
Supplemental “Pass-Through” Questionnaire (August 17, 2004), British Columbia, Questions 3, 9(b), at 3-4;
Alberta, Question 1, at 8; Manitoba, Question 2, at 10; and Saskatchewan, Question 3, at 12 (Exhibit CDA-23);
and Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada: WTO
Second Supplemental “Pass-Through” Questionnaire (October 5, 2004), British Columbia, Questions 3, 4, at 3-
5; Alberta, Question 1, at 8 (Exhibit CDA-24).

69 See Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada:
WTO “Pass-Through” Questionnaire (April 14, 2004), Question 1(b), Question 2(b), at 10-11 (Exhibit CDA-3);
Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada: WTO
Supplemental “Pass-Through” Questionnaire (August 17, 2004), British Columbia, Questions 2, 4, 6-7, 9, at 3-
5; Ontario, Questions 1-4, at 6; Alberta, Questions 2-3, 6-7, at 8-9; Manitoba, Question 3, at 10; and
Saskatchewan, Questions 4, 6, at 12-13; and Pass-Through Appendix, at 9-17 (Exhibit CDA-23); and Letter
from USDOC to Embassy of Canada, Certain Softwood Lumber Products from Canada: WTO Second
Supplemental “Pass-Through” Questionnaire (October 5, 2 004), British Columbia, Questions 1, 6-7, 9, at 3-5;

76. The Canadian respondents provided as much info rmation as was practicably available to them
and emphasized that the USDOC could complete its pass-through analysis with the aggregate
provincial data.
70 For example, in meetings and written submissions to the USDOC, British Columbia
noted that the documentation relating to all log purchase agreements and te nure agreements would
involve several truckloads of paper, and offered several alternative approaches, all of which were
rejected. British Columbia nevertheless provide d hundreds of pages of sample agreements, and
offered to provide any additional samples request ed by the USDOC. As outlined above, the USDOC
rejected almost all record evidence submitted in the section 129 proceeding.

77. In relation to the administrative review, the USDOC initiated this segment of this proceeding
on 1 July 2003, for the period from 22 May 2002–31 March 2003.
71 In its initial questionnaire issued
on 12 September 2003, the USDOC requested the Cana dian provinces to report the volume and value
of Crown logs sold by independent harvesters to unrelated lumber producers, but solicited no
information on sawmill-to -sawmill transactions. 72 The Canadian respondents provided the USDOC
with evidence that confirmed that there was a signifi cant volume of logs sold in such transactions and
which therefore required a pass-through analysis. 73 The Canadian parties also provided additional
information throughout the proceedings and during verification. The USDOC collected no additional
information and issued no new questionnaires concer ning pass-through. In the preliminary and final
results of the administrative review, the USDOC re fused to conduct a pass-through analysis using any
of the information provided by the Canadian respondents.74

Ontario, Question 1, at 7; Alberta, Questions 5, 8, 10, at 9-10; Manitoba, Question 1, at 11; Saskatchewan,
Question 1, at 13, Second Pass-Through Appendix, at 22-23 (Exhibit CDA-24).
 70 See e.g., B.C. 15 September 2004 Supp. Questionnaire Response, Narrative, at 5 and Norcon B, at 4
(Exhibit CDA-15); B.C. 5 October 2004 Supp. Questionnaire Response, at BC-PT-22, Exhibit BC-PT-55
(Exhibit CDA-25). The public version of Exhibit BC-PT-55, which supplements the information provided in
Norcon B, excludes business proprietary information as it is not susceptible to public summarization.

71 Initiation of Antidumping and Countervailing Duty Administrative Reviews and Request for
Revocation in Part , 68 Fed. Reg. 39,055 (Dep’t Commerce 1 July 2003) (Exhibit CDA-26). On
16 January 2004, the USDOC extended the time for completion of the preliminary results. See Certain
Softwood Lumber Products from Canada: Extension of Time Limit for Preliminary Results of Countervailing
Duty Administrative Review , 69 Fed. Reg. 2,568 (Dep’t Commerce 16 January 2004) (Exhibit CDA-27).
Similarly, in the preliminary results the USDOC extended the amount of time available for the final results of
the administrative review. See Preliminary AR Determination, 69 Fed. Reg. at 33,205 (Exhibit CDA-10).

72 See Letter from USDOC to Embassy of Canada, Countervailing Duty Administrative Review:
Certain Softwood Lumber Products from Canada (12 September 2003), attaching Questionnaire for the
Province of Alberta, Questions III (J), (K), and (L), at III-6; Questionnaire for the Province of British Columbia,
Questions III (K), (L), and (M), at IV-7; Questionnaire for the Province of Manitoba, Questions III, (D), (E) and
(F), at V-5; Questionnaire for the Province of Ontario, Questions III, (K) and (L), at VI-6; and Questionnaire
for the Province of Saskatchewan, Questions III, (D), (E) and (F), at VIII-4 (Exhibit CDA-9); and Preliminary
AR Determination, 69 Fed. Reg. at 33, 208 (Exhibit CDA-10) (“During the underlying investigation, the
Canadian parties claimed that a portion of the Crown logs processed by sawmills were purchased by the mills in
arm’s-length transactions with independent harvesters. Canada further claimed that such logs must be excluded
from the subsidy calculation unless the Department determines that the benefit to the independent harvester
passed through to the lumber producers. In anticipation of a similar claim in this administrative review, we
requested in the original que stionnaire that each of the Canadian pr ovinces report the vo lume and value of
Crown logs sold by independent harvesters to unrelated parties during the [period of review].”).

73 See Letter from Weil Gotshal & Manges to USDOC, Certain Softwood Lumber from Canada: First
Administrative Review, Pass Through of Benefit to Arm’s Length Purchasers of Logs and Lumber Inputs
(24 May 2004) (Exhibit CDA-28). See also Norcon C (Exhibit CDA-29), as revised in Letter from Steptoe &
Johnson to USDOC (April 26, 2004) (Exhibit CDA-30); and Kalt 2004a, at 43-50 (Exhibit CDA-21).

74 Preliminary AR Determination, 69 Fed. Reg., at 33,208-33,209 (Exhibit CDA-10); Final AR
Determination, at 45-48 (Exhibit CDA-11).

78. What follows is a brief summary of the reco rd evidence for each provi nce in both the section
129 proceedings and the administrative review.

A. British Columbia

79. In the section 129 proceeding, British Columbia provided the USDOC with a study by
Norcon Forestry Ltd. and the accounting firm Pr icewaterhouseCoopers (“Norcon A”) of 74 sawmills
representing approximately 53 per cent of the total volume of the Crown timber harvest, which
reviewed thousands of log purchase transactions with unrelated parties. Norcon A was supplemented
by a further study by Norcon Forestry Ltd. (“Norc on B”). Norcon B demonstrated that 11.6 per cent
of Crown logs consumed in B.C. sawmills were purchased from independent harvesters that held
tenure.
75 These surveys also demonstrated that an add itional 6.2 per cent of Crown logs consumed in
B.C. sawmills were purchased in arm’s-length sawmill-to-sawmill transactions. 76 T h e U S D O C
accepted that the surveys controlled for affiliati on based on the affiliation standard under section
771(33) of the Tariff Act of 1930 .77 In addition to providing the aggregate results of these surveys,
British Columbia provided detailed transaction-specific information on the thousands of transactions
included in the surveys, including information on volu me, value, the types of logs sold, the purchaser
and the seller, for both private and Crown log pur chases. The company-specific evidence provided in
these surveys was equivalent to the informati on the USDOC requested in its supplemental
questionnaires and could have been used to calcula te pass-through using the USDOC’s price-to-price
comparison methodology. 78 British Columbia also provided hundreds of pages of sample log
purchase agreements and tenure agreements, as well as three economic studies demonstrating that the
factors identified by USDOC do not alter the arm’s-length nature of the transactions at issue.

80. British Columbia also commissioned Norcon For estry Ltd. to conduct an additional, larger
survey of sawmills for the administrative review (“Norcon C”). Norcon C surveyed 132 sawmills,
receiving responses that accounted for 87 per cent of the logs consumed by sawmills in 2002.
79
Norcon C demonstrated that 20 per cent of logs consumed in sawmills were harvested from Crown
lands and purchased from independent harvesters. 80 In addition, British Columbia also provided
evidence that 5.7 per cent of logs consumed in sawmills were purchased in sawmill-to-sawmill
transactions.81 In total, British Columbia demonstrated that a minimum of 25.7 per cent of logs
harvested from Crown lands and consumed in sawm ills were purchased from unrelated parties during
the period of review.82 The USDOC subsequently verified the evidence contained in Norcon C.83

 75 Norcon A (Exhibit CDA-31), as revised in B.C. 15 September 2004 Supp. Pass-Through
Questionnaire Response, at 2, note 1 (Exhibit CDA-32) and Norcon B, at 2 (Exhibit CDA-15).
 76 Norcon A, at Appendix III (Exhibit CDA-31); Norcon B (Exhibit CDA-15). Purchases under fibre
exchange agreements were not within the scope of the surveys.

77 Draft 129 Determination, at 10 (Exhibit CDA-6).
 78 Norcon B (Exhibit CDA-15); and B.C. October 25, 2004 Supp. Pass-Through Questionnaire
Response, Narrative, at BC-PT-22 and Exhibit BC-PT-55 (Exhibit CDA-25). The public versions of Norcon B
and Exhibit BC-PT-55 do not contain the company-specific eviden ce referred to, as it is business proprietary
information that is not susceptible to public summarization.

79 Norcon C (Exhibit CDA-29).
 80 Ibid.; as amended in Letter from Steptoe & Johnson to USDOC (April 26, 2004) (Exhibit CDA-30).
 81 Ibid.
 82 Ibid. As further corroboration of the substantial percenta ge of the B.C. harvest yielding logs traded
in arm’s-length transactions, the record of the administ rative review also establishes that, over the past three
years, between 26 and 30 per cent of the logs from timber harvested on the B.C. Coast was sold through the
Vancouver Log Market. Similarly, in the B.C. Interior, logs accounting for about 26 per cent of the total harvest
were sold domestically rather than internally consum ed by integrated companies. See B.C. 12 November 2003
AR Questionnaire Response, Log Export Response at BC-LER-8, Exhibit BC-LER-1 (Exhibit CDA-33).

B. Alberta

81. Alberta used a computer database for the se ction 129 proceedings to identify the volume of
softwood logs sold by: (1) harvesters who did not own sawmills; and (2) harvesters that did own
sawmills but that did not supply these sawmills with Crown logs from their own tenure. Alberta
provided this data to Pricewater houseCoopers, who conducted a confiden tial survey of the recipients
of these logs. 84 The confidential survey requested that the recipient sawmills identify whether each
transaction was a purchase and whether the tran saction involved an unrelated vendor using the
definition of “affiliated” found in section 771(33) of the Tariff Act of 1930 . PricewaterhouseCoopers
then used the survey results to determine the volume of logs sold between unrelated parties. 85 The
report contained confidential company-specific da ta on the total qualifying transactions for each
company broken down by vendors without sawmills and vendors who were not selling from sawmill-
related tenures.86 Alberta demonstrated on this basis that there were some 730,618 cubic metres of
arm’s-length transactions between unrelated entities.87

82. Alberta also provided the USDOC in the admini strative review with evidence that 2,399,893
cubic metres of logs were transf erred to sawmills from unrelated parties in the period of review. 88
Furthermore, Alberta demonstrated that some 1,724,826 cubic metres of logs moved from unrelated
parties to the 15 largest lumber-producing mills.
89 Alberta indicated that these data likely represented
both cash sales and other forms of transactions ( e.g., log swaps). Alberta also provided evidence
showing that a total of 1,513,171 cubic metres of logs were purchased in “cash transactions” by mills
from unrelated entities, from both Crown and private sources.90

C. Saskatchewan

83. In the section 129 proceeding, Saskatchewan provided evidence that Forest Product Permit
(“FPP”) licensees that did not own sawmills sold some 81,403 cubic metres of logs, which
represented approximately 4.9 per cent of the Crown harvest in the period of investigation.
91
Saskatchewan collected this ev idence through “woodflow reports” maintained in six sawmills as a
condition of their tenure. 92 These “woodflow reports” listed the source of all logs processed in these
sawmills. Saskatchewan also requested that sawmills identify whether they were related to these FPP

 83 USDOC Memorandum from S. Moore to File, Countervailing Duty Administrative Review of
Certain Softwood Lumber fr om Canada: Verification of the Norcon Fo restry Survey and the British Columbia
Lumber Trade Council (BCLTC) Survey (June 2, 2004) at 9-12 (Exhibit CDA-34).
 84 Alberta September 15, 2004 Supp. Pass-Through Questionnaire Response, Exhibit AB-S-78;
revising Alberta 21 May 2004 Pass-Through Questionnaire Response, Narrative at AB-2, Exhibit AB-S-75, and
Exhibit AB-S-76 (Exhibit CDA-35). The public versions of Exhibit AB-S-76 and Exhibit AB-S-78 do not
contain the cited business proprietary information as it is not susceptible to public summarization.

