Document: WT/DS257/RW Page C-1 ANNEX C Submissions of Third Parties Contents Page Annex C-1 Third Party Submission of China – 17 March 2005 C-2 Annex C-2 Oral Statement of China – 21 April 2005 C-10 Annex C-3 Third Party Submission of the European Communities –
Date: 17 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 C

Submissions of Third Parties

Contents Page
Annex C-1 Third Party Submission of China – 17 March 2005 C-2
Annex C-2 Oral Statement of China – 21 April 2005 C-10
Annex C-3 Third Party Submission of the European Communities –

C-13
Annex C-4 Oral Statement by the European Communities – 21 April 2005 C-20

I. Introduction
1. China welcomes this opportunity to present its views in these proceedings involving the
United States’ compliance with the DSB recommendations and rulings in United States – Final
Countervailing Duty Determination With Resp ect to Certain Softwood Lumber from Canada . China
believes these proceedings relate to the correct understanding of Article 21.5 of the DSU and
Article VI:3 of GATT 1994 as well as the rulings by the original Panel and the Appellate Body in the
original dispute in which China has systemic interests.

2. In this third party submission, China will focus on the following two key issues:

 (i) the threshold issue of whether the USDOC administrative review determination is
properly before this Panel;

 (ii) whether the five external factors identif ied by the USDOC can be used to exempt the
US from conducting pass-through analysis as required by the rulings of the original
panel and the Appellate Body with respect to sales of logs between tenured
harvesters/sawmills and unrelated sawmills.

II. Whether the USDOC Administrative Review Determination Is Properly Before This
Compliance Panel

 A. The Threshold Issue Presented in These Proceedings

3. In the Request for Establishment of A Panel , Canada refers to the following measures by the
US: (i) the Section 129 Determination
1; and (ii) the First Administrative Review Determination (the
“Review Determination”)2. In its First Written Submission, Ca nada argues that the US, by adopting
these “measures taken to comply”, “continues to vi olate its obligations under Article VI:3 of the
GATT 1994 and Articles 10 and 32.1 of the SCM Agreements” 3 and failed to implement the
recommendations and rulings of the DSB. The US, in turn, request a prel iminary ruling that the
Review Determination is not a “measure[] taken to comply” and thus falls outside the scope of these
Article 21.5 proceedings4.

4. Thus, a threshold issue presented in this di spute is whether the Review Determination is
properly before this compliance panel.

 B. Terms of Reference of An Article 21.5 Panel

5. In China’s view, WTO jurispr udence establishes that the mandate of an Article 21.5 panel is
subject to two limitations.

1 Notice of Implementation Under Section 129 of the Uruguay Round Agreements Act; Countervailing
Measures Concerning Certain Softwood Lumber Products from Canada , 69 Fed. Reg. 75,305; Section 129
Determination: Final Countervailing Duty Determination, Certain Softwood Lumber from Canada ; Notice of
Amended Final Affirmative Countervailing Duty Determination and Notice of Countervailing Duty Order:
Certain Softwood Lumber Products from Canada, 67 Fed. Reg. 36,070.
2 Notice of Final Results of Countervailing Duty Administrative Review and Rescission of Certain
Company-Specific Reviews: Certain Softwood Lumber Products from Canada, 69 Fed. Reg. 75,917; and Issues
and Decision Memorandum: Final Results of Administrative Review: Certain Softwood Lumber Products from
Canada.
3 First Written Submission of Canada, paras. 35~40.
4 First Submission and Request for Preliminary Ruling of the United States (the “First Submission of
the US”), para. 12.

6. First, the mandate of a compliance panel shall be confined by the coverage of the measures
referred to by the complaining party in its panel request. If the parties to a dispute do not agree
otherwise, a compliance panel, as an ordinary panel, shall have the standard terms of reference set
forth in Article 7.1 of the DSU. Specifically, the ou ter edge of the terms of reference of a compliance
panel shall be the scope of the panel request by th e complaining party at a given dispute. This has
been confirmed by many compliance panels.
5

7. Second, the mandate of a compliance panel sh all be limited by the scope of “measures taken
to comply” with DSB recommendations and rulings. The Appellate Body in Canada – Aircraft
(Article 21.5 – Brazil) held that,

Proceedings 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
6. (original emphasis)
In EC - Bed Linen (21.5) , the Appellate Body explicitly stated that "[i]f a claim challenges a measure
which is not a 'measure taken to comply', that claim cannot properly be raised in Article 21.5
proceedings."7 (Original Emphasis)

8. Practically, there may be fewer disputes over whether a measure is cited by the complaining
party in its panel request. Rather, many of the disputes rest with whether a particular measure,
although cited by the complaining party, is a “measure[] taken to comply”. This is exactly the case in
this dispute.

 C. China’s Views on The Threshold Issue

9. In these proceedings, both parties seem to have no dispute on whether the Review
Determination was cited by Cana da in its panel request. As noted on the document WT/DS257/19,
the parties to this dispute agreed that the Panel shoul d have standard terms of reference. As a result,
the Panel’s terms of reference sh all be defined by Canada’s Requ est for Establishment of a Panel
(WT/DS257/15). In that document, Canada manifes tly referred to the Review Determination issued
by the USDOC. However, “Article 21.5 proceedings are limited to those ‘measures taken to comply
with the recommendations and rulings’ of the DSB”
8 and “it is, ultimately, for an Article 21.5 panel
— and not for the complainant or the respondent — to determine which of the measures listed in the
request for its establishment are “measures taken to comply” 9. Therefore, the threshold issue in this
dispute is whether the Review Determination cited by Canada in its panel request is properly before
this panel.

10. In this dispute, it may be argued, on the one hand, that the Review Determination was made
in a totally separate investigation procedure and based on the import data that is irrelevant to that of
the original investigation. On the other hand, it is arguable that the two determinations at issue were
made under the framework of the same set of pr oceedings which effectively affects import of
softwood lumber from Canada and the Review Determination supersedes the Section 129
Determination. In China’s view, the first argume nt relates to the questi on of whether the Review
Determination is a “measure[] taken to comply” while the sec ond argument concerns the matter
whether the Section 129 Determination is rendered non-existent.

