Document: WT/DS257/RW Page B-1 ANNEX B Submissions of the United States Contents Page Annex B-1 First Submission and Request for Preliminary Ruling of the United States – 10 March 2005 B-2 Annex B-2 Second Written Submission of the United States – 31 March 2005 B-9 Annex B-3 Oral Statement of the United Sates – 21 April 2005 B-25
Date: 10 March 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 B

Submissions of the United States

Contents Page
Annex B-1 First Submission and Request for Preliminary Ruling of the
 United States – 10 March 2005
B-2
Annex B-2 Second Written Submission of the United States – 31 March 2005 B-9
Annex B-3 Oral Statement of the United Sates – 21 April 2005 B-25

ANNEX B-1

FIRST SUBMISSION AND REQUEST FOR
PRELIMINARY RULING OF THE UNITED STATES

I. Introduction

1. On 6 December 2004, the US Department of Commerce ("Commerce") issued a revised
determination ("Section 129 Determination")
1 that implemented the recommendations and rulings of
the Dispute Settlement Body ("DSB") in United States – Final Countervailing Duty Determination
With Respect to Certain Softwood Lumber From Canada .2 The recommendations and rulings of the
DSB at issue relate to Commerce’s decision not to conduct a pass-through analysis with respect to
certain arm’s-length sales of logs in its Final Determination.3

2. As discussed further belo w, Commerce’s Section 129 Determ ination fully implements the
recommendations and rulings of the DS B, and is consistent with the Agreement on Subsidies and
Countervailing Measures ("SCM Agreement") and the General Agreement on Tariffs and Trade 1994
("GATT 1994"). The Panel should find, therefore, that Canada’s claims are unfounded.

3. In addition, as set out below, the United St ates requests a preliminary ruling that the final
results of the first assessment review
4 of the countervailing duty order on softwood lumber from
Canada, cited by Canada in its requ est for the establishment of a panel 5, are not "measures taken to
comply" with the recommendations and rulings of the DSB under Article 21.5 of the Understanding
on Rules and Procedures Governing the Settlement of Disputes ("DSU"). Therefore, these results fall
outside the scope of Article 21.5, and this Panel lacks jurisdiction to review them.

4. As provided for in the Panel's working pr ocedures, the United States will be providing a
rebuttal submission on 31 March 2005.

II. Procedural History

5. On 2 April 2002, Commerce published the Fina l Determination, finding that provincial
stumpage programmes in Canada provided a counte rvailable subsidy to Canadian lumber producers

1 Section 129 Determination: Final Countervailing Duty Determination, Certain Softwood Lumber
from Canada, December 6, 2004 ("Section 129 Determination") (Exhibit CDA-5). "Secti on 129" refers to the
provision of the Uruguay Round Agreements Act that provides procedures fo r implementing certain DSB
recommendations and rulings with respect to countervailing duty investigations.
2 Appellate Body Report, WT/DS257/AB/R, adopted 17 February 2004, ("Appellate Body Report");
Panel Report, WT/DS257/R, adopted 17 February 2004 ("Panel Report").
3 Notice of Final Affirmative Countervailing Duty Determination and Final Negative Critical
Circumstances Determination: Certain Softwood Lumber Products from Canada , 67 Fed. Reg. 15545
(2 April 2002), as amended, 67 Fed. Reg. 36070 (May 22, 2002) ("Final Determination"). Exhibit US-1.
4 An "administrative review", in US parlance.
5 WT/DS257/15, citing 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 Decembe r 20, 2004) (Exhibit CDA-8) and Issues and Decision Memorandum:
Final Results of Administrative Review: Certain Softwood Lumber Products from Canada, December 13, 2004.

and that certain non-stumpage progra mmes provided countervailable subsidies. 6 Commerce did not
conduct a pass-through analysis in the Final Determination.

6. On 3 May 2002, Canada requested consulta tions with the United States and thereafter the
DSB established a panel pursuant to Article 6 of the DSU ("original panel").

7. On 29 August 2003, the original panel found that Commerce’s failure to conduct a
pass-through analysis in the Final Determination with respect to arm’s-length sales to unrelated
sawmills and lumber remanufactur ers was inconsistent with Articles 10 and 32.1of the SCM
Agreement and Article VI:3 of the GATT 1994
7 However, the Appellate Body in its
19 January 2004, report reversed that aspect of the original panel report relating to Commerce’s
decision in its investigation not to conduct a pass-th rough analysis in respect of arm’s-length sales of
lumber by tenured harvesters/sawmills to remanufacturers8

8. The Appellate Body upheld, however, the original panel’s finding that Commerce acted
inconsistently with the SCM Agreement and GAT T 1994 by failing in the Final Determination to
conduct a pass-through analysis in respect of arm’s-length sales of logs by tenured
harvesters/sawmills to unrelated sawmills.
9 On 17 February 2004, the DSB adopted its
recommendations and rulings.10

9. On 5 March 2004, the United States notified the DSB of its intention to implement the
recommendations and rulings of the DSB.
11 Thereafter, the United States and Canada established a
ten-month "reasonable period of time" ending 17 D ecember 2004, within which the United States
agreed to implement the recommendations and rulings of the DSB.12

10. On 19 November 2004, Commerce issued a draf t Section 129 Determination and provided an
opportunity for parties to comment. On 6 D ecember 2004, Commerce issued the Section 129
Determination, which revised the original c ountervailing duty investigation determination and
implemented the DSB’s recommendations and rulings, effective for imports on or after
10 December 2004. On 16 December 2004, the notice of implementation was published in the
Federal Register.
13

11. On 17 December 2004, the United States informed the DSB that it had complied with the
DSB’s recommendations and rulings by properly conducting its pass-through analyses of certain
arm’s-length log sales occurring during the period of investigation ("POI").

6 The Final Determination subsequently was amended on May 22, 2002.
7 Panel Report, para. 7.99.
8 Appellate Body Report, para. 167(f). The United States did not appeal the Panel’s findings with
respect to arm’s-length log sales between tenured timber harvesters not owning sawmills and sawmills.
Appellate Body Report, fn. 157.
9 The other issues either appealed by the United States or Canada were decided in favor of the
United States. Appellate Body Report, para. 167.
10 DSB, Minutes of Meeting (17 February and 19 March, 2004), WT/DSB/M/165, 30 March 2004, at
4(a), para. 49.
11 WT/DS257/12, 9 March 2004.
12 WT/DS257/13, 30 April 2004.
13 Notice of Implementation Under Section 129 of the Uruguay Round Agreements Act; Countervailing
Measures Concerning Certain Softwood Lumber Products From Canada , 69 FR 75305 (16 December 2004).
Exhibit CDA-7.

III. Preliminary Ruling Request with Respect to the Final Results of the First Assessment
Review

12. The United States requests a preliminary ruling that the final results of the first assessment
review of the countervailing duty order on softwood lumber from Canada, c ited by Canada in its
request for the establishment of a panel in this dispute
14, are not "measures taken to comply" with the
recommendations and rulings of the DSB under Article 21.5 of the DSU. Therefore, these results fall
outside the scope of Article 21.5, and this Panel lacks jurisdiction to review them.

 A. Article 21.5 Proceedings are Limited to "Measures Taken to Comply" With the
DSB’s Recommendations and Rulings

13. The subject matter of these proceedings is de termined by the Panel’s terms of reference and
by Article 21.5 of the DSU, which provides that recourse be had to dispute settlement procedures
"[w]here there is disagreement as to the exis tence or consistency w ith a covered agreement of
measures taken to comply with the recommendations and rulings ." (emphasis added). Therefore, as
the Appellate Body has stated, "[p]roceedings under Article 21.5 do not concern just any measure of a
Member of the WTO; rather Article 21.5 proceedings are limited to those ‘measures taken to comply
with the recommendations and rulings’ of the DSB.15

14. Although the complaining party in an Article 21.5 proceeding decides the scope of its request
for panel establishment, including the measures it wi shes to challenge, it is the responsibility of the
Article 21.5 panel to determine whether the measure identified is or is not a "measure[ ] taken to
comply".16 If it is not, the measure falls outside of Ar ticle 21.5, and the panel lacks jurisdiction to
review the measure. As the panel in EC – Bed Linens stated, it is neither the complaining nor the
responding party that decides which measures are taken to comply: "Rather", said the panel, "this is
an issue which must be considered and decided by an Article 21.5 panel".17 That panel concluded that
"[t]o the extent a party may have challenged, in a request for establishment of an Article 21.5 panel,
measures which were not ‘taken to comply’ by the implementing Member, it is our view that a Panel
may decline to address claims concerning such measures".18

15. And, indeed, in the EC – Bed Linens dispute, the panel granted the EC’s preliminary ruling
request to exclude from consideration certain antid umping duty measures taken by the EC that were
cited by India, but that the panel found were not "taken to comply". In that dispute, in which the EC
was found to have incorrectly calculated dumping duti es in an investigation of bed linens from India,
the EC voluntarily applied the revised calculati on method to antidumping duties imposed on Pakistan
and Egypt. After concluding that no duties shoul d be imposed on bed linens from those sources (as a
result of the recalculation), the EC re-examined whet her imports from India, considered alone, caused
injury to the domestic industry. The EC conclu ded that they did, and therefore affirmed the
imposition of dumping duties on bed linen from India. India challenged this finding of injury and the
resulting imposition of duties on bed linen from Indi a as a WTO-inconsistent measure "taken to
comply" under Article 21.5.

14 WT/DS257/15, citing 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 D ecember 2004) (Exhibit CDA-8) and Issues and Decision Memorandum:
Final Results of Administrative Review: Certain Softwood Lumber Products from Canada, 13 December 2004.
15 Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft ,
WT/DS70/AB/R, adopted 20 August 1999, para. 36.
16 See, e.g., 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 , WT/DS141/RW, adopted 24 April 2003, as
modified by the Appellate Body Report, WT/DS141/AB/RW, ("EC – Bed Linens (Panel)"), para. 6.15.
18 EC – Bed Linens (Panel), para. 6.17 (emphasis in original).

16. The panel, in deciding not to re view the latter measure, stated that

[T]he fact that the EC, subsequent to its re-examination of the dumping
determinations with respect to imports from Egypt and Pakistan, and in the context of
a review initiated on the request of Eurocoton , carried out an analysis of whether
injury was caused by imports from India alone does not, ipso facto , establish that
Regulation 696/2002 is a measure "taken to comply". Rather the opposite would
seem to be the case – that Regulation would seem to be an entirely new
determination, reached as a result of events subsequent to the EC having adopted a
measure to comply with the DSB’s recommendation.19

17. In sum, Article 21.5 proceedings are limite d to "measures taken to comply" with the DSB’s
recommendations and rulings. As discussed below, th e final results of the first assessment review are
not "measures taken to comply" and therefore this Panel should decline to review those results.

 B. The Final Results of the First Assessment Review Are Not "Measures Taken to
Comply"

18. As discussed above, before the original panel, Canada challe nged Commerce’s Final
Determination in the countervailing duty investigation on softwood lumber from Canada.
20 After the
DSB adopted its recommendations and rulings, and with in the agreed "reasonable period of time", the
United States made a redetermination – the Section 129 Determination – in which it conducted a "pass
through" analysis and recalcula ted the countervailing duty rate. 21 The new reduced rate was
applicable to entries of subject merchandise on or after 10 December 2004.22

19. In this Article 21.5 dispute, Canada states that the Section 129 Determination is a "measure[ ]
taken to comply with the recommendations and ru lings" of the DSB and alleges that it fails to
implement the recommendations and rulings of the DSB.

20. But Canada also includes, without e xplanation, a completely separate Commerce
determination, i.e., the results of an assessment review, among the "measures taken to comply" which
it asks the Panel to examine under Article 21.5. The results of this assessment review are, in no sense,
"measures taken to comply" with the recommendati ons and rulings of the DSB concerning the Final
Determination in the original countervailing duty investigation.

21. As an initial matter, original investigations and assessment reviews are different processes
which serve distinct purposes. The purpose of an inv estigation is to determine the existence, degree,
and effect of any alleged subsidy; the purpose of an assessment review is to determine the amount of
duty to be assessed on previous imports of subject merchandise and the estimated countervailing duty
rate to be applied to future imports. Indeed, the distinction between countervailing duty investigations
and assessment procedures is explicitly recognized in the SCM Agreement.
23

22. In May 2003, Canada (among other interested parties) requested such an assessment review,
covering entries of subject merchandise during the period 22 May 2002, through 31 March 2003. The
resulting assessment review was not taken to comply with the recommendations and rulings of the

19 EC – Bed Linens (Panel), para. 6.20 (emphasis added).
20 Panel Report, paras 2.1-2.4.
21 Section 129 Determination. Exhibit CDA-5.
22 Notice of Implementation under Section 129 of th e Uruguay Round Agreements Act: Countervailing
Measures concerning Certain Softwood Lumber from Canada , 69 Fed. Reg. 75,917 (Dep’t Commerce
16 December 2004). Exhibit CDA-7.
23 See, e.g., SCM Agreement, fn. 52.