85 As Alberta does not have a category for “sawlogs”, Alberta’s submissions use “Section 80/81” logs
as a basket category of coniferous volume used to produce either lumber products, pulp or roundwood.
 86 Alberta 15 September 2004 Supp. Pass-Through Questionnaire Response, AB-S-78; revising Alberta
21 May 2004 Pass-Through Questionnaire Response, at Exhibit AB-S-76 (Exhibit CDA-35). The public
versions of Exhibit AB-S-76 and Exhibit AB-S-78 do not contain the cited information as it is business
proprietary and not susceptible to public summarization.

87 Ibid.
 88 See Government of Alberta Verification Exhibit GOA-6, Amended Table 50 (18 April2004) (Exhibit
CDA-36).
 89 Government of Alberta Verification Exhibit GOA-7, Amended Table 59 (Exhibit CDA-37).
 90 See Bearing Point, Timber Damage Assessment (TDA) Table – 2003 Update (17 October 2003), at 9,
submitted in Alberta 12 November 2003 AR Questionnaire Response, Exhibit AB-S-69 (Exhibit CDA-38).
 91 Saskatchewan 21 May 2004 Pass-Through Questionnaire Response, at SK-1, Exhibit SK-S-29
(Exhibit CDA-39). The public version of Exhibit SK-S-29 does not contain the cited business proprietary
information as it is not susceptible to public summarization.
 92 Saskatchewan May 21, 2004 Pass-Through Questionnaire Response, at SK-3-4 (Exhibit CDA-39).

licensees. Saskatchewan and We yerhaeuser also provided additiona l company-specific evidence to
the USDOC in response to the supplemental questionnaires.
93

84. Saskatchewan provided evidence concerning tr ansactions between independent harvesters and
unrelated sawmills in the administrative review. In particular, this evidence demonstrated that
licensees that did not hold a license to operate sawmills harvested 173,766 cubic metres of Crown
timber during the period of review.
94 Saskatchewan also submitted business proprietary evidence that
demonstrated that at least 3.8 per cent of the soft wood logs were sold by independent harvesters to
unrelated sawmills.

D. Manitoba

85. Manitoba provided evidence during the secti on 129 proceeding that some 48,100 cubic metres
or 8.7 per cent of timber harvested from Crown la nd was sold by Timber Sales Agreement (“TSA”)
licensees that did not own sawmills.
95 Manitoba requested that these TSA licensees provide
certification of: (1) the volume of their Crown harvest; (2) the identity of the purchasing sawmills;
and (3) whether they were related to the purchasing sawmills.96

86. In the administrative review, Manitoba demonstrated that “independent loggers,” i.e., those
TSA licensees and Quota holders that did not ow n sawmills, harvested 61,583 cubic metres or
4.45 per cent of the total Crown harvest of logs in the period of review.
97

E. Ontario

87. Ontario provided the USDOC with the request ed pass-through data for the total value and
volume of Crown timber entering the 25 largest sa wmills from independent harvesters that accounted
for 91.3 per cent of all Crown softwood timber in the section 129 proceeding. 98 Furthermore, these
sawmills certified that these tran sactions occurred with unrelated tenure holders and provided the
USDOC with the relevant certifications for specific sales. On this basis, Ontario determined that
17.75 per cent of Crown logs were sold at arm’s length. 99 The Ontario Forest Industries Association
and the Ontario Lumber Manufacturers Association also provided extensive transaction specific

 93 Weyerhaeuser 16 September 2004 Supp. Pass-Through Questionnaire Response (Exhibit CDA-40);
and Weyerhaeuser26 October 2004 Supp. Pass-Through Questionnaire Response (Exhibit CDA-41).
 94 Saskatchewan 12 November 2003 AR Questionnaire Response, at SK-34-35 (Exhibit CDA-42).
 95 Manitoba 21 May 2004 Pass-Through Questionnaire Response, Exhibit MB-S-38 (Exhibit CDA-43);
as revised in Manitoba September 15, 2004 Supp. Pass -Through Questionnaire Response, Revised Exhibit MB-
S-38 (Exhibit CDA-44).
 96 Manitoba 21 May 2004 Pass-Through Questionnaire Response, at MB-1 (Exhibit CDA-43). Tembec
(Manitoba) the largest of the independent harvesters acco unting for 51 per cent of this volume also completed
the USDOC Pass-Through Appendix. See Response of Tembec (Manitoba) to the US Department of
Commerce 17 August 2004 Supplemental Questionnaire “Pass-Through Appendix” (16 September 2004)
(Exhibit CDA-45); and Response of Tembec (Manitoba) to the US Department of Commerce 5 October 2004
Second Supplemental Questionnaire “Supplemental Pass-Through Appendix” (25 October 2004) (Exhibit CDA-
46). In its final section 129 determination, the USDOC wrongly excluded all of these transactions on the basis
that they occurred outside the period of investigation. See Draft Section 129 Determination, at 12 (Exhibit
CDA-6).

97 Manitoba 12 November 2003 AR Questionnaire Response, Narrative at MB-16, Exhibits MB-S-2
and MB-S-4b (Exhibit CDA-47).
 98 See Ontario 21 May 2004 Pass-Through Questionnaire Response, Narrative at ON-2, Exhibit ON-
PASS-1, Exhibit ON-PASS-3 (Exhibit CDA-48). The data provided to the USDOC were drawn directly from
the TREES database maintained by the Ontario Ministry of Natural Resources (“MNR”). This MNR database
was carefully examined and verified by the USDOC during the period of investigation, as it contains all the
needed independent harvester and sawmill-specific sales data for this timeframe.

99 Ibid. The 17.75 per cent is a subsequent revision to the 18.12 per cent referred to in the Ontario
21 May 2004 Pass-Through Questionnaire Response.

evidence, sales documentation, and other documen ts supporting the absence of pass-through of
benefit in the data supplied by the Government of Ontario.100

88. In the first administrative review, On tario provided evidence demonstrating that
approximately 6,465,085 cubic metres (or 42 per cent of the total timber harvested from Crown land)
was harvested by independent harvesters.
101 In addition, in response to the USDOC’s request at
verification, Ontario provided detailed evidence c oncerning the largest 25 sawmills in Ontario log
purchases from unrelated tenure holders during the period of review. 102 As the USDOC verified,
those 25 sawmills purchased 31 per cent or 4,391, 708 cubic metres of Crown softwood logs from
unrelated tenure holders. 103 The 4,391,708 cubic metres of Crown softwood logs from unrelated
tenure holders equal 29 per cent of the total Crow n softwood volume harvested during the period of
review.

 100 OFIA/OLMA 16 September 2004 Supp. Questionnaire Response (Exhibit CDA-49) and
OFIA/OLMA 25 October 2004 Supp. Questionnaire Response (Exhibit CDA-50).
 101 See Letter from Hogan & Hartson to USDOC, Certain Softwood Lumber Products from Canada :
Service of Government of Ontario Verification Exhi bits on Petitioner’s Counsel (6 April 2004), Minor
Corrections, at 16-127 (Exhibit CDA-51 ). The “Minor Corrections” verification exhibit is not included in
Exhibit CDA-51 as it contains business proprietary informa tion that is not susceptible to public summarization.
See also Letter from Hogan & Hartson to USDOC, Certain Softwood Lumber Products from Canada : Factual
Submission (15 March 2004), Exhibit 9 (final version of Exhibit ON-STATS-1) (Exhibit CDA-52).
 102 See Letter from Hogan & Hartson to USDOC, Certain Softwood Lumber Products from Canada :
Service of Government of Ontario Verification Exhib its on Petitioner’s Counsel (6 April 2004), Ownership
Interest Data, at 4750-4760 (Exhibit CDA-51). The “Ownership Interest Data” verification exhibit is not
included in Exhibit CDA-51 as it contains business proprietary information that is not susceptible to public
summarization. See also ibid., Minor Corrections, at 16-127 and Letter from Hogan & Hartson to USDOC,
Certain Softwood Lumber Products from Canada : Factual Submission (March 15, 2004), Exhibit 9 (final
version of Exhibit ON-STATS-1) (Exhibit CDA-52).

103 See Letter from Hogan & Hartson to USDOC, Certain Softwood Lumber Products from Canada :
Service of Government of Ontario Verification Exhib its on Petitioner’s Counsel (6 April 2004), Ownership
Interest Data, at 4756 (Exhibit CDA-51).

TABLE OF EXHIBITS
CDA-1 “Statement of Administrative Action” in Message from the President of the
United States Transmitting the Uruguay Round Agreements, Texts of Agreements
Implementing Bill, Statement of Administrative Action and Required Supporting
Statements, H.R. Doc. No. 103-316, vol. 1 at 656, 928, 1022-1027.
CDA-2 Uruguay Round Agreements Act , Pub. L. No. 103-465, § 129, 108 Stat. 4838, codified
at 19 U.S.C. § 3538 (2000).
CDA-3 Letter from USDOC to Embassy of Cana da, Certain Softwood Lumber Products from
Canada: WTO “Pass-Through” Questionnaire (14 April 2004).
CDA-4 Letter from Weil, Gotshal & Manges to USDOC, Certain Softwood Lumber from
Canada: WTO Implementation Questionnaire Response Concerning Pass-Through of
Alleged Benefit (16 September 2004).
CDA-5 USDOC Memorandum from J. Jochum to B. Tillman, Section 129 Determination:
Final Countervailing Duty Determination, Certain Softwood Lumber from Canada
(6 December 2004).
CDA-6 USDOC Memorandum from J. Jochum to J. May, Draft Decision Memorandum, 129
Proceeding for the WTO Appellate Body finding in the Final Countervailing Duty
Determination, Certain Softwood Lumber from Canada (19 November 2004).
CDA-7 Notice of Implementation under Section 129 of the Uruguay Round Agreements Act:
Countervailing Measures concerning C ertain Softwood Lumber Products from
Canada, 69 Fed. Reg. 75,305 (Dep’t. Commerce 16 December 2004).
CDA-8 Notice of Final Results of Countervailing Duty Administrative Review and Recission
of Certain Company-Specific Reviews: Certain Softwood Lumber Products from
Canada, 69 Fed. Reg. 75,917 (Dep’t Commerce 20 December 2004).
CDA-9 Letter from USDOC to Embassy of Canada, Countervailing Duty Administrative
Review: Certain Softwood Lumber Products from Canada (12 September 2003),
attaching Questionnaire for the Province of Alberta, Questions III (J), (K), and (L), at
III-6; Questionnaire for the Province of Britis h Columbia, Questions III (K), (L), and
(M), at IV-7; Questionnaire for the Province of Manitoba, Questions III, (D), (E) and
(F), at V-5; Questionnaire for the Province of Ontario, Questions III, (K) and (L), at
VI-6; and Questionnaire for the Province of Saskatchewan, Questions III, (D), (E)
and (F), at VIII-4-5.
CDA-10 Notice of Preliminary Results of Counterva iling Duty Administrative Review: Certain
Softwood Lumber from Canada , 69 Fed. Reg. 33,204 (Dep’t Commerce
14 June 2004)