5 EC - Bananas (21.5), WT/DS27/RW/ECU, para.6.5; Australia - Leather (21.5) , WT/DS126/RW,
para.6.3.
6 Canada – Aircraft (Article 21.5 – Brazil), WT/DS70/AB/RW, para 36.
7 EC - Bed Linen (21.5), WT/DS141/AB/RW, para.78.
8 Canada – Aircraft (Article 21.5 – Brazil), WT/DS70/AB/RW, para 36.
9 EC Bed Linen (Article 21.5 – India), WT/DS141/AB/RW, para 78.

11. Initially, the Review Determin ation may not be properly categorized as a “measure[] taken to
comply”. This point has been elaborated by the US in its First Submission. The date of
commencement of the review process was well before the date when the DSB adopted the panel and
Appellate Body report. The Review Determin ation was not issued under the US domestic
proceedings that are specifically enacted to address its violation of WTO rules concerning a
countervailing duty measure (Section 129(b) of the Uruguay Round Agreements Act).

12. However, in China’s view, the fact that th e Review Determination is not a “measure[] taken
to comply” does not lead to a decisive answer to the question of whether this measure is properly
before this panel. China recalls that, on the basis of the plain language of Article 21.5, the purpose of
the proceedings under this provision is to review and solve the dispute on “the existence or
consistency with a covered agreement of measures take n to comply with the recommendations and
rulings” of the DSB. China believes that “existence” and “consistency” are two distinct aspects of the
subject measure. The latter involves review that is not only “limited to ‘the issue of whether or not [a
Member] has implemented the DSB recommendation’”
10, but also “in the light of any provision of
any of the covered agreements.” 11 On the other hand, the former relates to the status of the revised
new measure. Both aspects are equally important th ough the “existence” matter is crucial in solving
the threshold issue in these proceedings.

13. The dispute of Australia – Automotive Leather (21.5 – US) demonstrates similar fact pattern
that deserves the reference by this Panel. In that dispute, Australia, subsequent to the DSB
recommendations and rulings, ordered the repayment of the grants of A$8.065 million from Howe on
14 September 1999 and reported to the DSB that it had carried out the recommendations and rulings
of the DSB. However, on the same date, Au stralia provided a loan of A$13.65 million on non-
commercial terms to Howe's parent company, ALH. The U.S. requested an Article 21.5 panel and
submitted that “it is clear that if the Panel can de termine the "existence" of measures taken to comply
with the ruling, it can consider whether the meas ures purportedly taken to comply were effectively
rendered non-existent”.
12 Australia maintained that the loan of A$13.65 was not part of the
implementation of the DSB’s rulings and recommendations which was not even notified to the DSB.13
In considering this issue, the compliance panel said,

The 1999 loan is inextricably linked to the steps taken by Australia in response to the
DSB's ruling in this dispute, in view of bot h its timing and its nature. In our view, the
1999 loan cannot be excluded fro m our consideration without severely limiting our
ability to judge, on the basis of the United States' request, whether Australia has taken
measures to comply with the DSB's ruling. In the absence of any compelling reason
to do so, we decline to conclude that a me asure specifically identified in the request
for establishment is not within our terms of reference.
14.
In China’s view, in an Article 25.1 procedure, if the complaining party submits that a “measure[]
taken to comply” is invalidated by a subsequent measure, the compliance panel should at least assess
this claim that relates to the “measure[] taken to comply” on the basis of relevant facts – the
subsequent measure. To exclude the second measur e would put the panel at the risk of failing to
make a comprehensive and well-founded judgement on the existence of a measure taken to comply
with DSB recommendations and rulings.

14. As China understands, the US applies a retrospective count ervailing duty assessment system.
Under such a system, the results of a re view (if conducted), not only determine
the duty that shall be

10 Canada - Aircraft (21.5), WT/DS70/AB/RW, para.40.
12 Australia – Automotive Leather (21.5 – US), WT/DS126/RW, para. 6.2.
13 Australia – Automotive Leather (21.5 – US), WT/DS126/RW, para. 6.1.
14 Australia – Automotive Leather (21.5 – US), WT/DS126/RW, paras. 6.5.

assessed on the goods imported during the period of review, but also establish the amount of cash
deposit for future imports of the subject product follow ing the review. In this sense, the results of a
review may be deemed to replace the original de termination except in cer tain extraordinary cases
(e.g., in case where the amount of subsidization found to be zero in a review the result of which will
not lead to the termination of the original de termination). Thus, China believes, due to the
countervailing duty assessment system adopted by th e US, the results of an administrative review
may, at least in form, replace the original final determination.

15. In the particular factual circumstance of this dispute, the Review Determination was
announced ten days after the Section 129 Determinati on took effect. Thus, the Review Determination
established a new rate for cash deposit for the goods from Canada and replaced the rate in the Section
129 Determination. Such changes in the applicable duty rate deserve further consideration on whether
the Review Determination, in substance , rendered the non-existence of the Section 129
Determination. Therefore, China is of the vi ew that the facts presented by Canada in these
proceedings, at least, have demonstrated that ther e is likelihood that the Review Determination may
nullify the Section 129 Determination.

16. On the basis of the above, it follows that if the Review Determination is found not to be a
“measure[] taken to comply”, it is still of importa nce to establish whether, as a matter of fact, the
Section 129 Determination is nullified by the Revi ew Determination and therefore, no “measure[]
taken to comply” exists. In China’s opinion, in order to perform the duty of “mak[ing] an objective
assessment of the matter before it” as required by Ar ticle 11 of the DSU, it is advisable for the Panel
to keep the Review Determination within its terms of reference instead of disregarding it at the very
beginning of the procedure. In the meantime, however, China wishes to emphasize that, if the Review
Determination is held not to be a measure taken to comply, the panel need only review the Review
Determination to the extent that it can make a ruling on whether the Section 129 Determination was
rendered non-existent and it is not the task of this Panel to review the Review Determination as a
“measure[] taken to comply” in parallel with the Section 129 Determination.

17. Furthermore, it has been consistently ruled by compliance panels that it may be appropriate to
consider events occurring until the date of panel request.
15 Such a view supports the position that this
Panel should consider the Review De termination, as relevant facts, which happened prior to the panel
request.

