Incoterms_® and Commercial Contracts

1.0 Introduction

Through its dispute settlement process, the World Trade Organization (WTO) provides a mechanism to address violations of market access commitments. However, the process can take several years or more, and often requires that the complaining Member go through a number of stages. It is not always enough to bring a complaint and obtain a finding of violation. In some cases, the respondent government may do nothing in response to such a finding; in others, the respondent government may change the measure in such a way that it continues to violate the rules. If that government does not come into compliance right away, the complainant may need to threaten, or actually impose, authorised trade sanctions, in order to induce compliance. While this extra work can be burdensome on a complainant, in most cases, where this kind of retaliation is carefully targeted, compliance, or at least some sort of compromise, is usually achieved at the end of the day.

To illustrate these issues, we discuss the case of United States – Certain Country of Origin Labelling (COOL) Requirements (WT/DS/384, 386), in order to reveal the process and challenges of ensuring market access through a persistent and firm effort to push a government to comply with its WTO obligations. Complicating matters, this case involved a measure that had an ostensibly legitimate public policy purpose – providing consumers with information on the origin of meat. As a result, there were certain political sensitivities that had to be taken into account. Looking under the surface of the measure’s rationale, however, the protectionist motivations became clear. Canada and Mexico, the complainants, were able to convince the panel and the Appellate Body of the true nature of the measure, and then to craft their retaliation in a way that caused the United States to withdraw the objectionable parts of the measure.

2.0 Background on the COOL Legislation and Regulations

Before the idea of mandatory Country-of-Origin Labelling (COOL) legislation attracted much attention from Congress, industry groups aired frustration over competition from Canadian and Mexican cattle producers. They framed the problem as Canadian and Mexican cattle being dumped on the US market.

The first COOL legislation was put forward by Rep. Helen Chenoweth-Hage (R-ID) on 17 April 1997, when she introduced the “Imported Meat Labelling Act of 1997.” This[Page298:]measure would have amended the Federal Meat Inspection Act to require labelling of meat products with the country-of-origin, specifically to indicate where an animal was raised before slaughter.¹A similar bill was introduced by Sen. Tim Johnson (D-SD) on the same day; he argued that the reason for country-of-origin labelling was the lower quality meat found in imported products.²Both bills did not advance beyond the committee stage. Rep. Chenoweth-Hage and Sen. Johnson reintroduced their bills two years later, and additional bills were put forward by Sen. Tom Daschle (D-SD) and Sen. Conrad Burns (R-MT).³Sen. Burns stated that his “bill will protect the consumer as well as the agricultural industry, which has had to face severe competition from foreign countries in recent years,” singling out Canada and Mexico.⁴

* Simon Lester is a Trade Policy Analyst at the Cato Institute, Washington, DC. Inu Manak is a PhD Candidate in the Department of Government at Georgetown University, Washington, DC.

It was around this time that the Ranchers-Cattlemen Action Legal Foundation (R-CALF) was founded for the purpose of filing anti-dumping and countervailing duty cases on behalf of the US cattle industry.⁵On 1 October 1998, R-CALF initiated two anti-dumping cases against live cattle from Canada and Mexico, and a subsidies case against live cattle from Canada.⁶In January 1999, the International Trade Commission (ITC) made a preliminary affirmative injury determination with respect to imports of live cattle from Canada; however, it reached a negative determination for the anti-dumping investigation on Mexico, which ended that case.⁷The ITC made a negative final injury determination with respect to Canada, stating that “significantly increasing volume of subject imports are not imminent, and that material injury will not occur in the absence of an antidumping duty order.”⁸This effectively ended R-CALF’s petition. In response, however, the group did not give up its fight against imports, but instead turned its attention to Congress, focusing on its push for a mandatory country-of-origin labelling statute.

