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2.0 The Legal Context

Each of the cases dealt with an issue important to the spirits industry – indirect taxes.
Each of the spirits cases found violations of GATT Article III:2, which provides that
products imported from other Members may not be subject to internal taxes that are
higher than those levied on “like” domestic products, and that “directly competitive or
substitutable” products can only be subject to minor differences in taxation. See
Chapter Two, Section 6.3.2.

3.0 The Cases

Japan – Taxes on Alcoholic Beverages: The most important alcoholic beverage tax
dispute in the GATT was decided in 1987.1 Japan taxed alcoholic beverages based on
product characteristics, including raw materials used, production methods and alcohol
content, as well as quality and price of the products. The result was that Japan taxed
under U.S. or applicable copyright law.

most foreign spirits at a higher rate than domestic spirits. The Panel Report, which
was adopted, found that the tax system violated GATT Article III:2 as it placed a
higher burden on “like” imported products.

As a result of this case, Japan amended its tax regime, but still imposed significantly
lower taxes on shochu, a locally produced alcoholic beverage that enjoyed a large
market share relative to other spirits, including vodka and whisky which were largely
imported.

Japan – Taxes on Alcoholic Beverages II: Soon after the conclusion of the WTO
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Agreements the European Communities, Canada and the United States challenged
permitted

Japan’s taxation of alcoholic beverages, alleging that it continued to discriminate

against imported spirits contrary to Article III:2.2 The tax differences were still very
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large. For example, the tax on shochu was between only 69 and 155 yen per kilolitre,
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whereas the tax on whisky varied between 909 and 982 yen/millilitre, and on vodka it
was 377 yen/millilitre. Based largely on their physical similarities, the Appellate Body
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affirmed the Panel’s finding that shochu and vodka were “like products”. Although the
other spirits involved, such as gin and whisky, were not “like” shochu, econometric
studies showed that they competed for the same markets and that there was
significant elasticity of substitution between them, so that they were “directly
competitive or substitutable”. Accordingly the tax system was found to be
inconsistent with Article III:2.

As a result of this case, Japan eliminated the differential in tax rates across all spirits
but whisky (on which the parties accepted a very modest differential) over a period of
three years from September 1997.3 Japanese imports of spirits rose by nearly 40%
over the next five years.4

Korea – Taxes on Alcoholic Beverages: As in the case of Japan, Korea imposed taxes
at varying rates on different alcoholic beverages. Soju, the traditional Korean spirit that
enjoyed a large market share was taxed at 35% in the diluted version and 50%
otherwise, whereas vodka, gin and rum were taxed at 80%, and whisky and brandy at
100%. Based on a cross-price elasticity study submitted by the complainants along
with other evidence of competition, the Panel found that soju and other alcoholic
beverages were directly competitive or substitutable for purposes of Article III:2. In
doing so it rejected Korea’s argument that the differential was justified because soju
was considerably less expensive than the other spirits. The Panel Report was upheld
Copyright 2017. ICC Services.

by the Appellate Body.5

As a result of this case, Korea amended its liquor and education tax laws. Each tax is now
imposed at a flat rate on a non-discriminatory basis on all distilled alcoholic beverages.

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 CHAPTER 13 | CASE STUDY C

Chile – Taxes on Alcoholic Beverages: 6 Chile’s system for taxing distilled spirits
differed from Japan’s and Korea’s in that the tax did not depend on the type of spirit,
but on its strength. Thus pisco (a popular Chilean spirit) was taxed at the same rate as
an imported spirit of the same strength. On its face this might appear non-
discriminatory, but in fact, probably by design, roughly 75% of domestic production
enjoyed the lowest tax rate (27%), and over 95% of imports were taxed at the highest
rate (47%).7 Influenced by this fact, and the fact that there was only a four degree
spread in alcohol content between the lowest taxed and the highest taxed products,
the Panel, upheld by the Appellate Body, found a violation of Article III:2. Again, the
Panel based its decision on evidence of cross-price elasticity derived from a consumer
survey. It was also relevant that pisco was marketed as being competitive with other
imported spirits.