DSB. Rather, it resulted from a separate affirmative request by Canada, among others, that
Commerce review new sales and subsidies data for the purposes of assessing countervailing duties for
imports during the review period and of setting a new estimated countervailing duty rate for
subsequent imports. US law required Commerce to conduct this assessment review once Canada,
among others, requested it.
24

23. Indeed, the assessment review was initiated on 1 July 2003, eight months before the
recommendations and rulings in this dispute were a dopted. This review proceeding, therefore, had
nothing whatsoever to do with "implementing" th e DSB's recommendations and rulings. For obvious
temporal reasons, the results of this assessment review – which was initiated before the DSB issued its
recommendations and rulings – cannot be considered "measures taken to comply".

24. Article 21.5 proceedings are by their natu re more focused and limited than other panel
proceedings under Article 6.2 of the DSU. Notably, instead of six months, the DSU anticipates that
Article 21.5 proceedings will norma lly take no more than 90 days. 25 Canada, for its part, has
underscored this aspect of these proceedings by systematically opposing any extensions of time in this
proceeding.26 For this reason, Article 21.5 proceedings are intended to focus, not on any measure
cited by the complaining Member – as is the case for other dispute settlement proceedings – but only
on measures taken to comply with DSB recommendations and rulings. It is beyond the scope of such
a limited 90-day inquiry to fully examine an entirel y new set of assessment review results based on a
wholly new administrative record, consisting of new sales, new imports, potentially new respondents
and potentially new subsidy programmes.

25. In sum, in this Article 21.5 proceeding, the Panel lacks jurisdiction to review the final results
of the assessment review cited by Canada because these results are not "measures taken to comply"
with the DSB’s recommendations and rulings, adopt ed on 17 February 2004, related to Commerce’s
Final Determination in the original countervailing duty investigation.

IV. Canada Bears the Burden of Proving its Claims

26. It is well-established that the complaining pa rty in a WTO dispute bears the burden of coming
forward with argument and evidence that establish a prima facie case of a WTO inconsistency.
27 If
the balance of evidence and argument is inconclusive with respect to a particular claim, Canada, as
the complaining party, must be found to have failed to establish that claim. 28 Canada has not met its
burden in this proceeding.

27. With respect to the standard of review, Article 11 of the DSU sets forth the standard of review
for this Panel. Article 11 calls for panels to "make an objective assessment of the matter before it,
including an objective assessment of the facts of th e case and the applicability of and conformity with
the relevant covered agreements ... ."

24 See 19 USC 1675(a). Exhibit US-2.
25 Compare Articles 12.8 and 21.5 of the DSU.
26 Recall, e.g., statements by the Canadian representative during the Panel organization meeting of
14 February 2005, as well as paragraph 2 of Canada’s letter of 15 February 2005, to the Panel regarding its draft
working procedures and timetable.
27 See, e.g., Appellate Body Report, United States – Measures Affecting Imports of Woven Shirts and
Blouses from India , WT/DS33/AB/R, adopted 23 May 1997, page 14; Appellate Body Report, European
Communities – Measures Concerning Meat and Meat Products (Hormones) , WT/DS26/AB/R,
WT/DS48/AB/R, adopted 13 February 1998, para. 104; and Panel Report, Korea – Definitive Safeguard
Measure on Imports of Certain Dairy Products , WT/DS98/R, as modified by the Appellate Body, adopted
12 January 2000, para. 7.24.
28 See, e.g., Panel Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and
Industrial Products, WT/DS90/R, as affirmed by the Appellate Body, adopted 22 September 1999, para. 5.120.

28. With respect to disputes involving a determ ination made by a domestic authority based upon
an administrative record, the Appellate Body, in Cotton Yarn, summarized the role of a panel under
Article 11 as follows:

[P]anels must examine whether the compet ent authority has evaluated all relevant
factors; they must assess whether the competent authority has examined all the
pertinent facts and assess whether an adequa te explanation has been provided as to
how those facts support the determination; and they must also consider whether the
competent authority’s explanation addresses fu lly the nature and complexities of the
data and responds to other plausible interp retations of the data. However, panels
must not conduct a de novo review of the evidence nor substitute their judgement for
that of the competent authority.
29

29. Thus, the Panel’s task is to determine whet her a reasonable, unbiased person, looking at the
same evidentiary record as Commerce, could have – not would have – reached the same conclusions.

V. Commerce Conducted a Pass-Through Analys is Consistent with the SCM Agreement,
the GATT 1994, and the DSB’s Recommendations and Rulings

30. As described in detail in the Section 129 Determination, Commerce responded to the DSB’s
recommendations and rulings by conducting a pass -through analysis, first issuing questionnaires
seeking record evidence to determine whether dur ing the period of investigation there were
arm’s-length sales of logs by independent harv esters to unrelated sawmills and by tenured
harvesters/sawmills to unrelated sawmills. Based upon its analysis of the record evidence, Commerce
determined that there were such arm’s-length log sales. For those arm’s-length sales, Commerce then
determined whether a benefit was passed through to the purchasing sawmills, using appropriate
benchmarks, and removed from the numerator of the aggregate subsidy calculation any benefit that it
found did not pass through to the purchasing sawmills.

31. Other sales, however, were determined not to be at arm’s length, either because the record
facts demonstrated that they were not or because Ca nada failed to provide suff icient record evidence
that would have enabled Commerce to analyze those sales. Ultimately, Commerce’s analysis of log
sales demonstrated to be at arm’s length resulted in a C$28,344,121 reduction in the numerator of the
ad valorem subsidy rate, which had the effect of reduc ing the country-wide subsidy rate from 18.79
per cent ad valorem to 18.62 per cent ad valorem.30

32. Canada now challenges Co mmerce’s Section 129 Determina tion under Article 21.5 of the
DSU. This challenge, however, has no basis in the SCM Agreement, the GATT 1994, or the
recommendations and rulings of the DSB. Co mmerce’s pass-through analysis was conducted in
accordance with the recommendations and rulings of the DSB and is WTO-consistent, and Canada’s
claims must therefore fail.

33. First, Commerce did not "presume" pass-through. To implement the DSB’s
recommendations and rulings, Commerce sought data from Canada substantiating its claims that
subsidies were not passed through. In some instances, the Canadian respondents provided the
requested data and Commerce conducted the recomme nded analysis, using appropriate log prices as
benchmarks. In other instances, however, despite repeated requests by Commerce, Canada failed to
provide the necessary data. Lacking sufficient data , Commerce was not able to conduct its analysis
for all of the log sales for which Canada requested such an analysis.
31

29 Appellate Body Report, United States – Transitional Safeguard Measure on Combed Cotton Yarn
from Pakistan, WT/DS192/AB/R, adopted 5 November 2001, para. 74.
30 Section 129 Determination, at 1. Exhibit CDA-5.
31 E.g., Section 129 Determination, at 3 and 13 (comment 8).

34. Second, Commerce properly investigated a nd made a determination concerning whether
particular sales were at "arm’ s lengt h." Contrary to Canada’s arguments
32, nothing in the SCM
Agreement, the GATT 1994, or the DSB’s recommendations and rulings supports Canada’s argument
that an arm’s-length analysis should be restricted to, in essence, a per se test based on affiliation
alone. Further, part of the DSB’s recommendations and rulings related only to a particular category
of arm’s-length log sales: those between tenur ed harvester/sawmills and unrelated, non-tenured
sawmills.33 The scope of the DSB’ s recommendations and rulings should therefore not be broadened
to include entities that were not part of those recommendations and rulings.

35. Finally, the results of Commerce’s recalculati on were applied to the only rate that was before
the original panel and Appellate Body, i.e., the 18.79 per cent ad valorem rate calculated in the Final
Determination. Therefore, Canada’s argument th at Commerce applied the results of its pass-through
analysis to a rate "which long before had been i nvalidated as a result of judicial review proceedings"
34
is without basis.

VII. Conclusion

36. For the reasons stated above, Canada’s cl aims against US implementation of the DSB’s
recommendations and rulings have no basis in the SCM Agreement, the GATT 1994, or the
recommendations and rulings of the DSB. The United States therefore requests that the Panel find
that the United States properly implemented the recommendations and rulings of the DSB and that the
Panel reject Canada’s claims in their entirety. Fu rther, the United States requests that this Panel find
that the results of the first assessment review fall outside the Panel’s jurisdiction in this Article 21.5
dispute.

32 E.g., First Written Submission of Canada, paras. 59 -65.
33 E.g., Appellate Body Report, para. 167(e).
34 First Written Submission of Canada, para. 10.

ANNEX B-2

SECOND WRITTEN SUBMISSION
OF THE UNITED STATES

31 March 2005

I. Introduction

1. On 10 March 2005, the United States filed its First Submission and Request for Preliminary
Ruling. Pursuant to the Panel's working proce dures, the United States is now filing its rebuttal
submission.

2. To implement the recommendations and rulings of the Dispute Settlement Body ("DSB") in
United States – Final Countervailing Duty Determina tion With Respect to Certain Softwood Lumber
From Canada
1,, on 6 December 2004, the US Department of Commerce ("Co mmerce") issued a
revised determination ("S ection 129 Determination"). 2 In accordance with those recommendations
and rulings, in the context of its Final Determination 3, Commerce determined the amount of the
subsidy that passed through the purchase transactio n with respect to certain arm’s-length log sales
between unrelated parties. Ultimately, Commerce’s analysis of log sales demonstrated to be at arm’s
length resulted in a C$28,344,121 reduction in the numerator of the ad valorem subsidy rate, which
had the effect of reducing the country-wide subsidy rate from 18.79 per cent ad valorem to 18.62 per
cent ad valorem .
4 Commerce’s Section 129 Determinati on is consistent with the DSB’s
recommendations and rulings, the Agreement on Subsidies and Countervailing Measures ("SCM
Agreement") and the General Agreement on Tariffs and Trade 1994 ("GATT 1994"), and the Panel
should so find.

3. In this proceeding, however, Canada is aski ng the Panel to find that the United States is
subject to conditions and restrictions that are nowhere to be found in th e SCM Agreement or GATT
1994, that were not part of the DSB’s recommendati ons and rulings, and that are entirely otherwise
unwarranted. In so doing, Canada attempts to deflect attention away from its own failure in many
instances to provide Commerce with the data neces sary to conduct the analysis recommended by the
DSB. Neither Canada’ s attempt to prevent Commerce from conducting a meaningful pass-through
analysis, nor its failure to provide the requested data, however, translates into a failure by the

1 Appellate Body Report, WT/DS257/AB/R, adopted 17 February 2004, ("Appellate Body Report");
Panel Report, WT/DS257/R, adopted 17 February 2004 ("Panel Report").
2 Section 129 Determination: Final Countervailing Duty Determination, Certain Softwood Lumber
from Canada , 6 December 2004 ("Section 12 9 Determination") (Exhibit CDA-5). The Section 129
Determination was implemented on 10 December 2005, at the request of the Office of the United States Trade
Representative. See Notice of Implementation Under Section 129 of the Uruguay Round Agreements Act;
Countervailing Measures Concerning Certain Softwood Lumber Products From Canada , 69 FR 75305
(16 ecember 2004). Exhibit CDA-7. For summaries of provincial claims and the results of Commerce’s
pass-through determination, see "Draft Decision Memorandum" In the Matter of the Section 129 Determination
on the Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada ("Draft
Section 129 Determination"), 19 November 2005, at 8-15 (Exhibit CDA-6). Any modifications to Commerce’s
analysis are discussed in the Comment section of the Section 129 Determination. "Section 129" refers to the
provision of the Uruguay Round Agreements Act that provides procedures fo r implementing certain DSB
recommendations and rulings with respect to countervailing duty investigations.
3 Notice of Final Affirmative Countervailing Duty Determination and Final Negative Critical
Circumstances Determination: Certain Softwood Lumber Products from Canada , 67 Fed. Reg. 15545
(2 April 2002), as amended, 67 Fed. Reg. 36070 (May 22, 2002) ("Final Determination"). Exhibit US-1.
4 Section 129 Determination, at 1. Exhibit CDA-5.

United States to comply with the DSB’s recommendati ons and rulings or results in a measure that is
inconsistent with the SCM Agreement or the GATT 1994.

4. As described below, and contrary to Canada’s arguments, Commerce conducted its
pass-through analysis consistently with the DS B’s recommendations and rulings, and the resulting
measure at issue is consistent with the SCM Agreement and the GATT 1994.

II. Commerce Conducted a Pass-Through Analysis That is Consistent with the DSB’s
Recommendations and Rulings and with the SCM Agreement and GATT 1994

5. Canada does not challenge Commerce’s genera l approach of reducing the numerator of the
ad valorem subsidy rate calculation to eliminate subsidies attributed to arm’s-length sales in which no
benefit was passed through. Instead, Canada comp lains that Commerce, rather than conducting a
pass-through analysis, "presumed" pass through. A foundation of Canada’s "presumption" argument
is its assertion that Commerce must adopt an unreasonable definition of the term "arm’s length"
5 that
would prevent Commerce from conducting a meaningful analysis of whether, in fact, sales are at
arm’s length. Consequently, whenever Commerce determined that a transaction was not at arm’s
length, according to Canada’s unreasonable defi nition of arm’s length, Commerce improperly
"presumed" pass-through of the subsidy. Additio nally, Canada argues that Commerce "presumed"
pass-through by disregarding aggregate data submitted by Canada 6 and excluding from its analysis
sales between tenure-holding sawmills. 7 In making its arguments Canada ignores the necessarily
company-specific nature of the analysis undertaken by Commerce and the actual findings of the DSB,
including the specific definitions of the categories of companies for which a pass-through analysis had
to be performed. As set forth below, Commerce properly conducted its pass-through analysis.