18. In summary, China is of the opinion that, although the Review Determ ination may not be a
measure taken to comply, it is closely linked to and may have an important effect on the existences of
the purported measure taken to comply – the Sec tion 129 determination. On such basis, China
believes it is the mandate of this Panel to consid er the Review Determination in these proceedings.
China suggests that the Panel may assess: (i) whether Section 129 Determination fully implements the
DSB recommendations and rulings and is consistent with the covered agreements; and (ii) if it does,
whether the Review Determination invalidates th e Section 129 Determinat ion and consequently
renders the non-existence of the latter.

III. Whether “Arm’s-Length Transaction” an d “Non-affiliation” Are One and The Same
Condition or Two Separate Conditions to Necessitate A Pass-through Analysis

19. In its First Written Submission, Canada argu es that the US failed to conduct pass-through
analysis for three reasons, one of which is the US DOC imposed two conditions to limit the number of
log transactions requiring analysis. These two conditions are: (i) the transacting parties are unrelated;

15 See, e.g., EC – Bed Linen (21.5) , WT/DS141/RW, para. 6.28; US – Shrimp (21.5), WT/DS58/RW,
paras. 5.12~5.13.

and (ii) none of the external factors identified by the USDOC exists. 16 The US, in its First
Submission, does not deny its application of these two conditions.17

20. In the following, China would like to share w ith the parties to this dispute as well as this
Panel its views on this disputed issue.

 A. The Analysis of the Appellate Body

21. In the course of reaching its conclusion, the Appellate Body largely relied on the
interpretation of Article VI:3 of the GATT 1994. In its report, the Appellate Body stated that,

The phrase "subsid[ies] bestowed ... indirectly", as used in Article VI:3, implies that
financial contributions by the government to the production of inputs used in
manufacturing products subject to an investigation are not, in principle, excluded
from the amount of subsidies that may be offset through the imposition of
countervailing duties on the processed produc t. Where the producer of the input is
not the same entity as the producer of the processed product, it cannot be presumed,
however, that the subsidy bestowed on the input passes through to the processed
product. In such case, it is necessary to an alyze to what extent subsidies on inputs
may be included in the determination of th e total amount of subsidies bestowed upon
processed products. For it is only the subsidi es determined to have been granted upon
the processed products that may be offset by levying countervailing duties on those
products.
18 (original emphasis in italic and added emphasis in bold)
The Appellate Body seemed to be of the view that if subsidies are bestowed on an entity different
from the producer of the subject product, pass-thro ugh of subsidies cannot be presumed. In this
respect, the Appellate Body did not emphasize that the transactions between the two entities shall be
free of interference by any external factor. In addition, the Appellate Body found further supports
from the definition of subsidy in Article 1 of th e SCM Agreement as well as its interpretation of
“benefit” in Canada – Aircraft. 19 In such analysis, the Appellate Body also focused on whether the
cumulative condition in Article 1 of the SCM Agre ement are met for the producer of the subject
products and whether the producer of the subject produc t is an indirect recipient. All such legal
analysis, in China’s view, relies on the presumption that the two entities, producer of the input and
producer of the subject product, are not the same entity.

22. The Appellate Body, in its analysis, did me ntion from time to time the term “arm’s-length
transactions”. However, it did not put forward the implication of this term. Neither did it base its
analysis on the presumption that the transactions at issue are free from influence by any external
factors.

 B. The Rulings of the Original Panel and the Appellate Body

23. Paragraph 167(e) of the Appe llate Body Report is as follows,

upholds
 the Panel's finding, in paragraph 7.99 of the Panel Report, that USDOC's
failure to conduct a pass-through analysis in respect of arm's length sales of logs by

16 First Written Submission of Canada, paras. 53 and 59.
17 See the First Submission of the US, para. 34. The US argues that “[c]ontrary to Canada’s arguments,
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 restri cted to, in essence, a per se test based on affiliation
alone”.
18 US – Lumber CVDs Final, WT/DS257/AB/R, Para. 140.
19 US – Lumber CVDs Final, WT/DS257/AB/R, Paras. 142~143

tenured harvesters/sawmills to unrelated sawmills is inconsistent with Articles 10
and 32.1 of the SCM Agreement and Article VI:3 of the GATT 1994;
This ruling does mention the terms “arm’s length sales” and “unrelated” in parallel. However,
referring to paragraph 7.99 of the original Pane l Report would easily exclude any potential confusion
that may be caused by the use of these two terms, which reads,

We therefore conclude that, for the reasons set forth above, the USDOC's failure to
conduct a pass-through analysis in respect of logs sold by tenure-holding timber
harvesters (whether or not also lumber producers) to unrelated sawmills producing
subject softwood lumber; (emphasis added)
The above ruling does not refer to “arm’s-length tr ansactions” as an extra condition to necessitate
pass-through analysis. The condition is only that the tenure-holding timber harvesters are unrelated to
sawmills. If the Appellate Body intended to insert “arm’s-length transaction” as an addition
condition, it should have said so and should have partially reversed th e original panel’s ruling on this
matter. Therefore, the term “ar m’s-length transactions” in the ruling of the Appellate Body can be
understood to bear the same meaning as that of “unrelated”.

 C. China’s View on the Issue of Pass-through

24. In China’s view, under the particular fact ual circumstances of this dispute and the
countervailing duty investigation on so ftwood lumber, it is not necessary to satisfy the test of five
external factors identified by the USDOC in order to require for a pass-through analysis.

25. First, China agrees with the analysis by the Appellate Body that an instance that require for
pass-through analysis is one where the direct recipien t of the subsidies at issue is not the same entity
as the producer of the countervailed subject product. In this respect, the meaning of the so-called
“same entity” is obvious – both entities are not related to or affiliated with each other in any other way
so that they cannot be treated as one and the same. Such an instance does not imply that the
transactions at issue should be free of interference by any of the five external factors identified by the
USDOC.