Back in Congress, legislators were still expressing their worries about foreign competition. In a September 2000 hearing, Rep. Chenoweth-Hage stated that, “[o]ne of the concerns of the northern-tiered States...is that there is a lot of cattle coming in in sealed trucks across the Canadian border to our border States, Idaho being one, the Dakotas, Montana, Washington, and then of course, it filters down and distorts the American market.”⁹

As noted above, several attempts were made prior to the 2008 Farm Bill to institute mandatory country-of-origin labelling for certain muscle cuts of meat, including beef, lamb, pork, as well as farm-raised fish.¹⁰COOL was eventually passed as part of the 2002 Farm Bill. However, implementation was delayed, principally because the proposed implementing regulations were considered too onerous. Those continuing delays led to the 2008 Farm Bill amendments, which provided, potentially, more labelling flexibility. The original 2008 Farm Bill did not include country-of-origin labelling provisions; they were later added by the House Committee on Agriculture, and the Senate Agriculture Committee.

With the legislation in place, on 1 August 2008 the Agricultural Marketing Service (AMS) of the US Department of Agriculture announced that an interim rule on mandatory COOL would take effect on 30 September 2008; a final rule was published on 15 January 2009, which would take effect on 16 March 2009.¹¹

The 2009 Final Rule established origin labelling rules for meat based on the following five categories: (1) Category A muscle cuts (US country-of-origin); (2) Category B muscle cuts (multiple countries-of-origin); (3) Category C muscle cuts (imported for immediate slaughter); Category D muscle cuts (foreign country-of-origin); and (5) Category E (ground meat). To qualify for category A, the animal must have been born, raised, and slaughtered in the United States; in contrast, category D is for products where no part of the production process has occurred in the United States, and it is therefore wholly of foreign origin. The other categories require labelling to specify that the meat is a product of the United States and Country X (and Country Y, if applicable). Through these requirements, the measure required tracking every point in the production[Page299:]process. In this regard, the amended 2013 Final Rule required categories B and C to specifically identify the production steps that occurred in each country, namely, where the product was born, raised, and slaughtered.

The trade problem with the measure was not the labelling requirement per se. Rather, it was that the structure of the measure gives certain meat processors an incentive to use only a single national source of products, so as to avoid the cost of segregating products by nationality. Canada and Mexico were therefore worried that the measure would lead to decisions by meat processors to stop using meat and cattle of Canadian or Mexican origin.

3.0 The WTO Litigation

Based on concerns about this trade impact, Canada and Mexico initially requested consultations, the first step in a WTO dispute, in December of 2008.¹²They moved forward with the disputes in October 2009, when each requested a panel. A single panel was established in November to hear both cases. Composition of the panel took a few months. In May of 2010, the panel was composed, with long-time WTO expert Christian Häberli as the chair. Dr Häberli served on all of the Bananas panels¹³and thus had experience with contentious WTO litigation involving agricultural products.

The panel issued its ruling in November of 2011, dealing with a wide range of procedural and systemic issues. On the key legal issue, it concluded that the COOL measure, in particular in regard to muscle-cuts of meat, violated the national treatment obligation of TBT Agreement Article 2.1.¹⁴An important aspect of its reasoning was that, in the context of the muscle-cut labels, the COOL measure “creates an incentive in favour of processing exclusively domestic livestock and a disincentive against handling imported livestock.” Accordingly, the measure “de facto discriminates against imported livestock by according less favourable treatment to Canadian cattle and hogs, and to Mexican cattle, especially Mexican feeder cattle, than to like domestic livestock.” ¹⁵

On appeal, the Appellate Body modified the panel’s reasoning in important ways, but reached the same result. Ultimately, the Appellate Body upheld, albeit for different reasons, the panel’s finding that the COOL measure, particularly in regard to musclecut meat labels, is inconsistent with TBT Agreement Article 2.1 because it accords less favourable treatment to imported livestock than to like domestic livestock.¹⁶

The Appellate Body report was circulated in June of 2012. The reports were adopted by the DSB in July of 2012. Through an Article 21.3(c) arbitration, the United States was given 10 months to comply.¹⁷

In the face of these adverse findings, the United States amended the COOL requirements, in a new regulation issued in May of 2013. However, in the view of Canada and Mexico, the US efforts to comply with the WTO DSB rulings were insufficient. In August of 2013, both complainants brought complaints under Article 21.5 of the Dispute Settlement Understanding, alleging that the new measures were not in compliance with WTO obligations. The original panel was called upon to examine these claims.