 A. Commerce Issued Questionnaires to Obta in Data Necessary to its Analysis

6. To conduct its pass-through analysis, Comme rce first had to obtain data from Canada
8
supporting Canada’s claim that a portion of the total volume of Crown logs processed into lumber – as
reported by Canada – should be reduced to acc ount for arm’s-length log sales between unrelated
parties in which no benefit passed through. Because Commerce had conducted the original
investigation on an aggregate basis and not on a company-specific basis and had not previously
conducted such a pass-through analysis, the admini strative record did not contain evidence supporting
Canada’s claims.

7. In the original investigation, Commerce calcu lated the subsidy benefit from Provincial Crown
timber programmes by assessing the extent to which each Province sold timber for less than adequate
remuneration. This subsidy benef it is the numerator, which is divi ded over the relevant sales of
lumber and by-products that benefit from the subsidy, the denominator, to determine the
countervailable ad valorem subsidy rate. Commerce needed specific information and data to calculate
any adjustment to this subsidy benefit numerat or to account for potentially arm’s-length sales of
Crown logs between unrelated parties in which the subsidy did not pass through. Specifically,
Commerce needed the volume of the log sales in Canada during the period of investigation ("POI")
for which Canada sought a pass-through analysis. Additionally, to determine whether the reported log
transactions were between unrelated parties, Commerce required information concerning any
affiliation between the buyer and seller of the logs. Further, Commerce required information
concerning government-mandated restrictions and other factors that could limit or control the terms of

5 First Written Submission of Canada, February 24 , 2005 ("First Written Submission of Canada"),
paras. 38, 59-65.
6 First Written Submission of Canada, para. 58.
7 First Written Submission of Canada, para. 54-55.
8 First Written Submission of Canada, para. 6. As acknowledged by Canada, "Section 129 proceedings
may involve the issuance of new questionnaires . . . ."

the sale, and thus undermine the arm’s-length nature of the sale. Finally, to conduct the "competitive
benefit" analysis, through which Commerce measured whether and to what extent any subsidy passes
through, Commerce required specific data on prices, species, size, grade, quality, discounts delivery
terms, and payment terms.

8. Therefore, Commerce asked Canada, through questionnaires, to identify the volume of log
sales subject to its pass-through claims, and to pr ovide specific information necessary to determine
whether log sales were between unrelated parties and at arm’s length. This would allow Commerce to
identify transactions that were eligible for the l ast phase of the analysis (competitive benefit). The
requested information related to, inter alia , the relationship between the parties to the specific
transactions (such as whether the parties were affiliated) and the circumstances surrounding the
subject sales.

9. On 14 April
9, 17 August10 and 5 October 2004 11 Commerce issued questionnaires and
supplemental questionnaires to Canada with respect to this issue. Commerce notified Canada in its
initial questionnaire that if a province was claiming that any portion of the volume of Crown logs
reported in the numerator 12 was sold in arm’s-length transactions and was between unrelated parties
and required an analysis to determine if the purchasing sawmill received a subsidy benefit, the
province was required to provide an explan ation of how the volume was calculated and
documentation supporting its claims. 13 The Canadian provincial gov ernments provided questionnaire
responses on 21 May 2004. Although the provincial governments provided certain information that
had been requested, the responses were incomplete.

10. Therefore, on 17 August 2004, Comme rce issued a supplemental "pass-through"
questionnaire in which it informed Canada that its 21 May 2004, responses were deficient in a number
of respects and that the "information provided in the questionnaire response is insufficient for the
Department to complete its ‘pass-through’ analysis.14 In that supplemental questionnaire, Commerce
requested additional and clarifying information from the provincial governments and from
independent harvesters and mills with respect to l og sales that they claimed were at arm’s length.
Responding to Canada’s complaint that certain of its requests could not be answered because the
provincial governments lacked access to certa in data, Commerce modified its requests for
information.

11. Notably, Commerce attached a pass-throug h appendix to the supplemental pass-through
questionnaire and requested that the provincial gove rnments provide the appendix to the independent
harvesters and sawmills involved in the log sales for which a pass-through analysis was requested. In
the pass-through appendix Commerce requested information directly from the sawmills and

9 See, Letter from Department of Commerce to Embassy of Canada, 14 April 2004, Pass-Through
Questionnaire. Exhibit CDA-3.
10 See, Letter from Department of Commerce to Embassy of Canada, 17 August 2004, Supplemental
Pass-Through Questionnaire. Exhibit CDA-23.
11 See, Letter from Department of Commerce to Embassy of Canada, 5 October 2004, Second
Supplemental Pass-Through Questionnaire. Exhibit CDA-24.
12 The numerator of Commerce’s final subsidy calculation consisted of the total benefit received, which
was calculated based on the total volume of Crown timber harvested during the POI that actually entered and
was processed by sawmills, as reported by each of the provinces.
13 In accordance with the DSB’s recommendations and rulings (Panel Report, at para. 7.99; Appellate
Body Report, at para. 167(e)), Commerce specifically requested information relating to the portion of the total
volume of Crown timber entering sawmills reported by the provinces claimed to be "sold in arm’s length
transactions by tenure holders that did not own a sawmill . . ." and "sold in arm’s- length transactions by tenured
timber sawmills to sawmills that do not have tenure . . ." Exhibit CDA-3, at 10, 11 (questions 1 and 2).
14 Exhibit CDA-23.

independent harvesters concerning affiliations and corporate relationships, as well as information
relating to the terms of the sales, including log sales data and purchase contracts.
15

12. On 15 September 2004, the Canadian parties submitted their responses to this supplemental
questionnaire. Certain sawmills and independent harvesters submitte d responses to the pass-through
appendix. However, notwithstanding Commerce’s earlier notice to Canada that in the absence of the
requested data Commerce might not have sufficien t data to complete its pass-through analysis,
Canada once again provided incomplete responses to Commerce’s data requests. Canada posited two
reasons for its failure to respond prop erly to Commerce’s requests: first, it claimed that certain of the
requests were voluminous and that it was burdensome for it to collect the data; second, it claimed that
certain information requested by Commerce was not relevant.16

13. On 5 October 2004, Commerce issued a sec ond supplemental pass-through questionnaire and
a supplemental pass-through appendix. Because the provincial governments failed to respond
adequately to Commerce’s earlier questionnaires, Commerce again requested clarifying and additional
information. As noted in its second supplemen tal pass-through questionnaire, Commerce modified
certain of its requests, where practicable, in r esponse to Canada’s claim that to provide the
information was burdensome. 17 With respect to Canada’s claim that certain information was not
relevant, Commerce reiterated to Canada that it needed the data to conduct the DSB’s recommended
analysis. The Canadian parties submitted a r esponse to the second supplemental questionnaire on
25 October 2004.

14. By refusing to provide certain of the data requested by Commerce, Canada was and is
attempting to restrict Commerce’s ability to conduc t a meaningful pass-through analysis. Canada
contends that Commerce’s arm’s-length analysis should be nothing more than a simple determination
of whether the parties to the transaction are unrelat ed. Indeed, Canada argues that Commerce erred in
not relying upon Canada’s "aggregat e" data – data that (although limited to sales between unrelated
parties) fails to address factors other than affiliation that could render the transactions something other
than arm ’s length. As discussed below, Co mmerce’s arm’s-length analysis properly included
examination of issues beyond mere affiliation.

 B. Commerce Properly Conducted Its Arm’s- Length Analysis as Part of Its
Pass-Through Analysis

15. Commerce first analyzed the information provi ded by Canada to determine whether the sales
were between related parties. If they were, no further analysis was conducted, because the DSB’s

15 Exhibit CDA-23, at 1 and Pass-Through Appendix - 1.
16 See, e.g., CDA-23, at 6 (Ontario question 1); Response of the Government of Ontario to the
Department’s 17 August 2004 Supplemental Pass-Through Questionnaire (15 September 2004), at ON-PASS-2,
-3 ("Ontario September 15 Pass-Through Response"). Exhibit US-3. See also, Response of the Government of
British Columbia to the Department’s 17 August 2004 Supplemental Questionnaire Concerning Pass Through of
the Alleged Benefits (15 September 2004), at 10 ("Britis h Columbia September 15 Pass-Through Response").
Exhibit US-4.
17 In the second supplemental questionnaire, Commerce further modified its requests. By way of
example, in response to the Govern ment of British Columbia’s ("GBC") statement that it did not have access to
log purchase agreements for the transactions claimed to be at arm’s length, Commerce limited its request to
those sawmills that participated in the Norcon Survey that was prepared at the GBC’s request. Exhibit
CDA-24, page 5 at 6. With respect to a the Government of Alberta’s ("GOA") concern that it could not provide
all copies of tenure agreements relating to commercia l timber permits ("CTPs"), Commerce limited its request
to tenure agreements associated with coniferous timbe r quotas ("CTQs") and certain CTPs that were identified
by Commerce. Exhibit CDA-24, page 8 at 1. Similarly, Commerce modified its requests for timber return data
from the GOA to those portions containing the text relating to the payment of the stumpage dues. Exhibit
CDA-24, page 9 at 7.

recommendations and rulings concerned only sales between unrelated parties. 18 Commerce next
analyzed the sales between unrelated parties to dete rmine if they were at arm’s length. Canada
challenges this necessary step in its entirety, in the apparent and mistaken belief that all sales between
formally unrelated parties are necessarily at arm’s length. Therefore, according to Canada, by even
analyzing whether such sales are, in fact, at arm’s length, and then eliminating sales that fail the
arm’s-length test from the pass-through analysis, Commerce is somehow illegally "presuming"
pass-through. This is incorrect. Indeed, it is Cana da that is "presuming" no pass through for all sales
between unrelated parties. Further, there is nothing in the SCM Agreement, the GATT 1994, or the
DSB’s recommendations and rulings that suggests that Commerce’ s analysis of whether sales are at
arm’s length should be so severely limited, or indeed, eliminated.

 1. Commerce’s Approach to Determining Whether Sales are at
"Arm’s Length" – Involving Factors Other Than Mere Affiliation – is
Consistent with the DSB’s Recommendations and Rulings, the SCM
Agreement, and the GATT 1994

16. Canada claims that Commerc e "applied a contrived standard"
19 in determining whether its
claimed log sales were at arm’s length. However, the term "arm’s length" is not used or defined in the
text of the SCM Agreement; thus, it is unclear on wh at basis Canada makes its claim that the standard
Commerce applied is "contrived". The Appellate Bo dy concluded in this dispute that both the SCM
Agreement and the GATT 1994 require that, where subsidies are bestowed directly on producers of an
input product, while countervailing duties are to be imposed on processed products, "and where input
producers and downstream processors operate at arm ’s length ," Commerce must establish that the
benefit is passed through to the downstream processor. 20 Therefore, where the two producers do not
operate at "arm’s length", no determination of the amount of the subsidy passing through the
transaction is required because the subsidy bestowed on the input producer benefits the producer of
the processed product. Whether the entities operate "at arm’s length" involves more than just a
question of formal affiliation; it involves an analysis of whether one party effectively "controls" the
other or whether the parties have roughly equal bargaining power. 21 In other words, if one of the
parties controls the other or their dealings are not between entities of equal bargaining power, neither
the SCM Agreement nor the GATT 1994 require that the amount of the subsidy passing through the
transaction be determined; rather, the investigating authority may regard the subsidy bestowed on the
input as benefiting the processed product.22

18 Canada has not challenged Commerce’s affiliati on determinations. First Written Submission of
Canada, para. 74, fn. 66.
19 First Written Submission of Canada, para. 59.
20 Appellate Body Report, para. 146 (emphasis on "arm’s length" in original).
21 See BLACK’S LAW DICTIONARY, Seventh Edition (West Group 1999) at 103 ("Of or relating to
dealings between two parties who are not related or not on close terms and who are presumed to have roughly
equal bargaining power; not involving a confidential relationship. . . ."). Exhibit US-5. See also, THE NEW
SHORTER OXFORD ENGLISH DICTIONARY, Thumb Index Edition (Oxford University Press 1993) at 114
("without undue familiarity; (of dealings) with neither party controlled by the other"). Exhibit CDA-18.
In the specific context of a dispute concerning countervailing duties, see Panel Report, Korea -
Measures Affecting Trade in Commercial Vessels , WT/DS273 (7 March 2005), para. 7.135 . (European
Communities’ challenged certain Korean subsidies as pr ohibited subsidies under Articles. 3.1 and 3.2 of the
SCM Agreement). In determining the appropriateness of a market benchm ark, the panel considered whether
purchasing negotiations were at arm’s length when the buyer was able to dictate the source from which a
shipyard was to procure an advanced payment refund guarantee (APRG). According to the panel, "[i]n such
cases, the designation of the APRG-provider by the buyer means that there is a risk that the APRG is not
negotiated at arm’s length, since the shipyard is a captiv e buyer. The rate paid by the shipyard might therefore
be higher than it would if the shipyard were able to shop around and compare offers from alternative suppliers."
22 See Appellate Body Report, para. 143 ("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; . ..") (underscored emphasis added).

