Document: WT/DS264/R Page C-1 ANNEX C PARTIES' COMMENTS ON REPLIES TO QUESTIONS FROM THE SECOND MEETING Contents Page
Document codes: WT/DS264/R
Complainant: Canada
Respondent: U.S.
Third parties: China, EU, India, Japan, New Zealand, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 1, 2, 4, 5, 9  Anti-dumpingArt. VI  GATT 1994Art. 18  Anti-dumping

ANNEX C

PARTIES' COMMENTS ON REPLIES TO QUESTIONS
FROM THE SECOND MEETING

Contents Page
Annex C-1 Comments of Canada on respon ses of the United States to questions
posed in the context of the second substantive meeting of the Panel
C-2
Annex C-2 Comments of the United States on responses of Canada to questions
posed in the context of the second substantive meeting of the Panel
C-13
Annex C-3 Letter of the United States expressing objections to the comments
of Canada on responses of the United States to questions posed in
the context of the second substantive meeting of the Panel
C-17
Annex C-4 Letter of Canada replying to the objections of the United States
regarding the comments of Canada on responses of the
United States to questions posed in the context of the second
substantive meeting of the Panel
C-18

ANNEX C-1

COMMENTS OF CANADA ON RESPONSES OF THE UNITED STATES
TO QUESTIONS POSED IN THE CONTEXT OF THE SECOND
SUBSTANTIVE MEETING OF THE PANEL

(5 September 2003)

86. The Panel refers to paras. 2 and 3 of the US Second Oral Statement. The Panel requests
the US to note all the "misstatement" that it has identified in Canada's submissions, in addition
to those mentioned in the Second Oral Statement. Further, in its replies to the questions posed
by the Panel, Canada's Second Written Submissi on and Second Oral Statement, Canada made
detailed factual presentations relevant to its clai ms. The US is requested to identify and
substantiate all factual aspects with which it disagrees with Canada.

 Canada’s comments on the US response to Question 86 are the following:

1. In the Attachment to the Second US Respon ses to the Panel’s Questions, the United States
has raised two new arguments regarding initiation.

2. First, the US argument that information on the operations of the US surrogate mills is in the
confidential version of the affidavits is not corr ect. As is obvious from the public version of the
affidavits, there is no bracketed discussion of the operations of the companies.
1

3. Second, the United States argues, for the first time, that the US surroga te mills “… were used
only with respect to factory overhead, planer shavings, and sawdust/bark”.
2 Canada notes that this
statement is in conflict with the statement in the pr ior paragraph of that attachment that information
from the US mills was used to provide factor usage data on stumpage, harvesting costs, labour,
electricity, fuel, and wood chips. A lumber mill’s costs are determined by multiplying its factor usage
by the per unit price for that factor. Factor usage costs are the part of the cost calculation that would
vary most from mill to mill, making it critical that the data be derived from mills that are
representative.

90. Please comment on Canada's Second Oral Statement, para. 20 which states that:

"[t]he United States, hiding behind the pretense of confidentiality, has not
provided this Panel with any information that was before Commerce about the
two US surrogate mills. These US mills were at the heart of Commerce’s
decision to initiate. Canada has not seen, and the Panel still does not have before
it, basic information in the hands of the United States, such as the names of the
US mills and what Commerce knew about those mills. The United States has
responded to Canada’s claims with nothing but assertions."

1 See affidavits at Petition, Exhibit VI.C-1 (Exhibit CDA-135).
2 See Attachment to the Answers of the United States to the Panel’s 13 August 2003 Questions,
26 August 2003, at 2 [hereinafter “US Attachment”].

 Canada’s comments on the US response to Question 90 are the following:

4. At paragraph 15 of its Answer to Question 90 and page 7 of its Attachment responding to the
Panel’s Question 86, the United States cites a US Department of Agriculture Publication entitled
Profile 2001: Softwood Sawmills in the United States and Canada .
3 The United States cites that
publication in support of its assertion that the US surrogate mills chosen to model the costs of
Canadian producers for purposes of initiation were representative of Canadian producers.

5. The US citation of this report is deceptive fo r two reasons. First, the study cited by the
United States was not before Commerce at the time of initiation. The Application only contained the
first three pages of Profile 1999: Softwood Sawmills in the United States and Canada. It did not
contain any listing of any companies, nor does it discuss “large, permanent operations”, the phrase
Commerce now relies upon to support its claim that at initiation it had evidence that the mills used
were representative.
4 The report now relied upon by the United States was not put on the record until
respondents filed the document nearly three months after Commerce made the decision to initiate. It
was put on the record as part of the respondents’ submission requesting Commerce to terminate and
rescind the investigation because of insufficient evidence.5

6. Second, and more important, the informa tion before Commerce at the time of initiation
indicates that the two US surrogate mills could not be characterized as “large, permanent operations.”
Counsel for the respondent companies have in formed Canada that information designated as
confidential confirms that: (1) any implication that the two US surrogate mills were “large, permanent
operations” at the time of initiation is false; and (2) Commerce knew this at the time of initiation.

7. Finally, the US refusal to provide the Panel specific information on the US surrogate mills or
on their operations on the basis that the informati on is confidential, claiming “Commerce’s legitimate
protection of the confidentiality of certain information as required by US statutory law”
6 is
inconsistent with the United States’ treatment of Canadian respondents’ data. Canada notes that the
United States has released the c onfidential information of individual Canadian companies, in
bracketed form, in this proceeding. For example, in defending itself against Canada's Article 2.4
claims, the United States has provided this Panel, and the Canadian Government, specific individual
prices of Abitibi, Tembec, Slocan, West Fraser and Weyerhaeuser. 7 These prices were given to
Commerce by the individual companies pursuant to an administrative protective order. Commerce
did not have their consent to reveal those prices to the Government of Canada and to the Panel.

96. At what stage were the respondents informed of DOC's finding that differences in
dimension do not affect price comparability? What opportunities were provided to respondents
to comment on that finding?

