It is an article of faith in Canada that because of the signifi- cant disparity between Canadian and American economic power, Canada is always better off settling trade disputes by way of the rule of law rather than the law of the jungle. Canada has therefore entered into numerous bilateral, plurilateral, and multilateral treaties in order to increase its international lever- age and manage its relationship with the United States. However, without effective means to apply treaty rules and resolve disputes, treaties are merely words on paper.

Rules-based dispute resolution was one of Canada’s key objectives in the negotiations that resulted in the 1989 binational Canada-United States Free Trade Agreement (the FTA). It will be recalled that Canada broke off negoti- ations with the United States in 1987 over this issue and last minute senior ministerial intervention was necessary to persuade the United States to agree to the include the FTA chapter entitled Binational Dispute Settlement in Antidumping and Countervailing Duty Cases. Likewise, Canada also made sure that the FTA’s successor, the trilat- eral 1994 North American Free Trade Agreement (the NAFTA) among Canada, the United States and Mexico, included chapter 19, which is entitled Review and Dispute Settlement in Antidumping and Countervailing Duty Matters.

One of the most notorious antidumping (AD) and countervailing duty (CVD) cases is commonly referred to as the softwood lumber dispute (softwood). Notwithstanding the dispute settlement provisions of the FTA and the NAFTA, softwood remains unresolved after several con- troversial AD and CVD cases and reviews over the past couple of decades.

To understand softwood, one must understand the concepts of dump- ing and subsidization. Under interna- tional trade treaty rules and Canadian and American domestic law, dumping occurs when goods are sold to importers in Canada at prices that are lower than the selling price of compa- rable goods in the country of export, or when goods are sold to Canada at unprofitable prices. The amount of dumping on imported goods may be offset by the application of anti- dumping duties.

Unlike dumping, which involves the pricing practices of private sector corporations, subsidization occurs as a result of government measures. For example, subsidization occurs when goods imported into Canada benefit from foreign government financial assistance, including grants, loans with preferential interest rates, tax breaks, and the like. The amount of subsidization on imported goods may be offset by the application of counter- vailing duties. In softwood, the United States Department of Commerce has determined that Canadian provincial stumpage programs, under which the provinces confer rights to harvest tim- ber from Crown forests, confer subsi- dies, which are countervailable under American law.

Before countervailing duties may be imposed on imported goods under Canadian and American law, com- plainants must surmount several hur- dles. First, they must establish that they have standing as domestic pro- ducers of like goods and demonstrate that their collective production consti- tutes a major proportion of the total domestic production of the like goods. Second, they must establish that a for- eign government is subsidizing the imported goods. Third, the domestic producers must prove that they have suffered economic injury, e.g., lost sales, reduced profits, job losses, etc. And last but not least, they must estab- lish that the subsidization has caused their injury. Similar basic requirements apply in a dumping case, i.e., standing, dumping, injury, and causation.

Softwood is notorious because it has triggered several rounds of AD and CVD cases which have also been the subject of numerous NAFTA dispute resolution attempts, none of which has resolved this issue. The purpose of this article is not to provide a chronol- ogy of these cases, or to determine which country has the best win-loss record in the flurry of reviews con- ducted under the dispute resolution provisions of the trilateral NAFTA or the multilateral World Trade Organization (WTO). Instead, my pur- pose is to discuss some of the key les- sons learned since the latest round of the softwood saga erupted in 1982:

  1. Canada’s international treaty obligations (and not the United States) have imposed limits on Canadian sover- eignty.

  2. International dispute resolu- tion cannot solve all political problems.

  3. Canada does not always speak with one voice in inter- national disputes.

  4. Cries of righteous indigna- tion may play well at home, but they do not promote the resolution of international disputes.

Canada’s international treaty obliga- tions (and not the United States) have imposed limits on Canadian sovereignty The relationship between national sovereignty and international treaty obligations is often emotional and controver- sial. This is particularly true in government subsidies cases, because nations hold different views on the role that governments should play in the economy. International rules against subsidies upset many eco- nomic nationalists because they are specifically designed to curtail the role of governments and to ensure that export competition is based on free market forces, rather than on which government treasury is best able to subsidize its domestic industry.

