Softwood Lumber Act of 2008: Customs and Border Protection Established Required Procedures, but Agencies Report Little Benefit from New Requirements
Published: 2009-12-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2006, the United States and Canada signed the Softwood Lumber Agreement. The agreement, among other things, imposed export charges and quotas on Canadian lumber exports to the United States. To assist in monitoring compliance with the agreement, in 2008 Congress passed the Softwood Lumber Act, which imposed several data collection and analysis requirements on the Department of Homeland Security's U.S. Customs and Border Protection (CBP) and required two reports from GAO. This report discusses (1) CBP's processes for meeting the act's requirements and (2) how these requirements contribute to U.S. efforts to monitor compliance with the 2006 Softwood Lumber Agreement. GAO issued a report in June 2009 on U.S. agency efforts to monitor compliance with the 2006 agreement. This report includes an update on these efforts. GAO analyzed information from relevant U.S. agencies, interviewed knowledgeable officials, and discussed these issues with U.S. and Canadian industry representatives.
section_title: What GAO Found
paragraphs: CBP has developed processes to reconcile and verify data provided by the exporter and importer as required by the act, but officials acknowledge continuing issues with data quality. CBP reconciles aggregated export prices from the U.S. entry forms with aggregated export prices from Canadian export permits. To meet the act's verification requirement that the importer has correctly reported the export price, the tax to be paid by exporters to the Canadian government (the export charge), and other information, CBP has created a process within its existing data system to collect these data. However, CBP has acknowledged continuing problems with data quality. For example, CBP port officials manually enter data into this system, which could lead to miscoding. CBP reported that the initial implementation of the act required extensive effort for the agency, but officials stated that ongoing activities need fewer resources. According to CBP, Department of Commerce, and Office of U.S. Trade Representative officials, the information produced through the reconciliation and verification requirements under the act adds little assurance of compliance with the 2006 Softwood Lumber Agreement. Some of the act's requirements are to ensure the proper operation of international agreements on softwood lumber and enforcement of these obligations. The agreement with Canada contains mechanisms for monitoring compliance, and, according to U.S. government officials, the added requirements of the 2008 U.S. legislation do not provide the U.S. government with additional assurance of compliance with the bilateral trade agreement. Specifically, CBP officials told GAO the requirements under the act do not provide the United States with assurance that the Canadian exporter paid the export charge, because the United States does not have access to company-level tax data from Canada. While the agreement is scheduled to expire in 2013, the act does not have an expiration date. CBP officials said they have not yet determined how they will fulfill their requirements under the act when the agreement expires, but they would no longer have the estimated export charge data that are used in implementing the act.

section_title: Letter
paragraphs: The United States and Canada have been involved in a decades-long  dispute regarding trade in softwood lumber. Canada is the primary  exporter of softwood lumber to the United States. In 2008, Canada  exported approximately $3.2 billion worth of softwood lumber products to  the United States, about 17 times the amount supplied by the next biggest  exporter to the United States. After several years of litigation related to  U.S. allegations of unfair Canadian subsidies, the United States and  Canada signed the 2006 Softwood Lumber Agreement. The agreement  ended ongoing litigation and requires, among other things, the Canadian  federal and provincial governments to establish export charges and  quotas for Canadian lumber exports. It also requires the two countries to  exchange information to support monitoring compliance with the  agreement.
In 2008, the United States passed the Softwood Lumber Act that requires,  among other things, that the U.S. government reconcile and verify  softwood lumber trade data. The act also requires GAO to report on   (1) whether countries that export softwood lumber or softwood lumber  products to the United States are complying with international agreements  entered into by those countries and the United States and (2) the  effectiveness of the U.S. government in carrying out the reconciliations  and verifications mandated by the Softwood Lumber Act. In response to  the first mandate, GAO reported in June 2009 that the U.S. and Canadian  governments have established mechanisms to monitor compliance with  the 2006 Softwood Lumber Agreement, but face operational challenges.
This report primarily addresses the second mandate on U.S. efforts to  reconcile and verify softwood lumber data as required by the act. In  addition, in accordance with our agreement with the Senate Committee on  Finance and the House Committee on Ways and Means, in appendixes III  and IV we include updated information on U.S. efforts to monitor  compliance, on which we first reported in June 2009. This report   (1) describes U.S. Customs and Border Protection’s (CBP) processes for  meeting the act’s requirements and (2) describes how these requirements  contribute to U.S. efforts to monitor compliance with the 2006 Softwood  Lumber Agreement.
To address these objectives, we obtained and reviewed planning and  programmatic documents describing CBP reconciliation and verification  procedures to implement the requirements of the act. We also interviewed  officials from CBP, the Department of Commerce (Commerce), and the  Office of the United States Trade Representative (USTR), to obtain their  perspectives on how the act’s requirements contribute to monitoring  compliance with the bilateral trade agreement and to obtain updated  information on compliance concerns with the agreement. We traveled to  the ports in Buffalo, New York, and Blaine, Washington, to meet with CBP  port officials as well as customs brokers representatives. In addition, we  interviewed officials from Canada’s Department of Foreign Affairs and  International Trade (DFAIT). We also interviewed industry representatives  in both the United States and Canada to obtain their perspectives on the  act’s requirements and the implementation of the bilateral trade  agreement. We determined that the information used is sufficiently reliable  for the purposes of this report. (See app. I for more information about our  scope and methodology.)