17. Thus, the issue is not merely one of affilia tion. In this regard, the DSB’s recommendations
and rulings themselves recognize a distinction between arm’s length and affiliation presenting
arm’s-length sales as a subset of sales between unrelat ed entities. Specifically, the DSB ruled that
Commerce should have conducted "a p ass-through analysis in respect of arm’s length sales of logs . .
. to unrelated sawmills".
23 This is completely inconsistent w ith Canada’s contention that an arm’s-
length analysis requires nothing more than a determination of affiliation.24

18. Commerce properly examined, in its pass-thr ough analysis, whether the parties to the log
sales were related through common ownership and also whether any of the circumstances surrounding
the log sales affected the nature of the sales to such an extent that th ey could not be considered arm’s
length. Initially, and as discussed above, Commerce ex amined whether any of the log sales at issue
were between affiliated parties. Consistent with the DSB’s recommendations and rulings, when
Commerce found that sales were between affiliated pa rties, it performed no further pass-through
analysis.
25 If the sales were between unaffiliated pa rties, Commerce examined the circumstances
surrounding the transactions as part of its "arm’s length" analysis.

19. Commerce properly examined the circumstan ces surrounding the sales Canada reported as
occurring between unrelated parties. Although Ca nada objects to Commerce’s approach, Canada can
point to no language in the SCM Agreement, the GATT 1994, or the DSB’s recommendations and
rulings that establishes the per se affiliation analysis advanced by Canada. Indeed, the record
evidence demonstrates that many of the sales that Canada claims are arm’s-length sales are affected
by government mandates and other conditions that re nder those sales not at arm’s length or otherwise
ineligible for the pass-through analysis. These will be discussed in the following section.

 2. The Record Demonstrates that Under the Canadian Stumpage
System, Many of the Circumstances of the Sales are Controlled by
Government Mandates and Other Conditions

20. Canada’s simplistic per se approach is divorced from the r eality of the Canadian stumpage
system. With respect to many transactions, record information demonstrates that certain government-
mandated restrictions and other factors controlled, limited, or otherwise affected the log sales,
warranting Commerce’s determination that they we re not conducted at arm’s length or, in some
instances, were not sales at all.

21. Specifically, record evidence demonstrat es that the provincial governments impose
restrictions upon log sales that affect many of th e transactions that Canada reported as arm’s-length
sales. Commerce identified two such categories of government-mandated restrictions: (1) limitations
on log sales that are contained in Crown tenure c ontracts, such as appurtenancy and local processing
requirements, and (2) wood supply agreements.
26 Canada does not suggest that such governmental
mandates do not exist, but instead submits that such mandates do not affect the arm’s-length nature of
the transaction between the parties. 27 According to Canada, the fact that the government dictates the
disposition of Crown timber by dictating to whom a seller must sell has no bearing on the actual terms
of sale – so long as parties are not formally a ffiliated, any transaction between them must be
considered at arm’s length. Despite Canada’s protestations to th e contrary, under both categories of
government-mandated restrictions, log sellers are not free to act in their best interests to choose and
negotiate among potential buyers. Where the provincial governments limit the ability of a seller to
sell freely and instead dictate to whom the seller must sell, Commerce reasonably determined,

23 Appellate Body Report, para. 176(e) (emphasis added, except that emphasis on "logs" is in original.)
24 Appellate Body Report, para. 124. (emphasis added).
25 Section 129 Determination, at 4. Exhibit CDA-5.
26 Section 129 Determination, at 4. Exhibit CDA-5.
27 First Written Submission of Canada, paras. 62-64.

consistent with any reasonable reading of the term "arm’s length," that the affected sales were not at
arm’s length.28

22. Further, based on the record, Commerce dete rmined that there was an additional factor
29 –
other than the above government-mandated restrictions – that affected many of the Canadian log sales
such that they could not be considered to be at arm’s length. The actual structure of certain log
purchase agreements 30 empowered the purchasing sawmill to control so many aspects of the
transaction that Commerce determined that transac tions covered by such purchase agreements could
not be considered to be arm’s length. Specifica lly, with respect to certain log purchase agreements,
the sawmill actively manages all aspects of harvest a nd delivery. With respect to others, the sawmill
finances or provides other goods or services as part of the transaction. 31 To enable Commerce to
distinguish log purchase agreements that do represent arm’s-length log sales from those that do not, it
was necessary for Commerce to review the purchase agreements themselves.

23. Although not exclusively arm’s-length issu es, Commerce identified two additional factors
affecting its pass-through analysis – factors that Canada contends should have had no bearing upon
Commerce’s analysis. Specifically, Commerce determined that in certain transactions the purchasing
sawmills pay the Crown stumpage fees directly to the government for logs obtained from independent
harvesters. Because the vehicle by which the Crown bestows the subsidy is through the administered
stumpage programmes, when the purchasing sawmill pays the Crown directly for the stumpage, the
purchasing sawmill directly receives the bene fit and "pass-through" is not at issue.
32 Additionally,
excluded from Commerce’s analysis were fibre exchanges between Crown tenure holders, which
often involved simple exchanges of, for instance, logs for chips, to meet appurtenancy and other
harvesting requirements. These exchange agreements are a mechanism for tenured sawmills to deal
with various government restrictions concerning th e disposition of the harvested timber and are not
log sales.33

24. The record was replete with evidence that demonstrated that certain government-mandated
restrictions and other factors controlled, limited, or otherwise affected the log sales (in fact rendering
some of them not sales at all), supporting Commerce’s determination to examine more than simple
affiliation in analyzing whether sales were at arm’s length for the purpose of its pass-through analysis.

28 See, e.g., Panel Report, Korea - Measures Affecting Trade in Commercial Vessels , WT/DS273
(7 March 2005), para. 7.135 ("captive buyer" creates risk that the transaction is not at arm’s length.).
29 Commerce identified three additional factors aff ecting its pass-through analysis. However, as
discussed above, two of the three factors are not exclusively arm’s-length issues.
30 Section 129 Determination, at 5. Exhibit CDA-5. The log purchase agreements that were provided
to Commerce are proprietary document s. However, Commerce can state generally that these agreements
contained vastly differing conditions and terms of sale. As evidenced by Commerce’s reduction in the
numerators of Alberta, Ontario and Saskatchewan, there were log purchase agreements that did satisfy
Commerce’s pass-through analysis.
31 Section 129 Determination, at 5. Exhibit CDA-5.
32 Section 129 Determination, at 5. Exhibit CDA-5.
33 Section 129 Determination, at 5-6. Exhibit CDA-5

C. Commerce Appropriately Required That Canada Provide Company-Specific
Information to Determine Whether the Transactions for Which a Pass-Through
Analysis Was Requested Were Eligible for Such Analysis

25. Canada contends that Comme rce improperly disregarded "aggregate" data that it submitted
containing sales information from the provinces that generally identified the purchasers and sellers
and the volume and value of sales that Canada identified using its per se test as arm’s-length
transactions.
34 Canada also complains that Commerce refused to rely upon certain "sample" data. As
discussed above, however, Commerce correctly determ ined that the arm’s-length component of its
pass-through analysis required more than just a determination concerning whether parties were
affiliated. Additionally, Commerce correctly determ ined that other factors affected the pass-through
analysis. Thus, Commerce required specific info rmation on each transaction for which Canada
requested a pass-through analysis, which necessitate d that Canada provide more than just its
aggregate data and, in some cases, more than its self-selected sample data. 35 This follows not only
from the very nature of the enquiry, but al so from the DSB’s recommendations and rulings
themselves.

26. The DSB’s recommendations and rulings required that Commerce determine whether
transactions between independent harvester s and sawmills, as well as between tenured
harvesters/sawmills and sawmills, "passed through" the benefit from subsidies provided to the
independent harvesters or tenured harvesters/sawmills. This is a company-specific issue, i.e., an issue
that is specific to each combination of log buyer and log seller, and the DSB recognized it as such.

27. Specifically, for instance, the Appellate Body referred to "the producer of the input" and "the
producer of the product processed from the input", finding that, "it would not be possible to determine
whether countervailing duties levied on the processed product are in excess of the amount of the total
subsidy accruing to that product, without establis hing whether, and in what amount, subsidies
bestowed upon the producer of the input flowed th rough, downstream, to the producer of the product
processed from that input".
36 While noting that the United States, in accordance with Article 19.3 of
the SCM Agreement, had conducted an aggregate co untervailing duty investigation, both the original
panel and the Appellate Body fou nd that this did not excuse Commerce from examining whether the
individual transaction between the input supplier and the producer passed through the subsidy benefit.
Thus, "before being entitled to impose counterva iling duties on a processed product, for the purpose
of offsetting an input subsidy, a Member must firs t determine, in accordance with Article 1.1, that a
financial contribution exists, and that the benefit conferred directly on the input producer has been
passed through, at least in part, to the producer of the processed product."37

28. Finally, the Appellate Body was unequi vocal that, where the input transaction is not at arm’s
length, there is no need for the investigating authority to analyze whether the subsidy passed through:

34 First Written Submission of Canada, paras. 8, 76.
35 Commerce did not disregard "sample" data provided by Canada. To the contrary, in response to
certain concerns expressed by Canada, Commerce permitted Canada to submit subsets of data responding to its
questionnaires. As noted previously, for example, w ith respect to British Columbia, Commerce limited its
request for log purchase agreements to the 74 sawmills that participated in the Norcon Survey that was prepared
at the GBC’s request. Exhibit CDA-24, page 5 at 6. With respect to the Government of Alberta’s ("GOA")
concern that it could not provide all copies of tenure agreements relating to co mmercial timber permits
("CTPs"), Commerce limited its request to tenure ag reements associated with coniferous timber quotas
("CTQs") and certain CTPs that were identified by Co mmerce. Exhibit CDA-24, page 8 at 1. Similarly,
Commerce modified its requests for timber return data from the GOA to those portions containing the text
relating to the payment of the stumpage dues. Exhibit CDA-24, page 9 at 7.
36 Report of the Appellate Body, para. 141 (emphasis in original ).
37 Report of the Appellate Body, para. 154 (emphasis added).

Where countervailing duties are used to offset subsidies granted to producers of input
products, while the duties are to be imposed on processed products, and where input
producers and downstream producers operate at arm’s length , the investigating
authority must establish that the benefit conf erred by a financial contribution directly
on input producers is passed through, at least in part, to producers of the processed
product subject to the investigation.
38

Commerce implemented these findings by requesti ng the data necessary to establish whether each
independent harvester or tenured harvester/sawmill so ld logs at arm’s length to each sawmill. Such
company-specific information was necessary for Comme rce’s analysis of whether, in any particular
transaction, the subsidy was passed through from th e input producer to the producer of the subject
merchandise. Indeed, the Appellate Body ackno wledges this fact when it reasoned that the
administering authority should determine "whether , and in what amount, subsidies bestowed upon the
producer of the input flowed through, downstream, to the producer of the product processed from that
input".39

29. Canada errs when it states that Commerce "ignor ed entirely the original panel’s view that
company-specific data are not necessarily re quired to conduct [sic] pass-through analysis". 40 T h e
original panel said nothing of the sort. In respon se to US arguments to the effect that there is a
mismatch between an investigation conducted on an aggregate basis and the company-specific nature
of the pass-through issue, the panel simply found th at pass through can indeed be examined during an
aggregate investigation.41 The panel did not suggest that company-specific information should not be
used to analyze whether there was a pass-through of subsidies.

30. Where parties provided the requisite info rmation, Commerce was able to conduct its
pass-through analysis. 42 For instance, although the Government of Ontario did not identify all
transactions in which the stumpage was paid by the purchasing sawmills rather than the harvesting
tenure holders, eight Ontario harvesters and mills di d provide such company-specific information in
response to Commerce’s questionnaires. 43 Using the data provided by those companies, Commerce
was able to conduct its pass-through analysis for those sales found, in light of the factors identified in
the section above, to be at arm’s length. 44 Similarly, with respect to Alberta, eight companies
provided Commerce with company-specific data, including sample purchase contracts, information
identifying those transactions for which the mill paid the stumpage directly to the Crown, and
information concerning purchases from private lands. 45 Just as it did for Ontario, using the
company-specific data provided by the Alberta companies, Commerce wa s able to conduct its
pass-through analysis for those sales found to be at arm’s length. Commerce was able to conduct its
analysis as well with respect to certain company-sp ecific data that it received in response to the
pass-through appendices provided to Saskatchewan.46

38 Report of the Appellate Body, para. 147 (emphasis in original).
39 Report of the Appellate Body, para. 141 (emphasis added).
40 First Written Submission of Canada, para. 58 (citing Panel Report, at para. 7.98).
42 By way of example, at the request of Commerce, Ontario identified the quantity of sales that were
sold to the purchasing mill subject to wood supply agreements. Exhibit CDA-23, at question 2; Ontario
15 September Pass-Through Response, at On-PASS-4, question 2 referring to ON-PASS-6, ON-PASS-7.
Exhibit US-3. Because Commerce determined that volume of sales not to be at arm’s length, no further analysis
was conducted with respect to those sales.
43 6 December 2004, "Pass-Through" Analysis Calculations for the Province of Ontario, at 2-4. Exhibit
US-6.
44 Section 129 Determination, at Comment 8. Exhibit CDA-5.
45 6 December 2004, "Pass-Through" Analysis Calculations for the Province of Alberta, at 2-5. Exhibit
US-7.
46 6 December 2004, "Pass-Through" Analysis Calculatio ns for the Province of Saskatchewan, at 2.
Exhibit US-8.