In a report issued in October of 2014,¹⁸the Panel once again found the United States to be in violation. This time, it found that the amended COOL measure had increased the original COOL measure’s detrimental impact on the competitive opportunities of imported livestock, and this impact did not stem exclusively from legitimate regulatory distinctions. As a result, the measure accorded less favourable treatment to imported livestock than to like products of US origin, in violation of TBT Agreement Article 2.1. It also found that, on the basis of its finding of detrimental impact, along with consideration of other relevant factors, the amended COOL measure violated the national treatment obligation of GATT Article III:4. [Page300:]

On appeal, the Appellate Body upheld these findings in a report issued in May of 2015.¹⁹The DSB adopted these reports on 29 May 2015.

With the United States having been found in violation again, in June of 2015 Canada and Mexico filed a request for authorisation from the WTO to suspend tariff concessions with respect to the United States, based on the level of nullification or impairment of the benefits they claimed to have suffered as a result of the COOL measure. Canada requested an annual amount of just over C$3 billion;²⁰Mexico asked for an annual amount of more than US$700 million.²¹

In response, as is always the case in these matters, the United States objected to the level of suspension proposed, and requested that this matter be referred to arbitration. The arbitration panel – made up of the same panellists who served on the original dispute – was constituted several weeks later. After a meeting with the parties in mid-September,²²the panel released its decision on 7 December 2015. It found that the COOL measure resulted in an annual nullification and impairment of benefits to Canada amounting to a little more than C$1 billion annually, and US$227 million annually to Mexico.²³

With respect to the products to be targeted, in June 2013 (while litigation was ongoing) the Canadian government released a list of US commodities for possible retaliation.²⁴ The official list, which specified products by state targets, would not be released until two years later. The idea was to provide ample time for industry groups and interested stakeholders to provide input in what would become the final list. In a statement by Ed Fast, Minister of International Trade and Minister for the Asia-Pacific Gateway, and Gerry Ritz, Minister of Agriculture and Agri-Food and Minister for the Canadian Wheat Board Trade, the Canadian government explained why it was releasing a list of products for retaliation at this time. They stated:

When the United States failed to comply by the May 23 deadline, we said we would pursue all options available. Today, we are also releasing a list of U.S. commodities for possible retaliation, to be published as soon as possible in the Canada Gazette, as a way to formally launch the consultation process…. To respect Canada’s WTO obligations, our government will not act on these retaliatory measures until the WTO authorises us to do so.²⁵

Ritz made clear that the list of 38 products was preliminary, and meant to serve as a living document that could be adjusted in the future.²⁶Mexico’s Ministry of Economy followed suit in a press release the same day,²⁷though the government did not provide a list of targeted commodities until 2015.²⁸

The act of publishing the list of commodities that could be targeted by retaliation, if authorised, was done to apply pressure, with the hope of resolving the dispute as soon as possible.

In April 2015, prior to the request for an authorization for a suspension of concessions, Canada and Mexico made known the specific targets for potential retaliation. Mexico said that it would draw from the same list it used for the NAFTA Trucking Services dispute,²⁹which included a variety of items, such as meat products, juices, fruits and vegetables, as well as a number of consumer products.³⁰Canada was even more specific in its list of targets, posting on its Embassy of Washington, DC, website in April 2015 a list of products for retaliation, broken down by US state.³¹This became part of the broader “#FIXCOOL” campaign, which highlighted the benefits of trade with Canada, state-by-state, and the negative impact of the COOL legislation. For instance, noting that Canada is California’s number one export market for agriculture and agri-food, the state was singled out for the largest amount of retaliatory tariffs, totalling US$835 million on wine, bread, pastry, cakes and biscuits, jewellery, semi[Page301:]milled or wholly milled rice, and pasta and couscous.³²This strategy was repeated with each state, spelling out specific HS tariff lines selected for future retaliation.