We conducted this engagement from December 2008 to December 2009 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
In this report, we recommend that the Secretary of the Department of  Homeland Security direct the Commissioner of CBP to report to Congress  on how CBP plans to fulfill the requirements of the act upon the expiration  of international agreements related to softwood lumber. We provided a  draft of this report to CBP, Commerce, and USTR. CBP concurred with the  report recommendation, stating that it will consult with Congress on how  to proceed when the Softwood Lumber Agreement expires. Commerce  also responded that it concurred with the report. We received technical  comments from CBP and USTR, and incorporated these comments as  appropriate. We also provided relevant sections to Canadian officials for  technical comment, which we incorporated as appropriate.
subsections: section_title: Background
paragraphs: Since the 1980s, the United States and Canada have been engaged in a  trade dispute regarding softwood lumber. One of the main causes of the  dispute is differences in costs for timber harvested on public land in  Canada as compared with timber from private land in the United States. In  Canada, federal and provincial governments own approximately   90 percent of the timberlands and set harvest fees and allocations. In  contrast, in the United States, only about 40 percent of the timberland is  publicly owned, and the timber from that land is sold through competitive  auctions. The U.S. lumber industry is concerned that the use of  government-set fees in Canada raises the possibility that private industry  in Canada has access to timber at less than market prices.
The decades-long softwood lumber dispute has alternated between  periods with a softwood lumber trade agreement and periods of litigation  without an agreement. In 2006, the United States and Canada ended a  period of antidumping and countervailing duty proceedings by signing the  Softwood Lumber Agreement, a 7-year agreement with an option for a   2-year renewal. The agreement established a framework for managing  Canadian exports of softwood lumber to the United States. Key provisions  of the agreement include variable export measures, information  exchange requirements, anticircumvention measures, dispute settlement  mechanisms, and a settlement agreement to end numerous claims that  were pending when the agreement was signed. (App. II contains more  information on the provisions of the 2006 Softwood Lumber Agreement.)
In 2008, Congress passed the Softwood Lumber Act imposing additional  requirements on CBP for monitoring the softwood lumber trade.  According to the legislation, the required reconciliations are to ensure the  proper operation and implementation of international agreements related  to softwood lumber. Furthermore, the importer declaration program  established by the act is intended to assist in the enforcement of any  international obligations arising from international agreements related to  softwood lumber. The act does not contain language specifying an end  date for these efforts. Under the act, CBP is to implement the following  requirements related to softwood lumber imports from all countries:  Importer declaration program: CBP is to establish an importer  declaration program requiring that importers from any country declare,  among other things, that they have made an appropriate inquiry and that to  the best of the person’s knowledge and belief the export price is determined as defined in accordance with the act; the export price is consistent with the export price on the export  permit, if any, granted by the country of export; and  the exporter has paid, or committed to pay, all export charges.
Reconciliation: To ensure the proper implementation and operation of  international agreements related to softwood lumber, CBP is to reconcile  the export price (or revised export price) declared by the importer with  the export price (or revised export price) on the export permit, if any.
Verification: To verify the importer declaration, the act requires CBP to  periodically verify that (1) the export price declared by the importer is the  same as the export price provided on the export permit, if any, issued by  the country of export and (2) the estimated export charge is consistent  with the applicable export charge rate as provided by Commerce.
Semiannual reports: CBP is to report to Congress every 6 months    describing the reconciliations and verifications programs and  identifying the manner in which the U.S. importers subject to  reconciliations and verifications were chosen; identifying any penalties imposed under the act and any patterns of  noncompliance with the act; and identifying any problems or obstacles encountered in the  implementation and enforcement of the act.
section_title: CBP Has Developed Processes to Meet the Requirements of the Act but Acknowledges Data Weaknesses
paragraphs: As shown in table 1, CBP has taken a variety of steps to implement key  provisions of the Softwood Lumber Act of 2008.
subsections: section_title: CBP Revised Its Entry Form and Databases to Collect Additional Data Required by the Act
paragraphs: CBP added three new fields to the U.S. entry form to collect data on the  export price, estimated export charge, and importer declaration needed  for the reconciliation and verification processes. CBP started enforcing  the new requirements imposed by the act in September 2008. The act and  CBP require these three data elements for softwood lumber imports from  all countries. However, according to CBP officials, only imports from  Canada include export charge information because of the 2006 Softwood  Lumber Agreement. Furthermore, CBP reported in October 2009 that  importers of softwood lumber products from non-Canadian countries have  a difficult time in determining the correct amount to list as the export  price because the export price definition in the act contains references  specific to Canadian softwood lumber, such as “remanufacturer.”
section_title: CBP Reconciles Aggregated Export Price Data from Canada with Aggregated Export Price Data from U.S. Entry Forms
paragraphs: To implement the act’s reconciliation requirement, CBP compares  publicly available aggregate regional export price data from Canada with  aggregate export price data from the U.S. entry form. (Under the act, CBP  is reconciling this information only for Canadian exports because Canada  is the only country with which the United States has an international  agreement specifically on softwood lumber.) As shown in figure 1, CBP  obtains the export price from the U.S. entry form, which the U.S. importer  should copy from the Canadian export permit. CBP then compares  aggregate monthly data from the U.S. entry forms with the publicly  available export price data that are posted on the Web site of Canada’s  DFAIT.
