NAFTA, WTO PANELS ISSUE SEEMINGLY CONTRADICTORY RULINGS ON SOFTWOOD LUMBER
On 10 August, a North American Free Trade Agreement (NAFTA) committee ruled that Canadian softwood lumber practices did not justify US anti-dumping duties on Canadian exports. Three weeks later on 29 August, a WTO dispute panel released an interim ruling that supports the American position that Canadian softwood posed a threat to US producers and, thus, imposing anti-dumping duties was not a breach of international rules. These latest rulings on the decades-old dispute have elicited high emotion from both sides of the border as both parties involved claim that the seemingly contradictory findings vindicate their respective positions.
The NAFTA Ruling
The 10 August ruling of the NAFTA Extraordinary Challenge Committee (ECC) concerns the 2002 determination by the US International Trade Commission (ITC) — a US federal agency responsible for antidumping and countervailing duty investigations — that Canadian softwood lumber posed a threat of material injury to the US lumber industry.
The US has consistently asserted that their duties on Canadian softwood were justified because "stumpage fees" — fees the Canadian government charges forestry companies to harvest timber on state-owned land — were too low and thus tantamount to subsidies (see BRIDGES Weekly, 14 January 2004, http://www.ictsd.org/weekly/04-01-14/story2.htm). On 31 August 2004, a NAFTA panel had ruled against this allegation by the US ITC and supported Canada’s position. The Office of the United States Trade Representative (USTR) rejected these findings, asserting that the panel had not followed established dispute settlement rules and that one of its members was in a conflict of interest position. The ECC, which is part of NAFTA’s appeals process, was established at the request of the USTR in order to review the decision. On 10 August 2005, the ECC unanimously dismissed the USTR’s allegations, upholding the initial panel’s finding that US anti-dumping duties on Canadian lumber were unfounded because Washington was unable to prove the existence of a threat of material injury.
Shortly after the ECC released its findings, the US announced that it would not comply. This, in turn, elicited threats of retaliatory duties from Canada. "We are not happy with the position of the United States to simply ignore what is a clear NAFTA ruling in Canada’s favour," Canadian Finance Minister Ralph Goodale said. He argued that the USD4.1 billion collected by US customs since softwood duties were established in May 2002 had been obtained illegally. Canada contends that the ECC ruling effectively requires the US to reimburse the duties.
The WTO Ruling
The high spirits in Canada that were brought on by the NAFTA ruling were dampened on 29 August when a WTO dispute panel released its interim finding which pronounced that US duties were not in breach of international law. This is not an unprecedented position for the WTO. In fact, WTO dispute panels have a history of supporting both countries’ positions when it comes to softwood lumber. In essence, the WTO agrees with the US that Canadian stumpage fees provide an advantage to the Canadian timber industry — but not to the degree that the US asserts. This has led to confusion around the issue.
In March 2004, for example, a WTO decision had both Canada and the US claiming victory when they ruled that while the US was justified in imposing duties on Canadian softwood, the amount they had established was too high and must be recalculated. The following December the US Commerce Department responded by lowering its anti-dumping duties on pine, spruce and fir from 18.79 percent to 17.18 percent, which was based on a revised ITC determination. Canada countered that the small reduction did not amount to compliance with the WTO decision. On 1 August 2005 a WTO compliance panel agreed with Canada’s position, which prompted Canada to file a request with the WTO to impose USD 169 million in retaliatory tariffs on the US. On 6 September 2005, the US appealed the 1 August ruling, which means it will likely be another three months before a final decision is reached. Meanwhile, a WTO ruling on Canada’s retaliatory tariff request is expected in mid-2006.