26. Second, it is possible that the five external factors may affect the transactions between the
separate entities and thereby influence the pass-thr ough of the direct subsidie s on the production of
logs. For example, due to limitations on log sales in Crown tenure contracts, the tenured harvester
may not sell its products to the sawmills at fair market value. As a result, the transaction price may be
lower than fair market value through which, subs idies on logs pass through to the production of the
subject products. In China’s view, it is the exte rnal factors and, potentially, other unknown factors
that cause the transaction price to be below fair market value and thereby, result in pass-through of
subsidies.

27. China further submits that the influence by any external factor can be fully taken into account
if a proper pass-through test is carried out. By choosing a permissible market benchmark, the
investigating authorities could precisely calculate the part of benefits that are passed through to the
purchasers of logs. Conversely, if the investigatin g authorities rule that, due to the existence of
external factors, pass-through of subsidies need not be analyzed and can be presumed in its totality,
the calculated subsidy amount would not reflect th e actual amount of benefits that are actually
bestowed indirectly on the production of the subject product. Such an approach would most likely
lead to imposition of countervailing duty in excess of subsidies bestowed “directly, or indirectly” on
the subject product in violation of Article VI:3 of the GATT 1994.

28. On the basis of the above, China is of the view that the five external factors identified by the
USDOC could not exempt the US from conducting pass-through analysis with respect to sales of logs
between unrelated harvesters/sawmills and sawmills.

IV. Conclusion

29. In conclusion, China is of the following views:

 (i) Although the Review Determination may not be a measure taken to comply with the
DSB recommendations and rulings at issue, it is closely linked to and may have an
important effect on the existences of the purported “measure[] taken to comply” – the
Section 129 determination; it is the mandate of this Panel to consider the Review
Determination in these proceedings from the perspective of whether it invalidates the
Section 129 Determination;

 (ii) The five external factors identified and applied by the USDOC in the Section 129
Determination could not exempt the U.S. from conducting pass-through analysis as
required by the rulings of the original pane l and the Appellate Body with respect to
sales of logs between unrelated harvesters/sawmills and sawmills.

ANNEX C-2

ORAL STATEMENT OF CHINA
21 April 2005

Introduction

1. Mr. Chairman, members of the Panel, it is our great honor to appear before you today to
present the views of China as a third-party to these proceedings. As the Panel already has our written
submission, we do not intend to restate all the comments contained in that document. Rather, we seek
to offer the Panel a concise synopsis of the views of China in regards to the current dispute between
Canada and the United States. In short, the issues we will focus on today pertain to (1) whether the
administrative Review Determination of the US Department of Commerce is properly within the
mandate of this Panel and (2) whether the five exte rnal factors identified by the US Department of
Commerce exempt the US from conducting a pass throug h analysis as required by the original Panel
and the Appellate Body in their rulings.

USDOC Administrative Review Determination

2. China is of the opinion that the mandate of an Article 21.5 panel is subject to two limitations.
First, the mandate of a compliance panel shall be confined by the coverage of the measures referred to
by the complaining party in its panel request. Second, as held by the Appellate Body in Canada -
Aircraft (Article 21.5 – Brazil ), “Article 21.5 proceedings are limited to those ‘measures taken to
comply with the recommendations and rulings of’ the DSB.”
1

3. Applying the first limitation to this dispute, it seems indisputable that Canada specifically and
explicitly refers to the DOC’s Administrative Re view Determination in its panel request and
therefore, this measure passes the test of the first limitation. However, to reiterate what was said
above, the mandate of this Panel shall be limited to those “measu res taken to comply with the
recommendations and rulings” of the DSB.

4. In this regard, given the facts of this dis pute, China tends to agree with the US that the
Review Determination may not be properly categor ized as a “measure taken to comply”. However,
while China does not consider the Review Determina tion to be a “measure taken to comply,” it also
does not believe that a decisive answer has yet been reached in regards to whether the Review
Determination is properly before this Panel. The underlying purpose of these proceedings is to review
and to resolve this particular dispute as to “the ex istence or consistency with a covered agreement of
measures taken to comply with the recommendations and rulings” of the DSB. Although the words
“existence” and “consistency” are of equal importance, in this particular dispute, China surmises that
the correct interpretation of “existence” will be cr ucial to the resolution of whether the Review
Determination is properly before the Panel.

5. The dispute of Australia – Automotive Leather (21.5 – US) offers pertinent insight concerning
such interpretation and deserves the attention of this Panel. In a similar fact pattern to the current
dispute, Australia, on the one hand, ordered the repa yment of a grant, a move that was purported to
withdraw the illegal subsidy; while on the other hand, it provided a non-commercial loan to the parent
company of the subsidy recipient. The United States requested an Article 21.5 panel. That
compliance panel stated that the loan in disput e was “inextricably linked to the steps taken by

1 Canada – Aircraft (Article 21.5 – Brazil), WT/DS70/AB/RW, para.36.

Australia in response to the DSB’s ruling . . . in view of both its timing and its nature”. 2 The panel
determined that the “loan cannot be excluded fro m our consideration without severely limiting our
ability of judge, on the basis of the United State’ s request, whether Australia has taken measures to
comply with the DSB’s ruling”. 3 Consequently, believing there to be no presence of a compelling
reason to act otherwise, the panel declined “to conc lude that a measure specifically identified in the
request for establishment . . .”4 was not in the panel’s terms of reference.

6. Consequently, in China’s view, because Ca nada has submitted that a “measure taken to
comply” has been invalidated by a subsequent measure, this Panel should at least be allowed to assess
the relationship between the Secti on 129 Determination and the Review Determination. To exclude
such an assessment would put this Panel at the risk of failing to make a comprehensive and well-
founded judgment as to the “existence” of a measure taken to comply with the relevant DSB
recommendations and rulings.

7. Looking at the particular facts of this dis pute, the Review Determination was announced ten
days after the Section 129 determin ation took effect which resulted in the establishment of a new rate
for the cash deposit for Canadian goods and replaced th e rate in the Section 129 determination. Such
facts warrant further consideration on whether th ese changes rendered the non-existence of the
Section 129 determination.