The threat of retaliation proved successful. On 18 December 2015, Congress repealed the measure, as it relates to beef and pork products.³³President Obama signed the repeal into law the same day.³⁴With respect to the regulations, Secretary of Agriculture Tom Vilsack released a statement, also on 18 December 2015, that COOL repeal was effective immediately.³⁵The final rule for the removal of mandatory COOL was published on 2 March 2016 in the Federal Register and became effective the same day.³⁶

Back at the WTO, the DSB authorised the retaliation set out in the arbitrator’s decision on 21 December 2015.³⁷Authorisation after compliance may seem unnecessary, but the complainants indicated that in the absence of a formal rule change, which had not yet occurred, US livestock importers might be hesitant to purchase the imported products at issue. More generally, they may have feared the reinstatement of the measure at some later time, and wished to formalise their right to retaliate, to be used if needed in the future.³⁸

4.0 Lessons Learned

• The COOL dispute illustrates how complainants can achieve market access through WTO dispute settlement. However, it also makes clear how slow that process can be. In this case, Canada and Mexico requested consultations in December 2008. The measure was modified to their satisfaction seven years later, in December 2015. That is a long time, and suggests that improvements to the efficiency of the process would be desirable. Until that happens, though, a strategy of persistence is the complainants’ only option.
• In this case, the threatened retaliation was effective in achieving a repeal of the COOL measure, in part because Canada and Mexico strategically laid out plans to target key US industries exporting to their respective countries.
• As a final point, this WTO dispute is one of a number of recent cases where civil society groups have raised questions about whether WTO obligations intrude too much into domestic policy-making, in ways that interfere with legitimate regulation. These cases are particularly difficult, because there is likely to be opposition from civil society, which must be taken into account. Here, the concern was that measures to provide consumers with information on the origin of products may violate WTO rules. However, when the facts of this case are examined carefully, it becomes clear that mandatory country-of-origin labelling measures are permitted. In fact, the original panel in this case found that the labelling requirements for ground beef do not violate these rules. Rather, it was only the requirements for muscle-cuts of beef and pork that were a problem. With regard to the musclecuts, there were options that would have provided consumers with a great deal of information, without requiring the costly segregation of products of different national origin that led to the finding of violation. For example, the law could have required that only products that had been certified as exclusively US origin could be labelled as such. If a meat processor used products from both Canada and the United States, on the other hand, it could use a label such as “Product of North America” or “Product of Canada and/or the United States.” But the legislative history of the provision indicates that those who promoted this provision were not looking for ways to provide consumer information, but rather were seeking a disguised means of protecting domestic producers from foreign competition.

Case Study B: Litigating Conceptual Disputes in the WTO: The Case of Zeroing

Neil R. Ellis1*

1.0 Introduction

One of the most significant developments in trade regulation over the past 20 years has been the establishment and global acceptance of the World Trade Organization’s dispute settlement system. Since the WTO was founded in 1995, its Dispute Settlement Body has become the preeminent forum for disputes involving international trade issues, evidenced by the fact that it has been presented with over 500 disputes (of which more than 200 have resulted in panel and Appellate Body decisions) addressing a range of controversies, large and small, among a host of Members. (See Chapter Twelve.) Decisions of panels and the Appellate Body have, in most cases, been settled and ultimately implemented by the Members, although admittedly not always with enthusiasm. A few disputes, however, have proven more difficult to resolve. Examples include situations involving non-trade policy objectives, such as: (i) health concerns, as in the protracted dispute regarding the ban by the European Union on imports of hormone-treated beef from Canada and the United States;³⁹(ii) environmental concerns, as in the disputes dating back to the GATT-days involving actions taken against fishing practices considered to endanger dolphins, United States – Tuna I and II;⁴⁰and (iii) major commercial disputes involving issues of Member prestige, such as the ongoing disputes between the United States and the European Union concerning large commercial aircraft.⁴¹

Another type of dispute that is difficult to resolve involves concepts that underlie WTO Agreements that are subject to conflicting understandings. One example is provided by anti-dumping cases involving the so-called “zeroing” methodology. Disputes challenging zeroing have flared up for over 15 years, and they continue today. A study of these disputes – which number nearly 20 – reveals the complexities confronting the dispute resolution system when parties have conflicting interpretations of basic principles.