 Canada’s comments on the US response to Question 96 are the following:

8. Canada agrees with the US statement in r esponse to this question th at the evidence submitted
and argument made “required Commerce to evaluate the pricing data on the record” for the purpose of

3 This is the publication cited at para. 25, footnote 38 of the US Second Written Submission.
4 See Petition, Vol. IB, Exhibit 1B-49, H. Spelter and T. McKeever, Profile 1999: Softwood Sawmills
in the United States and Canada (Washington: USDA, 1999) at 1-3. (Exhibit CDA-185).
5 See Certain Softwood Lumber from Canada: Request for Termination and Rescission of
Investigation, Letter from Weil Gotshal & Manges to Co mmerce (19 July 2001), at Enclosure 3 (Exhibit CDA-
51). Commerce initiated the investigation on 23 April 2001, and published the notice of initiation in the Federal
Register on 30 April 2001. See Certain Softwood Lumber Products from Canada , 66 Fed. Reg. 21,328 (Dep’t
Commerce 30 April 2001) (initiation) at 21,328 and 21,332 (Exhibit CDA-9).
6 Answers of the United States to the Panel’s 13 August 2003 Questions, 26 August 2003, at para. 14
[hereinafter “US Second Responses to Questions”].
7 See, e.g., Exhibits US-42 and US-76.

“carefully reviewing the effect of dimension on price.”
8 Yet, as the US response to Question 99
makes clear, Commerce did not do so. It applied no coherent methodology for selecting
representative comparisons, in sufficient number to ac hieve representative results. Also, it performed
no coherent analysis with respect to the handful of comparisons it appears to have examined. The
best explanation the United States can offer is that Commerce determined not to allow for any
adjustment (“difmer”) on any of the 2,382 non-identical comparisons it made,
9 on the basis of charts
showing individual transaction prices 10 for one pair of West Fraser Products and one pair of Slocan
products. These charts were not made part of Co mmerce’s record and thus appear to have been
created after the fact. Indeed, Commerce appears to have performed no valid analysis at all. Even
after the Final Determination, the United States has only offered a simple plotting of data points on
compressed charts that do not provide sufficient information to confirm that the data are appropriate.

97. Please comment on Canada's response to Question 22, with reference to the
respondents’ demonstrating a need for a price adjustment:

"at the beginning, of the period, in April 2000, Abitibi’s average net price for
No. 2 grade 2x4x8 was around [[ ]] whereas the No. 2 2x6x16 price was [[
]]. The comparable figures for economy grad e were [[ ]] for the smaller size
and [[ ]] for the larger."
 Canada’s comments on the US response to Question 97 are the following:

9. The graphical representation of data in Exhibit US-81, which was not before Commerce at the
time of its Final Determination,
11 is misleading, difficult to follow, and analytically deficient. 12
Although not explained, the graph plots, in a comp ressed fashion, all of Abitibi’s individual home
market sales of four products. The Y-axis appears to show the net price in Canadian dollars (after
subtracting freight costs and other adjustments),13 while the X-axis appears to plot the invoice date.14

10. Prices for individual sales are rarely set on the invoice date. For example, Abitibi has a wide
range of sales arrangements, including spot sales, in which prices are negotiated at the time of order,
as well as contract sales with longer-term prices, or with formula prices.

11. In view of the fluctuating nature of lumber prices, there is no reason to expect that sales of
even the same product with the same invoice date wi ll show the same price, much less that different
products will show “consistent” price differences based on the invoice date. It is for this reason that
Canadian respondents, and Canada in this proceed ing, have always examined monthly average or
annual average prices, as such averages smooth out data fluctuations caused by the different
mechanisms and times at which prices are set in relation to invoice date. A scatter diagram of
individual transaction prices based on invoice dates is essentially useless in determining whether
dimension has an impact on price.

8 US Second Answers to Questions, at para. 32.
9 See Canada’s Responses to Questions to the Parties from the Panel in Connection with the First
Substantive Meeting, 30 June 2003, at para. 97, for a table showing the number of non-identical comparisons
Commerce made for each respondent.
10 It is not clear whether these are gross or net prices.
11 The same is true of Exhibits US-76, US-42, and US-43.
12 Throughout this proceeding, the United States has argued that the Panel should not examine charts or
tables not before Commerce, even if the underlying data we re before Commerce. In submitting this exhibit, the
United States recognizes that which Canada has asserted all along. As long as the underlying data were before
the investigating authority, it is perfectly appropriate for parties to present these data to the Panel in a new form,
using graphs, charts and tables.
13 The United States did not state what adjustments were made.
14 This is not explained either.

12. In this respect, it is instructive to re view Abitibi’s data for the No. 2 grade products
Commerce examined. As Canada noted previously , the United States made a total of 2,382 non-
identical product price comparisons, and made no adjustment for physical characteristics for any of
those comparisons. This can only be justif ied if the record shows that dimension never affects price
comparability. Canada need only establish that fo r particular comparisons, dimension does affect
price to show that “due allowance” is required fo r differences in dimension, which allowance, as
Canada has acknowledged, may be zero in particular cases.15

13. An analysis of the data relied upon by the Un ited States is revealing. First, the weighted
average annual net price for each dimension product across the entire period of investigation was
computed. This shows, on average, whether diffe rent-dimension products sell for the same price or
different prices. The use of annual average prices is comprehensive, in that it considers all sales, and
also smooths out differences due to the manner a nd date on which the price for individual sales
occurs, as well as other anomalies.
16 The average net price charged by Abitibi for No. 2 2x6x16 was
[[ ]] for No. 2 2x4x8. These data show that, for
these products, dimension affects price, and significantl y so. The average differe nce in value is some
[[ ]], or almost [[ ]] per cent.

14. Next, adopting the US approach of using i ndividual transactions, and of invoice date as
relevant for comparison purposes,
17 we tested the US assertion that prices converge, diverge, and
overlap, show no “consistent” pattern, and thus cannot establish that dimension affects price. Instead
of simply providing a raw scatter diagram, we l ooked at the number of days on which both products
were sold, and calculated the number of times th e 2x6x16 product sold for a higher price than the
2x4x8. The data before Commerce show that of the 56 occasions on which both products were
invoiced on the same date, the larg er product sold for a higher price on 55 of those dates, or over
98 per cent of the time.18 This would seem to be fairly “consistent.”