8. For all the reasons above, China believes that while the Review Determination itself may not
be classified as a “measure taken to comply,” it is in extricably linked to the steps taken by the US in
response to the DSB’s ruling in both its timing and its nature. Because excluding the Review
Determination would severely limit the Panel’s ability to judge, upon Canada’s request, whether the
US has taken measures to comply with the DSB’s rulings and recommendations, China concludes the
Review Determination to be within this Panel’s mandate.

The Pass-Through Analysis

9. We now turn briefly to the second issue of the dispute, namely that of the pass-through
analysis conducted by the US. Specifically, the issue revolves around the DOC imposing two
conditions that in effect limited the number of lo g transactions that were subjected to a pass-through
analysis.

10. The DOC effectively required that releva nt log transactions (1) be conducted between
unrelated parties; and (2) satisfy an “arm’s length transaction” test before a pass-through analysis was
necessitated. As a result, the question ultim ately becomes whether the phrases “arm’s length
transaction” and “unrelated” are one and the same or rather distinctive terminology.

11. In its report, the Appellate Body seemed to be of the view that if subsidies are bestowed on an
entity different from the producer of the subject pr oduct, then a pass-through of subsidies cannot be
presumed. However, the Appellate Body did not intimate that the transactions between the two
entities had to be free of interference by external f actors. Neither did it base its analysis on such a
premise.

12. Referring specifically to paragraph 167(e) of the Appellate Body Report, in which the
Appellate Body affirms the original Panel’s findi ng with respect to sales of logs by tenured
harvesters/sawmills to sawmills, the phrases “arm’s length sales” and “unrelated” are mentioned in
parallel. However, looking at paragraph 7.99 of th e original Panel Report, which the Appellate Body
has purportedly affirmed, there is no mention of the phrase “arm’s length transactions” or “arm’s

2 Australia – Automotive Leather (21.5 – US), WT/DS126,RW, para.6.5.
3 Id.
4 Id.

length sales”; rather the only condition referenced is that the parties be unrelated. If the Appellate
Body had intended to impose an extra condition, as the US actually did, it should have said so and
partially reversed the original Panel’s rulings. Therefore, China believes that the phrase “arm’s length
transactions” in the ruling of the Appellate Body should be construed to bear the same meaning as that
of “unrelated”.

13. Finally, China would like to present its own views on the five external factors identified by
the US DOC. China believes that it is not necessary to sa tisfy this test of five external factors in order
to require a pass-through analysis. China submits th at an instance requiring a pass-through analysis is
one where the direct recipient of the subsidies at issue is not the same entity as the producer of the
countervailed subject product. Such an instance does not require the transactions to be free of
influence by any external factors.

14. In addition, China believes th at the five external factors ma y themselves be responsible for
resulting in the pass-through of subsidies. Howeve r, to skip a pass-through analysis would presume
that the subsidies are passed throu gh in its entirety. Such an appr oach would most likely exaggerate
the actual benefit indirectly bestowed on the subject product producers. China believes, by using an
appropriate pass-through analysis, the effects of the five external factors can be fully accounted for
without incorrectly calculating the actual amount of benefit on the subject product producers.

Conclusion

15. Mr. Chairman, that concludes the third-party statement of China. Thank you very much for
the attention.

I. INTRODUCTION

1. The European Communities (EC) welcomes this opportunity to present its views in this DSU
Article 21.5 proceeding. Canada claims that the United States has failed to implement the
recommendations and rulings of the DSB in United States –Lumber CVD Final. The Appellate Body
found that the countervailing duty imposed on soft wood lumber was not based on a pass-through-
analysis ensuring that the numerator is not artific ially inflated through non-subsidised arm’s length
sales.
1

2. The United States informed the DSB on 17 December that it had implemented its
recommendations and rulings through a determin ation pursuant to Section 129(b) of the Uruguay
Round Agreements Act (“Section 129 determination”). The Section 129 determination reduced the
original rate of 18.79% to a ra te of 18.62% (because of no pass-through in some cases) and was
effective on 10 December 2004.
2 However, ten days later, the first administrative review 3 of the
countervailing duty order kicked in, establishing a defi nitive countervailing duty rate for the period of
review and replacing the amended Section 129 countervailing duty cash deposit rate with a new cash
deposit rate (17.18%, not containing any reduction resulting from a lack of pass-through).4

3. Canada claims that the United States failed to implement the recommendations and rulings of
the DSB because neither the Section 129 determina tion nor the administrative review carry out the
pass-through analysis required by Articles VI:3 of the GATT 1994 and Articles 10 and 32.1 of the
SCM Agreement.
5

4. The United States has raised a preliminary objection contending that the administrative
review is not a measure “taken to comply” with in the meaning of Article 21.5 of the DSU and
therefore not within the jurisdiction of this 21.5 Panel.
6 According to the United States, the
administrative review is legally separate from the or iginal investigation/ S ection 129 determination
and concerns new factual data.7 The United States relies on EC – Bed linen 21.5, to argue that annual
administrative review measures are entirely new dete rminations and therefore not a measure “taken to
comply” within the scope of Article 21.5 proceeding.8

5. The EC considers that the US arguments are entirely misconceived. The US view (if
accepted) would turn the US system of countervailing duty assessment into a moving target that
escapes the WTO disciplines. Given that WTO jurisprude nce is limited, the EC will confine this third
party brief to this important jurisdictional question. As will be detailed below:

 ► Article 21.5 panels, in principle, have jurisd iction on all factual and legal matters relating
to the resolution of the original dispute (as defined by that panel’s terms of reference);

1 Appellate Body Report, United States – Lumber CVD Final, adopted on 17 February 2004.
2 19 U.S.C. § 3538(b). Final Countervailing Duty Determination, Certain Softwood Lumber from
Canada, 6 December 2004; Notice of Implementation Under Section 129 of the Uruguay Round Agreements
Act; Countervailing Measures Concerning Certain Softwood Lumber Products From Canada , 69 Fed. Reg.
75,305 (Dep't Commerce 16 December 2004).
3 Referred to as the “assessment review” in the US First Written submission.
4 Notice of Final Results of Countervailing Duty Administrative Review and Rescission of Certain
Company-Specific Reviews: Certain So ftwood Lumber Products from Canada , 69 Fed. Reg. 75,917 (Dep't
Commerce 20 December 2004); and Issues and Decision Memorandum : Final Results of Administrative
Review: Certain Softwood Lumber Products from Canada, December 13, 2004.
5 panel Request (WTDS257/15), Canada’s First Written Submission, para. 72.
7 US First Written Submission, paras. 21-24.
8 US First Written Submission, paras. 15-16.