As a result of this case, Chile amended its tax law to apply a 27% rate on all alcoholic
beverages from 21 March 2003.

Philippines – Taxes on Distilled Spirits: In late 2009 and early 2010 the European Union
and the United States initiated WTO actions against taxes imposed by the Philippines
on distilled spirits, alleging that the Philippine regime violated of Article III:2.8 The
Philippine regime distinguished between beverages distilled from materials largely
produced locally (sugar cane, coconut, nipa, cassava, camote or buri palm), and those
distilled from materials largely produced in Europe and the United States (cereals,
potatoes, corn, etc.), with the result that locally produced spirits were subject to a
much lower tax burden (15 pesos per litre) than imported spirits (between 159 and
635 pesos per litre).9 The Appellate Body found that the Philippines violated Article
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III:2 as there was enough evidence to suggest a significant degree of competitiveness

or substitutability for those distilled spirits in the Philippines market.10 It was significant
that the brand names of some of the domestically distilled spirits suggested that they
had been imported, e.g., Gran Matador brandy, which had various suggestions of
similarity to Spanish brandy on its labels, and Britannia London Dry Gin.

As a result of this case, the Philippines restructured its excise tax regime so as to
apply a uniform tax to all spirits.

Colombia – Measures Concerning Imported Spirits: For a number of years, the spirits
industry encountered problems with taxation, as well as various forms of
discrimination against imports by local governments in Colombia. In 2016, the EU
launched a WTO challenge against the Colombian tax measures alleging a violation of
Article III:2 (among other issues).11 A panel was established in September 2016. In
response, the Government of Colombia proposed a reform Bill to address the EU
concerns and those of other WTO Members. The Government prepared an
explanation of the Bill that included a discussion of Colombia’s obligations under the
WTO, pointing out that the current legislation needed to be adjusted to conform to
Article III of GATT 1994.12 At the time of writing (April 2017), Colombia had passed the
final version of the Bill into law and the EU and other WTO Members concerned, with
the help of industry, were assessing the compatibility of the new law with Colombia’s
WTO and FTA obligations.

As in other jurisdictions, the WTO cases brought by the alcoholic beverages industry
over the past 20 years shaped the discussions about the reform of Colombian laws
governing taxation and regulation of alcoholic beverages, and should lead to the
elimination of the discriminatory treatment of imported alcoholic beverages in Colombia.

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4.0 Industry’s Role in Alcoholic Beverage Disputes

The spirits industry has played, and continues to play a very positive role as an
advocate and promoter of excise tax reform in the alcoholic beverage sector. It has
worked with potential WTO Complainants and Third Parties both before and
throughout the WTO dispute process. It has been involved in studies of cross-price
elasticity. The industry also supplied substantial evidence of the operation of the
relevant markets for alcoholic beverages, including evidence of marketing campaigns
comparing domestic products with imported whiskies.

The alcoholic beverage cases demonstrate that industry can successfully use
international trade rules to challenge discriminatory taxes imposed by countries on
imported products. The cases clarified a number of the provisions relevant to Article
III:2. They also demonstrate the importance of bringing cases based on solid evidence,
not just of the tax regimes themselves but also of the competitive position of the
products in the market. In many of the cases, economic evidence of the
substitutability between imported and domestic products, especially evidence of
cross-price elasticity, proved persuasive when carried out with a sound statistical
foundation and due attention to the methodology. Evidence of the impact of the
taxes at issue on domestic and imported products also proved essential.

Following the success in these WTO disputes the spirits industry, working closely with
the officials in the EU, USA and Canada that had represented their interests in those
cases, turned to ensuring that the tax regimes in the targeted countries were
reformed. Both Chile and the Philippines, like Japan and Korea before them, brought
their taxes into compliance with WTO norms. It was not necessary to resort to WTO-
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sanctioned retaliation in any of these cases, as diplomatic and legal pressure proved
sufficient to persuade governments to enact reforms.