31. In many instances, however, Canada failed to provide the requisite information despite
repeated requests that it do so. For example, although Commerce limited its request for tenure
agreements containing domestic processing or ot her mandated requirements to those companies that
participated in the Norcon Survey, British Colu mbia failed to provide the copies that Commerce
requested.
47 British Columbia did, however, provide samples of such tenure agreements, but the
domestic processing requirements included in the sa mples that British Columbia submitted varied
widely.48 Although British Columbia argued that the domestic processing requirements contained in
the tenure agreements were outdated, standardized, or otherwise inapplicable during the POI, it failed
to provide any record evidence demonstrating that the requirements were not in force during the
POI.49 As a consequence, Commerce was not able to rely upon the sample agreements provided by
British Columbia to support its pass-through claim. Additionally, British Columbia failed to identify
that portion of the sales subject to its pass-thr ough claim in which the sawmills pay the Crown
stumpage fee directly to the government rather than paying the independent harvester from whom
they obtained the logs. 50 Finally, although British Columbia did provide certain log purchase
agreements it failed to provide the underlying tenure agreements. 51 There were similar deficiencies
with respect to Manitoba 52, and to lesser degrees with respect to Alberta, Ontario and
Saskatchewan.53 Where Canada failed to provide the information requested, Canada prevented
Commerce from completing its pass-through analysis.54

47 Exhibit CDA-24, at 3.
48 Exhibit CDA-6, at 10.
49 See Exhibit CDA-24, at 5, question 5; Response of the Government of British Columbia to the
Department’s 5 October 2004 Supplemental Questionnai re Concerning Pass Through of Alleged Benefits
(25 October 2004), at BC-PT-3, -4, -15. ("British Columb ia October 25 Pass-Through Response"). Exhibit US-
9.
50 British Columbia September 15 Questionnaire Response, at 10 (Exhibit US-4); British Columbia
25 October Pass-Through Response, at BC-PT-17 -19 (Exhibit US-9) . See also , Draft Section 129
Determination, at 10-11(Commerce summarizes the data that British Columbia failed to provide). Exhibit
CDA-6.
51 Draft Section 129 Determination, at 11. Exhibit CDA-6.
52 Manitoba failed to substantiate its claim that 8.70 per cent of the Crown log harvest did not result in
a pass-through of subsidies because its data deficien cies precluded Commerce from conducting its pass-through
analysis. Draft Section 129 Determination, at 11-12. Exhibit CDA-6. Although one company did respond to
Commerce’s pass-through appendix, the sa les data provided by that company were for sales arising after the
POI so Commerce determined that it wa s not appropriate to include those sa les in its analysis. Draft Section
129 Determination, at 12. Exhibit CDA-6. Canada now argues – but has offered no evidence support its
assertion – that those sales were not outside the POI. First Written Submission of Canada, para. 85, fn. 96.
53 As evidenced by the Section 129 Determination, a lthough there were some data issues with respect
to Alberta, Saskatchewan, and Ontario that preclud ed Commerce from conducting its pass-through analysis
with respect to the entire volumes for which these prov inces claimed no pass throug h, Commerce was able to
use data that had been provided and determined that a certain benefit did not pass through.
54 Contrary to Canada’s argument, Commerce was in fact precluded from conducting its pass-through
analysis with respect to the log sales contained in the Norcon Survey – a survey that Canada contends
demonstrates that 11.6 per cent of Crown logs cons umed in British Columbia mills were purchased from
independent harvesters that held tenure. First Written Submission of Canada, para. 79. Although Canada
submits that it provided transaction-specific data, it continually failed to provide necessary information
concerning government-mandated restrictions and other conditions that Commerce required to complete its
analysis. The Norcon Survey and the data that Canada refers to in Annex I of its first written submission
obscure the fact that the data could be relie d upon for little more than information about affiliation between
parties to the log transactions. Indeed, as explained in the Norcon Survey itself, "[f]or purposes of this survey,
arm’s length log purchases were defined as logs purchased by a lumber manufacturer from a person with which
it is not affiliated applying the definition of ‘affiliated pers ons’ contained in" US law. Exhibit CDA- 31, at 2.
As the United States demonstrates above, however, affiliation is only one component of the pass-through
analysis. The remaining 6.2 per cent referenced by Canada apparently repres ent transactions between
tenure-holding sawmills. First Written Submission of Canada , para. 79. As discussed below, such transactions
were not part of the DSB’s recommendations and rulings.

32. The truth is that, although Canada prevailed before both the original panel and the Appellate
Body in arguing that Commerce was required to conduct this pass-through analysis, Canada
apparently was unprepared to support many of its claims of no pass through with necessary evidence.
Instead, Canada seeks to undermine Commerce’s ability to conduct a full examination of the
pass-through issue. Commerce – reasonably and in accordance with the DSB’s recommendations and
rulings – found that the subsidy benefit passed th rough where the evidence indicated that the input
transaction was not at arm’s-length or where th e transaction otherwise was ineligible for a
pass-through analysis because it was not a sale or because the purchasing sawm ill paid the stumpage
to the Crown. Where Commerce found the input tr ansaction to be a sale at arm’s length, Commerce
completed the pass-through analysis required by the recommendations and rulings.

33. As demonstrated by the Section 129 Determ ination, when Canada properly supported its
claims, Commerce was able to, and did, conduc t its analysis. Commerce did not improperly
"presume" pass-through – to the contrary, as set forth above, Commerce conducted a pass-through
analysis in compliance with the SCM Agreem ent, the GATT 1994, and the recommendations and
rulings of the DSB.

 D. Commerce Used Appropriate Benchmar ks in its Pass-Through Analysis

34. Canada criticizes Commerce benchmarks but fails to allege any inconsistency with a
provision of the SCM Agreement, the GATT 1994 , or the DSB’s recommendations and rulings.
Thus, the Panel should reject Canada’s argument on this basis alone.

35. In any event, Commerce selected appropriate benchmarks. Where Commerce – upon
examining record evidence – determined that the input transaction was at arm’s length, it proceeded to
determine whether there was a competitive benefit: i.e., whether the benefit "passed through". As
previously explained, a subsidy provided to the producer of an input product confers a competitive
benefit on a downstream purchaser of the input when th e price paid for the subsidized input is lower
than the a market determined benchmark price for the same product. In selecting a market determined
benchmark, Commerce used, where possible, the ac tual company-specific prices that the purchasing
mill paid for logs harvested from pr ivate lands and for imported logs.
55 Where those data were not
available, Commerce relied on publicly available prices for logs harvested from private lands and logs
imported into the province.56

36. Commerce’s competitive benefit analysis dem onstrated that many of the arm’s-length log
sales during the POI in Alberta, Ontario, and Saskatchewan, were made at prices below the
benchmark prices, and therefore conferred a comp etitive benefit to the purchasing sawmills. As a
result of Commerce’s competitive be nefit calculations, therefore, only some portion of the Crown
harvest volume originally included in the numerator is excluded from the numerator of the revised
subsidy calculations.

37. Canada now contends that Commerce relied on benchmarks that do not reflect "a comparison
to the marketplace" 57 because they were unrepresentative of both the species harvested and of the
prices paid in each province for logs used in lumber production. Canada is incorrect. The benchmark
prices Commerce used were observable market-determine d prices for logs that were sold in Canada.
These prices corresponded to the same species of logs sold in each province for which a competitive
benefit analysis was conducted and were otherwise representative of market prices.

55 See, e.g., Exhibit CDA-23, at 3, 6, 8, 10, 12 and pass-through appendix; Exhibit CDA-24, at 3, 6, 8,
11, 13 and supplemental pass-through appendix.
56 Final Section 129 Determination, at 6. Exhibit CDA-5.
57 First Written Submission of Canada, para. 67.

38. For Alberta, Commerce used company-specific prices the mills paid for logs harvested from
private lands in the province and logs they imported into the province. Where those company-specific
prices were not available, Commerce used the wei ghted-average price published in the annual 2000
Timber Damage Assessment (TDA) survey conducted by KPMG.
58 For Ontario, Commerce used a
weighted-average price of trans actions for timber harvested from private lands, as reported in the
KPMG the "Delivered wood costs" schedule of the KPMG Report on Ontario Softwood Timber Costs
and Sources, 1 April 2000 to 31 March 2001, dated 22 June 2001.59 For Saskatchewan, which did not
provide any company-specific or published provincia l log prices, Commerce used a weighted-average
price of the domestic and import prices for spru ce-pine-fir (SPF), as reported by Alberta, Manitoba,
Ontario, and Quebec.60

39. In sum, Commerce used as benchmarks obser vable market-determined prices for logs that
were sold in Canada from unsubsidized sources to determine whether and to what extent a subsidy
passed through in arm’s length sales of logs between unrelated parties. For the reasons described
above, the benchmark prices Commerce used to c onduct its competitive benefit analysis properly
reflected market conditions in Canada during the POI.

 E. Commerce Did Not "Presume" Pass-Through

40. As demonstrated above, Commerce thoroughly i nvestigated Canada’s claims that no subsidy
passed through as a consequence of certain transac tions. As a result of its analysis, Commerce
removed from the numerator of its ad valorem subsidy calculation any subsi dy benefits it determined
did not pass through in arm’s length log sales be tween independent harvesters and sawmills and
between unrelated tenured timber harvesters/sawmills and sawmills. Commerce thus ensured that its
Section 129 Determination provided for a counterva iling duty only with respect to the benefit from
countervailable subsidies demonstrated to exist. Canada’s attempt to characterize Commerce’s
analysis as a "presumption" of pass through is not supported by the record.

41. Indeed, as noted earlier, it is Canada that is "presuming". Under Canada’s theory, when it
comes to pass-through, responding parties can control the analysis. If the country under investigation
chooses to provide proper evidence supporting its pass-through claim, authorities are able to conduct
their analysis and, depending upo n the determination, reduce the ad valorem rate. However, if the
country chooses not to provide necessary informa tion, according to Canada, the authorities are
precluded from conducting their analysis and must presume no pass-through – i.e., presume that no
subsidy is bestowed on the subject merchandise. Consequently, under Canada’s theory, once a
country under investigation raises a pass-through issue, it would be in a position simply to refuse to
provide any evidence supporting its claim, because the authorities would be prohibited from including
any of the claimed volume in their calculations.

42. From Canada’s perspective, there is a cert ain simplicity in its argument – Commerce should
simply accept Canada’s unsubstantiated assertions. For instance, because Britis h Columbia informed
Commerce that 11.6%
61 of the log sales were between unrelated parties, according to Canada,
Commerce must automatically find that the benefit for that associated volume of log sales did not pass
through and must be removed from the numerator. However, nothing in the DSB ’s recommendations
and rulings, the SCM Agreement, or the GATT 1994 re quires that the investigating authority simply
accept assertions of the country under investigation. To the contrary, the DSB recommended that

58 See, e.g., 6 December 2004, "Pass-Through" Analysis Calculations for the Province of Alberta, at 2.
Exhibit US-7.
59 6 December 2004, "Pass-Through" Analysis Calculations for the Province of Ontario, at 1-4. Exhibit
US-6.
60 6 December 2004, "Pass-Through" Analysis Calcula tions for the Province of Saskatchewan, at 2.
Exhibit US-8.
61 First Written Submission of Canada, para. 79.

Commerce conduct a pass-through analysis. Commerce did so and based its determination upon what
the record evidence demonstrated the facts to be and not upon what Canada presumed the result
should be for sales between all unrelated parties.

 F. Commerce Properly Investigated Categor ies of Sales Identified by the DSB

43. According to the DSB’s recommendations and rulings, Commerce should investigate
transactions between independent harvesters and sawmills
62, as well as between tenured
harvesters/sawmills and unrelated sawmills. 63 Although Canada claims that Commerce "inexplicably
excluded information of transactions in which the purchasing sawmill had tenure" 64 there is nothing
inexplicable about it, as these transactions were not part of the DSB’s recommendations and rulings.
In this respect, there was a specific definition of both "tenured timber harvester/sawmill" and
"sawmill". "Tenured timber harvester/sawmill" w as defined as "an enterprise holding a stumpage
contract that fells trees and produces logs, an d also processes logs into softwood lumber." 65
"Sawmill" was defined as "an enterprise that processes logs into softwood lumber and does not hold a
stumpage contract"..66

44. Given these precise definitions that bear dir ectly upon the DSB reco mmendations and rulings
with respect to pass-through, Commerce properly li mited this aspect of its pass-through analysis to
arm’s-length log sales by an enterprise holding a stumpage contract that fells trees and produces logs,
and also processes logs into softwood lumber, to an enterprise that processes logs into softwood
lumber and does not hold a stumpage contract, i.e., tenured timber harvester/sawmills to unrelated,
non-tenured sawmills. As the DSB recommendati ons and rulings recognized, tenure-holding
sawmills are direct subsidy recipients. It is entir ely appropriate therefore to include the volume of
logs processed by those sawmills in the total subsidy calculation.