Softwood demonstrates some fun- damental differences between Canada and the United States regarding public and private ownership of natural resources. In Canada, most provincial governments own Crown forest land and determine an important component in the price of the timber and logs that are used to produce softwood lumber, i.e., the stumpage fees that forest compa- nies pay for the right to harvest trees. Canada’s four Atlantic provinces are largely exceptions to this rule, because most of their forests are privately owned. In the United States, most forests are also privately owned, and market forces are supposed to drive pricing decisions.

Americans are wary of Canadian provincial government forest policies, which they find unfamiliar and opaque. Many Americans believe that reduced stumpage fees are used to promote local employment and other political objectives rather than to recover the actual costs of timber pro- duction. On the other hand, many Canadians see softwood as an American challenge to Canada’s sovereignty and our ability to manage our natural resources in the public interest. However, any such challenge to Canadian sovereignty does not origi- nate in the United States. Instead, the challenge arises in international treaty obligations, which Canada voluntarily assumed several decades ago. Restrictions on Canada’s ability to subsidize its domestic industry are found in the multilateral trade treaty that preceded the WTO, the 1947 General Agreement on Tariffs and Trade (the GATT). Article VI(6) of the GATT stated that ”œThe term ”˜counter- vailing duty’ shall be understood to mean a special duty levied for the pur- pose of offsetting any bounty or sub- sidy bestowed, directly or indirectly, upon the manufacture, production or export of any merchandise.” In its January 2004 decision, the WTO Appellate Body found that Canadian stumpage practices may constitute an actionable subsidy.

In sum, the fact that Canadian government practices may be consid- ered actionable subsidies does not arise from unilateral American harassment. The limits placed on the role Canadian governments may play in the econo- my arise from multilateral treaty obli- gations that Canada has voluntarily assumed. Canada has assumed some of these obligations as a result of Ottawa’s policy of pursuing multilateral treaties to offset American influence. These international treaty obligations have reduced the scope of Canadian nation- al sovereignty and the role that provincial governments can play in the forest industry. As a result, Canadians must recog- nize that there are also costs associated with the benefits that flow from Canada’s multi- lateralist foreign and economic policies. It is not a one-way street.

International dispute resolution cannot solve all political problems

Notwithstanding numerous dispute resolution proceedings, softwood continues to strain the Canada-United States relationship. The argument that the ongoing softwood saga is solely a result of NAFTA’s failure to adopt effective dispute resolution provisions does not withstand scrutiny. In addition to numerous NAFTA review pro- ceedings, there have been several WTO dispute settlement proceedings, none of which has resolved the dispute.

At the present time, sovereign nations are not willing to transfer all of their diplomatic, military or economic dispute resolution powers to interna- tional organizations like the United Nations or the WTO. Under the WTO dispute resolution system, a nation that violates its WTO commitments is not required to change the offending law or policy, it is merely required to pay the price that may be extracted through other nations’ right to retaliate.

In the preceding section, I dis- cussed the limits that international treaty obligations can impose on national sovereignty. The flipside of this point is that national sovereignty imposes limits on the ability of inter- national dispute resolution to solve problems. NAFTA’s chapter 19 is a case in point.

Under article 1904(1) of NAFTA, Canada and the United States have not relinquished all of their national sovereignty to a suprana- tional decision-making body that applies commonly agreed upon rules. Instead, they have merely agreed to ”œreplace judicial review of final antidumping and countervailing duty determinations with binational panel review.”

First, it must be recognized that ”œjudicial review” is not the same as a trial de novo or an independent full fledged reconsideration of a decision. Strictly speaking, judicial review is not an appeal to another body that has full decision-making powers. For example, if an aggrieved American exporter wish- es to use NAFTA’s chapter 19 to contest a final injury determination of the Canadian International Trade Tribunal, annex 1911 of the NAFTA states that the grounds for review are defined by subsection 18.1(4) of Canada’s Federal Court Act. In softwood, Canadian chal- lenges of American final dumping, sub- sidy or injury determinations are governed by the standard of review defined by the United States Tariff Act of 1930, which requires review panels to ”œhold unlawful any determination, finding, or conclusion found…to be unsupported by substantial evidence on the record, or otherwise not in accor- dance with law.”