CDA-11 USDOC Memorandum from B.E. Tillman to J.J. Jochum, Issues and Decision
Memorandum: Final Results of Administra tive Review: Certain Softwood Lumber
from Canada, C-122-839 (13 December 2004).
CDA-12 New Shorter Oxford English Dictionary (Oxford: Clarendon Press, 1993) at 1985
(“offset”).
CDA-13 Response of the Government of Al berta to the Department’s 14 April 2004
Questionnaire Concerning Pass Through of Alleged Benefits (21 May 2004),
Narrative at AB-1 – AB-7.
CDA-14 Response of the Government of Al berta to the Department’s 17 August 2004
Supplemental Questionnaire Concerning Pass Through of Alleged Benefits
(15 September 2004), Narrative at 1.
CDA-15 Response of the Government of British Columbia to the Department’s
17 August 2004 Supplemental Questionnair e Concerning Pass Through of Alleged
Benefits (15 September 2004), Narrative at 5 and Exhibit BC-PT-40.
CDA-16 USDOC Memorandum from B.T. Carreau to F. Shirzad, Issues and Decision
Memorandum: Final Results of the Countervailing Duty Investigation of Certain
Softwood Lumber Products from Canada, (21 March 2001) at 15.
CDA-17 Tariff Act of 1930, § 771(33), codified at 19 U.S.C § 1677(33) (2000).
CDA-18 New Shorter Oxford English Dictionary (Oxford: Clarendon Press, 1993) at 114 (“at
arm’s length… (of dealings) with neither party controlled by the other”)
CDA-19 Black’s Law Dictionary , 6th ed. (St. Paul, Minn.: West, 1990) at 109 (“arm’s-length
transaction”).
CDA-20 J.P. Kalt and D. Reishus, Economics of Arms’s Lengt h Transactions and Subsidy
Pass-Through, submitted as Response of the Government of British Columbia to the
Department’s 17 August 2004 Supplemental Questionnaire Concerning Pass Through
of Alleged Benefits (15 September 2004), Exhibit BC-PT-39.
CDA-21 J.P. Kalt and D. Reishus, Statement for the First Administrative Review, Attachment 1
to Letter from British Columbia Lumber Trade Council to USDOC (15 March 2004).
CDA-22 Letter from Weil, Gotshal & Manges to USDOC, Certain Softwood Lumber from
Canada: Comments on Draft Section 129 Determination (26 November 2004).

CDA-23 Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from
Canada: WTO Supplemental “Pass-Through” Questionnaire (17 August 2004).
CDA-24 Letter from USDOC to Embassy of Canada, Certain Softwood Lumber Products from
Canada: Second WTO Supplemental “Pass-Through” Questionnaire
(5 October 2004).
CDA-25 Response of the Government of British Columbia to the Department’s
5 October 2004 Supplemental Questionnaire Concerning Pass Through of Alleged
Benefits (25 October 2004), Narrative at BC-PT-22 and Exhibit BC-PT-55.
CDA-26 Initiation of Antidumping and Count ervailing Duty Administrative Reviews and
Request for Revocation in Part, 68 Fed. Reg. 39,055 (Dep’t Commerce 1 July 2003).
CDA-27 Certain Softwood Lumber Products from Canada: Extension of Time Limit for
Preliminary Results of Counterva iling Duty Administrative Review , 69 Fed. Reg.
2,568 (Dep’t Commerce 16 January 2004).
CDA-28 Letter from Weil, Gotshal & Manges to USDOC, Certain Softwood Lumber from
Canada: First Administrative Review, Pass-Through of Benefit to Arm’s-Length
Purchasers of Log and Lumber Inputs (24 May 2004).
CDA-29 Norcon Forestry Ltd., Survey of Primary Sawmills’ Arm’s Length Log Purchases in
British Columbia (15 March 2004), submitted with Letter from Steptoe & Johnson to
USDOC (15 March 2004).
CDA-30 Letter from Steptoe & Johnson to USDOC (26 April 2004), recording minor
corrections to the Norcon Arm’s Length Log Survey.
CDA-31 Response of the Government of British Co lumbia to the Department’s 14 April 2004
Questionnaire Concerning Pass Through of Alleged Benefits (21 May 2004), Exhibit
BC-PT-18 (Letter from Steptoe & Johnson to Akin, Gump, Strauss, Hauer & Feld
(20 May 2004) attaching Survey of Primary Sawmills’ Arm’s Length Log Purchases
In the Province of British Columbia filed with Letter from Steptoe & Johnson to US
Department of Commerce (21 December 2001)).
CDA-32 Response of the Government of British Columbia to the Department’s
17 August 2004 Supplemental Questionnair e Concerning Pass Through of Alleged
Benefits (15 September 2004), Narrative at 2, note 1.
CDA-33 Response of the Government of British Columbia to the Department’s
12 September 2003 Questionnaire (12 N ovember 2003), Log Export Response
Narrative at BC-LER-7 – BC-LER-9 and Exhibit BC-LER-1.

CDA-34 USDOC Memorandum from S. Moore to File, Countervailing Duty Administrative
Review of Certain Softwood Lumber from Canada: Verification of the Norcon
Forestry Survey and the British Columbia Lumber Trade Council (BCLTC) Survey
(2 June 2004) at 9-12.
CDA-35 Response of the Government of Al berta to the Department’s 14 April 2004
Questionnaire Concerning Pass Through of Alleged Benefits (21 May 2004) at AB-2-
3, Exhibit AB-S-75, Exhibit AB-S-76, and Exhibit AB-S-78.
CDA-36 Government of Alberta Verifi cation Exhibit GOA-6, Amended Table 50
(18 April 2004).
CDA-37 Government of Alberta Verification Exhibit GOA-7, Amended Table 59.
CDA-38 Bearing Point, Timber Damage Assessment (TDA) Table – 2003 Update
(17 October 2003), submitted in Response of the Government of Alberta to the
Department’s 12 September 2003 Questionnaire (12 November 2003), Exhibit AB-S-
69.
CDA-39 Response of the Government of Saskatch ewan to the Department’s 14 April 2004
Questionnaire Concerning Pass Through of Alleged Benefits (21 May 2004),
Narrative at SK-1 – SK-5 and Exhibit SK-S-29.
CDA-40 Response of Weyerhaeuser Company to the Department’s 14 April 2004
Questionnaire Concerning Pass Through of Alleged Benefits (16 September 2004).
CDA-41 Response of Weyerhaeuser Company to the Department’s Second WTO
Supplemental Pass-Through Questionnaire (26 October 2004).
CDA-42 Response of the Government of Saskatchewan to the Department’s
12 September 2003 Questionnaire (12 November 2003), Narrative at SK-34 – SK-35.
CDA-43 Response of the Government of Ma nitoba to the Department’s 14 April 2004
Questionnaire Concerning Pass Through of Alleged Benefits (21 May 2004),
Narrative at MB-1, Exhibit MB-S-38.
CDA-44 Response of the Government of Ma nitoba to the Department’s 17 August 2004
Supplemental Questionnaire Concerning Pass Through of Alleged Benefits
(15 September 2004), Revised Exhibit MB-S-38.
CDA-45 Response of Tembec Inc. (Manitoba) to the Department’s 17 August 2004
Questionnaire Concerning Pass Through of Alle ged Benefits (16 September 2004), at
1-7.

CDA-46 Response of Tembec Inc. (Manitoba) to the Department’s 5 October 2004 Second
Supplemental Questionnaire Concerning Pass-Through of Alleged Benefits
(25 October 2004), Narrative, at 1-2 and Attachments A and B.
CDA-47 Response of the Government of Manit oba to the Department’s 12 September 2003
Questionnaire (12 November 2003), Narrative at MB-14 – MB-16, Exhibit MB-S-2
and Exhibit MB-S-4b.
CDA-48 Response of the Government of On tario to the Department’s 14 April 2004
Questionnaire Concerning Pass Through of Alleged Benefits (21 May 2004),
Narrative at ON-1 - ON-2, Exhibit ON-PASS-1 and Exhibit ON-PASS-3.
CDA-49 Response of the Ontario Forest Indu stries Association and the Ontario Lumber
Manufacturers Association on behalf of th eir members to the Department’s August
17, 2004 Questionnaire Concerning P ass Through of Alleged Benefits
(16 September 2004).
CDA-50 Response of the Ontario Forest Indu stries Association and the Ontario Lumber
Manufacturers Association on behalf of their members to the Department’s
5 October 2004 2
nd Supplemental Questionnaire Concerning Pass Through of Alleged
Benefits (26 October 2004).
CDA-51 Letter from Hogan & Hartson to USDO C, Certain Softwood Lumber Products from
Canada: Service of Government of Onta rio Verification Exhibits on Petitioner’s
Counsel (6 April 2004).
CDA-52 Letter from Hogan & Hartson to USDOC, Certain Softwood Lumber Products from
Canada: Factual Submission (15 March 2004), Exhibit 9 (final version of Exhibit
ON-STATS-1).

TABLE OF CASES CITED IN THIS SUBMISSION

Panel Report United States – Final Countervailing Duty Determination With
Respect to Certain Softwood Lumber from Canada , Report of the
Panel, WT/DS257/R, adopted 17 February 2004.
Appellate Body Report United States – Final Countervailing Duty Determination With
Respect to Certain Softwood Lumber from Canada , Report of the
Appellate Body, WT/DS257/AB/R, adopted 17 February 2004.
Australia – Automotive Leather II
(Article 21.5 – US)
Australia – Subsidies Provided to Producers and Exporters of
Automotive Leather – Recourse to Article 21.5 of the DSU by the
United States , Report of the Panel, WT/DS126/RW and Corr. 1,
adopted 11 February 2000.
Australia – Salmon
(Article 21.5 – Canada)
Australia – Measures Affecting the Importation of Salmon – Recourse
to Article 21.5 of the DSU by Canada , Report of the Panel,
WT/DS18/RW, adopted 20 March 2000.
Canada – Aircraft (Article 21.5 –
Brazil)
Canada – Measures Affecting the Export of Civilian Aircraft –
Recourse by Brazil to Article 21.5 of the DSU , Report of the
Appellate Body, WT/DS70/AB/RW, adopted 4 August 2000.
Chile – Price Band System Chile – Price Band System and Safeguard Measures Relating to
Certain Agricultural Products , Report of the Appellate Body,
WT/DS207/AB/R, adopted 23 October 2002.
Dominican Republic – Cigarettes Dominican Republic – Measures Affecting the Importation and
Internal Sale of Cigarettes, Report of the Panel, WT/DS302, issued
26 November 2004 (under appeal).
EC – Bed Linen (Article 21.5 – India),
Panel Report
European Communities – Anti-Dumping Duties on Imports of Cotton-
Type Bed Linen from India – Recourse to Article 21.5 of the DSU by
India, Report of the Panel, WT/DS141/RW, adopted 24 April 2003.
EC – Bed Linen (Article 21.5 – India),
Appellate Body Report
European Communities – Anti-Dumping Duties on Imports of Cotton-
Type Bed Linen from India – Recourse to Article 21.5 of the DSU by
India, Report of the Appellate Body, WT/DS141/AB/RW, adopted
24 April 2003.
US – Shrimp (Article 21.5 – Malaysia United States – Import Prohibition of Certain Shrimp and Shrimp
Products – Recourse to Article 21.5 of the DSU by Malaysia , Report
of the Appellate Body, WT/DS58/AB/RW, adopted
21 November 2001.

I. INTRODUCTION

1. In this submission, Canada addresses the argu ments made by the United States in two parts.
First, Canada responds to the request by the United States for a preliminary ruling that the final results
of the administrative review fall outside the jurisdicti on of the Panel in this dispute. Second, Canada
rebuts the few assertions the United States makes in its first written submission.

2. For the reasons set out in this submission, Canada requests that the Panel reject the US
request as being without merit, and determine that the final results of the administrative review are
properly reviewable under Article 21.5 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes (“DSU”). Canada also requests that th e Panel reject the US assertion that the
US Department of Commerce (“USDOC”) conducted proper pass-through analyses.

II. RESPONSE OF CANADA TO THE REQUEST BY THE UNITED STATES FOR
PRELIMINARY RULINGS

3. The request by the United States for a preliminar ily ruling in this dispute is a request that the
Panel insulate the US imposition of counterva iling measures on softwood lumber from compliance
under the WTO Agreement. The Panel should reject th is request as being without legal basis, and as
running contrary to the very purpose of the dispute settlement system.