 G. Commerce Properly Calculated the Revised Rate

45. Contrary to Canada’s arguments that Commerce somehow applied its results to an
"invalidated" countervailing duty rate 67, Commerce properly calculated th e revised rate by removing
from the numerator of the ad valorem subsidy rate calculation the volume of log sales determined not
to have passed through 6868 The numerator of the ad valorem subsidy rate was reduced by
C$28,344,121. The revision reduced the only rate th at was before the original panel and Appellate
Body, i.e., the 18.79 per cent ad valorem rate calculated in the Final De termination, to 18.62 per cent
ad valorem.69 With the exception of this limited pass-th rough analysis, there are no outstanding DSB
recommendations or rulings that would have required further modification of the ad valorem rate
calculation.

III. The Results of the First Assessment Revi ew are Not Within the Panel’ s Jurisdiction

62 The United States did not appeal the Panel’s findings with respect to arm’s-length log sales between
tenured timber harvesters not owning sawmills and sawmills. Appellate Body Report, fn. 157.
63 Appellate Body Report, para. 167(e); see CDA-3, at questions 1 and 2.
64 First Written Submission of Canada, para. 55.
65 Appellate Body Report, fn. 150.
66 Appellate Body Report, fn. 151 (emphasis added).
67 First Written Submission of Canada, para. 10.
68 See 6 December 2004, Country-wide Rate Calcula tions Net of Subsidy Benefits That Did Not
Pass-Through - Revised as a Result of Comments Submitted by Parties to the Proceeding, at 2-8. Exhibit
US-10.
69 See Notice of Implementation Under Section 129 of the Uruguay Round Agreements Act;
Countervailing Measures Concerning Certain Softwood Lumber Products From Canada , 69 FR 75305
(16 December 2004). Exhibit CDA-7.

46. The United States reiterates its request, set out in its submission of 10 March 2005, that the
Panel preliminarily rule that the results of the first assessment review are not "measures taken to
comply" and therefore are outside Panel’s jurisdic tion in this proceeding. In particular, the
United States noted in its preliminary ruling requ est that original investigations and assessment
reviews are different processes with different administrative records that serve distinct purposes.
70 In
this case, the assessment review was initiated at th e behest of Canada, among others, eight months
before the recommendations and rulings in this dispute were adopted.

47. This is not a situation like that presented in Australia – Automotive Leather, in which a WTO-
inconsistent subsidy was both w ithdrawn and "regranted" in another form on the same day, in
"inextricably linked elements of a single transaction".
71 Rather, the assessment review is a completely
separate proceeding, based on a different record , designed to assess countervailing duties – a
proceeding, moreover, that can be requested by Ca nada at regular intervals well into the future.
Finally, it cannot be seriously asserted that, wher e there have been DSB recommendations and rulings
with respect to the imposition of supplemental duties on a product, any subsequent proceedings
related to those duties are "measures taken to comply". A previous panel has already found this not to
be the case, in EC – Bed Linens (Panel). 72 In sum, the United States reite rates that the results of the
first assessment review are neither "measures take n to comply" with recommendations and rulings,
nor do they render actual measures taken to comply "non-existent".

IV. The Panel Should Not Make the Specific Recommendations Sought by Canada

48. In its first submission, Canada has ask ed the Panel to make certain findings and
recommendations in the event that it agrees with Canada. Specifically, Canada asks that the DSB find
that the imposition of duties by the United States is inconsistent with the SCM Agreement and the
GATT 1994 and recommend either that the United Stat es refund the duties collected to offset the
amounts determined to pass through or revise its measure to be consistent with the relevant
agreements and refund the duties to the extent they exceed the amount of the subsidy determined to
have passed-through.
73

49. The Panel should decline to make such reco mmendations. The text of DSU Article 19.1 is
unequivocal regarding the recommendation that a panel is to make in such a case: "Where a panel or
the Appellate Body concludes that a measure is inconsistent with a covered agreement, it shall
recommend that the Member concerned bring the measure into conformity with that agreement."
(Emphasis added). In short, the recommendations th at Canada seeks here are not authorized by the
DSU.

70 See 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 , WT/DS141/AB/RW,
adopted 24 April 2003, para 123. "(the imposition and collection of anti-dumping duties under Article 9 is a
separate and distinct phase of an anti-dumping action that necessarily occurs after the determination of dumping,
injury, and causation under Articles 2 and 3 has been made.") Footnotes omitted. Although there is no specific
corollary to Article 9 of the Anti-Dumping Agreement in the SCM Agreement, the SCM Agreement recognizes
that Members may conduct assessment proceedings to de termine the final amount of countervailing duty to be
assessed. See Footnote 52 of the SCM Agreement.
71 Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather –
Recourse to Article 21.5 of the DSU by the United States , WT/DS126/RW and Corr.1, adopted
11 February 2000, para. 6.50.
72 See 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 , WT/DS141/RW, adopted 24 April 2003, as
modified by the Appellate Body Report, WT/DS141/AB/RW, para. 6.15.
73 First Written Submission of Canada, para. 72.

V. Conclusion

50. For the reasons stated above, Canada’s claims against the measure taken to comply with the
DSB’s recommendations and rulings have no basis in the SCM Agreement, the GATT 1994, or the
recommendations and rulings of the DSB. Thus, the United States requests that the Panel find that the
United States properly implemented the recommendati ons and rulings of the DSB and that the Panel
reject Canada’s claims in their entirety.

Exhibit List

Number Name

US-3 Response of the Government of On tario to the Department’s 17 August 2004
Supplemental Pass-Through Questionnaire (15 September 2004) (relevant pages).

US-4 Response of the Government of British Columbia to the Department’s
17 August 2004 Supplemental Questionnaire Concerning Pass Through of the
Alleged Benefits (September 15, 2004) (relevant pages).

US-5 BLACK’S LAW DICTIONARY, Se venth Edition (West Group 1999) at 103
(definition "arm’ s length").

US-6 6 December 2004, "Pass-Through" Analysis Calculations for the Province of Ontario

US-7 6 December 2004, "Pass-Through" Analysis Calculations for the Province of Alberta

US-8 6 December 2004, "Pass-Through" Anal ysis Calculations for the Province of
Saskatchewan

US-9 Response of the Government of British Columbia to the Department’s
5 October 2004 Supplemental Questionnaire Concerning Pass Through of Alleged
Benefits (October 25, 2004)(relevant pages).

US-10 6 December 2004, Country-wide Rate Calc ulations Net of Subsidy Benefits That Did
Not Pass-Through - Revised as a Result of Comments Submitted by Parties to the
Proceeding

ANNEX B-3

ORAL STATEMENT OF THE UNITED STATES

21 April 2005

Introduction

1. Good morning, Mr. Chairman and members of th e Panel. Thank you for agreeing to serve as
panelists in this proceeding and for the opportunity to appear before you today.

2. We recognize that our statement is lengthy, which flows from the fact that this is our first
opportunity to respond to Canada’s second submission. We were disappointed that Canada opposed
our request for sequential second submissions in this proceeding, which would have helped to avoid
this situation. We thank you in advance for your time and attention as we deliver our statement.

3. We will begin this morning by addressing Canada’s response to our preliminary ruling
request. Then we will explain how the United St ates properly implemented the recommendations and
rulings of the DSB by conducting the appropriate pass-through analysis.

Preliminary Ruling Request

4. As you know, the United States has requested a preliminary ruling that the results of the
assessment review are not “measures taken to co mply” pursuant to DSU Article 21.5, and are
therefore outside this Panel’s jurisdiction. As our request notes, the assessment review was a
proceeding separate from both the original counterva iling duty investigation determination challenged
by Canada and the Section 129 Determination at issu e here, was initiated prio r to the DSB’s adoption
of recommendations and rulings in this dispute, and had nothing to do with complying with the
recommendations and rulings of the DSB.

5. In an attempt to justify sweeping the separat e assessment review results into its Article 21.5
panel request, Canada has resorted to relying on the supposed “broad” scope of Article 21.5 and
“wide discretion” of the Panel to review measures under Article 21.5.
1 Canada also argues that a
failure to include the assessment review results in this compliance proceeding would be contrary to
the overall “purpose” of Article 21.5 proceedings.2

6. But the issue is simpler than Canada w ould have us believe. Either a measure is
 taken to
comply – and falls within the terms of Article 21.5 – or it is not, and is thus not within this Panel’s
jurisdiction. As the Appellate Body stated in Canada – Aircraft – and none of the reports cited by
Canada are to the contrary – Article 21.5 proceedings “do not concern just any measure of a Member
of the WTO; rather Article 21.5 pro ceedings are limited to those ‘measures taken to comply with the
recommendations and rulings’ of the DSB.”3

7. Let us review the facts. Canada’s orig inal request for consultations concerned the final
countervailing duty investigation determination published on 2 April 2002, and its panel request
alleged errors in that fina l investigation determination.
4 The original panel’s findings with respect to

1 E.g., Canada Second Written Submission, paras. 7 - 8.
2 Canada Second Written Submission, paras. 6, 26 - 30.
3 Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft ,
WT/DS70/AB/R, adopted 20 August 1999, para. 36.
4 WT/DS257/3, 19 August 2002.

pass-through related solely to that final investigati on determination. The Appellate Body stated that
“[b]efore the Panel, Canada challenged a number of aspects of the final determination by [the
Commerce Department] that led to the imposition of duties”
5 and the Appellate Body’s findings and
conclusions – including those with respect to the need for a “pass-through” analysis – thus related
only to that final investigation determination.

8. Therefore, to implement the DSB’s recommendations and rulings, Commerce issued a new
determination – the Section 129 Determination – that revised the original final investigation
determination by conducting the recommended pa ss-through analysis. By correcting the only
“inconsistency” identified by the DSB with respect to the final investigation determination, the
United States fully implemented the recommendations and rulings of the DSB to bring the measure
into compliance with the SCM Agreement.

9. Long before there were any DSB recommendations and rulings to implement, and pursuant to
long-standing, standard procedures, Commerce initiate d the first assessment review, at the request of
Canada, among others. The purpose of the asse ssment review was to determine the precise
countervailing duties that would be levied on pa rticular entries of merchandise entering the
United States after the United States had alread y imposed the countervailing duty measure (in US
parlance, after the publication of the countervailing duty order). This assessme nt review would have
been conducted regardless of the existence of a ny dispute challenging the original investigation
determination and it was nearly half over when th e recommendations and rulings in this dispute were
adopted.

10. Thus, Canada’s repeated assertions that Co mmerce itself “purported” or “alleged” that it
conducted the assessment review to implemen t the DSB’s recommendati ons and rulings are
inaccurate and have no basis.

11. Canada cannot deny that – in contrast to the assessment review – Commerce initiated the
Section 129 proceeding for the specific purpo se of addressing the DSB’s recommendations and
rulings. Indeed, the agreement of the parties on the “reasonable period of time” to implement the
recommendations and rulings in this dispute was nego tiated in the light of, and specifically refers to,
the US procedures for implementing WTO reports
6 – that is, the Section 129 procedures.

12. Faced with the undeniable fact that the assessment review results were not taken to comply
with the DSB’s recommendations and rulings, Ca nada instead argues that the Panel should
nonetheless consider them in this proceeding, because the assessment re view results either
(a) somehow rendered the Section 129 Determination “non-existent” or (b) were “inextricably linked”
to the recommendations and rulings of the DSB.

13. Neither of these assertions is true.

The assessment review results did not render the Section 129 Determination “non-existent”

14. First, in no way did the assessment results re nder the Section 129 Determination non-existent.
The final investigation determination challenged by Canada – a determination of the existence and the
amount of the subsidy – established one of th e prerequisites under Article 19.1 of the SCM
Agreement for the imposition of a countervailing duty. That investigation determination did not
establish the amount of duties that would be levied, or assessed, on the imports; that task is
undertaken as part of the separate assessment review . The final investigation determination simply

5 Appellate Body Report, United States – Final Countervailing Duty Determination with Respect to
Certain Softwood Lumber from Canada , WT/DS257/AB/R, adopted 12 February 2004, para. 1 (“Appellate
Body Report”).
6 WT/DS257/13.

established one of the bases for imposing counterva iling duties. The Panel should recall in this
connection that the remedy Canada sought in the di spute before the original panel was the revocation
of the countervailing duty order, which was based in part on the final investigation determination.

15. The Section 129 Determination, in implem enting the recommendations and rulings of the
DSB with respect to the final investigation determ ination, confirmed that the resulting imposition of
countervailing duties on 22 May 2002, was consistent with the SC M Agreement. The assessment
review could not, and did not, render that Section 12 9 Determination non-existent. Indeed, the very
fact that Canada is, itself, challenging the Secti on 129 Determination shows th at Canada believes that
it is of ongoing effect and relevant to the issue of compliance.