15. Finally, the data were repl otted, using less compressed, more appropriate Y-axis points that
allow one better to view the data. Rather than simply testing for patterns using Commerce’s “eyeball”
test, a regression analysis was done to determine, for each product, the best fitting curve matching
each product’s prices.19 This analysis enables one to plot the overall price pattern. The results are
presented in attached Exhibit CDA-185. Cont rary to Commerce’s unsupported assertions, the
regression analysis shows pronounced pricing differe nces between the two products. Indeed, the two
curves are almost parallel, demonstrating that the observed pricing differences were, in fact, fairly
consistent over the period.

16. In short, once the data are analyzed, rather th an simply printed, they establish that, for these
products, the dimensional di fferences create price differences a nd thus affect price comparability.
They also conclusively refute the US suggestion that sometimes one price is higher, sometimes the
other is higher, such that on average there is no difference.

99. With respect to the consistency in price pa tterns, the Panel has the following questions:

15 See Canada’s Responses to Questions to the Parties from the Panel in Connection with the Second
Substantive Meeting, 26 August 2003, at para. 46 [hereinafter “Canada’s Second Responses to Questions”].
16 It is for this reason that Canada’s initial presentation to the Panel included graphs showing annual
average prices for different dimension products. See POI Average Prices for Different Lengths and Widths:
Abitibi, Canfor, Slocan, West Fraser and Weyerhaeuser (Contains Business Confidential Information) (Exhibit
CDA-76).
17 Canada believes this approach to be erroneous for the reasons noted above.
18 Where there were multiple sales on the same date, we used the weighted average net price.
19 The regression performed was the ordinary least squares using a quadratic model.

 (a) Could DOC explain in detail the methodology it used to carry out its consistency
test? Illustrate your explanation with an example from the test that was carried
out in this case, including any sampling, selection of dates, etc. Did the US
consider using other methodologies?

 (b) Could the US explain in detail how the results of its test were evaluated? Please
explain the evaluation leading up to that conclusion.

 Canada’s comments on the US response to Question 99 are the following:

17. In response to this question, the United St ates claims that Commerce “examined random sales
of commonly sold softwood lumber products, compar ing products with rela tively small dimensional
differences”
20 and provided two examples. The United States further claims that Commerce did so for
“each of the Canadian respondent companies, plo tting sales over the entire period of investigation …
includ[ing] both above- and below-cost sales … .” 21

18. The United States, however, has provided no citation to any record document supporting that
this analysis was done. It strains credibility th at Commerce was able to “eyeball” all sales of
particular product comparisons for the entire Pe riod of Investigation (POI) for each of the
respondents, without needing to draft any document in support of this “analysis”.
22

101. Please comment on Canada's Second Oral Statement, para. 56 which states that:

“[t]he US International Trade Commission , in the injury inquiry, determined
that “lumber prices generally differ s ubstantially depending on grades and
dimensions”.”

 Canada’s comments on the US response to Question 101 are the following:

19. Contrary to the US contention that the US International Trade Commission’s (ITC) finding
of fact was not material to its injury determination, Canada notes that, as the investigating authority
charged with making the injury determination, the IT C, under US law, must specifically examine “the
effect of imports of that [investigated] merchandise on prices in the United States of domestic like
products.”
23 Indeed, price analysis is critical to th e ITC analysis. US law expressly requires the ITC
to compare prices of imported products with domestic like products for purposes of determining
whether imports are underselling domestic like products or causing price depression. 24 The ITC thus
examines pricing data of imported products and dom estic like products. In selecting and evaluating
such comparisons it is critical first to assess all f actors affecting price comparability, so as to ensure
that its price comparisons are meaningful. It is in this context that the ITC found that lumber prices
differ substantially, depending on grade and dimension.

20 US Second Answers to Questions, at para. 41.
21 Ibid, at para. 42.
22 In contrast, when Commerce want ed to confirm the appr opriateness of the relationship of prices
across grades, a Commerce official was tasked with the analysis and a me morandum was placed on the record
supporting that analysis. See DOC Issues and Decision Memorandum for the Antidumping Duty Investigation
of Certain Softwood Lumber Products From Canada (21 March 2002), Comment 33, at 24 and footnote 62
(Exhibit CDA-2) [hereinafter “IDM”].

23 19 U.S.C. § 1677(7)(B)(i)(II) (Exhibit CDA-7).
24 19 U.S.C. § 1677(7)(C)(ii) (Exhibit CDA-7).

102. In paras. 58-60 of Canada's Second Oral Statement, Canada alleged that the average
dumping margin for the non-identical comparis ons was 2 to 7 times higher than the average
margins of dumping for identical comparisons as DOC made numerous comparisons of smaller,
low-value lumber sold in the US to larger dimension, high-value lumber sold in Canada, without
any adjustment for dimension. Could the US co mment on this allegation that this establishes a
prima facie breach of the requirement of Article 2.4?

 Canada’s comments on the US response to Question 102 are the following:

20. The United States argues for the first time that the reason the margins on non-identical
comparisons were two to seven times higher than the margins on identical comparisons was because
the non-identical comparisons were on US sales of lo w-value products, which generated high margins
because they were the most dumped products. However, the reason Commerce found these products
to be the most dumped was primarily because of Commerce’s failure to adjust for differences in
physical characteristics when it compared non-identical merchandise. 25 The US argument is an
exercise in circular reasoning ( i.e., the result is used to justify the failure to comply with the
requirements of Article 2.4 that led to those results) that cannot support a conclusion that Commerce’s
establishment of the facts was proper and its evaluation of those facts was unbiased and objective.

