CONTRADICTORY RULINGS TRIGGER CONFUSION OVER 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, a World Trade Organisation (WTO) interim ruling was released on 29 August which supports the American position that the anti-dumping duties that have been imposed on Canadian softwood since May 2002 do not constitute a breach of international law. These latest rulings on the decades-old dispute have elicited high emotion from both sides of the border as the parties involved claim the seemingly contradictory findings vindicate their respective positions.

The NAFTA Ruling

The ruling of the NAFTA Extraordinary Challenge Committee (ECC) released on 10 August concerns the US International Trade Commission's (ITC) 2002 determination that found a threat of material injury to US lumber industry from Canadian softwood lumber. The ECC upheld its 2004 decision that US anti-dumping duties on Canadian lumber were unfounded because Washington was unable to prove such a threat. The ongoing dispute revolves around US assertions 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). On 31 August 2004, a NAFTA panel had ruled against this allegation by the US International Trade Commission (ITC) and supported Canada's position. The Office of the United States Trade Representative (USTR) rejected the NAFTA findings, asserting that the panel had not followed established dispute settlement rules and that one of the panel's members was in a conflict of interest position. The ECC, part of NAFTA's appeals process, was established at the request of the USTR in order to review the panel's decision. On 10 August 2005, the ECC unanimously dismissed the USTR's allegations.

Shortly after the ECC released its findings, the US announced that it would not comply which, 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. Goodale argued that the ECC finding confirmed that the US$4.1 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 the WTO released its interim finding on the issue which pronounced that US duties were not in breach of international law. This is only the latest in a series of WTO decisions which now stretch back over 20 years. While the WTO's decisions have a history of minor contradictions and unclear conclusions, they have generally agreed that while Canadian stumpage fees provide a financial benefit to Canadian timber companies, they do not merit the harsh US duties. Shortly after the 2004 WTO ruling against the US duties, the US Commerce Department lowered its anti-dumping duties from 18.79 percent to 17.18 percent, based on a new ITC determination in November that year.

Canada continues to argue that the duties are unfounded and had asked the most recent panel to evaluate the US' claim that it had complied with an earlier WTO ruling against the 2002 duties. Canada had already requested the WTO's permission to impose hundreds of millions of dollars in retaliatory duties on American exports. While a WTO ruling on Canada's request is expected in mid-2006, the interim report in favour of the US -- and the final report that is almost certain to be similar -- is likely to have an impact on the final outcome.

Mixed reactions

American officials remained tight-lipped after the NAFTA ECC findings were released, only maintaining that both parties should return to negotiations to resolve 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 United States. However, with the arrival of the WTO's decision, it appears 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.

Canada, for its part, insists that the matter will be discussed at a higher level when Canadian Prime Minister Paul Martin raises the issue in a meeting with US President Bush -- a meeting which has now been postponed in the wake of Hurricane Katrina.

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 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. Despite the fact that the WTO and NAFTA rulings are on slightly different aspects of the issue, 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 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," AP, 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," DFAIT NEWS RELEASE, 10 August 2005; "WTO Compliance Panel Finds U.S. Countervailing Duties on Canadian Softwood Lumber Illegal," DFAIT 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.