The industry also worked with government representatives and industry colleagues
from a number of other countries to build on the successes of the cases, including
development of strategies for ongoing engagement with the WTO and with trade
ministries around the world. A variety of mechanisms were used to tackle trade
problems in the wake of the WTO decisions.

For example, in 2004 the EU industry filed a complaint under the European Trade
Barriers Regulation (TBR)13 against discriminatory taxation of whisky in Uruguay. This
procedure required the industry to develop evidence and argumentation to support
its complaint as if it were preparing for a WTO case. The EU investigated the
complaint and based on a dialogue between the EU and Uruguay in the course of the
investigation the matter was resolved without the need to resort to WTO dispute
settlement.14 The “precedential value” of the WTO spirits cases was crucial in the
resolution of this matter.

In 2005 the EU wine and spirits industries filed another complaint under the TBR
against India’s imposition of additional customs duties and against certain state
government measures within India. DG Trade, responsible for trade within the EU
Commission, investigated and recommended that the EU should request consultations
with India in the WTO concerning the additional duties and the operation of a state
monopoly in Tamil Nadu.15 Following India’s commitment to remove the additional
duties imposed on wine and spirits exports from the EU, and pending further discussion
of the state measures at issue, the EU requested suspension of the WTO Panel.16

In 2008, the EU took the first steps toward a further challenge of measures in several
Indian states that discriminated against imported wines and spirits.17 The case built on
and added to the findings of the earlier TBR investigation, citing discriminatory
taxation in Maharashtra and Goa and restrictions on sale by Tamil Nadu. The case was

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 CHAPTER 13 | CASE STUDY C

not pursued further, in part because the EU and India entered into discussions aimed
at concluding a Free Trade Agreement. Indian wines and spirits, with a 150% tariff, are
a central issue in the ongoing FTA negotiations.

5.0 Lessons Learned by Industry from the Alcoholic Beverages Cases

 A central element in the success of the alcoholic beverages industry has been
its combination of persistence and preparation. Persistence is needed when
governments maintaining discriminatory measures refuse to make changes.
Preparation is needed to engage in serious discussions of discriminatory measures
based on clear evidence of the legal structure and operation of the measure in
question and of its commercial impact on the products at issue. A WTO case
requires preparation of detailed evidence, often including economic evidence of
the operation of the market and the competitive nature of the products, drawing
on tools such as cross-price elasticity studies.
 A WTO ruling provides leverage for changing a tax or regulatory regime found
to be in violation of another Member’s WTO commitments. The impact of having
the highly regarded WTO Appellate Body issue a public ruling against a measure
is significant in both diplomatic and political terms. It also provides the basis for
negotiating a change in measures found to be in violation of the WTO Agreement
through the threat of retaliation to back up diplomatic and political pressure. An
additional advantage of pursuing WTO dispute settlement is that the decisions,
while not binding on parties to future cases, do have some value as “precedent”.
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 The WTO process may seem slow to industry, although by comparison with
other international and domestic tribunals, or even international arbitration, it is
quite fast, and relatively cost-effective. In principle, a case should take less than
two years to reach a ruling from requesting consultations, with another year for
compliance by the respondent.
 The pressure exerted on the respondent Member during the dispute settlement
process can result in resolution of problems before the dispute settlement process
is completed.
 WTO dispute settlement should be supplemented by consideration of other
bilateral or regional treaty regimes that may be helpful in applying pressure on
governments to reform unreasonable or discriminatory measures.
 Short of dispute settlement, industry should also make use of relevant WTO
committees, such as the TBT or SPS Committees, and the excellent technical
work that they do. The spirits industry strives to make its voice heard through
government representatives during the TBT Committee meetings. Industry may
also benefit from making its voice heard through government representatives in
the WTO Accession process and in the regular Trade Policy Review Mechanism
meetings. These are important steps as they serve to put governments on notice
that their policies are vulnerable to WTO challenge.