16. Further, the Section 129 Determination was fully implemented, and revised the original final
investigation determination in every respect nece ssary to implement the recommendations and rulings
of the DSB. For instance, the Section 129 Determin ation revised the cash deposit rate established by
the final investigation determination – a cash deposit rate that, under US law, stays in effect unless
and until a party requests an assessment review. If no assessment review is requested, countervailing
duties are assessed at the cash deposit rate.

17. Canada’s allegation that the Section 129 De termination was “rendered non-existent” appears
to be an allusion to the argument that the United States made in the dispute Australia – Leather, where
withdrawal of the subsidy
 was non-existent. The situation there, however, is not at all analogous to
the facts of this dispute.

18. First, in Australia – Leather , the United States was arguing that the panel should review
whether a prohibited subsidy had actually been withdr awn, as specifically required by Article 4.7 of
the SCM Agreement, when the repayment of a grant had been contingent on the simultaneous grant of
a loan on non-commercial terms. In contrast, th is proceeding involves the question of whether a
measure has been brought into conformity with a WTO agreement.

19. Second, the Australia – Leather panel concluded that the subs idy had not been withdrawn at
all, because the supposed repayment and the non-comme rcial loan were, in effect, a single transaction
in which the subsidy simply shifted form. By contra st, in this dispute, the Section 129 Determination
and the assessment review results are separate and independent actions. The simple fact is, the
Section 129 Determination was made to bring the m easure in dispute into conformity with the SCM
Agreement as recommended by the DSB, wher eas the assessment review was conducted for a
completely unrelated reason. As such, the assessmen t review in no way affects that result of the
Section 129 Determination, and Canada has not shown otherwise.

The Results of the Assessment Review are not “I nextricably Linked”, either to the Section 129
Determination, or to the Recommendations and Rulings of the DSB.

20. In the alternative, Canada uses three WTO reports to argue that the assessment results are
“inextricably linked” to the recommendations and rulings of the DSB, and therefore should be
considered “measures taken to comply”. These re ports, however, only demonstrate further how the
assessment review is not within the scope of this Article 21.5 proceeding.

21. We’ve just discussed one of those disputes, Australia – Leather, in which the panel reviewed
both the measure that Australia claimed was taken to comply – the repayment of a subsidy grant – and
another measure that Australia claimed was not
 taken to comply – the new non-commercial loan. The
panel in that dispute concluded that the subs idy had not been withdrawn, because the supposed

repayment and the non-commercial loan were, as Canada quotes the panel, “inextricably linked
elements of a single transaction.”
7

22. But, as we mentioned, that situati on is very different from this one. In Australia – Leather ,
the repayment of the grant by the grant recipient was specifically and directly conditioned on the grant
recipient receiving the non-commercial loan – there w ould have been no repayment at all if there had
been no loan. It was on that basi s that the panel found that the loan was “inextricably linked to the
steps taken by Australia in response to the DSB’s ruli ngs in [that] dispute, in view of both its timing
and nature.”
8

23. In this dispute, by contrast, there is no such connection between the Section 129
Determination and the assessment review results: they were not in any sense contingent on one
another, nor were they in any sense part of a si ngle transaction. The assessment review would have
taken place regardless of whether there was a Section 129 proceeding under way, and, indeed,
regardless of whether there even was a WTO dispute.

24. Canada similarly cites to the dispute Australia – Salmon , in which, in response to DSB
recommendations and rulings, Australia modified its ban on salmon imports to permit imports that
satisfied certain criteria. In what was obviously a response to the modification of the ban, Tasmania,
one of Australia’s sub-federal un its, imposed its own ban. The Tasmanian ban did not arise from a
proceeding initiated as a matter of domestic law requi rements, irrespective of any WTO challenge.
Rather, it was an ad hoc action taken after the DSB had made recommendations and rulings against an
Australian import ban and after Aust ralia had taken action to modify the ban. All of the evidence –
both in terms of timing and subject matter – pointe d to these bans being truly “inextricably linked”.
Therefore, that panel properly found that the Tasmanian ban was a measure taken to comply.

25. By contrast, in this case, th e assessment review was initiated

 - upon request of the parties (including Canada), eight months before the DSB’s
recommendations and rulings were even adopted,

 - pursuant to a US statutory provision that requires initiation upon request on a specific
schedule and under specific deadlines, and

 - for the purpose of assessing countervailing du ties on entries not previously examined – not
for the purpose of implementing any recommendations or rulings.

Unlike the obvious “close connection” in Australia – Salmon , there is nothing that links the
assessment review to the recommendations and rulings of the DSB in this dispute.

26. Finally, Canada tries to distinguish the findings in EC – Bed Linens from this dispute,
claiming that the panel excluded the results of a review from that Article 21.5 proceeding because that
review did not deal with the same “subject matter” as the original determination. Canada also cites
EC – Bed Linens as establishing that it is appropriate for this Panel to review Commerce’s actions
with regard to a subsequent time period characteriz ed by new data, including completely different
import entries.

27. To the contrary, however, the EC – Bed Linens dispute demonstrates that a new determination
that was made in a subsequent segment of an an tidumping or countervailing duty proceeding – and

7 Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather –
Recourse to Article 21.5 of the DSU by the United States , WT/DS126/RW, adopted 11 February 2000,
para. 6.50 (“Australia – Leather”).
8 Australia – Leather, para. 6.5.

not made to implement recommendations and rulings of the DSB – falls outside the jurisdiction of
Article 21.5 panels. For instance, the fact that measures taken to comply might involve new facts
does not justify expanding Article 21.5 proceedings to encompass measures not taken to comply.
Indeed, this Appellate Body discussion cited by Ca nada has nothing to do with the question of what
constitutes “measures taken to comply”, but rath er the question of whether those measures are
“consisten[t] with a covered agreement”.

28. In sum, the assessment review that Canada has attempted to sweep into this Article 21.5
proceeding has nothing in common with those measur es considered to be “inextricably linked” or
“closely connected” in other disputes. To the contrary, the assessment review results have no relation
at all to either the Section 129 Determination or the recommendations and rulings. They are simply
not measures taken to comply and are therefore outside this Panel’s jurisdiction.

Contrary to Canada’s arguments, respecting the ju risdictional mandate of Article 21.5 does not
“ignore the purpose of compliance proceedings”.

29. Canada has failed to show that the assessment re view is a measure taken to comply in that it
is “inextricably linked” to the recommendations and rulings of the DSB. Nor has Canada shown that
measures taken to comply do not exist because the assessment review rendered the Section 129
Determination non-existent.

30. Canada therefore resorts to the argument that limiting the Panel’s review only to the measures
taken to comply – that is, not sweeping the separat e assessment review into the Article 21.5 basket –
somehow ignores the “purpose of compliance proceedi ngs”. The United States disagrees, for reasons
which we will discuss shortly. But regardless, a baseless reference to the general “purpose of
compliance proceedings” cannot direct a result that is not supported by a good faith reading of the
text, in its context and in light of the object and purpose of the DSU.

31. Further, the United States does not underst and how properly applying DSU Article 21.5 can
result in “ignor[ing] the purpose of compliance proceed ings”. Contrary to Canada’s arguments, with
respect to the only claim found to be WTO-inconsis tent – the pass-through analysis conducted in the
final investigation determinati on – a review under Article 21.5 of the Section 129 Determination
permits the prompt settlement of disputes: Canada complained about an inconsistency in the final
investigation determination, and this Panel will review whether that inconsistency has been corrected.

32. What Canada appears to be seeking is to avoid the need to bring a separate WTO dispute
against the United States on the separate assessmen t proceeding. Canada instead hopes to “kill two
birds with one stone” – albeit improperly – by sweeping a review of the separate assessment
proceeding into this Article 21.5 proceeding. Ca nada complains that having to initiate a separate
dispute settlement proceeding with respect to an assessment review somehow ignores the purpose of
compliance proceedings. However, in negotiating the DSU, Members agreed that the expedited
procedures of Article 21.5 would only be available for two very specific questions: (1) the existence
or (2) the consistency of measures taken to comply
. Members did not agree that the special
procedures under Article 21.5 would be available for any claim for which the complaining party felt it
would be more convenient to use Article 21.5.

33. If Canada believes that an assessment review is conducted inconsistently with the SCM
Agreement, it is within its WTO rights to request co nsultations with respect to that assessment review
and, if appropriate, request a panel. Indeed, asse ssment reviews can present different legal issues and
entail different obligations from final investiga tion determinations – in addition to involving
completely different administrative records – that make a separate set of consultations entirely
appropriate.

34. Moreover, Canada appears to suggest that the US system of retrospective duty assessments
somehow compels the Panel, in the special case of the United States, to sweep the assessment review
into this Article 21. 5 proceeding.
9 But there is nothing in Article 21.5 or in the SCM Agreement that
requires a different interpretation of “measures taken to comply” for those Members that employ a
retrospective duty assessment system, rather than a prospective one.

35. Canada suggested this morning, in paragraph 33 of its oral statement, that the United States
had somehow conceded that the assessment review was inconsistent with US WTO obligations.
Canada bases this suggestion on the absence of an explanation in the US submissions or oral
statement of the pass-through analysis in the fi rst assessment review. This is untrue. The
United States has not discussed the assessment revi ew because it falls outside of this Panel’s
jurisdiction. The United States does not in any sen se concede that the pass-through analysis in the
assessment review is inconsistent with WTO obligations.

Conclusion

36. In sum, Mr. Chairman and members of the Pane l, the results of the first assessment review are
not “measures taken to comply” and therefore fall ou tside the Panel’s jurisdiction in this Article 21.5
dispute. Therefore, we reaffirm our request that the Panel so rule.

Pass-Through Analysis

Canada Bears the Burden of Proof

37. It is important to recall th at Canada bears the burden of establishing a prima facie case of a
WTO inconsistency. In its panel request, Canada specifically refers to three separate provisions:
Articles 10 and 32.1 of the SCM Agreement and Article VI:3 of the GATT 1994.
10 Although Canada
concludes that the United States has acted incons istently with these provisions, it has failed to
demonstrate any such inconsistency or to describe wh y any of the specific actions that form the bases
of its arguments are inconsistent with these provisi ons. For instance, Canada challenges Commerce’s
arm’s-length analysis yet fails to identify how that analysis is inconsistent with any of the cited
provisions. Similarly, Canada challenges the pass-through benchmarks Commerce relied upon yet
once again fails to identify any way in which th ese benchmarks are inconsistent with the cited
provisions. Consequently, Canada has failed to make its prima facie case and for that reason alone the
Panel should reject Canada’s claims.

The United States Properly Implemented the DSB’s Recommendations and Rulings

38. The substantive issue facing this Panel is wh ether the United States properly implemented the
recommendations and rulings of the DSB in conducting its pass-through analysis with respect to the
final investigation determination. The answer is clearly “yes”. The positions of the United States
with respect to its Section 129 Determination are mo re fully contained in our written submissions.
This morning, we will not repeat all of the points made in those submissions but rather will briefly
highlight what we consider to be significant issues as well as respond to the i ssues raised in Canada’s
second written submission. As to those issues not raised in this oral statement, we refer the Panel to
our written submissions.

39. Initially, we will briefly outline Commerce’ s pass-through methodology. Next, we will
discuss the nature of Commerce’s arm’s-length analysis and Canada’s attempt to truncate that
analysis. Then we will focus upon Canada’s improper challenge to the benchmarks Commerce relied
upon in conducting its pass-through analysis. Finall y, we will address Canada’s peculiar claim that

10 WT/DS257/15.

US compliance with the express terms of the Appellate Body Report, was an effort by the
United States to avoid its WTO obligations.

Pass-Through Methodology

40. The DSB determined that the United States act ed inconsistently with certain of its WTO
obligations when it failed in its final investigation determination to conduct a pass-through analysis
with respect to two categories of arm’s-length log sales between unrelated parties. To implement
those recommendations and rulings Commerce was fi rst required to obtain additional information
from Canada relating to the POI. That information was requested through a series of questionnaires.
Specifically, Commerce requested information rela ting to those log sales for which Canada was
claiming that the subsidy did not pass through to the purchasing sawmill.

41. As a threshold matter, Commerce examined the data provided by Canada to determine
whether the sales were between affiliated, that is, related, parties. Consistent with the DSB’s
recommendations and rulings, when Commerce found that the sales were between affiliated parties, it
performed no further pass-through analysis. If the sales were identified as being between unaffiliated
parties, Commerce examined the circumstances surrounding the transactions to determine whether the
parties operated at arm’s length. Where Commerce determined that the transaction was at arm’s
length, it next determined whether there was a competitive benefit, that is, whether the benefit “passed
through” to the purchasing mill using market-d etermined benchmarks. Ultimately Commerce’s
analysis of arm’s-length log sales between unaffiliated parties resulted in a reduction in the numerator
of the ad valorem subsidy rate which in turn, had the effect of reducing the country-wide subsidy rate.

42. Consistent with the DSB’s recommenda tions and rulings, Commerce conducted a pass-
through analysis and based its determination upon wh at the record evidence de monstrated the facts to
be.