 ► The measure to be reviewed by this DSU Artic le 21.5 Panel is the continued application of
a countervailing duty on the basis of the administrative review (superseding both the
original determination and the Section 129 review).

6. This submission concludes that the Panel s hould dismiss the preliminary objection made by
the United States. However, the EC wishes to clarify that it does not take a position on whether or not
the administrative review complies with the recommendations and rulings of the DSB. The EC
expects to provide its views on this substantive issu e at the oral hearing (after having received the
parties’ rebuttal submissions).

II. THE SCOPE OF DSU ARTICLE 21.5 PROCEEDINGS

7. The scope of DSU Article 21.5 proceedings has several aspects that have not yet been fully
clarified in WTO jurisprudence. Some jurisdictional i ssues relate to the claims that can be made in a
DSU Article 21.5 proceeding. Here, the Appellate Body has already clarified that panels are to
review the “totality” of claims relating to th e consistency of that measure with the covered
agreements
9 (continuing violations, new violations and consequential violations of the covered
agreements). The precise issue before this Panel is whether the phrase “taken to comply” limits the
21.5 Panel’s jurisdiction to reviewing only a measure explicitly taken to comply (here the Section 129
review) as opposed to an administrative review.

8. Article 21.5 of the DSU provides in relevant part:

Where there is disagreement as to the ex istence or consiste ncy with a covered
agreement of measures taken to comply with the recommendations and rulings such
dispute shall be decided through recour se to these dispute settlement procedures,
including wherever possible resort to the orig inal panel. The panel shall circulate its
report within 90 days after the date of refe rral of the matter to it. When the panel
considers that it cannot provide its report within this time frame, it shall inform the
DSB in writing of the reasons for the delay together with an estimate of the period
within which it will submit its report.
9. Contrary to what the US argues, the phrase “tak en to comply” cannot be read to limit the 21.5
proceeding to those measures that were explicitly take n to replace the measure at issue in the original
proceedings. The phrase “taken to comply” must be read together with its immediate and broader
context as well as the purpose of the DSU to reach a prompt solution of a dispute.

10. Most importantly, it is preceded by the term “existence” and followed by the expression “with
the recommendations and rulings of the DSB”. This s uggests that the role of a 21.5 Panel is different
from the task of an original Panel. While the or iginal Panel is faced with a dispute relating to a
precise measure, the 21.5 Panel is tasked to assess whether or not there is a failure to comply and
whether or not the original dispute has been resolved.

11. Indeed, the broader purpose of Article 21.5 of the DSU is to secure the solution of a dispute
between two WTO Members relating to the measures br ought before the original Panel. This purpose
is reflected in Article 3.3 of the DSU which reads;

The prompt settlement of situations in wh ich a Member considers that any benefits
accruing to it directly or indirectly under the covered agreements are being impaired
by measures taken by another Member is essential to the effective functioning of the

9 Appellate Body Report, United States – Shrimp (21.5) , para. 87.

WTO and the maintenance of a proper balan ce between the rights and obligations of
Members.
12. Moreover, Article 3.7 of the DSU clarifies th at Article 21.5 proceedings form part of the
adjudication of an initial dispute by determining wh ether the defendant has withdrawn the measure or
otherwise complied. Article 3.7 of the DSU reads:

In the absence of a mutually agreed solu tion, the first objective of the dispute
settlement mechanism is usually to secure th e withdrawal of the measures concerned
if these are found to be inconsistent with the provisions of any of the covered
agreements. The provision of compensation should be resorted to only if the
immediate withdrawal of the measure is impracticable and as a temporary measure
pending the withdrawal of the measure wh ich is inconsistent with a covered
agreement. The last resort which this Understanding provides to the Member
invoking the dispute settlement procedures is the possibility of suspending the
application of concessions or other obliga tions under the covered agreements on a
discriminatory basis vis-à-vis the other Memb er, subject to authorization by the DSB
of such measures.
13. This particular nature of the DSU Articl e 21.5 proceeding was explicitly recognised by the
Panel in Australia – Salmon (21.5) which even considered a measure taken during the Article 21.5
proceeding on the basis of the following consideration:

To do otherwise would, in our view, go agai nst the principle of prompt settlement of
disputes and could hamper implementati on of both DSB recommendations in the
original dispute and our findings in this case.
10
14. Although the Appellate Body has not yet been faced with the precise point at issue here, it has
already confirmed the above principle in Canada – Aircraft 21.5:

In our view, the phrase "measures taken to comply" refers to measures which have
been, or which should be, adopted by a Me mber to bring about compliance with the
recommendations and rulings of the DSB. In principle, a measure which has been
"taken to comply with the recommendations and rulings" of the DSB will not be the
same measure as the measure which was the subj ect of the original dispute, so that, in
principle, there would be two separate and distinct measures34: the original measure
which gave rise to the recommendations and rulings of the DSB, and the "measures
taken to comply" which are – or should be – adopted to implement those
recommendations and rulings.
11
15. Moreover, the Appellate Body clarif ied in the accompanying footnote 34:

We recognize that, where it is alleged that there exist no "measures taken to comply",
a panel may find that there is no new measure.
16. The Panel in EC – Bed linen, on which the United States relies, based itself explicitly on the
Australia – Salmon 21.5 case law and only discarded later review measures adopted by the EC as they
were:

11Appellate Body Report, Canada – Aircraft 21.5, para. 36 (footnote omitted).

not so clearly connected to the panel and A ppellate Body reports concerned, both in
time and in respect of the subject-matter, that any impartial observer would consider
them to be measures “taken to comply”.12
17. It is important to note that the two measures in EC – Bed linen were not dismissed from the
scope of that 21.5 proceeding because they were “review measures”. They were dismissed because
they did not relate to the original dispute between the EC and India.