4. First, the final results of the administrative review are properly before the Panel because they
rendered the pass-through analyses and resulting adjustment provided in the section 129
determination non-existent. There is no support in the DSU for the US contention that a panel may
not review, under Article 21.5, measures that undo clai med “measures taken to comply”. Article 21.5
requires the Panel in this case to determine the “exis tence” of any measure taken by the United States
to bring the imposition of its countervailing duty into compliance with the recommendations and
rulings of the Dispute Settlement Body (“DSB”) on pass-through.

5. Second, the administrative review results are within the jurisdiction of the Panel under
Article 21.5 of the DSU because, like the section 129 determination, these results are inextricably
linked to the recommendations and rulings of the DSB in this case. In both measures, the USDOC
purports to bring its countervailing duty on softwood lu mber into conformity with its obligations to
conduct pass-through analyses; in both measures, it s treatment of the pass-through issue and record
evidence is nearly identical.

6. Third, the US request runs contrary to the very purpose of Article 21.5 compliance
proceedings. If the US position were to prevail, Canada would be required to bring an absurd
multiplicity of “new” dispute settlement cases on the same issue, involving the same claims, to secure
the same recommendations and rulings from the DSB. Acceding to the request would preclude any
“prompt settlement of situations” under Article 3.3, “positive solution to a dispute” under Article 3.7,
or “prompt compliance” under Article 21.1 of the DSU. Acceptance of the US position would allow
the United States to evade compliance with DSB rulings in perpetuity, frustrating the very purpose of
the DSU.

 A. Article 21.5 of the DSU Establishes a Broad Scope for Review

7. Article 21.5 of the DSU provides for expedited dispute settlement procedures to ensure full
implementation of recommendations and rulings of the DSB:

Where there is disagreement as to the ex istence or consistency with a covered
agreement of measures taken to comply with the recommendations and rulings such

dispute shall be decided through recourse to these dispute settlement procedures,
including wherever possible resort to the original panel. . . .
8. The ordinary meaning of the phrase “measures take n to comply,” read in context and in light
of the object and purpose of Article 21 and of the DSU as a whole, provides the Panel with wide
discretion to examine whether a Member has compli ed with the recommendations and rulings of the
DSB. The Appellate Body in Canada – Aircraft (Article 21.5 – Brazil) confirmed that the scope of
Article 21.5 is to be interpreted broadly:

[T]he phrase “measures taken to comply” refers to measures which have been, or
which should be , adopted by a Member to br ing about compliance with the
recommendations and rulings of the DSB.
1
9. An Article 21.5 panel is therefore not limit ed to examining only those measures that an
implementing Member claims to have been “taken to comply”. As the United States itself has
recognized, it is for the Panel alone to de termine the “measures taken to comply”. 2 It is also for the
Panel to determine whether such measures exist and, if so, whether they are consistent with the
implementing Member’s WTO obligations.

 B. The Final Results of the Administrative Review Are within the Panel’s
Jurisdiction of the Panel under Article 21.5 Because They Rendered Non-
Existent Any Purported Compliance Achieved in the Section 129 Determination

10. In its request for a preliminary ruling, the Un ited States fails to address the fact that the final
results of the administrative review rendered non- existent, the limited pass-through analysis and
resulting adjustment provided in the section 129 determination.

11. As explained in Canada’s fi rst written submission, the USDOC failed to perform appropriate
pass-through analysis for the log transactions identified in the administrative review.
3 The USDOC
therefore presumed, rather than demonstrated, the full pass-through of a benefit in arm’s-length
transactions.4 Accordingly, on 20 December 2004, the date on which the final results of the
administrative review came into force, the US DOC nullified the pass-through analysis and resulting
adjustment it provided in the section 129 determination.5

12. It is an uncontested fact that the final results of the administrative review rendered ineffective
the pass-through analysis and adjustment under th e section 129 determination. Consequently, the
final results of the administrative review are an in tegral part of the Panel’s determination “as to the
existence … of measures taken to comply” under Article 21.5 of the DSU. 6

 1 Canada – Aircraft (Article 21.5 – Brazil) , at para. 36 [emphasis added]. (“[I]n principle, there would
be two separate and distinct measures: the original measure which gave rise to the recommendations and
rulings of the DSB, and the ‘measures taken to comply’ which are – or should be – adopted to implement those
recommendations and rulings.”) [emphasis in original]
 2 US First Submission and Request for Preliminary Rulings, at para. 14. See also EC – Bed Linen
(Article 21.5 – India) Appellate Body Report, at para. 78 (“We agree with the Panel that it is, ultimately, for an
Article 21.5 panel – and not for the complainant or the respondent – to determine which of the measures listed in
the request for its establishment are ‘measures taken to comply’.”).
 3 First Written Submission of Canada, at paras. 53-60.
 4 Ibid., at paras. 3-5.
 5 Ibid., at paras. 28, 68.
 6 An examination of the “existence” of something, according to the ordinary meaning of that term,
includes assessing “Reality, as [opposed] to appearance” and establishing “[t]he fact or state of existing”. The
New Shorter Oxford English Dictionary (Oxford: The Clarendon Press, 1993), at 882. (Exhibit CDA-53)

13. The Appellate Body in EC – Bed Linen (Article 21.5 – India) explained that the mandate of a
compliance panel under Article 21.5 includes examini ng the existence of “measures taken to comply”
and that such an examination is not limited to th e factual circumstances or legal issues addressed in
the original panel proceedings:

We addressed the function and scope of Artic le 21.5 proceedings for the first time in
Canada – Aircraft (Article 21.5 – Brazil) . (…) We explained there that the mandate
of Article 21.5 panels is to examine either the “existence” of “measures taken to
comply” or, more frequently, the “ consistency with a covered agreement ” of
implementing measures. This implies that an Article 21.5 panel is not confined to
examining the “measures taken to comply ” from the perspective of the claims,
arguments, and factual circumstances relating to the measure that was the subject of
the original proceedings.
7
14. In Australia – Leather II (Article 21.5 – US), the United States itself argued that measures that
undo implementation appropriately fall within the scope of Article 21.5 of the DSU:

Under Article 21.5, this panel is to consider “the existence or consistency with a covered
agreement of measures taken to comply with th e recommendations and rulings.” Plainly, if
this Panel can determine the “existence” of measures taken to comply with the
recommendations, it can consider whether the measures purportedly taken to comply were
effectively rendered non-existent.8

15. As discussed, the compliance panel in that case found the government replacement loan at
issue was within their terms of reference under Article 21.5 of the DSU.

16. The panel in EC – Bed Linen (Article 21.5 – India) shared the view that the scope of
Article 21.5 is wide. In declining to include certa in EC measures in its compliance review, that panel
specifically noted that India “does not argue that the subsequent two measures undo the compliance
effectuated by the first measure.”
9

17. Because the final results of the administ rative review undo the pass-through analysis and
resulting adjustment provided in the section 129 dete rmination, the final results are properly before
the Panel.

 C. The Final Results of the Administrati ve Review Are Inextricably Linked to the
Recommendations and Rulings of the DSB and Are Therefore “Measures Taken
to Comply”

18. The final results of the administrative review are properly before the Panel also because they
are inextricably linked to the recommendations and rulings of the DSB and to what the United States
claims as being its “measures taken to comply”.

 7 EC – Bed Linen (Article 21.5 – India), Appellate Body Report, at para. 79 [italics in original].
 8 Australia – Automotive Leather II (Article 21.5 – US) , Annex 1-2, at para. 30. See also Third Party
Submission of China, at paras. 12-18.
 9 EC – Bed Linen (Article 21.5 – India) , Panel Report, at para. 6.21. See also Third Party Submission
of the European Communities, at para. 26, citing Dominican Republic – Cigarettes , at paras. 7.11-7.21 (“The
Panel also considers it necessary to examine Law 2-04 to secure a positiv e solution to the matter mandated to
this Panel since Decree 636-03 has b een replaced by Law 2-04.”); and, e.g., Chile – Price Band System , at
para. 144. (“[A] complaining party should not have to adjust its pleadings throughout dispute settlement
proceedings in order to deal with a disputed measure as a ‘moving target’.”)

19. As explained in Canada’s first written submission, the treatment by USDOC of the pass-
through issue in the final results of its administra tive review is nearly identical to its section 129 pass-
through determination.
10 The USDOC reproduced in the former the discussion of the five “factors”
from the latter nearly word for word. 11 Moreover, these discussions apply to the same Canadian
exports over the same period. In addition, the USDOC published preliminary results for the
administrative review containing a “pass-through” section nearly four months after the DSB made its
recommendations and rulings, and issued final results nearly ten months after those recommendations
and rulings.12

20. The United States, recognizing the complete iden tity of issues in both determinations and the
relevance of their timing, is left with arguing before the Panel that form ought to prevail over
substance. The United States argues that assessment reviews and original investigations are different
proceedings, and that while the administrative revi ew attempted to address the pass-through issue, the
review itself was initiated prior to the recommendations and rulings of the DSB.
13 In doing so, the
United States ignores the fact that, under US la w, the USDOC may implement the recommendations
and rulings of the DSB concerning an original in vestigation through a subsequent administrative
review.14

21. Article 21.5 of the DSU requires a compliance panel to examine the substance of a Member’s
measures notwithstanding any argument that the fo rm of the measures could preclude compliance
review. In Australia – Automotive Leather II (Article 21.5 – US) , for example, the panel rejected
Australian claims that a government loan issued to an automotive leather producer as a replacement
measure for a previous grant, which the DSB ha d recommended be withdrawn, was not a measure
“taken to comply”. The panel confirmed that th e subsequent loan was within its jurisdiction to
examine under Article 21.5 of the DSU because it w as “inextricably linked to the steps taken by
Australia in response to the DSB’s ruling in this dispute, in view of both its timing and its nature.”
 15

 10 First Written Submission of Canada, at para. 33.
 11 Compare USDOC Memorandum from J. Jochum to B. Tillman, Section 129 Determination: Final
Countervailing Duty Determination, Certain Softwood Lumber from Canada (6 December 2004), at 5-7
(Exhibit CDA-5) with Issues and Decision Memorandum: Final Results of Administrative Review: Certain
Softwood Lumber from Canada, C-122-839 (13 December 2004), at 46-47 (Exhibit CDA-11).
 12 First Written Submission of Canada, at paras. 31, 33-34. The USDOC also recognized that
arguments from the Canadian respondents regarding the need to conduct pass-through analyses were based on
the recommendations and rulings of the DSB in this respect. See Issues and Decision Memorandum: Final
Results of Administrative Review: Certain Softwood Lumber from Canada , C-122-839 (13 D ecember 2004), at
43 (Exhibit CDA-11). (“They argue that, in accordance with recent WTO Appellate Body and Panel findings,
the Department should conduct a pass-through analysis of logs purchased at arm’s length by lumber producers
to determine whether the alleged subsidy to timber harv esters from provincial stumpage benefited those lumber
producers.”)
 13 US First Submission and Request for Preliminary Rulings, at paras. 21-23.
 14 See “Statement of Administrative Action” in Message from the President of the United States
Transmitting the Uruguay Round Agreements, Texts of Agreements Implementing Bill, Statement of
Administrative Action and Required Supporting Statements , H.R. Doc. No. 103-316, vol. 1 at 656 (Exhibit
CDA-1), at 356-357. (“Furthermore, while subsection 129(b) [of the Uruguay Round Agreements Act] creates a
mechanism for making new determinations in response to a WTO report, new determinations may not be
necessary in all situations. In many instances, such as those in which a WT O report merely implicates the size
of a dumping margin or countervailable subsidy rate (as opposed to whether a determination is affirmative or
negative), it may be possible to implement the WTO report recommendations in a future administrative review
under section 751 of the Tariff Act.”)

15 Australia – Automotive Leather II (Article 21.5 –US) , at para. 6.5. (“In our view, the [new] loan
cannot be excluded from our consideration without severely limiting our ability to judge, on the basis of the
United States’ request, whether Australia has taken measures to comply with the DSB’s ruling.”)