Cdin exporter end Cdin export permit to Deprtment of Foreign  Affir nd Interntionl Trde (DFAIT)
U.S.
CBP compares aggregate information.
U.S. importer end U.S. entry form to U.S.  Custom nd Border Protection (CBP)
Are the total export prices the same?
According to CBP officials, on a monthly basis, they reconcile aggregate  export price data based on the Canadian region of export. CBP first  combines the individual-level export price data from each U.S. entry form  for all shipments during a 1-month period and reconciles these values with  the aggregate Canadian export data. According to CBP, each month,  analysts run a computer program to compare the U.S. and Canadian data  and to identify discrepancies. In its October 2009 semiannual report to  Congress, CBP reported that the overall variance between the export price  on the entry summary form and the export price received from the  “country of export” for the 6-month period between October 2008 and  March 2009 was 1 percent.
section_title: CBP Adapted Existing Mechanisms to Comply with the Verification Requirements under the Act
paragraphs: As required by the act, CBP has developed processes to verify the importer  declaration, which includes verifying that  the export price declared by the importer is the same as the export price  provided on the export permit, if any, issued by the country of export;  the estimated export charge is consistent with the applicable export  charge rate as provided by Commerce; and importers have “made appropriate inquiry, including seeking appropriate  documentation from the exporter,” and to the best of the importer’s  knowledge and belief that the exporter has paid or committed to pay all  applicable export charges.
To meet these legislative requirements, CBP adapted its existing Entry  Summary Compliance Measurement program to include softwood lumber  as a subcomponent. The program selects softwood lumber entries for  verification via random statistical sampling. When an entry is selected for  verification, import specialists at the ports review the entry form to ensure  that all of the required information is included and request supporting  documentation from the importers to verify that the information on the  entry document has been recorded correctly. The import specialists then  enter the results into an electronic database system that CBP headquarters  accesses and analyzes.
In its October 2009 semiannual report to Congress, CBP reported that  approximately 82 percent of the samples its officials verified during the  first 6 months of the process, from October 2008 to March 2009, correctly  reported the export price—with a higher rate, almost 85 percent, for  imports from Canada. Regarding the export charge, about 77 percent of  the entries CBP sampled from Canada had that value reported correctly. In  addition, CBP reported that about 90 percent of the importer declarations  were reported properly. According to CBP, the requirements did not apply  to an additional 5 to 10 percent of the selected Canadian samples because  they were exempt from the provisions of the bilateral trade agreement.  Officials stated that the combination of samples that were reported  correctly and those for which the requirements were not applicable  brought the overall results for the softwood lumber samples for Canada  close to what they see for other commodities.
section_title: CBP Officials Attribute Discrepancies Partly to Data Entry Errors
paragraphs: Because the importer or customs broker should copy the export price  from the Canadian export permit onto the U.S. entry form, CBP officials  said they expect discrepancies in the data to result mainly from the  following: (1) human errors in copying the export price from one form to  another and (2) differences caused by converting from Canadian to U.S.  dollars. In addition, CBP officials explained that the export price for a  shipment could be listed as one line on the Canadian export permit, but  broken into multiple lines on the U.S. entry form. CBP has instructed  importers in how to resolve this issue, but officials said that importers  sometimes do not perform this calculation correctly.
In its October 2009 report to Congress, CBP reported that discrepancies  between the export price reported on the Canadian export permit and the  export price reported on the U.S. entry form have decreased over time.  CBP reported a variance of almost 16 percent between the U.S. and  Canadian data in October 2008, the first month of reconciliations under  the act. By March 2009, the variance between the U.S. and Canadian  export prices had decreased to approximately 2 percent.
CBP officials told us that 5 to 10 percent of the entries randomly selected  for review as part of the verification process were not recorded correctly  due to data entry errors by either the importer or CBP’s import specialists.  These errors may have been caused by an import specialist incorrectly  recording the verification data in CBP’s database or not following the  instructions consistently. CBP officials added, however, that the errors are  not surprising considering that the requirements are new, and that the  importers and the CBP import specialists are still learning how to  correctly record information.
We identified the following two reasons for data entry errors:    Miscoding: Import specialists manually type specially developed softwood  lumber codes into the remarks section of CBP’s existing electronic  database system, which could lead to miscoding. For example, preliminary  results from the first round of the verification cycle from October 2008 to  March 2009 show “over-reporting” for the importer declaration. The  verification involves the import specialist obtaining documentation to  substantiate the importer declaration. There is no calculation or number  associated with the declaration itself; correct reporting would be  considered either “not reported” or “reported correctly.” There should be  no over- or underreporting.
Officials told us they are migrating from the existing system and will be  using a new system, Automated Commercial Environment, starting  January 2010. They stated that the new system will allow them to create  custom data entry fields, which they believe will most likely diminish  errors associated with miscoding.