2.0 The Zeroing Disputes

The Anti-Dumping Agreement,⁴²which builds on Article VI of the GATT, provides for an investigation, whose purpose is: (i) to determine whether dumping is taking place, and if so (ii) whether it is causing or threatening material injury to a domestic industry.⁴³If both determinations are affirmative, an anti-dumping order is issued and imports are subject to anti-dumping duties. Once in place, anti-dumping orders are subject to several types of reviews.⁴⁴The distinction between investigations and reviews became important as the zeroing controversy developed.

* Partner, Sidley Austin LLP, Washington, DC. The author gratefully acknowledges the assistance of Jan Yves N. Remy, a foreign attorney with Sidley Austin LLP, in the preparation of this paper. The views expressed in this chapter represent the personal views of the authors, and do not represent the views of Sidley Austin LLP or its clients. This chapter has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

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Article 2.4.2 of the Anti-Dumping Agreement sets out the guidelines by which “the existence of margins of dumping” is to be “established during the investigation phase”. That article comprises two sentences. The first provides that, during the investigation phase, the existence of margins of dumping “normally” is to be established through the application of one of two comparison methodologies – either: (i) by comparing a weighted average normal value with a weighted average of prices of all comparable export transactions (“W-to-W”); or (ii) by comparing normal value and export prices on a transaction-to-transaction basis (“T-to-T”).⁴⁵However, the second sentence of Article 2.4.2 provides for an exception whereby a weighted average normal value may be compared to prices of individual export transactions (“W-to-T”), provided that certain conditions are met (see Section 2.3 below).

The “zeroing” disputes arise from the fact that as a procedural matter, when calculating a dumping margin for an exporter, the investigating authority must frequently undertake multiple comparisons, either because many individual transactions are involved, or because the “product” that is the subject of the investigation is divided into multiple “sub-products” (or “models”). In such situations, the authorities generally determine the mathematical results of the comparisons for individual models or transactions, and then combine those results into a single dumping margin for the exporter and product.⁴⁶Some of the individual comparisons may generate positive mathematical outcomes (because the normal value is higher than the export price, i.e., there is dumping), and conversely, some may generate negative mathematical outcomes (because the normal value is lower than the export price, i.e., there is no dumping).

The question at issue in the zeroing disputes is whether it is permissible for investigating authorities, when combining the mathematical results of individual comparisons, to disregard the negative results or treat them as if they were zero (hence, the term “zeroing”). Although this sounds arcane, it has been the focus of significant controversy because zeroing inflates dumping margins, as it fails to give full effect to the negative results, which would reduce the margins.

As will be seen below, whether or not zeroing is permissible under the WTO Agreements requires consideration of the meaning of the terms “dumping” and “margins of dumping” in the Anti-Dumping Agreement, and Articles VI:1 and VI:2 of the GATT.