G. ABITIBI:

To the US:

113. Please comment on Exhibit CDA-176.

 Canada’s comments on the US response to Question 113 are the following:

21. The United States has made several new ar guments based on mischa racterizations of
Canada’s position. Contrary to the arguments now made by the United States, Canada has never
asserted that the costs of producing goods are fully re flected in accounts receivable, or that financial
costs are only incurred on inventory. Rather, it ha s been Canada’s consistent position that financial
costs relate directly to the total debt of a compan y (only debt generates inte rest expenses), and that
both debt and equity together relate to the total amount of cash invested in the company, or, as the
United States has sometimes termed it, the company’ s total “cash needs.” Su ch total cash needs are
reflected in total company assets. The facts establis h this to be correct. The basic formula for every
balance sheet is that liabilities (cash provided by debt) plus equity (cash provided by investors) equal
assets. As money is fungible, and thus specific assets are not associated with specific debt or specific
equity, debt relates equally to all assets, and financial expenses relate to total assets. To be precise, in
this case, Abitibi’s C$11 billion in assets are finan ced by C$3 billion in shareholder equity and
C$5.6 billion in long-term debt, and C$2.4 billion in other liabilities, including accounts payable, etc.
Debt is on the balance sheet, and thus interest expe nse resulting from debt also relates to items on the
balance sheet, not the cash flow statement (as the Un ited States erroneously asserts in its Response to
Question 115, at para. 62). The US position that Abitibi’s debt and interest expense relates
exclusively to its cost of sales of C$4 billion, ca nnot be reconciled with the evidence. Abitibi cannot

25 Commerce’s finding on non-identical comparisons wa s also due to its cost analysis, an issue not
before this Panel. Commerce allo cated the exact same costs to dimensi ons that had a low market value as it
allocated to dimensions that had a high market value. Had Commerce used the same value-based cost allocation
method for dimensions that it used for grades, then it would have allocated less cost to the low-value products,
more of them would have survived the costs test, and there would have been identical matches with much lower
dumping margins for more of these low-value products. Commerce then compounded the problem by
comparing lower-value products in the US market to higher-value products in the Canadian market without any
adjustment for the differences in physical characteristics.

have borrowed C$5.6 billion in long-term debt to finance C$4 billion in short-term expenses. The
evidence establishes that it is the US premise that is incorrect.

22. Next, the United States contends that it is a “false premise” that Abitibi finances the full value
of its assets in each year of production.
26 But while the United Stat es characterizes this claim as
“extraordinary” and “contrary to normal business practi ces”, without explanation, it is, in fact, true,
and demonstrably so. Indeed, it is what every bala nce sheet establishes. As noted above, debt plus
equity equals assets, every year. Contrary to the US argument, it is precisely the case that a company
must, each year, finance the full value of every asset it requires for its business. Indeed, this is the
necessary consequence of the United States’ own ar gument that money is fungible, and thus debt
relates to all assets rather than specific assets. A company deploys cash to buy an asset, and the
amount of cash required is reflected in its full value, not in its depreciation expense.

23. The United States overlooks the simple fact that the cash spent on an asset remains invested
in the asset. The value of the asset always reflects the cash deployed in that asset and thus the amount
that must be financed, as long as that asset is carried as an asset. Until an asset is sold, or fully
depreciated to zero, the amount that must be financed is the remaining value of the asset. It is never
the depreciation expense, because depreciation expe nse never reflects the amount of cash resources
the company has “tied up” in the asset.

To both parties:

115. The Panel understands Canada to argue in para. 80 of its Second Oral Statement that
an asset-based methodology can capture the flow elements through inventory. Please comment.

 Canada’s comments on the US response to Question 115 are the following:

24. The US arguments concerni ng inventory and cash flow again mischaracterize Canada’s
position. As Canada has repeatedly demonstrated, the amount of money needed over a year to finance
production is not the same as the total annual cost s of production. Unlike fixed and other assets
necessary for producing and selling Abitibi’s products (which assets are not sold, and thus must be
fully financed each year), once lumber is produced, it is sold and paid for. Abitibi thus only has to
finance lumber production from the time it begins to harvest logs until the time it receives payment
from its customer. It is only during this period that the company has had to deploy its cash.

25. The annual cash needed to finance the productio n and sale of lumber for a year thus is not
reflected in the production costs incurred in that year, much less in cost of goods sold (COGS), which,
as noted, reflects production costs incurred over a differe nt period. Rather, the cash needed to finance
the production and sale of lumber in a year is equal to the average costs of the current assets that must
be kept on hand to produce and sell lumber – the raw materials inventory, the work-in-process
inventory, the finished goods inventory, and th e accounts receivable. These costs alone reflect the
amount of cash invested in current lumber operations.

26. To illustrate, suppose Abitibi had a line of cr edit that it used to finance its ongoing lumber
operations. As expenses are incurred to harvest l ogs, process lumber, pay salaries, etc., the negative
balance in the account would increase. As payment is received from customers, the balance declines.
The key point is that the interest expense incurred ov er the course of a year will be a function of the
average negative balance in the account. The average negative balance, in turn, equals the total value
of all the inventory and accounts receivable asset accounts – the costs outstanding for raw materials
and goods produced but not yet paid for. Contrary to the US position, the annual interest charge will
bear no relationship to the total amount of expenses charged to the account in the year, much less the
“flow” through the account for goods produced at other times but sold during the period.

26 US Second Answers to Questions, at para. 58.

27. The fact that annual financing expenses relate directly to assets and not to current expenses
also has nothing to do with how proceeds from sal es are spent, as the United States erroneously
asserts. As the example above demonstrates, Ca nada’s argument in no way depends on how the
proceeds from the sales of lumber are used. The poin t the United States ignores is that lumber is sold
and paid for, and thus does not have to be finan ced for the entire cost period examined. Fixed and
other long-term assets, on the other hand, are not sold , but rather are kept in use for the entire cost
period. Thus, they must be financed, at their value, for the entire cost period.

28. Finally, the United States is wrong that th e COGS methodology considers both the costs of
goods in inventory as well as those sold, while Canada’s methodology considers only the costs of
goods in inventory. The issue before the Panel is not how to determine production costs, but rather
how to allocate interest expenses. Interest expe nses are a function of (1) cash needs, and (2) the
amount of time for which such cash must be invested . Total COGS for a year reflects neither of these
for that year. Canada’s methodology is based on both of these functions. The COGS during the year
are fully considered, but only for the time the cash invested in producing those goods remains
invested, i.e., until they are paid for, and thus only for so long as they remain an asset – either in raw
materials inventory, work-in-process-inventory, fi nished goods inventory, or accounts receivable.
Once a good is sold and paid for, no cash remains i nvested in that good, and it is no longer being
financed by the company. The United States ha s nowhere explained the basis for its position that
goods sold and paid for still are being financed by the producer.