Inconsistent application of guidance: Guidance for the import specialists  conducting the verifications at the ports states that the export price on the  U.S. entry form could be within a 2 percent margin of the export price  reported on the Canadian export permit to be considered correctly  reported. However, at one of the two ports we visited, we observed that  some, but not all, import specialists had inappropriately applied the   2 percent margin to the export charge as well. CBP officials at  headquarters stated that they were unaware of the differences in the  application of the guidance, but that they were continuing to provide  outreach to import specialists regarding how to correctly conduct the  verifications and record the results.
CBP officials attribute issues with the quality of the data used in the  reconciliation and verification processes to the relative newness of the  process. The act was enacted in June 2008 and went into effect in August  2008, 60 days later. According to CBP’s May 2009 report to Congress, CBP  delayed enforcement of the importer declaration program 30 days, to give  CBP time to publish the interim rule describing the new entry  requirements and to give the trade community time to make the necessary  changes to provide the three new data elements required for each line of  softwood lumber articles on the entry form. Industry representatives also  said they had very little time to reprogram their computer systems to  collect the necessary data. CBP began selecting random samples of  softwood lumber entry summaries on October 1, 2008.
CBP officials told us they conducted a series of training and outreach  programs to educate import specialists and importers on how to correctly  fulfill the new requirements the act imposed on shipments of softwood  lumber. For example, they established an e-mail box to receive questions  and a “Frequently Asked Questions” section on the agency’s Web site to  address the new requirements. CBP officials told us they consider the first  6 months of the verification process a dry run to observe the process and  determine areas that need improvement. The officials stated that they have  ongoing efforts to provide further guidance and clarification. As an  example, they cited memorandums sent to import specialists every   6 months identifying specific examples that were entered into the system  incorrectly and needed to be corrected. In addition, headquarters conducts  quarterly conference calls with staff at the ports and hosts an annual  meeting to discuss issues related to the overall Entry Summary  Compliance Measurement process used for all commodities, with  softwood lumber being one subcomponent of this process.
section_title: CBP Reported Incurring Initial Costs to Implement the Act, but Indicated That Ongoing Resource Requirements Are Very Limited
paragraphs: In CBP’s May and October 2009 reports on the agency’s implementation of  the act, CBP reported that it undertook extensive changes to its systems to  collect the required data elements on the U.S. entry form. The  reprogramming of these systems, training personnel, and providing advice  to the trade community on changes to the entry form required extensive  effort for the agency. CBP further reported that headquarters had to divert  resources from import safety, intellectual property rights, and other areas  to implement the act. However, CBP officials told us that, now that they  have established the reconciliation and verification processes required by  the act, the agency’s ongoing efforts related to the act’s requirements do  not consume as much time as did its initial efforts. For example, CBP  officials at headquarters and at the ports we visited said that work on  softwood lumber verifications in particular is not time intensive.
section_title: Agency Officials Believe That the Act’s Requirements Add Little to Their Efforts to Monitor Compliance with the Bilateral Trade Agreement; Requirements Are Likely to Continue after the Agreement Expires
paragraphs: CBP, Commerce, and USTR officials stated that the information produced  through the reconciliation and verification requirements under the act do  not directly help them monitor compliance with the 2006 Softwood  Lumber Agreement with Canada. The purpose of some of these legislative  requirements is to ensure the proper implementation and operation of  international agreements on softwood lumber and assist in the  enforcement of these obligations. The 2006 agreement with Canada  contains mechanisms for monitoring compliance, and, according to U.S.  government officials, the added reconciliation and verification  requirements of the Softwood Lumber Act of 2008 do not provide the U.S.  government with additional assurance of compliance with the bilateral  agreement. Specifically, CBP officials told us the requirements of the act  do not provide them with direct assurance that the Canadian exporter paid  the export charges owed to the Canadian government under the  agreement.
CBP officials said that comparing the aggregate export price data from the  Canadian export permits with the aggregate export price data from the  U.S. entry forms provides no additional information on the collection of  the Canadian export charge. CBP does not examine any export charge  data in the reconciliation process under the act. The export price, as  defined in the act, does not contain any information on the export charge.  The export price on the export permit is an estimated price at the time of  shipment. According to CBP officials, because the export price on the  Canadian export permit and the U.S. entry form is not the final revised  export price reported by the exporter to the Canada Revenue Agency, it  does not represent the value upon which the export charge is paid.
Similarly, CBP officials said the verification process for imports from  Canada does not provide the agency with additional information about  whether Canadian exporters are complying with the provisions of the  bilateral trade agreement, because the U.S. government does not have  access to the Canadian government’s tax records and therefore has no  means to confirm whether Canadian companies actually paid the export  charge. None of the data elements the act requires CBP to verify—the  export price, estimated export charge, or importer declaration—provide  additional evidence that the exporter paid the export charge, according to  CBP officials. As with the reconciliation process, the export price is  copied from the Canadian export permit to the U.S. entry form and does  not contain export charge information. The estimated export charge on  the entry form is reported by the importer based on the estimated export  price and Commerce’s determination of the export charge rate for that  month and province. Furthermore, the importer declaration only requires  importers to affirm that they made the appropriate inquiry that the  exporter has paid, or committed to pay, any applicable export charges.  Finally, for CBP to impose a penalty on importers who violate the act, CBP  is required to prove that the importer committed a “knowing violation.”  CBP officials told us that this violation is harder to prove than other  violations of customs laws. In October 2009, CBP reported that it has not  initiated any penalty actions for violations of the act.
