On July 26, 2002, the World Trade Organization (WTO) panel in charge of the Canadian softwood lumber case brought by Canada against the United States issued a confidential preliminary ruling favouring Canada.

Although the text has not been made public, various indirect sources have provided a summary of its principal conclusions. And in accordance with past WTO practice, the panel’s preliminary ruling is virtually certain to be con- firmed in the final ruling.

In order to win this case, Canada had to demonstrate that the Canadian practice at stake did not satisfy one or more of the three criteria legally defining a subsidy, name- ly: specificity, governmental financial contribution, and benefit conferred.

Before examining the conclusions of the WTO panel, it should be pointed out that the Canadian practice at stake relates to the allegedly below-market fees charged by the Canadian provinces for stumpage rights granted to Canadian softwood lumber producers on provincial public lands. Stumpage is the right to cut standing timber for a fee.

With regard to specificity, a governmental program is  ”œspecific” if it is granted selectively in law or in fact to a group of enterprises. In other words, if it is generally avail- able for all the sectors of the economy, it is not specific and therefore not a subsidy. In the softwood lumber case, it does not seem that the specificity criterion has been a real issue between the two parties. In fact, there are only two indus- tries, sawmills and pulp mills that use provincial stumpage programs.

On the issue of governmental financial contributions, it seemed at first sight that this criterion constituted a prom- ising line of defence for Canada. Indeed, common sense says a financial contribution is a sum of money granted to certain industries, and that was not the case in the softwood lumber dispute. However, this common sense impression is misleading in the context of the WTO Subsidies Agreement. This agreement indicates clearly that a governmental finan- cial contribution exists not only when a government pro- vides outright financial assistance, but also in the case where ”œa government provides goods or services other than gen- eral infrastructure.”

The WTO panel agreed with the United States that the softwood lumber case was an instance of such a financial contribution since the provision of stumpage rights by provincial governments constitutes the provision of a good (trees). Canada claimed that the stumpage programs cannot be equated with the provision of a good under the WTO Subsidies Agreement since they involve sovereign national policy on the management of natural resources. The panel rejected that claim on the basis that WTO texts defining a governmental financial contribution do not contain a preferential treat- ment for such a national policy, either explicitly or implicitly.

Clearly, Canada’s only solid line of defence was in connection with the ”œbenefit” crite- rion. According to the WTO’s past rulings, a ben- efit exists when the governmental financial con- tribution ”œmakes the recipient ”˜better off’ than it would otherwise have been, absent that contribution. In our view, the marketplace provides an appropriate basis for comparison in determining whether a ”˜bene- fit’ has been ”˜conferred’.”

This definition is sufficient in simple cases where the free market to which it implicitly refers as a benchmark for comparison is easily identifi- able. 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, a benefit will have been conferred upon the recip- ient firm according to the previous definition.

However, this definition becomes less clear when the free market to which it implicitly refers as a benchmark for comparison is not easily iden- tifiable. For example, is the amount for stumpage rights charged on Canadian private lands a valid benchmark resulting from a free market? It is exactly in this context that the US Department of Commerce took a risk by deciding that it could not use as a benchmark the stumpage fees on Canadian private lands, as the Canadian provin- cial governments would have preferred.

In other words, the Department of Commerce decided that stumpage fees on Canadian private lands could not be regarded as a valid indication of free market forces in Canada and thus were not a valid benchmark. Instead, the department decided to use as a benchmark the prices prevailing on US private lands near the Canadian border. After comparing stumpage fees on US private lands to stumpage fees on public lands in Canada, the department had no trouble finding that a benefit was conferred to Canadian softwood lumber producers.

It was clear that the Achilles heel of the US argument was that the Department of Commerce used a flawed method to find that a benefit was conferred. The WTO panel adopted this view and agreed with Canada that the Department of Commerce violated WTO sub- sidy rules by using cross-border comparisons. The WTO panel agreed with Canada that the subsidies agreement required that price compar- isons ”œshall be determined in relation to the pre- vailing market conditions…in the country of provi- sion or purchase.” Canada, therefore, prevailed on the basis that the Department of Commerce did not adequately demonstrate the existence of a benefit.

There is no doubt that this ruling consti- tutes a victory for Canada. We can’t lose sight of the fact that the legal advisers to the US lumber industry claimed until the last minute that they were certain that Canada would fail. However, it must be underlined that the Canadian victory rests only on the fact that the methodology used by the Department of Commerce for finding a benefit was flawed. This victory would have been decisive if the WTO panel had found the absence of a govern- mental financial contribution.

So, a new petition by the US lumber industry followed by a new determination of the Department of Commerce cannot be excluded. Of course, if that happens, the department will try to use a new methodology to find a benefit and will avoid using cross-border comparisons. But this manoeuvre will be difficult. The new methodology probably will be based on the rejec- tion as a benchmark of fees charged for stumpage rights on private Canadian lands. The stated rea- son would again be that the level of these rights is ”œdistorted.” It seems, however, that past WTO rul- ings indicate an allergy to such a ”œdistortion” approach since panel members do not find in WTO texts an explicit or implicit indication to corroborateit.

This means that a bilateral agreement between Canada and the United States about softwood lumber is still probable. Of course, this legal victory places Canada in an advantageous position in the negotiations of the terms of this agreement. But the legal victory doesn’t replace the need for a negotiated agreement.

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