Second, in addition to confining Binational Panel review to limited grounds of review, which are defined under the importing country’s domes- tic law, a binational panel does not apply a commonly agreed upon set of rules. Instead, NAFTA’s article 1904(2) provides that binational panels determine whether a final determination was in accordance with the antidumping or countervailing duty law of the importing party. In other words, in soft- wood, the NAFTA binational panels have only dealt with the issue of whether American final determinations have been in accordance with United States antidumping or countervailing duty laws.

Third, NAFTA binational panels have limited remedial powers. Article 1904(8) of NAFTA states that a panel may uphold a final determination or ”œremand it for action not inconsistent with the Panel’s deci- sion.” In softwood, panels have been forced to issue several remands, which has given rise to charges that the American government is ”œbucking” the NAFTA binational panels.

A plethora of NAFTA Binational Panel softwood review decisions have left many observers puzzled about which side is winning, particu- larly since both sides have been known to claim victory following a decision’s release. NAFTA binational panels are reviewing three final American soft- wood lumber determinations ”” the United States International Trade Commission’s final determination of threat of injury, and the Department of Commerce’s final determinations of dumping and subsidy.

Although these three NAFTA bina- tional panels were established over three years ago, and have issued several deci- sions, the softwood saga remains unre- solved. For example, on October 5, 2005, a NAFTA Binational Panel issued its fourth remand determina-ion regarding a United States Department of Commerce final CVD determination. The following chronology issued by the Government of Canada graphically illustrates the grueling steps required to try to force the American government to reduce the subsidy rate from 18.8 percent to 1.2 per- cent:

April 2, 2001: The United States Department of Commerce (DOC) initiat- ed its countervailing duty investigation of Canadian softwood lumber.

March 22, 2002: The DOC made a final affirmative countervailing duty determination and imposed an 18.79 percent duty on Canadian softwood lumber imports.

April 2, 2002: A binational panel was established under NAFTA chapter 19 to review whether the DOC’s final affirmative countervailing determina- tion was contrary to US law.

August 13, 2003: The panel issued its first report and instructed the DOC to correct its original countervailing duty determination.

January 12, 2004: The DOC released its countervailing duty remand determination and found a new subsidy rate of 13.23 percent. The DOC’s remand determination was sub- sequently challenged by Canada.

June 7, 2004: The panel issued its second report and again instructed the DOC to issue a determination consis- tent with US law.

July 30, 2004: The DOC issued its second remand determination and found a new subsidy rate of 7.82 percent. The DOC’s remand determination was subsequently challenged by Canada.

December 1, 2004: The panel issued its third report and again instructed the DOC to issue a determi- nation consistent with US law.

January 24, 2005: The DOC issued its third remand determination and found a new subsidy rate of 1.88 percent. The DOC’s remand determina- tion was subsequently challenged by Canada.

May 23, 2005: The panel issued its fourth report and again instructed the DOC to issue a determination consis- tent with US law.

July 7, 2005: The DOC issued its fourth remand determination and found a new subsidy rate of 1.21 per- cent. The DOC’s remand determina- tion was subsequently challenged by Canada.

August 10, 2005: The NAFTA Extraordinary Challenge Committee in the threat of injury case issued its deci- sion unanimously rejecting US claims and affirming the NAFTA panel’s ruling that the United States had no basis on which to find that the US lumber industry was threatened by imports of Canadian softwood lumber.

October 5, 2005: The panel issued its fifth report and again instructed the DOC to issue a determination consis- tent with US law.

It will be interesting to see what the United States Department of Commerce will come up with next. The fact that the NAFTA Binational Panel review process has resulted in a reduction of the subsidy amount from 18.8 percent to 1.2 percent can- not simply be ignored. However, despite these NAFTA rulings, Canadian importers continue to pay significant duties and, since 2002, the United States has collected about $5 billion in duties.

The Department of Commerce is not the only American agency bucking the NAFTA Binational Panel system. In the third decision of the NAFTA Binational Panel considering the threat of injury determination of the United States International Trade Commission, the panel concluded in its decision dated August 31, 2004, that:

The Commission had made it abundantly clear to this Panel that it is simply unwilling to accept this Panel’s review authority under Chapter 19 of the NAFTA and has consistent- ly ignored the authority of this Panel in an effort to preserve its finding of threat of material injury. This conduct obviates the impartiality of the agency, and severely undermines the entire Chapter 19 review process.