22. In Australia – Salmon (Article 21.5 – Canada) , the panel was faced with a sub-national ban
on certain imported Canadian salmon products, wh ich was introduced subsequent to national
measures that Australia declared were taken to co mply. Australia argued that the sub-national ban
was not a measure “taken to comp ly” within the meaning of Article 21.5 of the DSU. The panel
rejected the Australian argument, reasoning that:

… an Article 21.5 panel cannot leave it to the full discretion of the implementing
Member to decide whether or not a measure is one “taken to comply”. If one were to
allow that, an implementing Member could simply avoid any scrutiny of certain
measures by a compliance panel, even where such measures would be so clearly
connected to the panel and Appellate Body reports concerned, both in time and in
respect of the subject-matter, that any impartial observer would consider them to be
measures “taken to comply” .
16
23. The United States avoids such rationale and attempts to shield its administrative review
results from examination by the Panel by selectively quoting from the panel findings in EC – Bed
Linen (Article 21.5 – India).17 The US reliance on EC – Bed Linen (Article 21.5 – India) , however, is
misplaced. As the EC notes in its third party submi ssion, the panel in that dispute found that the EC
measures in question were not “taken to comply” within the meaning of Article 21.5 of the DSU
because they did not deal with the subject ma tter upon which the DSB had made recommendations
and rulings.18 Indeed, the panel expressly noted that “[t]he situation might be different had there been
a claim in the original dispute challenging the cu mulative assessment of the effects of imports from
India, Egypt, and Pakistan.”19

24. The United States also attempts to confuse th e issue by claiming that an Article 21.5 panel
does not have jurisdiction to evaluate USDOC tr eatment of additional record evidence concerning
exports subject to a US definitive countervailing duty.
20 This assertion misses the point entirely. The
Panel’s assessment “as to the existence or consistency with a covered agreement of measures taken to
comply” under Article 21.5 of the DSU necessarily involves an examination of new factual
information. As stated by the Appellate Body in EC – Bed Linen (Article 21.5 – India):

[A]n Article 21.5 panel is not confined to examining the “measures taken to comply”
from the perspective of the claims, arguments, and factual circumstances relating to
the measure that was the subject of the original proceedings. Moreover, the relevant
facts bearing upon the “measure taken to comply” may be different from the facts
relevant to the measure at issue in the orig inal proceedings. It is to be expected,
therefore, that the claims, arguments, and factual circumstances relating to the
“measure taken to comply” will not, necessarily , be the same as those relating to the
measure in the original dispute. Indeed, a complainant in Article 21.5 proceedings
may well raise new claims, arguments, and factual circumstances different from those

 16 Australia – Salmon (Article 21.5 – Canada) , at para. 7.10(22) [emphasis added]. See also EC – Bed
Linen (Article 21.5 – India), Panel Report, at para. 6.17.
 17 US First Submission and Request for Preliminary Rulings, at paras. 15-16.
 18 Third Party Submission of the European Communities, at para. 17 (“It is important to note that the
two measures in EC – Bed linen were not dismissed from the scope of that 21.5 proceeding because they were
‘review measures’. They were dismissed because they did not relate to the original dispute between the EC and
India.”).

19 EC – Bed Linen (Article 21.5 – India), Panel Report, at para. 6.18, fn. 36.
 20 US First Submission and Request for Preliminary Rulings, at para. 24.

raised in the original proceedings, becau se a “measure taken to comply” may be
inconsistent with WTO obligations in ways different from the original measure.
21
25. The section 129 determination and the final results of the administrative review are
inextricably linked to the DSB recommendations and rulings in this dispute because they both address
the obligations of the United States to conduct pass-through analyses with respect to independent
harvester and sawmill-to-sawmill log transactions fo r the same exports for the same period of time. 22
The mere fact that the administrative review might have been initiated under a distinct provision of
US law does not excuse the failure by the USDOC, for example under Article 10 of the Agreement on
Subsidies and Countervailing Measures (“SCM Agreement”), to “take all necessary steps to ensure
that the imposition” of the US countervailing duty on softwood lumber “was in accordance with” the
requirement to conduct pass-through analyses under “t he provisions of Article VI of GATT 1994 and
the terms of this Agreement”.

 D. The US Request to Exclude the Final R esults of the Administrative Review from
the Panel’s Jurisdiction Ignores the Purpose of Compliance Proceedings

26. As a broader systemic matter, the US request for a preliminary ruling runs contrary to the
very purpose of an Article 21.5 panel in its review of the imposition of countervailing measures.

27. The US request, taken to its logical conclusi on, would require Canada to make a series of
identical claims to address an unchanging issue under Article VI:3 of the General Agreement on
Tariffs and Trade 1994 (“GATT 1994”) and Articles 10 and 32.1 of the SCM Agreement. The US
obligation to demonstrate whether, and to what extent, alleged subsidies to log production pass
through arm’s-length log purchases before imposing duties on softwood lumber products would
remain in dispute for each annual assessment revi ew under Article 21 of the SCM Agreement during
the potential five-year life (or longer) of the US definitive countervailing measure. Such a result
would leave the DSB in the absurd situation of having made numerous identical recommendations
and rulings concerning a definitive countervailing du ty for which compliance may never be secured.
Were the Panel to allow the US request in this case, it would effectively insulate US countervailing
measures from compliance with the recommendations and rulings of the DSB concerning pass-
through.

28. The EC has noted the absurdity of the US request in this respect in its third party submission:

Accepting the US view that the administra tive review is not subject to a DSU 21.5
Panel review would turn the US system of duty assessment into a moving target that
escapes from countervailing duty disciplines. Each administrative review would have
to be subject to a new panel request, and by the time the panel, Appellate Body and
implementation procedure was completed, a nother administrative review would have
overtaken the results of any Section 129 determination.
23
29. Acceding to the US request would therefore preclude any “prompt settlement of situations”
under Article 3.3, “positive solution to a disput e” under Article 3.7, or “prompt compliance” under
Article 21.1 of the DSU. In Australia – Salmon (Article 21.5 – Canada) , the United States
paradoxically took the following position:

 21 EC – Bed Linen (Article 21.5 – India) , Appellate Body Report, at para. 79 [italics in original]. See
also EC Third Party Submission, at para. 28, referring in addition to the Appellate Body’s report in US – Shrimp
(Article 21.5 – Malaysia), at para. 86.
 22 Third Party Submission of China, at paras. 14-15.
 23 Third Party Submission of the European Communities, at para. 29.

[W]e also wish to express the agreement of the United States with the broad and
inclusive approach the Panel has taken t hus far in defining the scope of this
proceeding. The Panel’s approach is the only one consistent with the purpose of the
WTO dispute settlement system as reflected in Articles 3 and 21 of the Dispute
Settlement Understanding: the prompt settleme nt of disputes. Disputes could not be
settled “promptly” if a defending party were permitted to thwart a thorough review of
its WTO compliance by staging the introduction of details of new measures over a
period of time, and then arguing that they must escape WTO scrutiny for a further
period of time.
24
30. In this dispute, the DSB ruled that the Unite d States must demonstrate, rather than presume,
that a subsidy passes through arm’s-length log tran sactions. The United States defies this ruling
when, in an administrative review of the amount of the countervailing duty that gave rise to the matter
before the DSB, it performs none of the required an alysis and continues to presume pass-through.
The Panel should therefore reject the U.S. preliminar y ruling request and find that the results of the
first administrative review are properly before it in this proceeding.

III. REBUTTAL SUBMISSION OF CANADA
31. Canada established in its first written submission that in both the section 129 determination
and in the administrative review, the USDOC continued to presume, rather than demonstrate, a pass-
through of a subsidy in arm’s-length purchases of l ogs by sawmills in violat ion of US obligations
under Article VI:3 of the GATT 1994 and Articles 10 and 32.1 of the SCM Agreement.

32. The United States responds to the entirety of Canada’s claims in only two paragraphs.
25 In
these paragraphs, the United States contends th at the USDOC properly determined that the
overwhelming majority of log purchase transactions were not at arm’s length and properly rejected
significant volumes of record evidence. It al so claims that the “recommended analysis” was
performed for transactions that were found to be at arm’s length, using “appropriate log prices as
benchmarks”. Finally, the United States claims that the recommendations and rulings of the DSB
concerned only those sawmill-to-sawmill transactions in which the purchaser did not hold tenure.

33. Canada addresses each of these US assertions in turn.

34. First, the reliance by the USDOC on the five “factors” as a pretense to reject arm’s-length log
transactions is not supported by the GATT 1994, or the SCM Agreement, nor does it accord with
basic economics. As a matter of well-established economic principles, transactions do not have to
take place in a regulatory vacuum, if such a marketplace even exists, to be “at arm’s length”.

35. Second, where the USDOC accepted that tran sactions were at arm’s length, it failed to
perform proper market comparisons.

36. Third, neither the original panel nor the Appellate Body restricted the requirement for a pass-
through analysis to log transactions where the pur chasing sawmills did not hold tenure, and nowhere
in the original proceeding or appeal did Canada or the United States argue that a pass-through analysis
should be restricted to such transactions.

 24 Australia – Salmon (Article 21.5 – Canada) , Third Participant Submission of the United States,
 25 US First Submission and Request for Preliminary Rulings, at paras. 33-34.

 A. The Five “Factors” Used by the USDOC to Disregard Arm’s-Length
Transactions Are Irrelevant to Whether Entities Operate at Arm’s Length

37. Both the original panel and the Appellate Body confirmed that a Member may not presume
that a subsidy passes through transactions where a s ubsidy is received by “someone other than the
producer or exporter of the product under investigation” or where “the producer of the input is not the
same entity as the producer of the processed product”.
26

38. Canada has demonstrated that the US soft wood lumber subsidy calculations include amounts
attributable to log purchases by sawmills from unrelated parties.
27 The Canadian respondents provided
substantial record evidence concerning such pur chases, which the USDOC rejected without having
demonstrated that a pass-through occurred. The United States can point to no record evidence or
analysis demonstrating that alle ged stumpage subsidies passed through to the purchasing lumber
producers; instead, it asserts only that “Commerce did not ‘presume’ pass-through”. 28 Nevertheless,
the USDOC continued to include that alleged st umpage subsidy amount in its softwood lumber
subsidy calculations.

39. The reliance by the USDOC on its five “factors” to dismiss, without analysis, the majority of
the transactions as non-arm’s-length is not suppor ted by the GATT 1994, the SCM Agreement, or
basic economics. None of the “factors” identified by the USDOC as having “an impact on the
disposition of the Crown logs sold by independent harvesters”
29 transform an arm’s-length transaction
into one that is not at arm’s length. Nor can these “factors” otherwise be used to avoid conducting an
analysis of log transactions.30

40. Basic economic principles dictate that dom estic processing requirements do not affect the
arm’s-length nature of a transaction, as such regulations do not alter the opposition of economic
interest between sawmill and harvester.
31 Indeed, if anything, such a requirement may provide the
harvester greater market power because it would limit where a sawmill may acquire its inputs. 32
Thus, there is no basis to disregard transactions due to the presence of domestic processing
requirements.

41. The USDOC’s assertion that a transaction is not at “arm’s length” where a log purchaser is
responsible for the payment of stumpage fees is equally without support. An independent harvester
will extract from a sawmill the full market value of what it provides to the sawmill ( i.e., the log),
regardless of who “writes the check”.
33 This fundamental economic principle is commonly found in
introductory economic texts. Although the party writi ng the check may affect the observed log price,
it will never affect the value paid by the sawmill for the logs. 34 Moreover, a contractual provision
specifying the party responsible for remitting stumpa ge is no different than a provision specifying

 26 First Written Submission of Canada, at paras. 47-50.
 27 Canada First Submission, at paras. 3-5, 26.
 28 US First Submission and Request for Preliminary Rulings, at para. 33.
 29 Final Section 129 Determination, at 9 (Exhibit CDA-5).
 30 First Written Submission of Canada, at paras. 62-64.
 31 J.P. Kalt and D. Reishus, Statement for the First Administrative Review, Attachment 1 to Letter from
British Columbia Lumber Trade Council to USDOC (15 March 2004), at 42-43, 48-51, 55 (Exhibit CDA-21);
J.P. Kalt and D. Reishus, Economics of Arms’s Length Transactions and Subsidy Pass-Through , submitted as
Response of the Government of British Columbia to the Department’s 17 August 2004 Supplemental
Questionnaire Concerning Pass Through of Alleged Benefits (September 15, 2004), Exhibit BC-PT-39, at 9-10
[“Kalt 2004d”] (Exhibit CDA-20).