In conclusion, the spirits tax cases demonstrate that the WTO dispute settlement
process can be a “game changer” for industry when dealing with discriminatory tax or
regulatory measures. Recourse to WTO dispute settlement places a substantial
burden on industry, and on their government representatives, to collect and analyse
data to present to WTO panels, but the results may discourage the development of
similar discriminatory trade measures by governments around the world.

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1 Japan – Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages, L/6216 – BISD 34S/83
(1987). In addition to the Japan – Alcoholic Beverages case, there were three other alcohol-related GATT decisions: Panel on
Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies, L/6304 – BISD 35S/37 (1988);
Canada – Import, Distribution and Sale of Certain Alcoholic Drinks by Canadian Provincial Marketing Agencies, DS17/R – BISD
39S/27 (1992); and United States – Measures Affecting Alcoholic and Malt Beverages, DS23/R – BISD39S/206 (1992).
2 Japan – Taxes on Alcoholic Beverages, WT/DS8; WT/DS10; WT/DS11 (1996).
3 Japan – Taxes on Alcoholic Beverages, Mutually Acceptable Solution on Modalities for Implementation (12 January 1998) WT/
DS8/19, WT/DS10/19, WT/DS11/17.
4 See Trade Statistics of Japan, http://www.customs.go.jp/toukei/srch/indexe.htm.
5 Korea – Taxes on Alcoholic Beverages, WT/DS75/AB/R ; WT/DS84/AB/R (1999), para. 10.67.
6 Chile – Taxes on Alcoholic Beverages, WT/DS87/AB/R ; WT/DS110/AB/R (2000).
7 Id. para. 7.158.
8 Philippines – Taxes on Distilled Spirits, WT/DS396/1; WT/DS403/R (2012).
9 Id. paras. 2.3-2.92.
10 Philippines – Taxes on Distilled Spirits, WT/DS396/AB/R and WT/DS403/AB/R (2012), para. 242.
11 Colombia – Measures Concerning Imported Spirits, WT/DS502 (pending).
12 Discussion Document for First Reading of Draft Law no. 152/2015 (Chamber of Representatives).
13 Council Regulation 2015/1843 (6 October 2015) OJ 16 October 2015 L272/1. Guidance on using the TBR can be found at
http://trade.ec.europa.eu/doclib/docs/2005/april/tradoc_122567.pdf.
14 Commission Decision of 8 July 2005 Suspending the examination procedure concerning obstacles to trade consisting of
measures imposed and practices followed by the Eastern Republic of Uruguay affecting trade in Scotch whisky (22 July
2005), OJ L190/27 taken under authority of the Trade Barriers Regulation, Council Regulation (EC) No 3286/94 of 22 Decem-
ber 1994.
15 India – Measures Affecting the Importation and Sale of Wines and Spirits from the European Communities, Request for
Consultations by the European Communities WT/DS352/1/ (23 November 2006); and Report to the Trade Barriers Regulation
Committee (28 June 2006), http://trade.ec.europa.eu/doclib/docs/2006/july/tradoc_129462.pdf and Addendum (13 October
2006), http://trade.ec.europa.eu/doclib/docs/2006/november/tradoc_131213.pdf.
16 India – Measures Affecting the Importation and Sale of Wines and Spirits from the European Communities, Communication
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from the Chairman of the Panel, WT/DS352/6 (17 July 2007). The United States brought a case on the Additional Duty mea-
sure despite withdrawal of the duty itself by India. The Appellate Body concluded that the measures would be contrary to the
WTO if they were higher than state excise taxes, but declined to make a recommendation to the Dispute Settlement Body in
light of the lack of sufficient evidence on the operation of state excise taxes relative to the Additional Duty. See India – Addi-
tional and Extra-Additional Duties on Imports from The United States DS360/WT/AB/R (2008).
17 India – Certain Taxes and Other Measures on Imported Wines and Spirits, Request for Consultations by the European Commu-
nities, WT/DS380/1, G/L/855 (25 September 2008).