To avoid further remands and engaging in what was becoming a ”œping-pong game,” the NAFTA Binational Panel remanded the case and directed the commission to make within 10 days ”œa determination con- sistent with the decision of this panel that the evidence on the record does not support a finding of threat of material injury.” In so doing, the panel was, in effect, directing the commis- sion to make a no injury finding, which would mean there was no basis to impose antidumping or counter-vailingduties.

Rather than accept the panel’s mes- sage, the American lumber indus- try chose to shoot the messenger, by challenging one of the American Panel members on the grounds that his con- duct created an appearance of impro- priety or an apprehension of bias. A NAFTA Extraordinary Challenge Committee (the ECC) examined the panel decision and the behaviour of the American panel member and affirmed the panel’s decision. Following the release of the ECC decision on August 10, 2005, Canada claimed victory.

Not to be outdone, the American Coalition for Fair Lumber Imports issued a press release on August 29, 2005, enti- tled ”œWorld Trade Organization Decision upholds duties on unfairly subsidized and dumped Canadian softwood lum- ber,” which stated:

”œThis new determination should put to rest any questions about whether duties are justified in this case,” said Coalition for Fair Lumber Imports Chairman Steve Swanson. ”œThis WTO victory demonstrates that the ECC and the NAFTA panel decisions were wrong,” Swanson added.

In effect, the Americans argued that the WTO decision trumped the NAFTA decisions.

As noted above, some NAFTA crit- ics have attempted to blame the failure to resolve the softwood dispute on NAFTA. There is no doubt that the aforementioned three shortcomings of the NAFTA AD and CVD dispute reso- lution mechanism have played a role. However, NAFTA is not alone in its shortcomings, because Canada has also launched three WTO challenges that have failed to solve the dispute.

In one of these WTO panels, the United States claimed victory because the WTO ruled that stumpage pro- grams are a financial contribution and may be actionable subsidies. Even though provincial stumpage programs were found to be financial contribu- tions, Canada also claimed victory because the WTO ruled that the United States had used the wrong methodology to calculate the amount of the subsidy.

The lessons learned from the soft- wood NAFTA and WTO dispute resolution provisions are that the cur- rent system allows numerous proceed- ings to be launched, with uncertain and potentially conflicting outcomes, because they are based on different rules and standards of review. Unlike litigation in domestic courts, where there is usually a clear winner and loser at the end of the day, interna- tional dispute resolution can be unclear and inconclusive. By adopting a scatter gun approach to litigation, which challenged several American final determinations (dumping, sub- sidy, and injury) in two different inter- national dispute resolution fora (NAFTA and WTO), Canada unleashed a torrent of decisions that were not always entirely clear or consistent.

As a result, both sides are current- ly claiming victory. The latest furor has Canada claiming victory based on a recent NAFTA decision, to which the United States has countered with a vic- tory claim regarding a WTO decision. In addition to jurisdiction shopping, with one side relying on a WTO deci- sion while the other side relies on a NAFTA decision, the softwood combat- ants do not hesitate to create their own media spin every time a decision is issued. When the American lumber industry does not like NAFTA deci- sions, it also issues constitutional chal- lenges for added effect.

The Canadian and American industry reactions to the aforementioned NAFTA panel CVD decision dated October 5, 2005, illustrate how each side attempts to use these decisions in their media campaigns. On October 5, the British Columbia Lumber Trade Council issued a press release subtly titled ”œUnanimous NAFTA Panel Delivers Case-Ending Victory in Softwood Lumber Dispute.” The same day, the United States Coalition for Fair Lumber Imports issued a release entitled ”œNAFTA Panel again Fails to Identify Obvious Lumber Subsidy,” which concluded by attack- ing NAFTA panels that ”œroutinely act beyond their authority under US law,” and announcing another constitution- al challenge to the NAFTA Binational Panel system.

The foregoing litany of decisions from no less than six different pro- ceedings launched under the NAFTA and the WTO illustrate that interna- tional dispute resolution procedures cannot produce the same results as a domestic judicial system, because they do not have the same coercive tools at their proposal. Until coun- tries are prepared to cede more national sovereignty to internation- al dispute resolution bodies like the United Nations, the WTO and the NAFTA binational panels, it is unre- alistic to expect these bodies to quickly and definitively resolve all of the disputes that come before them. Not all political problems can be resolved by international dispute resolution. 

