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Canadian Lumber Case

Canadian Lumber Case. By: Sara Scarbro, Jeremy Shulman & Stephan Smith. Contents. History and Context The Issue of Dumping US Law WTO Rules The US Position The Canadian Position Decisions Implementation and Sanctions Our Proposal. History and Context. Background on Softwood Lumber:

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Canadian Lumber Case

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  1. Canadian Lumber Case By: Sara Scarbro, Jeremy Shulman & Stephan Smith

  2. Contents • History and Context • The Issue of Dumping • US Law • WTO Rules • The US Position • The Canadian Position • Decisions • Implementation and Sanctions • Our Proposal

  3. History and Context Background on Softwood Lumber: • Canadian exports of Softwood Lumber were worth $8.5 billion in 2005 • 1/3 of US consumption • First disputes between US & Canada over Canadian lumber date back to 1820 • Previous disputes: • Lumber I - 1982 • Lumber II - 1986 • Lumber III - 1991

  4. History and Context Major themes of the case: • The issue of Dumping and Countervailing Duties (CVDs) and the effects on trade and domestic consumers • Bilateral and multilateral trade relationships between the US and Canada: • Free Trade Agreement (FTA) • North American Free Trade Agreement (NAFTA) • World Trade Organization (WTO)

  5. History and Context The Issue of Dumping: • Dumping: Exporting at prices below the prices charged back in the domestic market • Why would a country dump its products on a foreign market? • To gain market share • The future ability of becoming a price maker Article 2.1: “…a product is to be considered as being dumped, i.e. introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price…”

  6. History and Context • 1996-March 31, 2001Softwood Lumber Agreement in 1996 • April 2, 2001: Coalition for Fair Lumber Imports (CFLI) filed countervailing and anti-dumping duty petitions with the United States government • April 23, 2001: Dept. of Commerce (ITA) initiated investigation into AD and CVD • August 9, 2001: Dept. of Commerce (DOC) instructed the US Customs Service to subject Canadian softwood lumber imports to a 19.31% bond or cash requirement • August 21, 2001: Canada requested WTO consultations • March 22, 2002: DOC final determination for a country-wide subsidy of all softwood lumber from Canada • April 2, 2002: Gov’t of Canada requests NAFTA Panel Review under Chapter 19

  7. The Issue: US Law Three stages in US AD and CVD cases: • Initial Investigation: • ITA and ITC determine whether there has been specific material injury to an industry • If injury is found, determination is made to determine precise amount of duties to be enforced • Annual Review Procedure • ITA reviews duties to determine whether a refund or further duties are owed to importer • Revocation Procedures Judicial review of all final determinations

  8. The Issue: US Law Determination of Dumping: • ITA used “multiple averaging” in the Canadian Softwood Lumber case • Subdividing the product under investigation into sub-groups of transactions to determine a weighted average for both normal price and export price

  9. The Issue: WTO Law Article 2.4.2 of the Anti-Dumping Agreement: • Weighted average to determine both normal price and export price of all comparable export transactions • Cannot sub-divide products in groups as the US did

  10. The Issue: WTO Law Article VI of GATT 1994: • Does not forbid dumping • It authorizes anti-dumping duties to offset dumping if the dumping causes material injury to a domestic industry • Allows for provisional retaliation if measures outlined in Article 5 of the Agreement are met

  11. The Issue: NAFTA Chapter 19 of NAFTA: • First apart of US-Canada FTA • Bi-national panel review for issues regarding AD and CVD measures • All final determinations of a government can only be appealed Article 1904: “1. As provided in this Article, each Party shall replace judicial review of final antidumping and countervailing duty determinations with binational panel review.”

  12. The Issue: NAFTA NAFTA: Dispute Settlement • Can only determine the legality of trade law within the member country • NAFTA disagreed with the US need for tariffs • Canada has taken issue to WTO DSU because US did not remove CVDs & ADs per NAFTA’s recommendation

  13. WTO Dispute: USITC Report • September 2002: USITC issues a Final Determination of Dumping • Report results in a 8.43% tariff & 18.7% countervailing duty on Canadian softwood lumber imports. • In its report, the USITC uses zeroing to determine the level of dumping of softwood lumber into the US market.

  14. Determining Dumping: Article 2.4.2 • Weighted average-to-weighted average (W-W) methodology –all export transactions must be used to compare prices. • Can also be calculated using the transaction-to-transaction (T-T) methodology if an explanation is provided. This methodology does not take into accountthe weighted average of all export transactions, only specific transactions.

  15. Canadian Position (2004 Panel Report) • 12 total Claims • Main Issue: “zeroing”: • Violates Article 2.4.2 of the AD Agreement • DOC did not consider “all comparable export transactions” • Identical to the practice that the EC used in the EC-Bed Linen case and was deemed inconsistent with Article 2.4.2 (Japan sided with Canada on this point)

  16. U.S. Position (2004 Panel Report) • “Zeroing” • Articles 2.4 and 2.4.2 don’t state what model is to be used to determine dumping margins and the combining of these margins • Purpose of an anti-dumping investigation is to determine whether or not dumping is occurring; not to try to offset “positive” and “negative” margins of dumping. • “Zeroing” has been an issue throughout the negotiating history of the AD Agreement and it was not prohibited. Therefore, it’s okay to use this methodology and it doesn’t violate 2.4 and 2.4.2.