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 CHAPTER 13 | CASE STUDY D

Case Study D:
The US-Canada Lumber Trade Battles
Spencer S. Griffith1*

1.0 Introduction
The US lumber industry has filed a series of subsidy and anti-dumping cases against
imports of softwood lumber from Canada over a period of more than 30 years. For
most of that time, those imports have been subject to restraints, either under the
anti-dumping and/or countervailing duty laws, or under bilateral agreements. The
softwood lumber case presents a dramatic example of the power of a large and well
organised producer group to use the US trade remedy laws to restrict imports to the
detriment of US consumers. The case also starkly illustrates the politicised nature of
high profile and massive trade remedy cases. The US trade remedy system is
designed to operate outside the political arena (except for safeguard cases), but cases
do take place against a politicised backdrop (“background music,” as it was described
by a leading trade lawyer). The twist and turns of the lumber case over the last
30-plus years have been driven by litigation, trade policy, domestic and international
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politics, appeals to various domestic and international tribunals, and changes in the
law that take place – often simultaneously – in a variety of fora. Canada has won
appeals of virtually all of the US Commerce Department and International Trade
Commission anti-dumping and countervailing duty decisions over the years, but the
trade tension continues.1

Imports of lumber from Canada into the US are very large, varying from about US$6.8
billion in 2004 to around US$4.5 billion at the time of writing (April 2017) (at current
exchange rates), as lumber consumption varies with overall economic conditions, such
as housing starts.

1.1 Terminology
Before we discuss the dispute, a little basic terminology is in order. Timber consists of
the standing trees in the forest that are cut down and turned into logs. Logs are then
transported to sawmills, where they are converted into lumber. Lumber is the wood-
framing product, such as 2x4s, which are used to build houses. Finally, “stumpage” is
the fee paid to cut down standing timber.

In Canada, most of the forests are owned by the provincial governments. In contrast,
in the United States, much of the forest base is privately owned. Much of that land,
however, was provided either free or at significant discounts by US governmental entities
as lands were developed, such as for railroad rights-of-way. Timber in Canada is cut by
sawmills owning stumpage rights, or by independent loggers who sell to sawmills. The
sawmills and loggers pay a stumpage fee to the Canadian provincial governments.

1.2 The Key Issue

The central issue in the case has been the US claim that the stumpage fees paid by
the Canadian sawmills to the provincial governments are “too low.” Under World Trade
Organisation (WTO) law (incorporated into US trade law), a government that receives
1 Spencer Griffith is a partner with the law firm Akin Gump Strauss Hauer & Feld LLP. He is counsel to the Government of British
Columbia in the Softwood Lumber from Canada countervailing duty cases.

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less than “adequate remuneration” when providing an input into the manufacture of a
product (such as stumpage fees paid for timber harvesting rights) is providing a
“benefit”, which is one of the necessary elements of a countervailable subsidy2 – the
others being financial contribution and specificity. (See Chapter Five.) US trade law
implements the WTO rule requiring that the adequacy of remuneration should be
determined “in relation to prevailing market conditions in the country of provision for
purchase.…”3 Normally, then, the US Commerce Department would compare the
stumpage fee paid to a provincial government with stumpage fees paid to private
sellers in the same province. The US lumber industry, however, claims that the markets
for stumpage in the Canadian provinces are distorted by the fact that the provincial
governments are the predominant suppliers of timber, which allegedly influences
prices in private markets. Canada argues that the domestic stumpage markets are not
distorted, and that any such cross-border comparisons are unlawful. How then, should
the US Commerce Department resolve this issue?