To keep things in perspective, it must be recognized that problems arising from dispute resolution bodies with limited authority are not confined to international disputes. In Canada, the provinces have refused to cede any binding decision-making power to the dispute resolution panels under the Agreement on Internal Trade. Recently, the Province of Alberta successfully challenged Quebec’s restrictions on colouring margarine so that it looks like butter. The Province of Quebec is expected to simply ignore the inter- provincial trade panel’s findings and continue to protect the butter interests of its dairy farmers.

Canada does not always speak with one voice in international disputes Given that stumpage fees and forestry policies fall under provincial jurisdiction, different Canadian regional interests have often conflicted during the past two decades of the softwood saga. Some Canadian interest groups have promoted a strategy based on litigation, whereas others have favoured negotiations. There is a big dif- ference between fighting and talking. It is no secret that the Americans have attempted to
use these differences to ”œdivide and conquer” their Canadian counterparts.

The number of Washington law firms representing the different Cana- dian interests in the aforementioned NAFTA Binational Panel CVD decision issued on October 5, 2005, illustrates the number of Canadian players involved. In addition to the lawyers who represented the Government of Canada, several provinces had their own counsel. British Columbia, Alber- ta, Saskatchewan, Ontario and Quebec each had their own set of lawyers. In addition, the four Atlantic provinces jointly retained counsel. The Meadow Lake Tribal Council also had legal rep- resentation.

Not to be outdone by their provin- cial governments, the Canadian lumber industry also retained numer- ous law firms. Several regional coali- tions retained counsel, including the British Columbia Lumber Trade Coun- cil, the Ontario Forest Industries Asso- ciation, the Quebec Lumber Manufacturers Association, and the Maritime Lumber Bureau. In addition to these Canadian industry coalitions, individual Canadian companies had their own legal representation, includ- ing Canfor Corporation, J.D. Irving, Ltd., Bowater Incorporated, and the Moose River Lumber Company.

In stark contrast to the large num- ber of Canadian participants in this NAFTA Binational Panel proceeding, the American side basically consisted of one federal government depart- ment, the United States Department of Commerce, and one industry coali- tion, the Coalition for Fair Lumber Imports Executive Committee. Canada cannot blame the shortcomings of international dispute resolution sys- tems for internally created problems arising from divisions within the Canadian camp.

As a former Canadian prime min- ister once asked, ”œWho speaks for Canada?” There is no doubt that the multitude of interests on the Canadian side has created an extremely complex web of different interests and positions. Before it sits down with its American counterparts, the Canadian government must attempt to herd this gaggle of interests together and try to come up with a common position that reflects the national interest, rather than the low- est common denominator. This is not an easy task, and many believe that Canada’s inability to quickly react and speak with one voice has further complicated and prolonged the soft- wood saga. Notwithstanding this fact, the Charest government in Quebec wants to further increase the provin- cial role in Canada’s international relations. Such is the nature of Canadian federalism.

Cries of righteous indignation may play well at home, but they do not pro- mote the resolution of international disputes

Recently, Canada has reacted to the United States’ softwood posi- tion with increasingly shrill cries of indignation. For exam- ple, a Government of Canada press release issued following the release of the NAFTA Binational Panel CVD decision, stated ”œThe US should live up to its NAFTA obligations, rather than continuing to cater to nar- row protectionist interests in the US lumber industry.”

Since Canada caters to nar- row protectionist interests in several Canadian industries and has been known to engage in lengthy international disputes to protect these interests, such cries of righteous indignation lack credibility abroad and do not promote the resolu- tion of international disputes. For example, when the United States suc- cessfully challenged Canada’s dairy export subsidies in the WTO, it took six WTO decisions and several years before Canada complied with its WTO obliga- tions.

Likewise, Canada is currently engaged in WTO agriculture negotia- tions where it is arguing that there must be ”œsubstantial improvement in market access for all agriculture and food products” on the one hand, but on the other hand the Martin govern- ment is stating that it is ”œalso commit- ted to defending the ability of producers to choose how to market their products.” This is code language for maintaining 200-300 percent tariffs and other market access barriers in order to protect Canadian dairy and poultry farmers.