119. In its reply to question 56, the US refers to the "reliability of cost data". Based on the
record, did DOC find in the context of the investi gation that data submitted by Tembec for the
Forest Products Group was not reliable? If so, please point to relevant documents submitted to
the Panel – including cost verification reports – or provide them.

 Canada’s comments on the US response to Question 119 are the following:

29. In its answers to Questions 119 and 120, the United States states four times, in paragraphs 65-
69 and at pages 16-17 of the Attachment, that no evidence was presented that Tembec’s divisional
data were kept in accordance with generally accepted accounting principles (GAAP). Those
statements are inaccurate. Note 20 to Tembec’s Consolidated Financial Statements contained in
Tembec Inc.’s 2000 Annual Report explicitly states that “[t]he accounting policies used in these
business segments are the same as those described in the summary of significant accounting policies”
to the Consolidated Financial Statements.
27

30. As noted in the Auditors’ Report to the Cons olidated Financial Statements, an audit includes
assessing the accounting policies used in preparing the statements. The auditors found those
statements, including the policies used in prep aring them, to be in accordance with GAAP in
Canada.28 The United States assertion that Tembec’ s Forest Products Group records are not
maintained in accordance with GAAP is an assertion unsupported by any evidence and contrary to the
evidence that is on the record.

120. Please comment on paras. 84-88 of Canada's Second Oral Statement, specially on the
last sentence of para. 85.

 Canada’s comments on the US response to Question 120 are the following:

27 See Tembec Section A Questionnaire Response (22 June 2001), Exhibit A-15 (Tembec Inc. 2000
Annual Report) at 44 (Exhibit CDA-94).
28 Ibid., at 29 (Exhibit CDA-173).

31. The United States makes two new arguments in paragraph 66 and on page 17 of its
Attachment in response to the Panel’s question about the evidence that Tembec’s pulp and paper
operations incurred significantly higher G&A than its lumber operations. The first new argument is
that “the productivity of assets does not determine the amount of G&A used … .”
29 That argument is
not relevant. Canada never made arguments concerning assets with respect to Tembec’s G&A. The
United States is confusing Abitibi and its financing expenses with Tembec’s G&A.

32. The second argument is that “no reliable ev idence was presented showing that Tembec’s
lumber division incurred less G&A than its other divisions.”
30 This argument is an inaccurate ex post
facto rationalization. The Hyperion statements incl uded as exhibits to the verification reports show
that the pulp and paper groups incurred higher G&A than the Forest Products Group.31

33. The United States further claims in paragraphs 65 and 67 that “Commerce rejected the [Forest
Products Group G&A] data because they were less re liable and could have led to distortions.” This
new argument is also an ex post facto rationalization that was not part of the agency’s explanation for
rejecting the Forest Products Group G&A data. Commerce, in its Issues and Decision Memorandum,
defended its normal practice of using company-wide data by noting that “[this] methodology also
avoids any distortions that may result if, for business reasons, greater amounts of company-wide
general expenses are allocated disp roportionately between divisions.”
32 Commerce made no findings
that this hypothetical concern was applicable to Tembec. Commerce never made any written findings
that Tembec’s Forest Products Group G&A data were l ess reliable or would lead to distortions. The
record evidence actually shows that Commerce’s use of the company-wide data led to distortions that
would have been avoided had Commerce used the Forest Products Group data.

34. Finally, the United States, in paragraph 69 of its answer to Question 102 and at page 17 of its
Attachment, claims that Commerce used Tembec’s divisional data only for the very narrow purpose
of removing certain packaging costs from the de nominator in the calculation of the G&A ratio.
Commerce, the United States claims, did not use Tembec’s divisional data for any other purpose.
Actually, Commerce used the Forest Products Group divisional data for every element of the sales
databases and its price-to-price comparisons, including not only the sales prices themselves, but also
every adjustment.
33 Moreover, Forest Products Group divisional data were used for every element of
Commerce’s cost calculations except G&A and financing expenses. They were used to determine the
costs of all raw materials, labour, energy, depreciation and factory overhead.34

123. It is stated in para. 84 of the US Second Written Submission that:

"[g]eneral expenses are, by definition, expenses incurred for the benefit of a
corporate group as a whole. They are not specific to one or another product
line. A requirement that general expe nse be directly related to the good
produced would make it impossible to allocate general expense within a
company that produces many goods because a direct relationship would never
be identifiable. This would render meaningless the requirement of Article 2.2

29 US Attachment, at 17.
30 Ibid.
31 See Tembec Cost Verification Exhibit 10, at 2 (Contains Business Confidential Information) (Exhibit
CDA-149).
32 IDM, Comment 33, at 105 (Exhibit CDA-2).
33 See DOC Analysis Memorandum For Tembec Inc., at 1 (“This margin is based on sales information
supplied by Tembec.”) (Tembec Sales Exhibit, at 6 (Contains Business Confidential Information) (Exhibit
CDA-187)); see also Verification Report and Accompanying Exhibits providing verified data derived from
Tembec’s Forest Products Group (ibid., at 7-24).
34 See Cost Verification Report, at 5 (ibid., at 8).

that “a reasonable amount for administrative, selling and general costs” be
included in a company’s cost calculation."
In its practice, how does DOC treat G&A costs wh ich have been demonstrated to it not to
"pertain[] to production and sales () of the like product" in accordance to the chapeau of
Article 2.2.2? Please provide a recent example of that practice.