As discussed below, resolution of this complex issue has resulted in more than 30
years of intensive litigation, four separate US Commerce Department and International
Trade Commission investigations (a fifth has just begun), high-level political
involvement, intense lobbying from both sides, appeals to a variety of US and
international courts and panels, tens of millions of dollars in legal and other expert
fees, and the collection of billions of dollars in anti-dumping and countervailing duties.
In the most recent completed round of litigation, the United States refused to refund
those duties even after various NAFTA panels had ruled that the underlying subsidy,
dumping, and injury findings were invalid, and Canada had to obtain a special ruling
from a US court ordering the Commerce Department to refund the duties.
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The lumber wars have been the most difficult issue in US-Canada trade relations for
decades, impacting billions of dollars in trade. US lumber production cannot satisfy
US demand, and imports of lumber from Canada play an important role in the US
market. Both sides are frustrated. The US industry keeps filing new cases, and Canada
keeps winning on appeal. Every time Canada wins on appeal, however, a new case is
threatened or US law is changed.

2.0 The Cases

2.1. Lumber I
The first subsidy case against imports of lumber from Canada was filed by the US
lumber industry in 1982. It alleged that Canadian provincial stumpage programmes
conferred a countervailable subsidy on the basis of a cross-border comparison of
stumpage rates in Canada with stumpage rates in the United States. The US
Commerce Department in 1983 ruled that Canadian provincial stumpage programmes
were not a countervailable subsidy because they were not provided to a specific
industry or group of industries, as required for a subsidy to be countervailable.4 The
US Commerce Department found that stumpage was “used within Canada by several
groups of industries….”5 The US Commerce Department also ruled that a cross-border
comparison of Canadian stumpage prices with US prices would be “arbitrary and
capricious” because of the differences in species, costs, taxes, and other factors
affecting prices, and that “it is not the Department of Commerce’s policy to use
cross-border comparisons in establishing commercial benchmarks.…”6 The US industry
did not appeal the Commerce Department’s Final Determination.

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2.2 Lumber II
After losing the first case, the US industry reorganised and put together a broader
coalition of lumber producers from the entire United States, including the US South,
thus expanding the Coalition’s political clout. High-level political talks between the two
governments failed to resolve the ongoing tension. In 1986, the now-larger US industry
coalition filed a new countervailing duty case against Canada. In a stunning example
of an agency reversing its position, the Department in its preliminary determination
ruled that Canadian stumpage programmes were “specific,” despite the fact that there
had been no change since 1983 (when the Department ruled that stumpage was not
specific) in the number of industries using logs. The US Commerce Department
claimed that there were new facts on the record supporting its reversal of its prior
position. The US Commerce Department calculated a preliminary subsidy rate of 15%,
which was roughly half way between the 27% rate advocated by the petitioner and
the zero rate advocated by Canada. Instead of using private benchmarks in Canada,
the US Commerce Department compared the stumpage rates with the provinces’
costs of providing timber-harvesting rights to calculate the alleged subsidy.7

Before the final determination was issued, the two governments agreed to a
settlement (the Memorandum of Understanding [MOU]), under which the
countervailing duty case was terminated in exchange for a 15% export tax imposed by
the Canadian province. Under this arrangement, exports were subject to the same
level of tax as they would have been under the preliminary countervailing duty order,
but at least the money stayed in Canada.

2.3 Lumber III

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Settlement of the Lumber II case did not resolve the tension over trade in lumber.
Various Canadian interests criticised the MOU, and attempts by the two governments
to renegotiate revised terms were not successful. In 1991, Canada terminated the
settlement because, in its view, provincial stumpage rates had risen enough to cover
or exceed costs. Under pressure from interests supporting the US industry, the US
Commerce Department took the rare step of “self-initiating” a new subsidy
investigation without waiting for the domestic industry to file a petition. The US
Commerce Department again ruled that Canadian stumpage programmes were
specific. On the benefit issue, the US Commerce Department this time compared
Canadian provincial stumpage rates with certain Canadian benchmarks to calculate
the amount of the alleged subsidy (2.91%). The US Commerce Department ruled that
it would not be appropriate to use a cross-border benchmark, such as US stumpage
rates, because of the US Commerce Department’s “longstanding practice and
preference to measure subsidies provided by a government within the jurisdiction of
that government.”8 The US Commerce Department also – for the first time – ruled that
the British Columbia log export permitting system, under which British Columbia log
exporters had to obtain a permit demonstrating that the logs to be exported were
“surplus” to the needs of the domestic market, constituted a subsidy to the
production of lumber of 3.6%. The argument was that by allegedly restraining exports,
the system artificially increased the supply of logs in the domestic market, thus
reducing their prices, to the benefit of the lumber producers using those logs.9