The requirements of the act, however, may have an indirect effect on  Canadian exporters’ compliance with the bilateral trade agreement,  according to USTR and Commerce officials, because the act’s  requirements demonstrate that the United States is looking closely at  softwood lumber imports. A representative of the U.S. softwood lumber  industry said that the act’s requirements may also have improved the  accuracy of the Canadian data, and that the importer declaration program  is useful because he believes that it provides additional information on  whether the export charge was paid.
Some of the act’s requirements are to ensure the proper implementation  and operation of international agreements on softwood lumber and assist  in the enforcement of these obligations. The 2006 Softwood Lumber  Agreement is in force until 2013; however, the act does not have an  expiration date. As a result, it is unclear whether, or to what extent, CBP  will need to continue to implement the U.S. legislative requirements when  the bilateral trade agreement expires. CBP officials said they have not yet  determined how they will fulfill their requirements under the act when the  agreement expires, but assume that they will have to continue  implementing the verification and importer declaration requirements.  However, without the bilateral trade agreement, CBP would no longer  have the data for the export charge calculation that are included as part of  the verification process. A senior CBP official said that the agency would  probably devote more attention to this issue closer to 2013.
section_title: Conclusions
paragraphs: One purpose of the Softwood Lumber Act of 2008 is to ensure the proper  operation and implementation of international agreements related to  softwood lumber. CBP has established mechanisms to comply with its  requirements. However, officials from USTR, Commerce, and CBP told us  the act’s requirements add little direct benefit to their efforts to monitor  compliance with the 2006 Softwood Lumber Agreement, although U.S.  officials and some industry representatives stated there may be some  indirect benefit resulting from the increased scrutiny of softwood lumber  imports from Canada. The act does not state what CBP’s reconciliation  and verification requirements would be in 2013—when the bilateral trade  agreement is currently scheduled to expire. It is unclear how CBP would  implement its continuing requirements under the act and what purpose  these requirements would have in the absence of an international  agreement.
section_title: Recommendation for Executive Action
paragraphs: To provide Congress with sufficient time to clarify the U.S. Customs and  Border Protection’s requirements under the Softwood Lumber Act of 2008,  we recommend that the Secretary of Homeland Security direct the  Commissioner of CBP to report to Congress on how the agency plans to  fulfill the requirements of the act upon the expiration of international  agreements related to softwood lumber.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the U.S. Customs and Border  Protection, Department of Commerce, and Office of the U.S. Trade  Representative. We received written comments from CBP and Commerce,  which are reprinted in appendixes V and VI. CBP concurred with the  report recommendation, stating that it will consult with Congress on how  to proceed when the Softwood Lumber Agreement expires. Commerce  also concurred with the draft report. We also received technical comments  from CBP and USTR, which we incorporated as appropriate. We also  provided relevant sections to Canadian officials for technical comment,  which we incorporated as appropriate.
We are sending copies of this report to interested congressional  committees, the Secretary of Commerce, the Secretary of Homeland  Security, and the U.S. Trade Representative. In addition, this report will be  available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Loren Yager at (202) 512-4347 or yagerl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Individuals who made key contributions to this  report are listed in appendix VII.
section_title: Appendix I: Scope and Methodology
paragraphs: To describe U.S. Customs and Border Protection’s (CBP) processes for  meeting the reconciliation and verification requirements of the Softwood  Lumber Act of 2008, we reviewed related documents and interviewed CBP  officials. We analyzed planning and programmatic documents describing  CBP reconciliation and verification procedures, reviewed CBP reports  covering the results of its efforts and discussed these results with CBP  officials in Washington, D.C. We also traveled to Blaine, Washington, and  Buffalo, New York, to interview CBP port officials to determine how they  conduct verifications under the act. We met with lumber industry and  customs brokers in Washington, D.C.; Blaine; and Buffalo to discuss the  impact of the act’s requirements on industry.
To better understand how the act’s requirements for reconciliations and  verifications contribute to U.S. monitoring of the 2006 Softwood Lumber  Agreement, we interviewed knowledgeable officials, and obtained  information from the Department of Commerce (Commerce), the Office of  the U.S. Trade Representative (USTR), and CBP. We also met with lumber  industry representatives and customs brokers in Washington, D.C.; Blaine;  and Buffalo to discuss the effect of the act’s reconciliation and verification  processes on U.S. government agencies’ monitoring efforts of compliance  with the bilateral trade agreement.
To update our June 2009 report about the U.S. government’s efforts to  monitor compliance with the 2006 Softwood Lumber Agreement, we  obtained documents summarizing the LCIA (formerly the London Court of  International Arbitration) decisions and agency documents on compliance  concerns. We also discussed the status of current compliance concerns  with officials from Commerce, USTR, and CBP. Our review focused on  Canada because it is the only country with which the United States has an  agreement specifically related to softwood lumber and is by far the largest  exporter of softwood lumber to the United States. Shipment-level data for  the reconciliations under the bilateral trade agreement were not publicly  available. GAO did not independently verify the results of these  reconciliations done under the agreement. CBP provided data on U.S.  imports from Canada at the regional level. We compared these CBP  regional-level data with Census data for volume and value to assess the  accuracy and consistency of the two data sets. We interviewed officials  from Canada’s Department of Foreign Affairs and International Trade  (DFAIT) to update the status of Canadian efforts to comply with the  bilateral trade agreement and its related coordination efforts with U.S.  agencies.