  17. Canadian Position…AGAIN(2004 Panel Report) • U.S.’s interpretation of the negotiating history is a distortion • It has been widely understood by all negotiating parties that the language, while not specifically prohibiting it, “zeroing” was prohibited.

  18. Background (“Zeroing”) • “DOC calculates weighted-average net prices for each product sold in the United States.” • “[DOC] then compares each of those U.S. prices to the product's normal value, which…is ideally the weighted-average net price of the most similar product sold in the home market.” • “When normal value is higher than the U.S. price, the difference is treated as the dumping amount for that sale or that comparison.” • “When…the U.S. price is higher, the dumping amount is set to zero rather than its calculated negative value.” • “Zeroing thus eliminates "negative dumping margins" from the dumping calculation.”

  19. WTO Dispute Issue #1 • The USITC report used zeroing to determine level of dumping. • Zeroing – assigning a margin of zero to goods that have a higher export price then home price. • Zeroing prevents the negative margin for one category of lumber (export price is higher than home price) from offsetting a margin of dumping for another category.

  20. WTO DSU Panel #1 • March 2003: Panel established at the request of Canada. • Canada argues that zeroing is a violation of WTO obligations. (It also led to higher levels of dumping). • March 2004: Panel rules that USITC use of zeroing to determine dumping as inconsistent with Article 2.4.2 • Panel Rational: US did not take into account all comparable export transactions. • Zeroing failed to measure export transactions where the export price was higher than the home price.

  21. WTO Appellate Body #1 • April 2004: US Appeals DSU Panel Ruling • August 2004: Appellate Body upholds DSU decision. US practice of zeroing breaches WTO anti-dumping rules. • Report recommends that the US bring its anti-dumping measures into conformity with its obligations under the WTO.

  22. Implementation • US Revises Dumping Determination to bring measures into conformity with the WTO. • November 2004: ITC issues new threat of injury to comply with the AB ruling. • New methodology used to determining dumping is based on a comparison of prices of exports and imports on a T-T basis but also used zeroing. • The use of zeroing did not incorporate transactions where prices of exports were higher than imports to determine overall level of dumping. • New rate was 11.54% compared to 8.53%

  23. Canada Retaliates • February 2005: Canada files a request to retaliate against the US. • Threatens to fine the US for the cash deposits on softwood lumber held in the US Department of Treasury. • February 2005: Canada requests a WTO DSU compliance panel to review the revised report and calculations used.

  24. Canadian Position(2006 Panel Report) • AB in 2004 found that zeroing is prohibited “in the context of the weighted average-to-weighted average (“W-W”) comparison terminology. • This reasoning also applies to transaction-to-transaction (“T-T”) comparison methodology as well.

  25. U.S. Position(2006 Panel Report) • AB’s prohibition of zeroing under the W-W comparison was based on the interpretations of “margins of dumping” and “all comparable export transactions” • New Zealand agreed with the U.S. that the T-T comparison methodology is permissible, but for different reasons than the U.S. presented. • T-T transactions can be treated as “margins of dumping” since they are not “intermediate values”—transactions are specific instances of dumping, so they can be used.

  26. WTO Dispute Issue #2 • Canada argues that previous ruling prohibits the use of zeroing in any calculation to determine dumping. • New USITC report using the T-T methodology doesn’t take into account the transactions in which export prices are higher than home prices. • US argues that methodology used is different and should not be treated with the same treatment as the W-W methodology.

  27. WTO DSU Decision #2: Final Decision • November 2005: DSU compliance panel finds US consistent with WTO obligations. • Canada failed to demonstrate that Article 2.4.2 prohibits zeroing in T-T comparisons.

  28. Recent Developments April 27, 2006 Bilateral Agreement: • Canada’s share of US market is not to exceed 34% • Canada to impose 15% export tax • Lifting of tariffs and quotas • $4 billion of $5 billion in penalties collected by the US on softwood imports since 2002 will go back to Canadian producers

  29. Recommendations • US and Canada should re-establish the Softwood Lumber Agreement, but by allowing more imports from Canada, while ensuring a détente of future legal cases • Standardized system for determining dumping adopted by all WTO members • Canada could develop a stronger case to argue the US implementation of issue #1 wasn’t satisfactory

  30. References • John H. Jackson, William J. Davey & Alan O. Sykes Jr., International Economic Relations 4th Ed. (St.Paul: West Group, 2002). • World Trade Organization, Report of the Panel: United States - FinalDumping Determination on Softwood Lumber From Candada, WT/DS264/RW,April 2006. • “You’ve stumped us,” The Economist print edition, Mar 28, 2002. • International Trade Canada: http://www.dfait-maeci.gc.ca/eicb/softwood/, 2/20/06. • “Dispute Settlement under NAFTA,” http://www nafta.org,10/21/03. • British Columbia: Ministry of Forests and Range, www.gov.bc.ca. • Center for Trade Policy Studies, Free Trade Bulletin No. 11, April 27, 2004, http://www.freetrade.org/pubs/FTBs/FTB-011.html. • Martin Crutsinger, :US Says It May Have Deal in Lumber Fight,” Washington Post, April 27, 2006.

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