Canada appealed the US Commerce Department’s determination, as well as the

International Trade Commission’s (ITC) injury determination, to binational dispute
resolution panels established under the new US-Canada Free Trade Agreement
(USCFTA). Canada had believed that such binational panels would provide more
searching reviews of DOC and ITC decisions than the US courts.10 The panels threw
out the US Commerce Department’s subsidy determination (by a 3-2 vote on national
lines) and the ITC’s injury determination.11 The United States then appealed to an
Extraordinary Challenge Committee (ECC) set up under the USCFTA, which while not

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a full-fledged appeals court, was authorised to hear challenges to the legitimacy of

decisions issued by binational panels. The United States claimed that some of the
panel members had conflicts that they had failed to disclose, and that the underlying
panels had manifestly exceeded their power, authority and jurisdiction by failing to
apply the appropriate standard of review. The ECC, by a vote of two to one (again
along national lines), rejected the US appeals, and thus the underlying panel decisions
throwing out the US Commerce Department subsidy findings and the ITC injury
findings were upheld.12

Even though Canada had won the case, it faced continued pressure from US interests
by, for example, the filing of a lawsuit by the US industry challenging the
constitutionality of the FTA panel system, and changes to US law to make it more
favourable to the US industry’s position. As a result of these efforts, US trade law was
amended to address some of the panel’s findings in Lumber III. Senator Max Baucus,
the then-Chairman of the US Senate Finance Committee, which has jurisdiction over
trade law, was from Montana and was a vocal and ardent supporter of the US lumber
industry. The amended US law made it easier for the US Commerce Department to
find specificity in a given case (by allowing it to find specificity on just one of the four
factors listed in the statute) and by stating that the US Commerce Department was
not required to consider the effects of a subsidy when determining whether a
subsidy exists.13

The two governments renewed efforts to reach a potentially long-standing settlement

of the trade dispute. Ultimately, a five-year agreement was reached in 1996 (the 1996
Softwood Lumber Agreement), under which export taxes were imposed on shipments
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above specified volumes of lumber.

2.4 Lumber IV
The US industry in 2001 filed a new countervailing case on the very day after the 1996
agreement expired. Various Canadian interests hired their own counsel. Each side also
hired economists and consultants to provide expert advice. Each side also retained
lobbyists and public relations experts, and actively sought out political support for
their position. Despite having previously said that a cross-border comparison would
be “arbitrary and capricious” (Lumber I) and “inappropriate” (Lumber III), the US
Commerce Department reversed course and used a cross-border comparison of
Canadian provincial and US stumpage rates to calculate a subsidy rate of 18.79%. This
time, the US industry also filed a dumping case, and the US Commerce Department
found a dumping margin of 8.43% that was added to the calculated subsidy rates.

Canada appealed the US Commerce Department’s subsidy and dumping findings to

binational panels established under NAFTA (similar to those under the USCFTA) and
to the WTO. After years of litigation, during which billions of dollars in duties were
collected by the US government, Canada ultimately won the appeals and the US
Commerce Department’s subsidy and dumping findings were reversed.14 The US
government, however, took the position that it did not have to refund to Canada the
billions of dollars of duties collected because Canada had appealed to NAFTA panels
rather than to US courts. Canada sought and obtained an order from a US court that
the US was required as a matter of law to refund the duties.15

Despite these victories, the US still continued to pressure Canada over trade in lumber.
Again seeking a more stable and long-term resolution of the trade tension, the two
governments in 2006 agreed to yet another agreement governing trade in lumber –
the Softwood Lumber Agreement (SLA). Under this new settlement, the Canadian
provinces agreed to impose either export taxes or volume restraints on their exports
of lumber corresponding with specified levels of lumber prices in the United States.