We conducted this performance audit from December 2008 to December  2009 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Key Provisions of the 2006 Softwood Lumber Agreement
paragraphs: The 2006 Softwood Lumber Agreement established a framework for  managing the U.S.-Canadian softwood lumber trade and includes key  provisions that are summarized below:    Export measures: The agreement allows Canadian regions to choose  between two export control systems, with export measures that vary  according to the prevailing monthly price of lumber (see table 2). All of  the regions were allocated a percentage of U.S. softwood lumber  consumption based on the regions’ historic exports to the United States.  That share of a region’s U.S. consumption is used by the Canadian  government to calculate quotas.
Option A consists of an export charge, but no quota. Additionally, a  region is subject to a surge penalty if the total volume of exports for  that region exceeds its trigger volume, which is calculated, in part, by  its share of U.S. consumption in a month.
Option B consists of an export charge and a quota.
The United States and Canada are required to exchange information to  identify changes in Canadian federal and provincial forest management  and timber pricing policies. Canada is required to notify the United  States of changes made to certain timber pricing or forest management  systems and, among other information, provide evidence of how these  changes improve statistical accuracy and reliability of a timber pricing  or forest management system or maintain and improve the extent to  which stumpage charges reflect market conditions. The agreement  requires each party to respond to requests from the other for  information relevant to the operation of the agreement.
The United States and Canada also are required to exchange  information to reconcile value and volume data on a region-specific  basis. If the two countries are unable to reconcile region-specific  aggregated data, the agreement requires the two countries to compare  more specific data, including comparing information on the Canadian  export permit with that on the U.S. entry summary form. The  agreement calls for “complete reconciliation” within 9 months of each  quarter where the parties cannot reconcile region-specific data.
Anticircumvention: Under article XVII of the agreement, neither party  shall take action to circumvent or offset commitments made under the  agreement, including any action having the effect of reducing or offsetting  the export measures or undermining the commitments set forth in article  V. Article XVII(2) of the agreement provides clarification with respect to  the types of actions parties consider would or would not reduce or offset  the export measures. Some of the actions listed under article XVII(2)  include provincial timber pricing and forest management systems as they  existed on July 1, 2006, any modifications or updates to those systems that  meet specified criteria, and other government programs that provide  benefits on a nondiscretionary basis in the form and total aggregate  amount in which they existed and were administered on July 1, 2006. For  an elaboration of the programs, please see the 2006 Softwood Lumber Act,  article XVII(2).
Dispute settlement: The agreement has mechanisms to resolve disputes  over compliance, which includes arbitration under the auspices of the  LCIA.
In addition, the agreement ended existing U.S. trade remedy  investigations. It also established the Softwood Lumber Committee, with  joint Canadian-U.S. representation, and several technical working groups  to oversee implementation of the agreement. Because of recent low  softwood lumber prices, the Canadian softwood lumber industry has been  paying the highest export charge rates mandated by the agreement since  the enactment of the agreement. (See fig. 2.)
section_title: Appendix III: CBP Continues to Address Challenges to Reconciling Value Data under the 2006 Softwood Lumber Agreement
paragraphs: In June 2009, GAO reported on the challenges that U.S. and Canadian  officials identified in reconciling the U.S.-entered value and the Canadian  export price data. Under the 2006 Softwood Lumber Agreement, the  United States and Canada are required to compare and reconcile the  import volume and value data from the United States to the export volume  and value data from Canada by region on a quarterly basis. As of early  November 2009, the two countries had reconciled 6 quarters of volume  data but had not been able to fully reconcile the value data for any quarter  since the 2006 Softwood Lumber Agreement went into effect. (CBP stated  that they planned to have additional meetings with Canadian officials  about the reconciliations in November 2009.) We previously reported the  factors that U.S. and Canadian officials have identified that make  comparing and matching the U.S. import values to Canadian export values  challenging. The Canadian value data on the Canadian export permit uses  an approximate value determined at the time of shipment based on the  export price definition in the 2006 Softwood Lumber Agreement, while the  U.S.-entered value on the U.S. entry summary form is defined by statute  and is expected to be higher because it may include export charges, which  are not part of the Canadian export price data. More broadly, factors that  may cause the U.S. values to be different from the Canadian values include  the following: (1) inconsistent units of measurement, (2) estimated versus  actual values, (3) inconsistent inclusion of export charges in the prices,   (4) remanufactured goods, (5) a $500 cap, and (6) a mismatch of shipment  dates and entry dates. (For a more detailed discussion of each of these  factors, see GAO-09-764R.)