2.1 The Bed Linen Case

The “zeroing” issue first arose in WTO dispute settlement in 1998. In EC – Bed Linen, India claimed that the EC had violated Article 2.4.2 of the Anti-Dumping Agreement by engaging in “zeroing” when it calculated the margins of dumping in an investigation. The Appellate Body agreed with India. It explained, in what would come to serve as the bedrock principle for future analyses, that Article 2.1 of the Anti- Dumping Agreement defines the appropriate focus for the dumping calculation as “a product”, so that the margins of dumping are determined for a “product”, and not multiple types or models of a product.⁴⁷Moreover, because Article 2.1 opens with the clause, “For the purpose of this Agreement,” its principles apply to the “margins of dumping” under Article 2.4.2.⁴⁸Thus, the Appellate Body found, “[w]hatever the method used to calculate the margins of dumping, in our view, these margins must be, and can only be, established for the product under investigation as a whole.”⁴⁹

Further, the first sentence of Article 2.4.2 provides that one methodology by which a margin of dumping may be calculated is “on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions….” The Appellate Body determined that, in disregarding the results of certain comparisons (those with negative results), the EC did not establish a margin of dumping on the basis of “all” comparable transactions for the product as a whole.⁵⁰

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Furthermore, the Appellate Body concluded that, by failing to fully take into account the prices of all the comparable transactions, the EC had failed to engage in a “fair comparison” as required by Article 2.4 of the Anti-Dumping Agreement.⁵¹

This analysis laid down the foundation for zeroing jurisprudence. The ensuing debate demonstrated that, despite its apparent technicality, this conflict addressed the basic issue of the meaning of “dumping”. The term dumping had been used by Members, ambiguously, to mean both: (i) the results of individual comparisons of specific export sales (or weighted average export sales) and their respective normal values, and (ii) the aggregation of those individual comparison results to determine the overall margin for the “product” and the overall outcome for an exporter/product. Indeed, this ambiguity is reflected in the statutory definitions adopted by the United States in implementing the Uruguay Round Agreements, inasmuch as one statutory provision defines a “dumping margin” as “the amount by which the normal value exceeds the export price or constructed export price of the subject merchandise”⁵²(which, on its face, could mean either the result of individual comparisons or the aggregate amount of such individual results), whereas a second statutory provision defines “weighted average dumping margin” as “the percentage determined by dividing the aggregate dumping margins determined for a specific exporter or producer by the aggregate export prices and constructed export prices of such exporter or producer”⁵³(thus clarifying that the initial term, “dumping margin,” means only the former).

2.2 Subsequent Cases

The battle in the WTO over the meaning of “dumping” has continued since EC – Bed Linen. After India’s successful challenge of EC practice, several Members, including the EC, attacked US use of a similar “zeroing” practice. In US – Softwood Lumber V,⁵⁴US – Zeroing (EC),⁵⁵and US – Zeroing (Japan),⁵⁶the panels distinguished EC – Bed Linen and concluded that the US practice of zeroing in both investigations and reviews was consistent with US obligations under the WTO Agreements. In all three cases the Appellate Body reversed the panels.

In these disputes, the Appellate Body consistently interpreted the treaty terms according to the vision it first enunciated in EC – Bed Linen and declined to accept limitations or alternative views developed by the panels. The Appellate Body clarified, however, that its analysis did not depend on what had appeared to be one of the underpinnings of the Bed Linen decision – namely, the “all comparable export transactions” phrase in the first sentence of Article 2.4.2.

In Softwood Lumber V, the US Department of Commerce did something unusual in attempting to implement the Appellate Body decision – it used the second (“T-to-T”) comparison option authorised in the first sentence of Article 2.4.2, comparing the normal value and export price of individual transactions, rather than the W-to-W method, which was its normal practice. It did so expressly on the ground that it considered zeroing to be permissible when an investigating authority employed the T-to-T comparison methodology, unlike the W-W methodology.⁵⁷Canada brought compliance proceedings under Article 21.5 of the Dispute Settlement Understanding, to challenge what it perceived to be US failure to satisfy its implementation obligations.⁵⁸