Mixed reactions
American officials remained tight-lipped after the NAFTA ECC findings were released, only maintaining that both parties should pursue a negotiated solution to the issue. However, Canada was resolute that the NAFTA decision was clear and absolute, and that the time for negotiating was over. "It’s like playing a game of poker and, if you lose the hand, saying ‘let’s negotiate the pot’. It doesn’t work that way. You lose the hand, you pay the money, then you go on to the next hand," said Frank McKenna, Canada’s Ambassador to the US. However, with the WTO panel’s preliminary report, some feel that the next hand might have already arrived. "The [WTO] panel’s finding confirms that dumped and subsidised imports of softwood lumber from Canada threatened to materially injure the US industry," said USTR spokeswoman Neena Moorjani.
The devastating hurricane in the southern US delayed a phone conference between Canadian Prime Minister Paul Martin and US President George W. Bush during which they were expected to discuss the softwood lumber issue. This has been re-scheduled for 8 September; the softwood issue is expected to share the stage with discussions about a Canadian assistance to reconstruction efforts. The dual-issue conference has led some to draw unexpected links. While US builders have long contended that duties on Canadian softwood lumber were inflating the cost of construction in the US, Susan Petniunas from American Consumers for Affordable Homes linked them specifically to the hurricane. "This tragedy, coupled with ongoing lumber tariffs, will only further harm lumber consumers - especially those needing affordable housing in the US," she stated in an interview.
Uncertain future the result of overlapping trade agreements
While both sides claim victory, confusion prevails on the implications of these seemingly contradictory rulings. According to Canadian trade lawyer Lawrence Herman, the WTO and NAFTA rulings should not be seen as contradictory, but rather as "mutually exclusive." He noted that NAFTA panels evaluate compliance with domestic laws while the WTO Dispute Settlement Body assesses Members’ adherence to international trade laws.
The ensuing debate has also drawn attention to the logic of a country’s engagement in overlapping trade agreements. Canada has been fighting US duties under both trade pacts with the hopes that a win from either body would bolster their case. However, the findings that have emerged call this strategy into question. Indeed, with multiple rulings emerging from multiple trade panels on multiple issues, a gloss of confusion appears to have washed across the debate. While the WTO and NAFTA rulings do not address the same exact issue, they conflict on the key issue of whether US duties on Canadian softwood — regardless of the set amount — are justified. Thus, both parties are pointing to the respective trade bodies’ findings as proof of their vindication.
Canadian trade lawyer Barry Appleton stresses that "NAFTA states very clearly that in the case of a conflict between NAFTA and the WTO, NAFTA prevails." Meanwhile, Steve Swanson, of the American lumber lobby group the Coalition for Fair Lumber Imports contends that "this new [WTO] determination should put to rest any questions about whether duties are justified in this case."
"Canada Considers Retaliatory Tariffs," ASSOCIATED PRESS, 23 August 2005; "Canada Mulls Tariffs Over Lumber Spat, Emerson Says (Update 3)," BLOOMBERG, 23 August 2005; "Canada Scraps Softwood Lumber Talks with U.S.," REUTERS, 16 August 2005; "Canada may Retaliate with Tariffs in Softwood Battle," CBC.CA NEWS, 23 August 2005; "ECC Rules No Justification for Softwood Lumber Duties," INTERNATIONAL TRADE CANADA NEWS RELEASE, 10 August 2005; "WTO Compliance Panel Finds U.S. Countervailing Duties on Canadian Softwood Lumber Illegal," INTERNATIONAL TRADE CANADA NEWS RELEASE, 1 August 2005; "WTO Loss to U.S. Won’t Change Canadian Position in Softwood War: Minister," CBC.CA NEWS, 31 August 2005; "WTO Compliance Panel Rules in Favor Of U.S. on ITC Lumber Duty Determination," WTO REPORTER, 31 August 2005, "U.S. Housing Advocate Wants Lumber Duties Dropped for Hurricane Reconstruction," CBC.CA NEWS, 6 September 2005; "U.S. Appeals WTO Ruling Against Import Duties on Canadian Wood," BLOOMBERG, 6 September 2005; "U.S. Appeals WTO Compliance Report," BUSINESSWEEK ONLINE, 6 September 2005.