CBP officials stated that they have made progress in value reconciliation  as the quality of data has improved. They acknowledged that, despite this  improvement, larger differences persist at regional levels compared with  aggregate countrywide data. CBP officials believe remanufactured goods  account for the majority of differences, based on their review of an  analysis conducted by Canadian officials. As provided in the 2006  Softwood Lumber Agreement, the U.S. value reported on the U.S. entry  summary form is the value of the final finished product, while the  Canadian value on the export permit should be the original cost of the  wood and should not include the value-added by the remanufacturer.  According to CBP, the difference between the value of the original wood  and the final product can exceed thousands of dollars. According to CBP  officials, they reviewed an analysis by Canada of 1 quarter, which showed  that remanufactured goods accounted for about 5 percent of the total  value of softwood lumber shipments for that quarter, but 95 percent of the  total value discrepancies. CBP officials told us they have not  independently analyzed the impact of remanufacturers on the value  differences observed in value reconciliation. They told us that they have  not yet developed the programming capacity to identify and separate  exports from remanufacturers from other exports.
Representatives from the U.S. industry group continue to be skeptical of  the reconciliation under the bilateral trade agreement and believe Canada  may be undercollecting export charges based on its own data analysis.  This analysis, using publicly available data from the U.S. Census Bureau,  showed that the actual tax collected is consistently lower than the amount  that the representatives estimate should be collected. Representatives  from the group told us that they do not believe it is possible for the factors  identified by the U.S. and Canadian officials to explain the level of  differences in the values they observed. The U.S. and Canadian trade data  used in the official reconciliation are not publicly available. GAO did not  conduct independent evaluation of the reconciliation results.
However, CBP provided us with data on U.S. imports from Canada at the  regional level. Our analysis comparing the CBP data with the Census data  revealed many differences and inconsistencies. For example, the regional  differences between CBP value and Census data are not in proportion with  the size of exports from the region. Quebec accounts for about 20 percent  of the exports from Canada, but close to 40 percent of the value  differences between CBP and Census. In addition, the differences between  CBP and Census data are usually proportionally larger for the value data  than for the volume data. CBP officials stated it is not possible to replicate  the official reconciliation using the Census data.
section_title: Appendix IV: U.S. Agencies Continue Monitoring the 2006 Softwood Lumber Agreement and Have Identified Concerns
paragraphs: U.S. agencies continue to monitor Canada’s compliance with the 2006  Softwood Lumber Agreement and have identified a number of concerns.  U.S. agencies monitor compliance through a variety of sources, including  notifications from Canada that are required under the agreement, news  reports, and provincial and federal government Web sites for  announcements of changes to forest policies and programs. According to  U.S. officials, they have spent substantial resources to determine whether  some Canadian or provincial programs represent a new or substantial  change to existing programs that might be exempted from the  anticircumvention provision of the agreement. U.S. agencies state that  they investigate their concerns and, where appropriate, request additional  information from Canada. Should the concerns remain unaddressed, the  United States may resort to the dispute settlement mechanisms contained  in the agreement, which can include arbitration under the auspices of the  LCIA.
LCIA decisions regarding Canada’s calculation of volume measures.  The first arbitration regarding Canada’s calculation of volume measures  began in August 2007 (LCIA Case No. 7941). The Canadian government  contended that adjusting U.S. consumption only applied to provinces  under the quota provision, and that the adjustment mechanism only  applied beginning in July 2007. The United States contended that the  adjustment mechanism applied to calculating expected U.S. consumption  for all provinces and should have been used beginning the first quarter of  2007. The arbitration tribunal found that, although the adjustment of  expected U.S. consumption did not apply to the provinces without a quota,  Canada should have begun applying the adjustment mechanism to the  provinces with quotas in January 2007.
The arbitration tribunal determined that 30 days from the remedy award  was a reasonable period of time for Canada to cure its breach of the  agreement. Pursuant to the agreement, the arbitration tribunal determined  that if Canada failed to cure the breach within the 30 days, as  compensation for the breach, Canada shall be required to collect an  additional 10 percent export charge on softwood lumber products  exported to the United States from the option B regions until they had  collected CDN$68.26 million (US$54.8 million).
On April 2, 2009, the Canadian government requested arbitration to  determine whether its proposed payment of US$34 million plus interest to  the United States had cured the breach (LCIA Case No. 91312). The U.S.  government did not consider Canada’s offer to make a payment as having  cured the breach. In addition, because the United States considered that  Canada failed to either cure its breach or impose the compensatory  measures determined by the arbitration tribunal, on April 15, 2009,  pursuant to the agreement, the United States imposed a 10 percent  customs duty on imports of softwood lumber products from Ontario,  Quebec, Manitoba, and Saskatchewan.
In September 2009, the LCIA issued a decision in which it did not consider  Canada’s tender of US$36.66 million (US$34 million plus interest) to the  U.S. government as having cured the breach and determined that the  remedy required Canada to impose export charges on the involved  regions. The LCIA decision did not issue any ruling on whether the United  States was required to remove its 10 percent ad valorem customs duty on  softwood lumber products from the involved Canadian provinces at this  time. The decision encouraged both parties to agree on an amicable  settlement regarding this issue. According to Canadian government  officials, the Canadian government has developed mechanisms to collect  the 10 percent export charge from these provinces. Canada has proposed  to the United States that the two countries coordinate on establishing a  mutually acceptable date to lift the U.S. duty and impose a Canadian  export charge. According to USTR officials, the United States is  considering Canada’s proposal.