 Canada’s comments on the US response to Question 123 are the following:

35. In its response to Question 123, the United States acknowledges that its policy is to allocate
only a portion of parent company G&A to the producer of the like product. The United States
misstates its practice. In Brass Sheet and Strip, Commerce found that, in calculating G&A:

[it] includes an amount of G&A from related companies which pertains to the product
under investigation. G&A and other non-ope rating income and expense items are not
considered fungible in nature. Thus, non- operating income and expenses realized by
a related company does not necessarily affect the general activity of [the
respondent].
35
36. This practice clearly anticipates that non-ope rating expenses are not fungible and that some
such expenses incurred by a parent company may not “affect the general activity of the respondent.”
Weyerhaeuser’s hardboard siding expense is a non-op erating expense. The United States concedes
that it relates to non-like product. If, as Commerce states, such expenses are not fungible, then there
is no basis for attributing the hardboard siding expense to the production and sale of Weyerhaeuser
Canada Limited’s softwood lumber.

125. Please comment on the following portio n of para. 229 of Canada's Second Written
Statement:

"Commerce agreed that it was proper to exclude the expense from parent
company G&A in its preliminary determination".

 Canada’s comments on the US response to Question 125 are the following:

37. The United States suggests that it did not kn ow that Weyerhaeuser excluded the hardboard
siding expense until verification, after the Prelimin ary Determination. Canada submits as Exhibit
CDA-188 pages from Exhibit D-11 of Weyerhaeuser’s Section D response. This response was
submitted on 23 July 2001, months before Commer ce’s Preliminary Determination. The attached
pages include Weyerhaeuser’s worksheet for calculating parent company G&A and clearly omits the
hardboard siding expense, which is a line item that appears in Weyerhaeuser’s financial statement
(also included in Exhibit D-11). Commerce revi ewed Weyerhaeuser’s submission and accepted the
data. It never objected to Weyerhaeuser’s calculation. It reviewed the data at verification and, again,

35 Brass Sheet and Strip from Canada , 61 Fed. Reg. 46,618, at 46,619 (Dep’t Commerce
4 September 1996) (Exhibit CDA-104), citing Certain Hot-Rolled Carbon Steel Flat Products from Japan , 58
Fed. Reg. 37,154, at 37,166 (Dep’t Commerce July 9, 1993).

never mentioned that the exclusion of the hardboard siding expense was an issue to be reviewed.
Commerce only addressed this issue in vague terms after the record closed.
36

36 See the discussion on pages 85-87 of Canada’s Second Written Submission.

ANNEX C-2

COMMENTS OF THE UNITED STATES ON RESPONSES OF
CANADA TO QUESTIONS POSED IN THE CONTEXT
OF THE SECOND SUBSTANTIVE MEETING
OF THE PANEL

(5 September 2003)

1. In this submission, the United States comment s on certain statements Canada made in its
26 August 2003 responses to questions from the Pane l. The United States is mindful of the narrow
scope of the Panel’s invitation to comment and, th erefore, responds only to new factual data and new
arguments raised by Canada. There are many other statements in Canada’s 26 August 2003 responses
with which the United States disagrees. However, in general, the United States has already addressed
the substance of those statements in its prior submissions.

A. Physical Characteristics

2. In its response to Panel Question 92, Cana da has significantly oversimplified the softwood
lumber production process and the methodologies used by the respondent companies for recording
their many production costs. The United States refers the Panel to Comment 4 in the Final
Determination for a detailed discussion of the issues involved in measuring the cost of producing
softwood lumber in this case.
1

3. In paragraph 33 of its response, Canada states that Commerce “ created” variable cost
differences among product grades. 2 Commerce did not “create” any costs or any cost differences.
The costs and cost differences associat ed with grade are a direct result of the data on the record. At
the Canadian companies’ urging (and, in fact, contrary to the wishes of the domestic parties),
Commerce reallocated certain costs that were re corded and reported by the companies on a volume
basis. These costs were reallocat ed to the various grades produced using pricing data, because grade
was determined to result from qualities inherent in the wood. 3 As a result, the variable costs of
varying grades of softwood lumber may differ.

4. In paragraph 35 of its response, Canada states that the United States has raised the question of
variable costs and is thereby confusing the issue. At no point in this dispute has the United States
raised any question with respect to Commerce’s calculation of variable costs or any related issue. The
United States has simply explained the basis for Commerce’s long-standing approach for granting
adjustments for differences in phy sical characteristics, which normally depends on differences in
variable costs.4 Nor has the United States ever attempted to “change the focus” in this case to address
“how the allocation would be calculated." 5 The United States has consiste ntly directed its arguments

1 Final Determination, Comment 4 (Exhibit CDA-2).
2 Canada Responses to Second Panel Questions, para. 33.
3 See Final Determination, Comment 4 (Exhibit CDA-2).
4 See US First Written Submission, paras. 126, 133 notes 163, 164; US First Answers to Panel
Questions, para. 43; US Second Submission, para. 53, note 89; US Second Answers to Panel Questions, paras.
21-30.
5 Canada Responses to Second Panel Questions, para. 35.

to the requirements of Article 2.4, unless a specifi c question from the Panel or argument from Canada
has dictated otherwise.

5. In response to Question 93, at paragraph 39 , Canada makes yet another attempt to plead
surprise with Commerce’s Final Determination. This time, however, Canada argues for the first time
that respondents did not and could not know what Commerce’s model match methodology would be.
This contradicts much of Canada’s argument, wh ich rests on the parties’ comments regarding model
matching and the implication of Commerce’s alleged acquiescence to those model matching
suggestions in the Preliminary Determination. Canada argues that respondents could not anticipate
what pricing arguments to make unless they coul d have anticipated (apparently with absolute
precision) what non-identical matches Commerce would actually make.

6. Canada’s latest claim of surprise mak es no sense. Respondents were well aware of
Commerce’s model match hierarchy, which did not change significantly from the Preliminary
Determination to the Final Determination.
6 Thus, they could easily anticipate, generally, what
softwood lumber items were likely to be compared as identical and similar. They were familiar with
their own databases and their own product mixes. This is the kind of examination that Commerce
performed. The softwood lumber databases are enorm ous (thousands of transactions). As a result,
even Commerce could not determine precisely what items are similar and what items are matched as
identical until the final computer programme gene rated the final matches, taking into account all
variables and adjustments. If Commerce had been re quired to perform the analysis Canada suggests,
and release it to the parties for comment and possi ble revision, Commerce could not have completed
the investigation in a timely manner.

