Softwood lumber: What kind
of ruling could emerge from a WTO panel ?
Professor of International Law, University of Quebec. Professor Benitah has just published at Kluwer Law International a comprehensive book on the law of subsidies entitled “The law of subsidies under the GATT/WTO system”[1]
Recently, Canada has announced its intention to challenge in the World
Trade Organization (WTO) the preliminary decision of the U.S. Department of
Commerce relating to softwood lumber.
As we know, countervailing duties of the order of 19% were decreed
against softwood lumber imported in the United States from Quebec, Ontario,
British Columbia, Alberta, Manitoba and Saskatchewan. At the same time, Canada
tries to negotiate a bilateral agreement with the United States. In the context of this negotiation, there is
no doubt that the each party has the potential (if the negotiation for a
bilateral agreement fails) WTO ruling fresh in its mind. It is thus important to have a precise idea
of what kind of ruling could emerge from a WTO panel.
The central question before this panel would be the following: Does the
United States have the right by virtue of its WTO international obligations to
consider Canadian stumpage fees as a countervailable subsidy? To answer the
previous central question, it is necessary to begin with the WTO definition of
a subsidy. According to WTO texts, a
practice is a subsidy if it satisfies three criteria. First, it must be
“specific”, namely granted selectively to a group of enterprises. In other words, if it is truly generally
available for all the sectors of the economy, then it is not specific and
therefore not a subsidy. Second, the practice must comprise a governmental
“financial contribution”, and finally, it must confer a “benefit” to its
recipient.
Let us recall briefly that U.S. lumber producers alleged in their
complaint that stumpage fees paid by Canadian softwood lumber producers to
harvest and cut timber under the timber management systems maintained by the
provinces are countervailable subsidies. To evaluate the validity of this
assertion and thus the odds for Canada before the WTO, we must analyse how the
preceding three criteria defining a subsidy apply in the context of these
stumpage fees. Canada can succeed only if it demonstrates that one or several
of these criteria are not satisfied in this case.
With regard to the specificity criterion, the U.S. Department of
Commerce determined that “there are only two industries,
sawmills and pulp mills, that use provincial stumpage programs, [therefore] we
preliminarily determine that the provincial stumpage
programs are specific”. It does seem that little will result for Canada from a defense founded on this criterion.
At first glance, it would seem that a defense based on the governmental
“financial contribution” criterion is much more promising for Canada since
stumpage fees do not entail the payment by provincial governments of a sum of
money to Canadian softwood lumber producers. Unfortunately, this impression is illusory
since WTO texts specify clearly that a governmental financial contribution
exists also in the case where “a government provides goods or services other than general
infrastructure”. The U.S. Department of Commerce determined that the softwood
lumber case was an illustration of such a financial contribution. Since WTO texts relating to the governmental
financial contribution criterion are clear, our intuition is once again that
Canada’s defense along this line would not be fruitful.
The remaining line of defense must thus be
based on the “benefit” criterion. Our fundamental intuition, that we will
justify hereafter, is that the vagueness of WTO texts relating to this
criterion constitutes the only card that Canada could play decisively. Before going
into details, it is important to stress that, in spite of the fact that WTO
rulings often exceed one hundred pages, they are essentially based on one or
two fundamental reasoning. This aspect may surprise the reader, but this is
exactly what happens in practice. Our intuition is that the central reasoning
that the WTO panel will make in relation with the “benefit” criterion will seal
the outcome of the softwood lumber case. However, there is no doubt that the
panel will be forced to be extremely creative in its analysis of the “benefit” conferred by the stumpage fees for
the reason that the term “benefit” is quite simply not defined in WTO texts!
This aspect may strongly surprise the reader but it often happens that
international negotiators do not like to be too precise in order to avoid
friction that could jeopardize the final signature of agreements.
Nevertheless, an indirect analysis of the whole WTO subsidies agreement
has made it possible for WTO panels to establish a case law definition of what
constitutes a “benefit”. This definition stipulates that an benefit exists
when “the
[governmental] financial contribution places the recipient in a more
advantageous position than would have been the case but for the financial
contribution… the only logical basis for determining the position the recipient
would have been in absent the financial contribution is the market” (Canada-Aircraft).