It will also be recalled that former Prime Minster Chrétien announced at the Kananaskis G8 Summit he host- ed that Canada was committed to eliminating tariffs and quotas on ”œalmost all imports” from the 48 coun- tries that the United Nations has called ”œleast developed countries,” 34 of which are in Africa. The market access pledge only applied to ”œalmost all imports” from the poorest of the poor countries in Africa and elsewhere because Canada exempted dairy, poul- try and egg products. This lack of prin- ciple and catering to local protectionist industries did not go unnoticed in Africa and elsewhere.

Anyone who has travelled abroad and discussed Canada’s international trade policies with developing and developed countries quickly becomes aware that the Canadian track record does not support current claims that, unlike the United States, Canada lives up to its international obligations and does not cater to narrow protectionist interests. Canada does not have clean hands in this regard and, therefore, Ottawa’s cries of righteous indignation lack credibility abroad and do little to promote the resolution of international disputes. Although righteous indigna- tion may appear to be clever because it plays well here at home, it is not credi- ble in Washington, Geneva, or else- where and, therefore, this tactic should be dropped from the Canadian soft- wood strategy sooner rather than later.

The fact that Canada has its own dirty little protectionist secrets illustrates that governments continue to be prepared to sacrifice the princi- ples of international trade on the altar of the short-term political gains which arise from catering to narrow protec- tionist domestic industries. Again, there are limits on how far governments will go in ceding national sover- eignty to international treaties and dis- pute resolution. Softwood should not be treated as an aberration. It is merely a glaring example of how the econom- ic rents and power that flow to certain domestic industries from government protectionism enable these industries to create powerful lobbies that cause domestic politics to trump interna- tional trade liberalization.

In recent weeks, the Martin govern- ment has upped the ante in the soft- wood saga. First, the prime minister has attempted to frame this as purely a NAFTA issue and whether the Americans respect the NAFTA and the rule of law. Little or no mention is made of the WTO decision that the Americans are currently relying on. Second, Ottawa is now engaging in a tactic that it has long rejected ”” linkage.

In the past, Canada has been loathe to link one issue (softwood) to another issue (energy) because it was feared that the dispute would escalate, which ultimately would not be in the interests of the smaller player, Canada. In a speech to the Economic Club of New York on October 6, Martin stated:

It’s clear that the U.S. approach to softwood brings into question the integrity of NAFTA in general and the efficacy of the dispute resolu- tion mechanism in particular.

In the North American con- text, we have to recognize that NAFTA is a framework, not just for the trade of commodities, but for the trade of most all goods and services, investment and energy ”” and for this to operate smoothly we have to be able to rely on the dispute set- tlement mechanism….

In terms of trade ”” in terms of our prosperity ”” clearly the opening of China and India present opportunities which both of us, as sovereign countries, will seek to exploit. We in Canada clearly regard these markets as attractive

Following this speech, Canada’s  minister of natural resources was dispatched to Beijing to discuss energy sales to the Chinese. So far, Washington does not appear to have really noticed.

At the time of writing this article, it is clear is that there are at least four lessons to be learned from the softwood saga. First, although most governments want the employment and other economic benefits that flow from international treaties and trade liberalization, few governments are in a hurry to cede all their national sov- ereignty in return for these benefits. It is unlikely that countries like Canada and the United States will stop cater- ing to narrow protectionist industries in the foreseeable future. Second, until governments cede more national sov- ereignty to international dispute reso- lution, it is unrealistic to expect NAFTA binational panels or WTO pan- els to solve all political problems. Third, Ottawa does not have the power to speak for Canada on the interna- tional stage on matters that involve provincial jurisdiction. As a result, other countries will continue to attempt to divide and conquer while Ottawa is preoccupied with developing an internal consensus. Fourth, it is clear that Ottawa’s cries of righteous indignation will not cut any ice in Washington or other international capitals that matter, although they may help the current minority govern- ment make its caucus feel good and pick up a few seats in British Columbia.

The outcome of the policy enunciated in Prime Minister Martin’s speech to the Economic Club of New York on October 6 is currently unclear. By put- ting the NAFTA in play and linking softwood to energy, the prime minister has entered uncharted waters. The jury is still out on whether brinkmanship will finally break the softwood logjam once and for all. 

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