32 Kalt 2004d, at 10.
 33 Ibid., at 4-5.
 34 Ibid., at 6-7.

which party is responsible for sa tisfying outstanding liens or govern mental obligations that might
affect a transaction.

42. Finally, in an industrial context it is common for a buyer of goods or services to provide
equipment, expertise or materials as part of a tr ansaction. The essence of an arm’s-length transaction
is that the seller is able to extract from the buyer the value of what the seller provides. Accordingly,
these transactions remain at arm’s length even if the buyer provides goods or services used by the
seller – whether cash, material, credit extended or other consideration.
35

43. Moreover, the United States cannot be excused from its obligation to conduct the required
pass-through analysis on the pretense that transacti on-specific information, which was not reasonably
required to perform the analysis, was not available. Given that the investigation and review were
conducted on an aggregate basis, it is particular ly incongruous for the United States to refuse to
consider such information with respect to its pass-through analysis. The Canadian respondents
provided all information that was reasonably availa ble, including aggregate information sufficient to
conduct the analysis.
36

 B. The USDOC Improperly Relied on Log Import Transactions in Performing Its
Pass-Through Analysis

44. In the few instances where the USDOC purporte d to perform a pass-through analysis, it used
benchmarks derived from log import transactions that did not reflect “market” conditions. 37 As the
Appellate Body and the original panel made clea r, the USDOC was required to establish whether the
alleged stumpage subsid y conferred on timber harvesters was passed through the arm’s-length log
transaction. The section 129 determination benchmarks, however, which included prices for imported
logs, were unrepresentative of the timber and ma rket conditions in these provinces for which they
were being used.

45. Specifically, the USDOC used extremely sma ll and highly variable log imports relied on to
calculate the benchmark for Saskatchewan. For a ll provinces other than Québec, log import volumes
are extremely low, representing only 22.85 per cent of imports into Canada.
38 Accordingly, the use of
import prices in benchmarks for Saskatchewan (which accounted for only 0.00175 per cent of imports
during the period of investigation) necessarily resulte d in the introduction of unrepresentative values.
The USDOC did not investigate whether this small vol ume of imported logs was representative of the
Crown harvest, and should not have assumed that it was.

46. Additionally, log import prices are extraord inarily high in value because they typically
involve special purchases. The prices are unrepresent ative of prices paid for logs used in softwood
lumber production. The tariff categories that apply to logs are overly inclusive and capture products
used as inputs for high-end applicati ons. Tariff item 4403 of the Canadian Customs Tariff, “wood in
the rough” is a catch-all category for rough wood ite ms not otherwise specified. Subheading 4403.20
– “other coniferous” – refers to a broad category – coniferous wood in the rough that is untreated.

 35 Kalt 2004d, at 8-9.
 36 First Written Submission of Canada, at paras. 76, 79.
 37 USDOC Memorandum from Robert Copyak to James Terpstra, “Pass-Through” Analysis
Calculations for the Province of Saskatchewan, 129 Proceeding for the WTO Appellate Body Finding in the
Final Countervailing Duty Determination, Certain Softwood Lumber from Canada (6 December 2004) (Exhibit
CDA-59); USDOC Memorandum from R obert Copyak to James Terpstra, “Pass-Through” Analysis
Calculations for the Province of Ontario, 129 Pro ceeding for the WTO Appellate Body Finding in the Final
Countervailing Duty Determination, Certain Softwood Lumber from Canada (6 December 2004) (Exhibit CDA-
60).

38 Response of the Government of Canada to USDOC’s November 24, 2003 Supplemental Remand
Questionnaire Response (3 December 2003), at GOC-2 and Exh. GOC-GEN-59 (Exhibit CDA-55).

While the category may include untreated logs, it can also include logs that have been debarked, sawn
logs such as roughly squared logs, house logs, pul p logs, round logs for veneer production, tree
stumps and roots of special woods, and ‘certain growths’ for making special furniture veneers or
smoking pipes. Many of these products are of higher value and are of a higher price than untreated
logs destined, for example, for housing construction and many ar e not used for lumber production at
all.
39 As a result, these import prices did not reflect a “market” price for logs used in softwood lumber
production and should not have been used to derive benchmarks.

47. Accordingly, the use by the USDOC of these unrepresentative log import prices in the section
129 determination distorted the results of its limited pass-through analysis.

 C. US Arguments Concerning Sawmill-to-S awmill Transactions Have No Basis in
the Findings of Either the Original Panel or the Appellate Body

48. Finally, the United States contends that the recommendations and rulings of the DSB were
limited to a particular category of sawmill-to- sawmill transactions, even though no such argument
was made by either Canada or the United States during the original proceedings, and neither the
original panel nor the Appellate Body made any such distinction.
40 The United States seeks to place
tenured sawmills on one side of the transaction, but non-tenured sawmills on the other. 41 T h e
United States, through this limitation, is attempting in yet another creative way to avoid its obligation
to conduct the pass-through analysis identified by bo th the original panel and the Appellate Body
under Article VI:3 of the GATT 1994 and Articles 10 and 32.1 of the SCM Agreement.

49. The original panel concluded that a pass-thr ough analysis is required for all arm’s-length log
transactions between unrelated sawmills:

[T]he USDOC’s failure to conduct a pass-through analysis in respect
of logs sold by tenure-holding timber harvesters (whether or not also
lumber producers) to unrelated sawmills producing subject softwood
lumber … was inconsistent with Article 10 and thus Article 32.1
SCM Agreement, and with Article VI:3 of GATT 1994.
42
50. The Appellate Body agreed and upheld:

… the Panel’s finding, in paragr aph 7.99 of the Panel Report that
USDOC’s failure to conduct a pass- through analysis in respect of
arm’s length sales of logs by tenured harvesters/sawmills to unrelated

 39 See also Response of the Government of Alberta to the USDOC’s 25 September 2003 Questionnaire
(14 October 2003), at AB-17 (“To rep eat, it is critical to note that the statistics [used by the Department] ...are
for ‘wood in the rough,’ which would include roughly squared timbers, untreated telephone poles and other such
processed wood products and may not include any logs in the round, with bark attached.”) (Exhibit CDA-56)l
Response of the Government of British Columbia to the USDOC’s September 25, 2003 Questionnaire
(14 October 2003), at BC-19 (Exhibit CDA-57); and Response of the Gouvernement du Québec to the
USDOC’s 25 September 2003 Questionnaire (October 14, 2003), at 14 (Exhibit CDA-58).

40 In footnote 151 of its report, the Appellate Body indicates that the term “sawmill” refers to “an
enterprise that processes logs into softwood lumber and does not hold a stumpage contract.” Appellate Body
Report, at para. 124, fn. 151. The Appellate Body also cites to record evidence on independent harvester
transactions Canada provided before the original panel as confirming the existence of arm’s-length sales of logs
by “… tenured timber harvesters/sawmills to unrelated sawmills not holding stumpage rights …”, Appellate
Body Report, at para. 150.

41 First Submission and Request for Preliminary Ruling of the United States, at para. 34.
 42 Panel Report, at para. 7.99.

sawmills is inconsistent with Articles 10 and 32.1 of the SCM
Agreement and Article VI:3 of the GATT 1994.43
51. The Appellate Body, therefore, upheld the c onclusions of the original panel that a pass-
through analysis was required for all arm’s-length log transactions between sawmills. There is no
qualifier in the Appellate Body’s decision that pur chasing sawmills must be “non-tenured”, and there
is no such qualifier in the original panel decision that it upheld. There would be no legal or economic
reason to restrict the requirement to conduct a p ass-through analysis to purchasing sawmills without
tenure, and had the Appellate Body intended to restrict the scope of its ruling in this manner, it would
have done so explicitly.

52. Whether the purchasing sawmill holds or does not hold stumpage rights is irrelevant to the
Appellate Body’s reasoning. The crux of the Appella te Body’s reasoning relates to the fact that the
transaction concerns an input product ( i.e., a log). Where a lumber producer sources its log input
other than from its own timber harvesting and log production , the receipt of an alleged stumpage
subsidy is necessarily indirect and requires pass-t hrough analysis before it may be countervailed as an
alleged subsidy to lumber production .
44 The Appellate Body did not condition its conclusion on
circumstances concerning the purchasing sawmills.

II. CONCLUSION
53. Canada requests that the Panel determine the fi nal results of the first administrative review are
within the jurisdiction of the Panel under Article 21. 5 of the DSU. Canada also requests the Panel to
reject as unfounded the claims made by the United States in its first written submission.

 43 Appellate Body Report, at para. 167(e) [italics in original].
 44 Appellate Body Report, at paras. 146-47, 156-59.

TABLE OF EXHIBITS

TABLE OF EXHIBITS

CDA-53 The New Shorter Oxford English Dictionary , (Oxford: The Clarendon Press, 1993),
at 882.

CDA-54 Australia – Salmon (Article 21.5 - Canada) , Third Participant Submission of the

CDA-55 Response of the Government of Canada to USDOC’s November 24, 2003
Supplemental Remand Questionnaire Response (3 December 2003), at GOC-2 and
Exh. GOC-GEN-59.

CDA-56 Response of the Government of Al berta to the USDOC’s 25 September 2003
Questionnaire (14 October 2003), at AB-17.

CDA-57 Response of the Government of British Columbia to the USDOC’s
25 September 2003 Questionnaire (14 October 2003), at BC-19.

CDA-58 Response of the Gouvernment du Qu ébec to the USDOC’s 25 September 2003
Questionnaire (14 October 2003), at 14.

CDA-59 USDOC Memorandum from Robert Copyak to James Terpstra, “Pass-Through”
Analysis Calculations for the Province of Saskatchewan, 129 Proceeding for the
WTO Appellate Body Finding in the Final Countervailing Duty Determination,
Certain Softwood Lumber from Canada (6 December 2004).

CDA-60 USDOC Memorandum from Robert Copyak to James Terpstra, “Pass-Through”
Analysis Calculations for the Province of Ontario, 129 Proceeding for the WTO
Appellate Body Finding in the Final Countervailing Duty Determination, Certain
Softwood Lumber from Canada (6 December 2004).

ANNEX A-3

ORAL STATEMENT OF CANADA

21 April 2005

I. INTRODUCTION

1. We are here today because the Dispute Settleme nt Body has ruled that a subsidy on harvested
timber – that is, logs – does not necessarily p ass-through to the softwood lumber manufactured from
those logs. This is so where the producer sells the logs to an unrelated entity who turns the logs into
lumber. In these circumstances, before the Unite d States may apply countervailing duties to the
softwood lumber manufactured from those logs, it h as an obligation under Article VI:3 of the GATT
and Articles 10 and 32.1 of the SCM Agreement to establish that the benefit of the subsidy has
passed-through from the producer of the logs to the producer of the lumber.

2. The United States’ compliance obligations in this case were uncomplicated. Before it applied
countervailing duties to lumber made from logs acq uired in such arm’s-length transactions, it had an
obligation to conduct a pass-though analysis to dete rmine whether the benefit of any subsidies on
those logs passed through to the lumber. By agreement with Canada, the United States had ten
months in which to conduct that analysis.

3. Instead of complying, the United States has gone to great lengths to avoid the obligations
flowing from the DSB’s ruling. At the end of th e ten months the United States issued a revised
countervailing duty determination under section 129 of its Uruguay Round Implementation Act . The
United States did conduct a pass-through analysis for a small fraction of the transactions that were the
subject of the DSB’s ruling, but for the overwhelm ing majority of transactions it did no pass-through
analysis. Instead, it invented an elaborate threshol d test which it used to exclude most arm’s-length
transactions from any pass-through analysis. The t est the United States invented to exclude arm’s-
length transactions from pass-through analysis has no b asis in WTO law. It defies basic principles of
economics and is even contrary to the criteria fo r arm’s-length transactions under the United States’
own law.