B. Calculation of the Dumping Margin

7. In response to Panel Question 104, Canada argues for the first time that, when using the
transaction-to-transaction comparison methodology in Article 2.4.2 of the AD Agreement, an
investigating authority must offset dumping margin s with the amount by which distinct transactions
have not been dumped. Ca nada’s sole basis for this assertion appears to be the “ fair comparison”
language of Article 2.4.
7 According to Canada, not providing an offset “gives these transactions less
weight in the calculation of the overall dumping margin." 8 Canada is simply incorrect. As the
United States explained in response to the Pane l’s Question 109, in calculating the overall dumping
margin, Commerce divides the aggregate amount of dumping by the aggregate value of all export
transactions that were examined. The aggregat e value of all export transactions includes all
non-dumped export transactions and no adjustment is made to their value as a result of the fact that
they were not dumped. Thus, non-dumped transacti ons are weighted in th e exact same manner as
dumped transactions – by their value – and there is no basis for Canada’s suggestion that they are
given less weight. At the same time, such transact ions properly do not affect the numerator in this
calculation because, as Canada agrees, “the price comparison revealed no dumping."9

C. Abitibi Financial Expenses

8. In response to Panel Question 115, Canada h as submitted new factual information in the form
of Exhibit CDA-181. Exhibit CDA 181 is misleading and inaccurate for at least two reasons. First,
Canada uses this exhibit to impl y that all of Abitibi’s asset categories are more or less equal.
However, as the United States has explained, the vast majority of Abitibi’s assets are capital assets for

6 Final Determination, Comment 7 (Exhibit CDA-2) (The basic methodology did not change between
the Preliminary and the Final Determination. Commerce did fine-tune the matches, i.e., subdivided length into
length bands and added grade groups).
7 Canada Responses to Second Panel Questions, paras. 48-49.
8 Id., para. 58.
9 Id., para. 49.

which depreciation expenses were realized. 10 (The chart labels these assets as “Building” and
“Machinery and Equipment.”) The chart is misl eading, because it suggests that the asset category
“Land,” which was so insignificant that Abitibi did no t list it separately on its financial statement, is
roughly equal to these other asset categories.

9. The relative size of “Building” and “Machiner y and Equipment” as compared to “Land” is
important and illustrates the shifting nature of Canada ’s argument before this Panel. Initially, Canada
argued that the COGS-based methodology was inappr opriate as applied to Abitibi because it ignored
the fact that Abitbi’s non-lumber producing divisi ons required more capital assets than the lumber
division.
11 The United States explained that because the COGS methodology included depreciation
expenses, which are realized on the vast major ity of Abitibi’s capital assets, the COGS methodology
adequately considered the varying capital asset requirements in allocating financial expenses.12

10. In response, Canada’s argument changed, a nd started to focus on the only example of capital
assets for which depreciation expenses are not realized, to wit, land. Canada argued that because
depreciation expenses were not realized on la nd, the COGS methodology must be unreasonable.
13 By
creating a chart that suggests that Abitibi owned significant amounts of land during the POI, Canada
seeks to strengthen its argument. However, this Panel should look beyond th e misleading nature of
Exhibit CDA-181. Abitibi did not own significant amounts of land during the POI, as evidenced by
the fact that it did not included it as a separate line item on its financial statement.
14

11. Exhibit CDA-181 is also misleading because it explicitly states that all production (or
“sawmill”) costs are captured in inventory. 15 Normally, a company produces a large amount of
inventory that is sold throughout the year. N one of the production costs for these sold goods is
included in inventory at the end of the year. T hus, inventory in no manner includes all the production
costs incurred throughout the year.

12. In allocating financial expen ses, it is important to consider all production costs, because a
company may incur financial expenses on any of its costs, including any of its production costs
throughout the year. In response to Panel Question 115, Canada argues that a company would not
incur financial costs on sold goods, because the proceeds from sales are used to pay for the production
of those sold goods.
16 However, this argument disregards the fungible nature of money, a concept
with which Canada ostensibly agrees. 17 Because of the fungible nature of money, proceeds from
sales, just like proceeds from a loan, may be used to pay for assets as easily as production costs.
Thus, all production costs, and not just those in inventory, are properly considered when allocating
financial costs.

D. Tembec By-Product Revenue

13. In response to Panel Question 130, Canada in correctly characterizes a point made by the
United States at the Second Substantive Meeting. The United States did not assert that Exhibit
CDA-175 demonstrates that there is an actual "c ost of production for a by-product." As the
United States has explained throughout this proceedi ng, by-products do not have an actual cost of
production. Nonetheless, just as transfer costs ar e generally less in value than unaffiliated party
transactions, because of the existence of profit, so t oo are offsets to the cost calculation, in this case

10 See, e.g. US Second Written Submission, para. 74.
11 See, e.g. Canada First Written Submission, paras. 191-194.
12 See, e.g. US Second Written Submission, para. 74.
13 See, e.g. Canada Responses to First Panel Questions, para. 136.
14 See, Abitibi Financial Statement, p. 35 and p. 49 note 9 (exhibit CDA-82).
15 See also, Canada Responses to Second Panel Questions, paras. 83-86.
16 See, e.g. Canada Responses to Second Panel Questions, para. 85.
17 See, e.g. Canada Second Written Submission, para. 189.

by-products, generally less in value than the sale pr ice of by-products to unaffiliated purchasers. As
Commerce explained in paragraph 88 of its An swer's to the Panel's 13 August 2003 Questions,
Exhibit CDA-175 supports this proposition. The exhi bit provides, as a general proposition, that at
some point, a company will assign a value to a by-produc t. Once this value has been assigned, future
sales of that by-product to unaffiliated parties may result in a “gain,” for accounting purposes, to the
company. Nothing Canada has offered in draw ing distinctions between accounting methods for
valuing by-products refutes this proposition, and in fact, Canada ’s new explanations ignore the
United States’ central argument: Commerce used Tembec’s own books and records to value wood
chips in this investigation, as required by Article 2.2.1.1. of the AD Agreement. In doing so, it
determined that the difference between Tembec's interdivisional transfer prices and its sales to
unaffiliated purchasers could be explai ned by this reasonable, anticipa ted "gain". Canada’s Exhibit
CDA-175 supports Commerce’s accounting methodology, which recognizes the existence of such a
“gain”, and Canada’s new arguments have failed to show otherwise.