18. The EC submits that the case-by-case test applied by the Panel in EC – Bed linen should be
further interpreted in line with the above considerati ons. In particular, it is the EC’s submission that
the scope of the 21.5 proceeding is determined by all aspects of the measure giving rise to the initial
dispute. The purpose of the 21.5 proceeding is to determine wh ether or not the defendant has
complied by either withdrawing that measure or bringing it otherwise in full compliance with the
covered agreements. Whether a measure is taken to comply must then be decided on a case-to-case
basis having regard to the original dispute (as define d by the terms of reference of the Panel) and the
particular obligations of the covered agreement at issue.

19. As already confirmed by the DSU Article 21.5 Panel in EC – Bed linen , it is for the Panel
alone to determine which measures it reviews when determining whether or not there is compliance.
13
Moreover, the appropriate date for assessing the compliance of a Member with the recommendations
of the DSB is the date of establishment of the Article 21.5 panel.
14

III. IS THE ADMINISTRATIVE REVIEW WITHIN THE SCOPE OF THIS
PROCEEDING?

20. Canada claims that the United States failed to comply with the rulings and recommendations
of the DSB (pass-through analysis) because none of th e measures taken by the United States carries
out such pass-through analysis.

21. The United States defends itself legally by argui ng that the administrative review is a separate
measure from the (i) original determination and (ii) Section 129 determination and, hence, not before
the Panel.

22. The US view is based on the assumption that the measures to be attacked in countervailing
duty cases are the determinations made by the investigati ng authorities. This is false. As is clarified
in Article 10 of the SCM Agreement, the measure of concern is the “imposition of a countervailing
duty”, defined as a “special duty levied” for the pur pose of offsetting a subsidy. The WTO Member
imposing the countervailing duty is under the obligati on to demonstrate through an investigation and
determination that such duty is not “in excess of the … subsidy” as required by Article VI:3 of the
GATT 1994. Therefore, the accompanying determinations play a significant role in assessing whether
the duty is in excess of a subsidy. However, it is the duty itself that interferes with trade and is the
measure of concern. To the extent a counterva iling duty is not imposed on the basis of a proper
determination, it is incompatible with WTO law.
15

23. The United States has a retrospective syst em of imposing countervailing duties. The
administrative review at hand in this case is a hybrid instrument. It fixes the final duty rate for the
assessment period with retrospective effect. It is similar to a retrospective assessment within the
meaning of Article 9.3 of the Anti-Dumping Agreement and it certainly is not a fully-fledged review

12 Panel Report, EC – Bed linen 21.5, para. 6.17.
13 Panel Report, EC – Bed linen 21.5, para. 6.15.
14 Panel Report, United States – Shrimp 21.5, paras. 5.12-5.13.
15 See description of the measure in Appellate Body Report, United States – Lumber CVD Final, para. 2.

of both the subsidy and injury within the meaning of Article 21 of the SCM Agreement .
16
Significantly, the administrative review does not cha nge the date of the expiry of the measure under
Article 21.3. The administrative review happens to change the cash deposit rate provisionally for
future imports, but only subject to a further annual review in the future.

24. While footnote 52 of the SCM Agreement recognises the existence of such annual reviews
used in a retrospective system, it does not, as suggested by the United States
17, recognise that these
types of administrative review are separate from the original determination (and or a Section 129
determination).

25. The United States has not disputed Canada’s ch aracterisation of the administrative review as
superseding
 both the original countervailing duty determ ination and the Section 129 determination. 18
As explained by the United States, the Section 129 determination exclusively focused on the original
investigation and partially redid it. However, th at Section 129 determination was only in place for 10
days. It was then superseded by the administrativ e review which definitively fixed the duties for the
relevant period. At the date of the establis hment of the Panel (14 January 2005) only the
administrative review was effectively in place.

26. According to WTO jurisprudence, a measure that essentially replaces an earlier measure
remains within the terms of re ference of an original Panel.
19 A fortiori , a 21.5 Panel must be in a
position to assess whether an annual administrative review determination that confirms and
supersedes the original determination relati ng to the same countervailing duty constitutes a
“continuing violation”.

27. Contrary to what the US attempts to argue, the Panel in EC – Bed linen 21.5 does not stand
for a general proposition that any review measure is outside the scope of a 21.5 proceeding. As noted
already under point 17 above, the review measures at issue in that case were entirely different in
nature. The EC applies a prospective system of assessing duties and therefore does not carry out such
annual administrative reviews. The measures at hand in EC – Bed linen were either specific reviews
of anti-dumping duties imposed on exporters from ot her Members (Egypt and Pakistan) or entirely
new determinations in a review based on results of an event subsequent to the EC having adopted the
implementing measure in EC – Bed linen.

28. Also the final US argument that it would no t be possible to fully assess a new set of facts
relating to an assessment review , based on a wholly new administrative record, within the 90 day
period prescribed by Article 21.5 and that therefor e administrative reviews must be subject to a
different proceeding
20, is without merit. The Appellate Body already recognised that the examination
of an Article 21.5 measure can require assessment of a new set of facts. 21 The 90 day period reflects
the right of the complaining Member to a prompt resolution of the original dispute by determining
whether or not compliance exist before he may resort to suspension of concessions.

29. Accepting the US view that the administrativ e review is not subject to a DSU 21.5 Panel
review would turn the US system of duty assess ment into a moving target that escapes from
countervailing duty disciplines. Each administrative re view would have to be subject to a new panel
request, and by the time the panel, Appellate Body and implementation procedure was completed,

16 Panel Report US – Softwood Lumber (Preliminary), para 7.151.
17 US First Written Submission, para. 21 and footnote 23.
18 Canada’s First Written Submission.
19 See most recently, Panel Report Dominican Republic – Cigarettes, paras. 7.11-7.21
21 Appellate Body Report, Canada – Aircraft 21.5 , para. 41. See also, Appellate Body Report,
United States – Shrimp 21.5, para. 86.

another administrative review would have overtaken the results of any Section 129 determination. A
new panel would have to be started against this review, creating a “Groundhog Day” situation.

IV. CONCLUSION

30. For the above reasons, the EC considers th at the Panel has full jurisdiction over the
administrative review measure in this case and that the US preliminary objection should therefore be
dismissed.