This definition is sufficient in simple cases where the “market” is easily
identifiable. For example, if a Canadian firm receives a governmental loan at
an interest rate that is lower than the rate charged by Canadian private banks,
then it is clear that, according to the preceding definition, a benefit will
have been conferred to the recipient firm. However, this definition becomes
less certain when the free market to which it implicitly refers is not easily
identifiable. It is exactly in this context that the U.S. Department of
Commerce took a chance in the softwood lumber case by determining that “since
stumpage fees on [Canadian] public lands are the price driver for the stumpage
market in [Canadian] Provinces, we conclude that the stumpage fees on private
lands are largely derivative of the public land prices and are therefore
distorted”. Then, the Department inferred from this determination that it could
not use as a benchmark information submitted by provincial governments relating
to stumpage fees on Canadian private lands. In other words, unlike the previous
example where conditions prevailing in the private sector constituted by
Canadian commercial banks could be considered as an acceptable market
benchmark, the U.S. Department of Commerce decided that stumpage fees on
private lands in Canada could not be regarded as a valid indication of market
forces in Canada and thus they were not a valid benchmark. It should be added
that the Department took another chance by deciding to use as a benchmark
prices prevailing in U.S. private lands. According to the Department, these
prices constitute an adequate benchmark since “it is reasonable to conclude
that U.S. stumpage would be available to softwood lumber producers in Canada at
the same prices available to U.S. lumber producers”. As we know, after
comparing U.S. private stumpage fees to stumpage fees on public lands in Canada,
the Department had no trouble finding that a benefit was conferred to Canadian
softwood lumber producers. If there is an Achilles’ heel in the U.S. decision,
it is likely that in must be sought in the preceding determinations.
What could Canada do in this context? A mistake that must be avoided as
a priority is to argue that this difference in prices is normal since the cost
of lumber in Canadian public lands is intrinsically lower than the cost of
lumber in U.S. private lands, and therefore Canadian stumpage fees correspond
to no more than the “net cost” of lumber for provincial governments. In the
past, Canada already used this kind of reasoning in the Canada Aircraft
case and it failed. The WTO panel will not be interested at all in knowing if
provincial governments cover or not their cost of production. The panel will be
interested first and foremost in knowing if Canadian lumber producers are
placed in a more advantageous position than would
have been the case but for the provincial stumpage fees. However, the argument
relating to the intrinsic difference in production costs could be decisive if
Canada manages to convince the WTO panel that stumpage fees on private lands in
Canada are lower than stumpage fees on private lands in the United States because
of an intrinsic difference in production costs between the North and the South
of the border and not because of a supposed distortion of the fees in Canadian
private lands. It is not our aim in this article to analyze the economic
feasibility of such a demonstration. However, in case this demonstration would
be possible, it would ensure the success of Canada. There is no reason why a
WTO panel would accept the benchmark selected by the U.S. Department of
Commerce if it is convinced that stumpage fees on Canadian private lands are
not resulting from a distortion.
What would happen if Canada fails to
provide this demonstration? Another way of formulating the same question is to
wonder if in such a case the WTO panel would then be ready to accept the benchmark
selected by the U.S. Department of Commerce.
It is clear that in such a case Canada’s position would become less sure
since the WTO panel will find itself in a situation that does not fall exactly
under any WTO precedent case.
The panel will have an
enormous creative margin since the adequate benchmark for determining what is
the “market” is not defined in WTO texts. It is thus necessary to look for
indications in preceding WTO rulings that could reveal the direction in which
this creative margin will be used. Contrary to what was asserted by certain
advisers of American softwood producers, we are inclined to believe that these
indications lead to the conclusion that the WTO panel will have a negative
feeling towards the U.S. determination. In the Canada- Milk case that
fell under the terms of the Agreement on Agriculture, Canada was to some extent
in a position inverse to its present one since it rejected the use of Canadian
domestic milk price as a benchmark under the pretext that this price was distorted.
The last WTO panel that examined this case, rejected firmly this distortion
argument by underlining in a passage which will certainly be invoked in the
softwood lumber case that “Nothing in the text[s]…. specifies to what extent
the higher domestic price may result from government intervention. The only benchmark which is stipulated is
the price for the domestic market, independently
of [italics added by the panel] the extent of government
intervention in the formation of that price.”
Even if the softwood lumber case will not be examined under the terms of
the Agreement on Agriculture, the fact remains that this indication is
significant because WTO panels are attached to the ‘ordinary’ meaning of texts.
Another indication can be
found in the Brazil-Aircraft case. Although the legal context of this
case is slightly different from the softwood lumber case, there are
similarities since Brazil wanted to use export credits terms offered by Canada
as a benchmark for determining if it was conferring a “material advantage”. The
Brazil-Aircraft panel rejected firmly this position by stressing once
again that “nothing in the text[s]...indicates that the examination of material
advantage involves a comparison with the
export credit terms available with respect to competing products from other
Members (italics added by the panel)”. Although the legal provisions
relating to the “material advantage”
criterion are somewhat different from those governing the “benefit” criterion,
it seems that we have here a significant indication since the position of the
United States in the softwood lumber case reminds us of the rejected Brazil’s
position. In both cases, it is maintained that an inter-countries comparison is
the adequate approach for finding a benchmark.
Although nobody can see into the future because of the enormous creative margin that the WTO panel will have, we are inclined to be optimistic for Canada. Our intuition, which is founded on the preceding analysis, is that the WTO panel will instinctively seek to avoid validating the U.S. position and that, at the very least, it will produce a ruling cutting the baby in half. In this latter case, every party will find in the ruling some elements confirming its position. It would be highly desirable to avoid such a conclusion since it will mean a new war of attrition between Canada and the United States.