Commerce Properly Conducted its Arm’s-Length Analysis

43. There is no dispute between the parties that for a transaction to be eligible for consideration in
Commerce’s pass-through analysis, the DSB determ ined that the transaction must be between
unrelated parties and be at arm’s length.
11 Canada does not challe nge Commerce’s affiliation
determinations, so we will not discuss those thres hold determinations. Rather, the dispute between
the parties concerns the interpretation of the term “arm’s length” – a term that is not defined in the
text of the SCM Agreement.

44. The Appellate Body found that both th e SCM Agreement and the GATT 1994 require that
Commerce establish that the benefit is passed thro ugh to the downstream processor where subsidies
are bestowed directly on producers of an input product while the countervailing duties are to be
imposed on processed products, “and where the input producers and downstream processors operate
at arm’s length”.
12 Thus, where the two producers do not operate at arm’s length, no pass-through
analysis is required because the subsidy bestowed on the input producer benefits the producer of the
processed product. The United States properly dete rmined that whether entities operate at “arm’s
length” involves more than simply an examination of formal affiliation – rather, it involves analysis of
whether one party effectively controls the other or whether the parties have roughly equal bargaining
power.

45. Canada, however, conflates the issues of a ffiliation and arm’s length arguing that an arm’s-
length determination requires nothing more than a determination of affiliation. Indeed, Canada’s
per se approach to arm’s length is set forth in para graph 62 of its first written submission when it

12 Appellate Body Report, para. 146 (emphasis in original).

states “that a transaction between unrelated parti es is by definition an arm’s-length transaction”.
Because Canada treats these disparate concepts as on e, Canada contends that by analyzing whether
such sales are, in fact, at arm’s length, and then eliminating sales that are not at arm’s-length from the
pass-through analysis, Commerce somehow “presumed” pass-through. To the contrary, it is Canada
that is presuming no pass through whenever there are sales between unaffiliated parties.

46. By contrast, the DSB recognized a distinction between arm’s length and affiliation in its
recommendations and rulings, noting that Commer ce should have conducted a “pass-through analysis
in respect of arm’s length sales of logs . . . to unrelated sawmills”.
13 Canada’s approach which would
end the analysis once affiliation is determined is thus inconsistent with the DSB’s recommendations
and rulings.

47. In contrast, and consistent with the DSB’ s recommendations and rulings, Commerce properly
examined the circumstances surrounding the sales that Canada reported as occurring between
unrelated parties to determine whether those transactions were at arm’s length. Where parties to a
transaction are not free to bargain with whomever they choose or to bargain on terms not encumbered
by government mandates and restrictions that were imposed as a condition of obtaining the logs in the
first place, Commerce properly determined that such transactions were not at arm’s length.

48. The SCM Agreement, the GATT 1994 and th e DSB’s recommendations and rulings do not
require that Commerce’s arm’s-length analysis be constrained in the fashion proposed by Canada.
Indeed, as previously noted, although Canada generally alleges that Commerce’s arm’s-length
analysis is inconsistent with WTO obligations, it fails to cite to any specific WTO provision that
supports its position that an arm’s-length analysis can be nothing more than an examination of
affiliation.

49. As we will discuss next, the facts presen ted to Commerce demonstrate that under the
Canadian stumpage system, many of the circumst ances of the log sales are controlled by government
mandates and other conditions that rendered those sal es not at arm’s length or otherwise ineligible for
the pass-through analysis.

Commerce Properly Considered the Circumstances of the Sales in its Arm’s Length Analysis

50. In our second written submission we detailed the government mandates and other conditions
that Commerce identified in its Section 129 De termination as controlling, limiting or otherwise
affecting the subject log sales. Briefly, the govern ment-mandated restrictions include appurtenancy,
local processing requirements, and wood supply agre ements which dictate to the harvester those
entities to which it must sell. These government manda tes restrict the ability of a seller to act in its
best interests when selecting from among potential bu yers. Where parties are not able to negotiate
freely, such sales could not be considered to be at arm’s length.

51. Additionally, certain log purchase agreements were such that the purchasing mill controls
significant aspects of the transaction or provided other goods or services as part of the transaction so
that sales under these agreements could not be arm’s-length sales. Canada does not deny the
existence of these conditions (although the Governme nt of British Columbia does contend, with no
support, that it does not enforce the appurtenancy re quirements contained in its tenure agreements).
Rather, Canada argues that it is basic economics that these restrictions do not affect the arm’s-length
nature of the transactions between the parties.

52. Canada’s view of intr oductory economics does not amount to a WTO obligation. Canada’s
argument glosses over the reality of the system created by these mandates and conditions . By
way of example, where a subsidy is provided to an input producer who can only sell to a particular

13 Appellate Body Report, para 176(e)(emphasis added, except that emphasis on “logs” is in original.)

purchaser, the purchaser is in a position substantially to dictate the price. Consequently, such a sale
would not be at arm’s length. The same result obtains where local processing requirements exist.

53. As noted above, these government mandates a nd other conditions are imposed as a condition
of the tenures. Consequently, they go to the very heart of the issue Commerce is investigating.
Contrary to Canada’s assertion, as evidenced by the fact that Commerce has found arm’s-length
transactions in Canada’s regulated market, Commerce is not requiring a marketplace free from
regulation as a prerequisite for fi nding transactions to be at arm’s length. However, because these
mandates and conditions subs tantially control timber transactions in Canada, they were fundamental
to Commerce’s arm’s-length analysis.

54. Finally, Commerce identified two additional factors – that are not exclusively arm’s-length
issues – that affected its pass-through analysis. Notably, for those transactions in which the
purchasing mill paid the Crown stumpage fees direct ly to the government for logs obtained from the
independent harvester, Commerce determined that no pass-through issue arose. Because the
stumpage fee is the vehicle through which the Crown bestows the subsidy the purchasing sawmill
directly receives the benefit . Canada misses the point when it argues that “[a]lthough the party
writing the check may affect the observed log price, it will never affect the value paid by the sawmill
for the logs.”
14 Unlike the transactions identified by the DS B, in these transactions the sawmill is the
direct recipient of the subsidy and thus there is no need to examine whether the benefit passed through
to the purchasing mill. Moreover, because the ve ry essence of the pass-through analysis is
determining with whom the benefit resides, Canada’s analogy to a situation in which a party generally
satisfies an outstanding lien on behalf of another is irrelevant.15

55. Additionally, Commerce properly excluded fro m its analysis fiber exchange agreements
between Crown tenure holders, which often involved, by way of example, exchanges of logs for
chips, to meet appurtenancy and other harvesting requirements. These exchange agreements are not
log sales but rather are tools by which tenured sawmills satisfy their appurtenancy and local
processing requirements. Because such exchange s are not “sales” at all, there was no need for
Commerce to conduct an arm’s-length analysis of the transactions.

56. In sum, Canada has not established that Co mmerce’s arm’s-length analysis is in any way
contrary to the SCM Agreement, the GATT 1994 or the DSB’s recommendations and rulings.

The Panel Should Decline to Consider Canada’s Ch allenge to Commerce’s Benchmarks and in Any
Event, Commerce Used Appropriate Market-Determined Benchmarks

57. Canada criticizes Commerce’s benchmarks as not reflecting “market” conditions, but has thus
far failed in its written submissions to specify in wh at way the benchmarks were inconsistent with the
SCM Agreement, the GATT 1994, or the DSB’s reco mmendations and rulings. More significantly,
Canada failed to even identify its challenge to th e pass-through benchmarks in its panel request.
Consequently, not only has Canada failed to make a prima facie case that there is a WTO
inconsistency, this claim is outside the Panel’s terms of reference.

58. In terms of the substance, and as expl ained in the second written submission of the
United States, a subsidy provided to the producer of an input product confers a competitive benefit on
a downstream purchaser of the input when the price paid for the subsidized input is lower than a
market-determined benchmark price for the same product. Thus, to dete rmine whether a benefit
“passed through” to the purchasing mill, that is, whether there was a competitive benefit to the
purchasing mill, Commerce required market-determine d benchmarks. Canada does not dispute the

14 Canada Second Written Submission, para. 41 (emphasis in original).

necessity for such benchmarks but rather, argu es that because Commerce’s benchmarks include
import prices, the benchmarks are not representative of market conditions in Canada.

59. In selecting market-determined benchmarks , Commerce used, where possible, the actual
company-specific prices that the purchasing mill pa id for logs harvested from private lands and for
imported logs. Commerce requested in its supplemental pass-through questionnaires and
accompanying pass-through appendices that Canada provide such data to assist Commerce in
developing market benchmarks. As evidenced by Commerce’s calculations, where those company-
specific purchase data were available, Commerce used them. Where such data were not available,
Commerce used publicly available prices for logs harvested from private lands and for imported logs.

60. Canada raises two separate challenges to th e US benchmarks in its second submission. The
first challenge relates solely to the benchmark developed for Saskatchewan. The second challenge
relates to Commerce’s inclusion of import prices in its benchmarks generally. We will discuss
Canada’s general challenge to th e inclusion of import prices in the benchmarks before discussing
Canada’s specific challenge relating solely to Saskatchewan.

61. In developing its benchmarks, Commerce determined to use prices based on market
conditions in Canada. Import log prices, like dome stic log prices, reflect prices that purchasers in
Canada paid for logs during the POI. Con sequently, Commerce included import prices in its
benchmarks. Despite the fact that these import prices are actual Canadian transaction prices, Canada
argues that Commerce must ignore these prices. There is no basis, however, for doing so.

62. Moreover, Canada's claim that the import data are taken from an excessively broad tariff
classification is misplaced. Canada collects data on several categories of imports of "wood in the
rough . . . Other, coniferous" - "Poles," "Piles and fe nce posts," "Logs for pulping," and "Other," (the
“Other” category is broken down by species).
16 Logs used for lumber production thus fall into this
last category, which was the only category Commerce included in its benchmarks. Although Canada
speculates that other higher value products may al so have been included in this last category,
the evidence is to the contrary. For example, Canada states that imports of high-value veneer
logs would also fall into this category. But Quebec - the province with by far the largest value of
log imports - reported that veneer mills in Quebec used zero imported softwood logs during the
period of investigation. 17 Additionally, contrary to Canada's statement in paragraph 46 of its
second submission, pulp log imports were reported separately by Statistics Canada and were
not included in Commerce’s calculation.

63. With respect to Saskatchewan, Canada provide d no data regarding prices of private log sales
in the province, and – as Canada notes – only very limited data on log imports. Accordingly, there
was insufficient data on prices for logs purchased by sawmills in Saskatchewan. Commerce therefore
developed a proxy based on prices paid by mills in Canada for logs of the same species as found in
Saskatchewan. As elsewhere, Commerce treated all log purchases consistently, irrespective of
whether they were purchased from domestic or imported sources.

64. In sum, the United States developed mark et-determined benchmarks which included import
prices, where available, for use in its pass-through analysis. As previously noted, Canada has failed to
allege any WTO inconsistency in Commerce’s development of the benchmark.

16 GOC 17 October 2003, Questionnaire Response at Exh. GOC-GEN-51 (relevant pages). Exhibit US
– 11.
17 GOC 28 June 2001, Questionnaire Response, Exhibit QC-S-5, at QC-11, and Quebec Exhibit 5.
Exhibit US – 12.

65. As a final point, there is an error in pa ragraph 39 of the second written submission of the
United States. Specifically, the wo rd “unsubsidized” should be deleted from the first sentence of that
paragraph.

Commerce Properly Investigated Categories of Sales Identified by the DSB

66. As discussed in both our first and second wr itten submissions, the two transaction categories
subject to Commerce’s pass-through analysis we re the transactions identified in the DSB’s
recommendations and rulings. Consistent with those recommendations and rulings, Commerce
properly conducted a pass-through analysis with respect to transactions between unrelated
(i) independent harvesters and sawmills, and (ii) tenured timber harvesters/ sawmills and non-tenured
sawmills. Canada alleges that Commerce’s investigation of th e second of these categories was
nothing more than a “creative way” for the United States to avoid its obligation to conduct the pass-
through analysis contained in the DSB’s recommendations and rulings.

67. Canada is wrong. The Appellate Body specifically defined the second category of
transactions for which it recommended a pass-through analysis. The term “sawmill”, the purchasing
mill in the second category, was defined as “an ente rprise that processes logs into softwood lumber
and does not hold a stumpage contract ”.
18 The seller in the second category was specifically
identified as a “tenured timber harvester/sawmill”.19

68. Canada, in effect, asks this Panel to find th at in evaluating whether there is compliance with
the DSB’s recommendations and rulings, the Panel s hould ignore the express language used in those
recommendations and rulings. Cana da’s approach makes no sense. Instead, consistent with the
DSB’s recommendations and rulings, Commerce acco rded those terms the definitions established by
the DSB. This Panel should do the same.

Conclusion

69. In conclusion, we want to thank the Panel ag ain for this opportunity to respond to Canada’s
arguments in its written submissions, and we look forward to responding to any questions that the
Panel may have.

18 Appellate Body Report, fn. 151 (emphasis added).
19 Appellate Body Report, fn. 150 (emphasis added).