The Appellate Body agreed with Canada. It conceded that the “all comparable sales” phrase does not modify the T-to-T comparison option under the first sentence of Article 2.4.2. Nevertheless, the Appellate Body concluded that certain other provisions in the Agreement require that the calculation of dumping margins include the full value of all individual comparison results in T-to-T comparisons, as well as W-to-W, and that this requirement was violated through the use of zeroing. The Appellate Body rejected the argument, presented by the United States and accepted by the Panel, that linking the phrase “all comparable transactions” solely with the W-to-W[Page308:]comparison option in the first sentence of Article 2.4.2 meant that investigating authorities, when applying the T-to-T comparison methodology, were not governed by the same obligation to consider the full mathematical value of “all” transactions.⁵⁹In doing so, the Appellate Body identified the same basic principles underlying Article 2.4.2 that had first been noted in Bed Linen, and concluded that the term “margins of dumping” in the first sentence could not have a different meaning depending on which of the two “normal” comparison methodologies was employed in individual cases. Instead, the Appellate Body noted that the proper interpretation of the term “margins of dumping” required the consideration of all individual comparison results, whether on a W-to-W or T-to-T basis. It also confirmed its prior reliance on the context provided by Article 2.1,⁶⁰which, as noted above, refers to a “product” – meaning “product as a whole”. In addition, the Appellate Body found support from the context provided by various other provisions of the Anti-Dumping Agreement.⁶¹

Thus, in the course of adjudicating the zeroing issue, the Appellate Body considered a broad array of topics governed by the Agreement, and provided a coherent explication of its various provisions to support its interpretation that zeroing was inconsistent with the concept of dumping. Moreover, the Appellate Body addressed the application of the concept of dumping in the full range of proceedings covered by the Agreement – including “the investigation phase”, the assessment reviews and the five-year reviews.⁶²

The zeroing disputes highlighted two incompatible views of the meaning of the term “dumping”. At the end of the day, in order to ensure that the Members maintain a coherent understanding of their obligations as set forth in the WTO Agreements, it was necessary that a single meaning be adopted; conflict could not continue indefinitely. As the concurrence in the Appellate Body’s report in United States – Continued Existence and Application of Zeroing Methodology (WT/DS350) eloquently explained:

Whatever the difficulty of interpreting the meaning of “dumping”, it cannot bear a meaning that is both exporter-specific and transaction-specific. . . . The range of meanings that may constitute a permissible interpretation does not encompass meanings of such wide variability, and even contradiction, so as to accommodate the two rival interpretations. One must prevail. The Appellate Body has decided the matter. At a point in every debate, there comes a time when it is more important for the system of dispute resolution to have a definitive outcome, than further to pick over the entrails of battles past. With respect to zeroing, that time has come.⁶³

2.3 Zeroing Revived – Targeted Dumping

And so it appeared that the issue had finally been resolved. In its report circulated in June 2011, the Panel in US – Orange Juice (Brazil) accepted the Appellate Body’s position regarding zeroing,⁶⁴and in other disputes, the issue was resolved with minimal challenge by the United States.⁶⁵In 2012 the Department of Commerce announced that it would no longer use zeroing in anti-dumping reviews,⁶⁶more than five years after it had said that it would not use zeroing in investigations.⁶⁷

But the debate has not ended. As pointed out in Section 2.0 above, Article 2.4.2 contains a second sentence. The authority granted by this sentence to employ the W-to-T comparison methodology in cases of “targeted” dumping – which occurs when there is “a pattern of export prices which differ significantly among different purchasers, regions, or time periods” – had not been used for many years. However, at the same time as it implemented the adverse WTO decisions on the use of zeroing in investigations and periodic reviews, the US Department of Commerce resuscitated its authority to use the W-to-T comparison methodology in investigations by developing new methodologies to meet the preconditions set forth in the US statutory analogue of the second sentence of Article 2.4.2. The Department made clear that: (1) when employing the W-to-T methodology pursuant to the authority granted by the domestic statutory analogue to the second sentence of Article 2.4.2, it could once[Page309:]again use the zeroing methodology; and (2) although both the second sentence of Article 2.4.2 and the domestic statutory analogue are explicitly limited to investigations, the Department would use that authority to employ W-to-T comparisons, with zeroing, in periodic reviews as well (if targeted dumping is found to exist).