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 CHAPTER 13 | CASE STUDY D

The US brought a few arbitrations under the SLA against Canada, alleging
circumvention of the export restraints. Canada won all but one of these arbitrations
where the ultimate liability found was very small. The US lumber industry claimed that
the arbitrations were not fair, and publicly criticised the dispute resolution provisions
of the SLA to which they had previously agreed.

2.5 Lumber V
The SLA expired in the fall of 2015. Based on public reports, the two governments are
engaged in settlement talks. President Obama and Prime Minister Trudeau in March of
2016 instructed their respective trade officials to try to reach a deal. Settlement talks
continued through the fall of 2016, but the two governments could not reach a agreement.

On 25 November 2016, the US industry filed a new round of subsidy and dumping
cases against imports of lumber from Canada. The two countries will now, once again,
go back to the US Commerce Department and the ITC for yet another round of
massive and politically sensitive trade litigation.

3.0 Conclusion
The US-Canada lumber war illustrates that trade remedy laws are a blunt instrument
when attempting to resolve differences over trade policy. Domestic producer groups
need to be well organised and well funded to mount sustained trade remedy cases,
and the foreign parties also have to devote significant resources to defend such large
cases. Even though US anti-dumping and countervailing laws are intended to be
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applied in an objective and transparent manner, it is helpful for both sides to garner as
much political support as possible to help advocate each side’s position in the court of
public opinion and public policy. Also, economic and consulting experts are vital parts
of the teams for both the petitioners and foreign respondents.

In addition, while long-term and hopefully stable settlements of large cases are often
preferable, in practice they can prove difficult to reach. The political settlements
reached in the lumber wars are the exception. This is in part why there are now fewer
“settlements” of trade remedy cases. In the past the US Commerce Department
sometimes entered into “suspension agreements,” under which a dumping or subsidy
case was “suspended” in exchange for certain commitments by the foreign producers.
But such suspension agreements are generally disfavoured these days and rarely seen.

4.0 Lessons Learned

 If a large case, arrange political support from your politicians to express their views
to appropriate agencies as necessary during the case. Foreign producers should
try to get support from domestic interests, such as consumers, who obviously have
more political clout. In the lumber cases, the US homebuilders supported Canada’s
view that imports of lumber should not be restricted, but their political influence
was less than that of the US lumber industry.
 Large cases are expensive, with significant legal fees. Arrange for splitting of legal
fees among the domestic producers supporting the case. Petitioner groups usually
hire a single law firm.
 If you are a foreign producer, you will need to obtain counsel quickly, as anti-
dumping and countervailing cases move fast. It is likely that different foreign
producer interests and foreign governments will each need their own counsel,
because of possibly divergent interests, particularly during settlement discussions.

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 BUSINESS GUIDE TO TRADE AND INVESTMENT | INTERNATIONAL TRADE

Although in the first two Lumber cases, Canadian interests were represented by
a single law firm, in the last two each lumber-producing Canadian province and
each provincial industry, as well as the federal government, and each company
respondent in the dumping case, had its own counsel.
 Coordination among counsel and foreign producer interests and foreign
governments is key. Arrange a joint defence agreement, so that confidential
information can be shared among teams representing foreign producer and foreign
government interests.
 For foreign producer interests, assemble, with advice of counsel, a large team at
the company or government to develop the necessary information, which will be
voluminous.
 Economics play a key role in these cases, and both sides will need to retain
economists as expert witnesses. In Lumber IV the Canadian interests retained three
distinguished academic economists.
 If a large and sensitive case, obtain public relations consultants to advocate your
position in the court of public opinion.
 Take a long-term view of the case. Large, politically sensitive cases often drag on
for years of litigation and appeals, even after the initial subsidy or dumping case is
concluded.
 For both domestic and foreign producer interests, assess possible room for
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settlement at the appropriate time in a case.

 For foreign producer or government interests, build a record that will support your
position on appeal even if you lose the case initially before a foreign administrative
agency.

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