4. On the basis of its flawed threshold test, the United States has al so sought to evade its
obligations by claiming that it lacked the necessary information to do a pass-through analysis. As
Canada will show, it supplied the United States with all the information it needed and went to great
lengths to comply with its requests. The Un ited States’ onerous additional demands involved
information that was irrelevant to a pass-through an alysis, did not come until most of its reasonable
period of time to comply had expired, and would have imposed an impossible evidentiary burden on
Canadian respondents in the process.

5. The United States also failed to perform any pass-through analysis for other sales of logs,
those to companies that produced both logs and lumber. Nothing in the adopted findings of the panel
or the Appellate Body licensed the exclusion of these transactions.

6. In all of these instances, the United Stat es simply assumed that the entire benefit passed
through from the logs to the softwood lumber and in cluded the full amount of that benefit in its duty
calculations on the lumber. In the original case, th e DSB ruled that the Unite d States’ presumption of
pass-through was inconsistent with its obligations under the GATT and the SCM Agreement. The
United States has repeated its presumption of pass- through in the determinati ons challenged here and
they are similarly inconsistent with its WTO obligations.

7. The United States’ purported compliance measure took effect on 10 December 2004. But
then, three days later, the United States issued another determination covering the same products over
the same period. In this new determination, which was made pursuant to the United States’
administrative review process, the United States definitively set the countervailing duties for the
softwood lumber covered by the DSB’s ruling usi ng the same flawed that it used reasoning in its
section 129 determination. Yet this time it conducte d no pass-through analysis at all, not even the
extremely circumscribed analysis of the section 129 determination.

8. This administrative review determination took effect on December 20, 2004 and superseded
the section 129 determination. That is, the section 129 determination ceased to be effective after just
ten days, and just three days after the United Stat es informed the DSB that it had complied with its
recommendations and rulings by properly conducting a pass-through analysis.

9. In sum, the United States’ section 129 determ ination did not redress its non-compliance with
its obligations under the GATT and the SCM Agreemen t. Moreover, to the extent that it even
partially complied with these obligations, it rende red that limited compliance non-existent by the
administrative review.

10. Despite this, the United States continues to insist that it has complied with the
recommendations and rulings of the DSB. It insi sts, as well, that its administrative review
determination is not properly before this panel, regardless of how that determination has undone even
the United States’ purported compliance measure in this case, the section 129 determination.

11. Canada’s response to the United States’ re quest for a preliminary ruling has addressed why
the administrative review determination is properly within the scope of your review. The third party
submission of the European Communities reaches the same conclusion. So too does the third party
submission of China, although it takes a different path to get there. In Canada’s view, this issue is
crucial, as it goes directly to the ability of the United States to impose a non-compliant measure while
relying on its domestic anti-dumping and countervail regime to evade its WTO obligations. Canada
will be pleased to take questions on this matte r, but because it has been thoroughly canvassed in
previous submissions and in the third party subm issions, Canada will not take up time today with
further affirmative argument on it.

12. Canada will focus today on the assertions made by the United States in its second written
submission. First, Mr. Cochlin will explain why the US presumption of pass-through is contrary to its
obligations under the GATT and the SCM Agreement and why the threshold test the United States has
devised is both incorrect and unfounded. Then, Mr. Owen will explain that the United States had all
the available information it required to perform the pass-through analysis mandated by the DSB’s
ruling, and how Canada neverthel ess made considerable efforts to comply with the unreasonable and
irrelevant US demands for additional information.

II. COMMERCE CONTINUED TO PRESUME, RATHER THAN DEMONSTRATE,
INDIRECT SUBSIDIZATION

13. Mr. Chairman, Members of the Panel, the central question in dispute before you is this: did
the United States continue to presume the pass-through of alleged stumpage subsidies in violation of
Article VI:3 of the GATT and Articles 10 and 32.1 of the SCM Agreement?

14. Contrary to the numerous, repeated assertions by the United States, a presumption of pass-
through is exactly what the United States Depart ment of Commerce (“Commerce”) applied where it,
first, rejected transactions based on its contrive d “arm’s-length” threshold test; second, refused to

consider in any way certain sawmill-to-sawmill tr ansactions; and finally, claimed that information
necessary to conduct pass-through analyses was otherwise deficient.

15. The issue of “pass-through” arises in this case because, in many instances, sawmills could
have only received the al leged stumpage subsidy indirectly – through purchases of Crown log inputs
from unrelated harvesters or other sawmills. Indi rect subsidization of softwood lumber production
therefore would occur only if the input subsidy “p assed through” from the log seller to the purchasing
sawmill.

16. Both the original panel and the Appellate Body made clear that Commerce is required to
demonstrate – and not presume – such alleged indir ect subsidization before it could lawfully impose
countervailing duties under Article VI:3 of the GATT and Articles 10 and 32.1 of the
SCM Agreement.
1 Commerce must demonstrate that the alleged direct subsidy to log production
passes through and becomes an indirect subsidy to lumber production. Such analysis involves
demonstrating, by making appropriate market co mparisons, that the purchasing sawmills received a
“benefit” within the meaning of Article 1.1(b) of the SCM Agreement.

17. The United States does not contest that it has an obligation to conduct a pass-through analysis
in this case.
2 Indeed, for a small fraction of the log transactions identified in its section 129
determination, Commerce compared log prices to ma rket benchmarks to demonstrate the existence
and amount of a pass-through.3 In most respects, Canada does not contest this limited analysis.

18. However, for the vast majority of log tran sactions covered by its section 129 determination,
and for all transactions covered by its administ rative review results, Commerce performed no such
analysis. Instead, it attempted at every turn to avoid the obligation to demonstrate a pass-through.

19. For all log volumes rejected by Commerce, it presumed, rather than demonstrated, a pass-
through. It deemed – without proof or analysis – that the alleged subsidy to the upstream log producer
automatically becomes a subsidy to the unrelated downstream purchasing sawmill.

20. The United States goes to great lengths to divert the Panel’s a ttention from Commerce’s
presumption of a pass-through.
4 It wants the Panel to believe that it is operating within its discretion,
and that it is aggressively trying to meet its pass-th rough obligations. The fact remains, however, that
without having done pass-through analyses and w ithout having employed a presumption, Commerce
would have been required to limit its numerator to only Crown timber going directly to softwood
lumber production. As the United States explai ns, however, Commerce instead established the
numerator of its subsidy calculation by requesting and using the total volume of all harvested Crown
timber entering sawmills either directly or indirectly.5

III. COMMERCE APPLIED A CONTRIVED “ARM’S LENGTH” TEST TO AVOID
PERFORMING THE REQUIRED PASS-THROUGH ANALYSES

21. The primary way in which Commerce avoided having to perform a pass-through analysis was
by devising a novel test for determining whether a transaction was at arm’s length. The United States
no longer claims that it had no obligation to conduct any pass-through analysis at all, as it did in the
original proceedings. It now claims, instead, th at the obligation only arises where Canada can
demonstrate that a transaction has occurred not only between unrelated parties, but also outside any

 1 First Written Submission of Canada, at paras. 41-50.
 2 Second Written Submission of the United States, at para. 35-36.
 3 Ibid., at para. 39.
 4 Ibid., at paras. 15, 40-42.
 5 Ibid., at paras. 7 and 9, footnote 12.

possible influence of “government-manda ted restrictions and other factors”.
6 The United States
maintains that an “arm’s length” transaction is defined by more than “mere affiliation”.7 In so doing,
it ignores even the arm’s length standard set out in its own law, and which it has routinely used.8

22. Through an exercise in ex post facto rationalization, the United States argues that
Commerce’s so-called factors are justified by a th ree-pronged test, custom-tailored for this dispute.
9
First, a transaction must be between unrelated par ties. Second, one party to the transaction must not
“effectively control” the other. Third, both parties must have “roughly equal bargaining power”.

23. Canada does not contest the first of these requi rements. It is the only part of Commerce’s
arm’s length test that is warranted, based on the find ings and conclusions of the original panel, as
upheld by the Appellate Body.
10

24. The second requirement of the US test is no di fferent than the first. “Effective control” is
already covered in the US statutory definition of “affiliated parties”, which Commerce incorporated in
its questionnaires. The only transactions for wh ich Canadian respondents claimed that Commerce
should do a pass-through analysis were those betw een parties that were not “affiliated”. That
statutory definition covers a wide range of relationships between parties to a transaction, ranging from
family relationships, to direct or indirect owne rship of an organization, and expressly includes any
situation where one person “controls” any other person. According to the statute, the term “control”
refers to situations in which a person “is legally or operationally in a position to exercise restraint or
direction over the other person”.
11 Commerce did not contest, but rather confirmed, that the definition
of “affiliated parties” was applied properly in this case.12

25. The third requirement – “roughly equal bargaining power” – is pure fabrication, tailored for
this case to justify Commerce’s use of so-called factor s to reject transactions. Nowhere is it found in
the analysis of the original panel or the Appella te Body. Moreover, were “roughly equal bargaining
power” a requirement for arm’s-length transactions, almost any transaction anywhere could be
rejected by investigating authorities on that basis alone. One party to a transaction will often have
greater bargaining power than the other, but this does not mean that the terms of the transaction do not
reflect a market outcome.

26. Fundamentally, by rejecting transactions on the hypothesis that their outcome might somehow
be “affected” by market conditions, Commerce conf lates the obligation to conduct a pass-through
analysis, which would demonstrate the existence and amount of a pass-through, with the task of
identifying transactions to which that obligation applies.
13

27. Moving to the five factors themselves, we ha ve detailed in our written submissions why they
are irrelevant to whether a pass-through analysis is required. I therefore propose to make just three
points today.

 6 Ibid., at para. 20.
 7 Ibid., at paras. 16-17.
 8 First Written Submission of Canada, at para. 62, footnote 54 (citing SAA at 928; Exhibit CDA-1).
 9 Second Written Submission of the United States, at para. 16.
 10 First Written Submission of Canada, at paras. 47-49.
 11 Ibid., at para. 60, footnote 51, citing to section 771(33) of the Tariff Act of 1930 (19 U.S.C. §
1677(33)) (Exhibit CDA-17).
 12 First Written Submission of Canada, at paras. 60, 74; Second Written Submission of the
 13 See, e.g., Third Party Submission of China, at paras. 26-27.

28. First, the United States makes the telling co ncession that its “additional factors” are not
“exclusively arm’s-length issues”.14 The factors in question here re gard who paid the stumpage fees,
and whether transactions involved a fibre exchange agreement.

29. As a matter of basic economics, neither factor is an “arm’s length” issue at all. The issue of
who remits the government stumpage fee says not hing about whether the alleged input subsidy
passed through to the purchaser. A contractual pr ovision assigning to the buyer the obligation to pay
a debt owed by the seller does not affect the value of the good sold. The value of a log is determined
by the supply and demand for that log.
15 Moreover, what the United States calls the “vehicle by
which the Crown bestows the subsidy” 16 has been found in this case to be the provision by
government of standing timber to timber harvesters. Therefore, the US argument that the government
provided the alleged stumpage subsidy directly to sawmills, where they paid the stumpage fee on
behalf of the harvester, is not supported by the facts. Standing timber is provided to the upstream
timber harvester, not the downstream sawmill. Th ese facts do not suddenly change simply because
the purchasing sawmill might remit the government stumpage on beha lf of the upstream stumpage
holder.

30. Similarly, a barter arrangement in the form of a fibre exchange agreement merely provides
that the buyer is paying the consideration owed to the seller in goods rather than in cash. Indeed,
barter is perhaps the oldest form of market trans action. This factor is irrelevant to determining
whether the seller is able to extract from the buyer the value of what the seller provides, and hence
whether any subsidy has passed through.