“existence” of a measure taken to comply read in the light of the broader purpose of DSU Article 21.5
to secure a prompt solution of a dispute between WTO Members. 3 Canada also explicitly agreed with
the EC’s basic proposition that the jurisdiction of DSU Article 21.5 Panels must, therefore, be
determined in a way that prevents implementation measures from becoming “moving targets”.

5. There are different legal concepts on how to do this. Canada and China put much emphasis
on the fact that the administrative review while not being the “measure taken to comply” undid the
Section 129 determination and, therefore, falls (as a successor measure) under the Panel’s purview.
4
While the EC agrees with this characterisation of the relationship between the administrative review
and the Section 129 determination5, it considers that this general procedural criterion (Panel’s terms of
reference also cover successor acts) is not exclusiv ely determinative for the jurisdiction of this DSU
21.5 Panel.

6. Given the major systemic importance of this issue, in particular for the EC, the EC
respectfully requests the Panel to give the third parties further opportunity to comment in detail on
Canada’s arguments on how to define the scope of an Article 21.5 proceeding through written
questions.

7. Let me close today’s observations on this point by noting that, ironically, the US, through its
preliminary objection, brings itself into a catch-22 situation. If it rejects the consideration by the
Panel of the administrative review as complian ce measure, no measure taken to comply existed
(because the Section 129 determination had expired be fore the establishment of the 21.5 Panel). The
Panel’s report could therefore be quite short.

III. PASS-THROUGH

8. Turning now to the key substa ntive issue in this dispute: pass-through. The US and Canada
disagree whether the US investigating authoriti es have done enough in terms of procedure and
substance to demonstrate that subsidies receive d by certain upstream producers were passed-through
to the down-stream producer of lumber products.

9. The need to ensure a pass-through an alysis is not written explicitly into the SCM Agreement
but stems directly from the obligation of a WTO Member imposing a countervailing duty to comply
with Article VI:3 of the GATT 1994, and Article 10 of the SCM Agreement which require that
investigating authorities:

 before imposing countervailing duties, must ascertain the precise amount of a subsidy
attributed to the imported products under investigation.
6
10. There are different situations in which the need for a pass-through analysis may arise, e.g.,
whether a subsidy was extinguished following a transfer of ownership. This Panel is tasked to assess
whether the US investigating authorities established that subsidies to input producers benefited the
downstream producers of the processed product subject to the investigation. 7 The key question is
whether the US investigating authorities established that benefits received by the input producers

3 EC Third Party Submission, paras. 10-18.
4 Canada’s rebuttal submission, para. 4, China’s Third Party submission, para 12.
5 EC Third Party Submission, paras. 2.and 25.
6 Appellate Body Report, US – Countervailing Measures on Certain EC Products, para. 139.
7 Appellate Body Report, US – Lumber, para. 146.

 have been passed through, at least in pa rt, from producers of logs to producers of
softwood lumber (and remanufactured lumber) which are the products subject to the
investigation.
8
11. The US and Canada disagree on whether the approach taken by the US investigating
authorities suffices to establish the correct amount of subsidisation.

12. The EC as a third party is not in a position to comment in detail on this fact-intensive issue
before the Panel. However, it wishes to offer a few general comments:

13. As regards the test for pass-through, the main parties appear to disagree on the meaning of
“arm’s length”, in particular, whether it refers exclus ively to a “related person” test. The EC notes
that neither of these two notions are set out anywhere in the SCM Agreement. The obligation of an
investigating authority is to establish the precise amount of subsidisation be nefiting the product on
which a CVD is imposed in accordance with Article VI:3 of the GATT 1994.

14. The Appellate Body referred for cont extual guidance to Article 19.3 of the SCM Agreement
whereby countervailing duties “shall be levied, in the appropriate amounts in each case, on a non-
discriminatory basis on imports of such product from all sources found to be subsidised and causing
injury”. The Appellate Body recognised that th is provision gives investigating authorities broad
discretion to choose between different means of demonstrating and calculating the amount of the
subsidisation, in particular whether they reso rt to sampling, aggregate or company specific
investigations.
9

15. The precise methodological approach to dete rmine pass-through (or better: the amount of
benefit received by the producer of the target pr oduct) inevitably varies from case-to case. The pass-
through is likely to be somewhere between 0 and 100% depending, amongst other things, on the
relationship between the input supplier and the proces sor as well as the economic context. Where the
producers of the input and the processed product form part of the same economic entity , it may be
presumed that 100% of the subsidy passed through.
10 By contrast, where the input product was sold
on a functioning market at arm’s length and for fair market value, there is a presumption of 0% pass-
through.11

16. The existence and amount of pass-through must be established on a case-by-case basis.
While a number of different factors may be relevant , the EC considers that the price charged by the
input supplier to the producers of the product (in comparison to some relevant benchmark) plays a key
role in measuring to which extent (if at all) the subsidy benefited the producer of the processed
product.

17. The discretion of investigating authoriti es on how to establish pass-through is (as always)
limited by the general obligation of investigati ng authorities to carry out an objective and unbiased
examination, and the need to ensure that th e countervailing duties are imposed in “appropriate”
amounts “in each case” and on a “non-discriminatory basis” from “all sources found to be
subsidised”.

18. Procedurally, the investigating authority mu st do its best to facilitate the pass-through
examination, e.g., by preparing a questionnaire and offering a company-specific approach unless the
number of respondents is too high to allow a meaningf ul individual examination to take place. In
such cases sampling or similar techniques may be required.

8 Ibid., para. 147.
9 Appellate Body Report, US – Lumber, paras. 152-153.
10 Ibid. para. 142.
11 Appellate Body Report, US – CVD on Certain EC Products, WT/DS212, para. 126.

19. The investigating authority must then provide an adequate and reasoned explanation why, on
the basis of the information received, the amount of pass-through calculated in the individual case is
appropriate and that its assessment of the facts on the record is objective and unbiased.

IV. CONCLUSION

20. Mr. Chairman, Members of the Panel, this c oncludes our oral statement. I thank you for your
attention and stand ready to respond to any questions you may have.