E. Slocan

6. In response to Panel Question 135, Canada makes a new assertion that the United States
"conceded" during the Second Substantive Meeting th at Commerce concluded that Slocan’s futures
profits constituted an offset to indirect selling expenses.
18 Commerce certainly made no such
conclusion, and the only point the United States made during the Second Substantive Meeting was
that these expenses might properly be indirect e xpenses, despite Slocan's own claim during the
investigation that it had no indirect selling expen ses in the United States. Thus, the United States
notes that (1) this supposed "concession" is nowhere on the record of the investigation, (2) is a post
hoc argument raised by Canada (but never raised by Slocan), and (3) indirect selling expenses still
would not affect price comparability in the context of Slocan’s requested adjustment, because they are
not terms and conditions of sale to a US customer.
19

18 Canada Responses to Second Panel Questions, para. 126.
19 See US First Written Submission, para. 249-250.

ANNEX C-3

LETTER OF THE UNITED STATES EXPRESSING OBJECTIONS
TO THE COMMENTS OF CANADA ON RESPONSES OF THE
UNITED STATES TO QUESTIONS POSED IN THE CONTEXT
OF THE SECOND SUBSTANTIVE MEETING OF THE PANEL

(9 September 2003)

Dear Mr. Chairman,

 My authorities have instructed me to express objections re garding Canada’s
5 September 2003, Comments on US Responses to Qu estions from the Panel in Connection with the
Second Panel Meeting (“Canada’s Comments”). On 28 August 2003, the Panel permitted a limited
opportunity for the Parties to comment on each othe r’s replies to questions posed by the Panel
following the second substantive meeting. The Panel instructed the Parties “not to comment on any
factual issues or arguments which have already been subject to discussion during the procedure, but to
restrict their comments to any new factual data or any new arguments raised by the other Party.”

 Material in Canada’s Comments exceeds the scope of the Panel’s instructions. In particular,
Canada has submitted yet another “regression” anal ysis (Exhibit CDA-186), this time for certain
Abitibi transactions. This exhibit is not addressed to “new factual data” or “new arguments.” Instead,
it is addressed to factual issues and arguments that ha d been introduced prior to the 26 August 2003
submission of responses to questions. Canada’s ass ertions regarding Abitibi’s sales were included in
Canada’s 30 June 2003, Responses to Panel Question from the First Substantive Meeting, para. 87.
At the Second Substantive Meeting, the Panel asked the United States to comment on Canada’s
assertions, which the United States did in its Res ponse to Panel Question 97, at paras. 34-36 and
Exhibit US-81. Canada improperly has submitte d new evidence to the Panel under the guise of
responding to “new” data and arguments. Therefore, not only is the submission of this exhibit
contrary to the Panel’s explicit instructions of 28 August 2003, it is contrary to para. 14 of the Panel’s
working procedures.

 Contrary to Canada’s suggestion, ( see Canada’s Comments at note 12), the United States has
not objected to the submission of charts, such as C DA-Exhibit 76, that simply reflect the data that
were before the investigating authority. The Unite d States did not object to the submission of the
presentation of that data, notwithstanding that such charts and analysis had not been presented to
Commerce during the underlying investigation. The United States continues to object, however, to
eleventh-hour manipulations of the underlying data. This is the case for Exhibit CDA-77 and, now,
Exhibit CDA-186. Under Article 17.5(ii), such submissions cannot serve as a basis for establishing a
violation of obligations under the AD Agreement.

 The United States is providing a copy of this letter directly to Canada.

ANNEX C-4

LETTER OF CANADA REPLYING TO THE OBJECTIONS OF
THE UNITED STATES REGARDING THE COMMENTS OF
CANADA ON RESPONSES OF THE UNITED STATES
TO QUESTIONS POSED IN THE CONTEXT OF THE
SECOND SUBSTANTIVE MEETING OF THE PANEL

(15 September 2003)

Dear Mr. Chairman,

 In its letter of 9 September 2003, the United States objects to the submission of Exhibit CDA-
186 as part of Canada’s comments on the US responses to the Panel’s questions from the second
substantive meeting.

 As stated in Canada’s comment on the res ponse of the United States to Question 97 of the
Panel, Exhibit CDA-186 was part of Canada’s comme nts on Exhibit US-81. In Exhibit US-81, the
United States for the first time presented an anal ysis of the daily net prices for certain Abitibi
products. This analysis was not before Commerce during the underlying investigation. Moreover,
these net prices were not on the record before Commer ce, but rather had to be calculated for the Panel
by subtracting certain adjustments from gross prices . At the Panel’s invitation, Canada commented
on Exhibit US-81 because it contained new factual data. Canada also commented on new arguments
made by the United States based on Exhibit US-81 that are misleading, difficult to follow, and
analytically deficient.

 As to the more general objection by the Un ited States that the acceptance by the Panel of
regression analyses would contravene paragraph 14 of the Panel's Working Procedures, Canada refers
to its reply of June 10, 2003, to the preliminary obj ections filed by the United States to Canada’s First
Written Submission. As stated there, it is Cana da’s view that regression analyses are admissible,
provided that the underlying data were before the i nvestigating authority; otherwise, the Parties would
be barred from assisting the Panel by explaining th e relevance of such data in relation to the
obligations of the investigating authority pursuant to the Anti-Dumping Agreement.

 Indeed, Canada sees no distinction between the use of record data in Exhibit US-81 and
Exhibit CDA-186. Both require calculations using r ecord data, and both plot the same data points.
These exhibits both equally reflect the record data that were before Commerce.

 Thank you for considering these comments.