U.S. request to LCIA regarding Ontario and Quebec provincial  programs. In January 2008, the United States requested arbitration to  determine whether six provincial programs or other measures in Ontario  and Quebec circumvent the agreement (LCIA Case No. 81010). The U.S.  government contends that these measures include a number of grants,  loans, loan guarantees, tax credits, and programs to promote wood  production that circumvent the commitments made by Canada in the  agreement. Canada maintains that these measures are in full compliance  with the agreement. A decision on this case is expected in 2010.
Concern about the large amount of low-grade timber harvested in  Central British Columbia. U.S. agency officials remain concerned about  the large amount of lumber being produced from low-grade timber from  the mountain pine beetle-infested British Columbia interior region.  Although the grade definitions existed prior to the agreement, U.S.  agencies question whether the grading system is being appropriately  applied. Lumber producers pay the minimum harvest fee of CDN$0.25 per  cubic meter for this low-grade wood. Since the mid-1990s, large sections of  central British Columbia have been infested with the mountain pine beetle,  a bark beetle that attacks and kills mature lodgepole pine trees. Natural  Resources Canada, a federal agency, anticipates that the beetle will kill   80 percent of British Columbia’s mature pine forests by 2013. As a result of  the beetle infestation, lumber companies in the British Columbia interior  region are currently harvesting a large volume of dead trees. British  Columbia’s lumber industry has adopted the practice of heating mountain  pine beetle-infested timber to reveal any preexisting cracks, a process that  they contend allows for correct lumber grading. U.S. industry contends  that this process inflates the amount of low-grade timber and thus reduces  cost for British Columbia lumber producers.
U.S. agency officials visited British Columbia in summer 2008 to  investigate the grading of beetle-killed timber. Subsequently, the United  States sent Canada a number of technical questions, including questions  on the grading system. In spring 2009, a delegation from British Columbia  traveled to Washington, D.C., and briefed U.S. government officials on  grading and the mountain pine beetle issues. In October 2009, the  delegation again met with U.S. government officials and provided specific  responses to each of the outstanding questions that the United States had  sent to the province prior to this meeting. According to USTR and  Commerce officials, the United States is now reviewing and analyzing  these data and other information provided.
Concern about reduced fees for harvesting timber in coastal  British Columbia. U.S. government officials have questions about the  January 2009 reduction in the fees charged for harvesting timber in the  British Columbia coast. The British Columbia Ministry of Forests and  Range uses an equation, under the coast market pricing system, to  determine the fees charged for harvesting timber from public land. The  equation is updated annually to account for changes in the market value of  timber and in other factors, such as the cost of road construction or  replanting trees, and is also adjusted quarterly to reflect changes in market  conditions. The equation was grandfathered into the agreement; however,  U.S. officials are concerned with how British Columbia has adjusted the  equation. According to British Columbia officials, the January 2009 fee  reduction was the result of the confluence of the annual and quarterly  updates of the timber fee equation. U.S. agency officials have requested  additional information from Canada. USTR officials stated in September  2009 that Canadian officials have invited U.S. econometricians to British  Columbia to discuss the details of the adjustments with the British  Columbia provincial officials who made the adjustments to the equation.
Concern about potential abuse of the Temporary Importation  under Bond program. CBP headquarters and port officials expressed  concern that the Temporary Importation under Bond (TIB) program could  be abused by the softwood lumber industry. According to data from CBP,  a comparison of TIB imports to total softwood imports shows that TIB  represented less than 0.08 percent of total softwood lumber imports for  fiscal year 2009. Although officials acknowledge that TIB imports are a  small amount of total imports, they stated that they are examining the  issue. TIB is a procedure whereby, under defined circumstances,  merchandise may enter into a U.S. Custom’s territory temporarily, for a  period of up to 1 year. Such goods must be covered by a bond, and the  importer must agree to export or destroy the merchandise within a  specified time or pay liquidated damages, normally double the estimated  duties applicable to the entry. Although softwood lumber products from  Canada covered under the Softwood Lumber Agreement are subject to the  export measure and export charge, they are not subject to a U.S. import  duty. The liquidated damages for products under TIB is limited to   $100 per entry. For example, according to CBP port officials in Blaine,  some softwood lumber products that enter the United States from Canada  under TIB are not required to be accompanied by a permit issued under  the Canadian export permit program, because the intent is to manufacture  the lumber into wood siding at a U.S. plant. Port officials pointed to the  positive economic benefits for local U.S. businesses from such shipments.  However, these port officials also raised concerns that they are limited to  applying a $100 liquidated damages fee if they are not supplied with proof  of export. These officials stated that the $100 liquidated damages would  represent a small fraction of the 15 percent Canadian export tax that  would normally be applied to softwood lumber exports. The port officials  stated that in recent years, about 9 percent of softwood lumber entries at  that port were under the TIB program and that for fiscal year 2009, about   5 percent of these entries had not been properly closed out showing  export. The officials stated that they are not certain whether the failure to  close these TIB movements was a paperwork oversight or represented  cases where the goods had stayed in the United States without making  formal entry and without paying the Canadian export charge.
section_title: Appendix V: Comments from the Department of Homeland Security
section_title: Appendix VI: Comments from the Department of Commerce
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Celia Thomas, Assistant Director;  Jason Bair; Ming Chen; Karen Deans; David Dornisch; Tim Fairbanks;  Rachel Girshick; Grace Lui; and Christina Werth made key contributions to  this report. Kate Brentzel and Etana Finkler provided technical support.