31. Second, with respect to Commerce’s “log pur chase agreement” factor, the United States in its
rebuttal submission cites various possible contractua l arrangements to explain Commerce’s failure to
conduct a pass-through analysis.
17 These contractual terms are part of the agreed structure of a
transaction between unrelated parties, and as Canada has explained, simply reflect the results of the
bargain reached.18

32. Finally, Canada e xplained that provincial regulations imposing “limitations on log sales” and
“wood supply agreements”
19 do not dictate the material terms of the log sale agreement, such as price,
delivery arrangements, or timing. A regulatory vacuum is not a prerequisite for arm’s-length
transactions.20 Were it so, no sale could ever be found to be at arm’s-length.

33. By way of conclusion to this section, we not e that the United States to date has offered no
justification regarding Commerce’s presumption of a pass-through for all transactions in the
administrative review; it argues only that the measure is not properly before the Panel.
21 Accordingly,
up to this point, the United States here has essen tially conceded that the failure by Commerce to
perform a pass-through analysis in the administrative review was inconsistent with US obligations.

 14 Second Written Submission of the United States, at para. 22, footnote 29, and at para. 23.
 15 First Written Submission of Canada, para. at 64; Rebuttal Submission of Canada, at para. 41.
 16 Second Written Submission of the United States, at para. 23.
 17 Ibid., at para. 22.
 18 First Written Submission of Canada, at paras. 64; Rebuttal Submission of Canada, at para. 42.
 19 Second Written Submission of the United States, at para. 21.
 20 First Written Submission of Canada, at paras. 64; Rebuttal Submission of Canada, at para. 40.
 21 Second Written Submission of the United States, at paras. 46-47.

IV. COMMERCE Failed TO CONDUCT ANY ANALYSIS WHERE THE PURCHASING
SAWMILL HELD A STUMPAGE CONTRACT

34. I turn now to address another instance in which Commerce impermissibly presumed a pass-
through.

35. Commerce limited its questionnaires to only a select subset of sawmill-to-sawmill
transactions, denying a pass-through analysis where the purchasing sawmills held tenure.

36. As justification here, the United States claims that the Appellate Body reversed, rather than
upheld, the original panel’s conclusi on in paragraph 7.99 of its report.
22 Allow me to quote directly
from paragraph 7.99:

“[T]he USDOC’s failure to conduct a pass-through analysis in respect of logs
sold by tenure-holding timber harvesters (whether or not also lumber
producers) to unrelated sawmills producing subject softwood lumber… was
inconsistent with Article 10 and thus Article 32.1 SCM Agreement, and with
Article VI:3 of GATT 1994.”
37. The original panel’s conc lusion covers transactions where the purchasing sawmills held
tenure. There is no reversal of this conclusion in the Appellate Body’s repor t; to the contrary, there
are pages of reasoning in support.23

38. In an attempt to explain Commerce’s exclusi on of these transactions, the United States offers
only that, “tenure-holding sawmills are direct subsidy recipients”.
24 This statement fails entirely to
explain how the alleged stumpage subsidy passes fr om upstream timber harvesters to downstream
purchasing sawmills. Commerce simply presumed the pass-through.

39. The only other reason the United States offers for Commerce’s refusal to conduct the required
analysis is that the Canadian respondents faile d to provide necessary data. As my colleague
Mr. Owen will now explain, the US claims in this respect are false, and the Canadian respondents
provided more than sufficient evidence to allow Commerce to conduct a pass-through analysis in both
determinations.

V. THE RECORD EVIDENCE WAS SUFFICIENT TO PERFORM A PROPER PASS-
THROUGH ANALYSIS

 A. The Canadian Respondents Provide d All Available Evidence Necessary for
Commerce to Perform a Pass-Through Analysis

40. Mr. Chairman, Members of the Panel, the United States complains that Canada failed to
provide the necessary data to allow Commerce to conduct a pass-through analysis and is, in fact,
“attempting to restrict” its ability to conduct such an analysis.
25

41. These assertions are patently false. Commerc e had everything it needed and more to conduct
a pass-through analysis.26 The Canadian respondents provided pric ing data that was representative of
the arm’s-length transactions in these provinces a nd was more than sufficient to conduct a pass-

 22 Ibid., at para. 44.
 23 Rebuttal Submission of Canada, at paras. 51-52.
 24 Second Written Submission of the United States, at para. 44.
 25 Ibid., at paras. 14, 32.
 26 See First Written Submission of Canada, at para. 58.

through analysis. Commerce should have used th is information to calculate the amount of pass-
through applicable to the entire volume of arm’s-length transactions for each province.

42. Allow me to briefly outline this information.

43. British Columbia provided Commerce with the na me of the seller, volume, value, and species
information for each of the more than 3,000 arm’ s-length purchases by sawmills that accounted for
53 per cent of the Crown harvest in that province.
27 In addition, for these same sawmills, British
Columbia provided equally detailed informati on on more than 2,500 arm’s-length transactions
involving logs harvested from private lands. 28 These data could have been used to calculate the
amount of pass-through for these transactions and an average amount of pass-through for the
remaining arm’s-length volumes in this province. Instead, Commerce ignored all of these data.

44. Alberta had PricewaterhouseCoopers comp ile transaction-specific pricing data for
approximately 80 per cent of arm’s-length transactions for which it claimed a pass-through analysis.
29
Commerce relied on these transaction-specific data to cal culate its pass-through adjustment. It failed,
however, to use these pricing data to calculate the average pass-through of subsidies – if any – for the
remaining volumes of arm’s-length transactions.

45. Saskatchewan and Manitoba both provided exte nsive transaction-specific pricing data. More
specifically, Saskatchewan request ed Weyerhaeuser – its largest softwood lumber producer – to
provide their data. Weyerhaeuser was involved in approximately 40 per cent of independent harvester
transactions in this province.
30 Similarly, Manitoba provided Commerce with transaction-specific
information from Tembec, an independent harvester which was involved in 51 per cent of the arm’s-
length transactions in that province.31

46. Ontario provided company-specific data relati ng to sawmills responsible for 91.3 per cent of
the Crown harvest. 32 The Ontario industry associations also provided Commerce with transaction-
specific information for two of the largest independ ent harvesters and 23 of the largest sawmills in
that province. In fact, Commerce received tr ansaction-specific pricing data from companies
accounting for over 90 per cent of the Crown ha rvest entering sawmills during the period of
investigation.33

47. In short, Canadian respon dents provided Commerce with transaction-specific information for
the majority of transactions between independent harvesters and sawmills in most provinces. In
addition, Ontario provided company- or sawmill-specif ic data. Commerce, therefore, had more than
enough information to conduct pass-through analyses.

48. No pricing data was requested by Co mmerce in the administrative review. 34 Moreover, the
Canadian respondents had no opportunity to present this information, as Commerce did not request
this evidence in the section 129 proceeding unt il after closure of the factual record in the
administrative review. Commerce is now requesti ng this transaction-specific information in its
second administrative review.

 27 First Written Submission of Canada, at para. 80.
 28 Ibid.
 29 Ibid., at para. 81.
 30 Ibid., at para. 83.
 31 Ibid., at fn 96.
 32 Ibid., at para. 87.
 33 Ibid.
 34 Ibid., at para. 77.

49. Given Commerce’s failure to request transac tion-specific evidence, it should have either
removed the arm’s-length volumes that had been id entified from the numerator or used the sawmill-
specific information submitted by some provinces to conduct pass-through analyses. Instead,
Commerce chose to rely on its “factors” to once ag ain impermissibly presume a full pass-through of
the alleged stumpage subsidy.

B. Commerce’s Accusation that Canada Withheld Evidence is Without Merit

50. So, as I have outlined, the United States had ever ything it needed to conduct its analysis. It
now accuses Canada, however, of being unprepared to support its pass-though claims with evidence.
Why? Because Canada did not provide transaction-speci fic information for each of the five “factors”
in response to supplemental questionnaires issued six to eight months into the reasonable period of
time. This information was unnecessary and irrelevant to a pass-through analysis. Given the timing
of the questionnaire and the type of information sought, this information was also impossible to
provide.

51. A large portion of the evidence Commerce complains it did not receive was irrelevant and
unnecessary for conducting a pass-through analysis.
35 As Mr. Cochlin has explained, tenure
agreements, wood supply commitment letters, paym ent of stumpage fees by the log purchaser, log
purchase agreements and fibre exchange agreements are not relevant to whether a transaction is
conducted at arm’s length.

52. In many instances, the amount of informa tion requested by Commerce was impossible to
provide. For example, British Colu mbia was expected to retrieve, c opy and submit more than 3,000
tenure agreements that were scattered over dozens of district forestry offices. 36 This would have
amounted to upwards of 60,000 pages of documents. Canada notified Commerce on multiple
occasions of the impossibility of complying with th is request, offered numerous sample agreements,
and otherwise sought a reasonable alternative. Only after nearly five months did Commerce agree to
modify its demands, requesting “excerpts” from all agreements in the province containing certain
specified provisions. Commerce’s “compromise” would have required British Columbia to locate and
manually review all tenure agreements in the prov ince to identify the relevant excerpts, and submit
reams of complete tenure agreements, in a little over two weeks.

53. Further, Commerce solicited none of the transaction-specific pricing data that it now asserts
are so “essential” for a pass-thr ough analysis in its first questionnaire. Instead, Commerce waited
until more than half of the reasonable period of tim e had elapsed before requesting these data in its
supplemental questionnaires and pass-through appendices.
37 Commerce also waited until this time to
request information on three of its five “factors”, including copies of log purchase agreements and
fibre exchange agreements for every arm’s-length transaction in the provinces during the period of
investigation.38 In addition, Commerce demanded that the Canadian respondents identify every
transaction where a sawmill paid stumpage on behalf of an independent harvester.

54. The pass-though appendices used to collect information from companies on affiliation,
pricing data and the “factors” contained more than twenty-four pages of questions and attachments.
The supplemental questionnaires directed the provinces to distribute the appendices to all independent
harvesters and sawmills that were involved in arm’s-length transactions. In the case of British
Columbia, this would have required the dist ribution of the appendices to 3,000 independent

 35 Ibid., at paras. 75-76.
 36 Ibid., at para. 76 (citing to BC September 15, 2004 Supp. Questionnaire Response, Narrative, at 5
and Norcon B, at 4 (Exhibit CDA-15)).

37 Ibid., at para. 75.
 38 Ibid.

harvesters and 175 sawmills operating in that provi nce. If British Columbia had provided Commerce
with the required nine copies and produced the ot her twenty copies required for the service list,
without responses, this would have amounted to almost two million, two hundred and ten thousand
pages of information . If the independent harvesters and sawmills had filled out the questionnaires,
Commerce would have received millions more pages of documentation . As I am sure you will agree,
it is hardly reasonable to expect British Columbia to manage the printing and submission of millions
of pages of documents in under two months; in fact, it borders on the absurd.

55. Finally, as we explained earlier, Commerce was given more than enough data to conduct a
pass-through analysis. The United States has not offered a single valid reason for refusing to use most
of this information.

VI. CONCLUSION

56. In conclusion, the United States presumed a pass-through in violation of its WTO obligations.
Commerce’s presumption of a pass-through covers the vast majority of log transaction volumes
identified in the section 129 proceedings, and all transaction volumes identified in the administrative
review. Canada has explained that Commerce was not justified in rejecting the log transactions that it
did, whether by: first, applying a new “arm’s length” threshold test; second, claiming that the
Appellate Body reversed the original panel findings and conclusions with respect to certain sawmill-
to-sawmill transactions; or third, claiming that information was missing or deficient.

57. In both its section 129 determination and its administrative review, Commerce once again
necessarily and impermissibly presumed pass-through.

58. Canada therefore requests that the Panel:

• Find that the US imposition of countervailing duties in respect of the Crown log transactions
identified in this dispute is inconsistent with Article VI:3 of the GATT and Articles 10 and 32.1 of the
SCM Agreement;

• Recommend that the United States bring its measures into conformity with its obligations under
those provisions; and

• Suggest, in accordance with Article 19.1 of the DSU, that the United States do one of the
following two things:

 ⁰ It should refund the amount of the countervailing duties it imposed to offset alleged
subsidy amounts impermissibly presumed to pass through;

or

 ⁰ It should revise its measures to meet its WTO obligations and refund the amount of the
countervailing duties it imposed to the extent that they exceeded the amount of
the alleged subsidy demonstrated to ha ve passed through to the production of
softwood lumber.