Unsurprisingly, these developments have generated another spate of WTO disputes, commenced by Korea in 2013 (US – Washing Machines),⁶⁸and by China in the same year (US – Anti-Dumping Methodologies (China)).⁶⁹In the Washing Machines case the Appellate Body found that a number of aspects of the Department of Commerce’s targeted dumping methodology were inconsistent with the Agreement, and severely limited the use of the methodology. In China’s case the Panel also found fault with the Department’s methodology.

3.0 Conclusion

The existence of difficult cases is not a sign of weakness in the WTO dispute settlement system. To the contrary, it reflects the fact that the system is sufficiently robust and well-regarded that Members are willing to bring contentious issues before it in an attempt to obtain their resolution. To the extent that disputes arise from ambiguities in the negotiated texts, such lack of precision may be unfortunate, but may also be necessary in order to reach accord at all. As stated by the concurrence in United States – Continued Existence and Application of Zeroing Methodology:

… there is an inevitable recognition that a treaty bears the imprint of many hands. And what is left behind is a text, sometimes negotiated to a point where an agreement to regulate a matter could only be reached on the basis of constructive ambiguity, carrying both the hopes and fears of the parties. Interpretation is an endeavour to discern order, notwithstanding these infirmities, without adding to or diminishing the rights and obligations of the parties.

A robust dispute settlement system can handle ambiguities, provided the parties are willing to accept and abide by the outcome of such disputes. In the zeroing cases, the WTO dispute settlement system has slowly been moving toward this goal. [Page310:]

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Case Study C: International Rules Against Discriminatory Treatment of Imports: Taxation of Alcoholic Beverages

Iain MacVay *

1.0 Introduction

Governments regulate to protect public health and raise revenue. However, government regulatory policies, in particular tax policies, may also affect the competitive position of traders and may make imported products uncompetitive. Regulatory policies may also disrupt supply chains, limiting or eliminating the economic benefits of trade.

This case study focuses on the spirits industry’s response to government tax laws that violated WTO commitments by discriminating against imports. It demonstrates the continued importance of the WTO, in particular Article III:2 of GATT 1994 (see Chapter Two, Section 6.3.2), which has been at the heart of WTO disputes brought by governments on behalf of the alcoholic beverage industry.

The spirits industry has been very successful in challenging discriminatory tax schemes, using a variety of channels to address its concerns. A central element of the industry’s success has been its ability to assemble the necessary evidence with respect to the competitive effect of discriminatory policies, in order to persuade WTO Member Governments to initiate WTO disputes on its behalf – necessary because private parties cannot bring disputes to the WTO. Each of the four concluded cases brought by a Member government resulted in changes to government taxation policies that eliminated the discrimination in favour of domestic products, following findings that the taxes in question violated Article III:2. Each case reaffirmed core legal principles and made factual findings that could be applied in discussions with other WTO Member governments. The principles established in the cases helped the industry persuade other governments to drop discriminatory tax policies without the need to resort to formal dispute settlement. The cases also demonstrate that the industry is prepared to take its concerns to Member governments and to work closely with these governments if WTO dispute settlement is necessary.

Relevant GATT and WTO cases are briefly summarised below, and the discussion then turns to the role of industry in supporting the litigation and to “lessons learned” that should help representatives from other business sectors develop strategies for challenging discriminatory trade measures, in particular discriminatory taxation schemes. [Page312:]

* Iain MacVay is a London-based Partner in King & Spalding’s International Trade Practice.

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 1987.⁷⁰Japan 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 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 Agreements the European Communities, Canada and the United States challenged Japan’s taxation of alcoholic beverages, alleging that it continued to discriminate against imported spirits contrary to Article III:2.⁷¹The tax differences were still very large. For example, the tax on shochu was between only 69 and 155 yen per kilolitre, 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 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 1997.⁷²Japanese imports of spirits rose by nearly 40% over the next five years.⁷³

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 by the Appellate Body.⁷⁴

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. [Page313:]

Chile – Taxes on Alcoholic Beverages: ⁷⁵Chile’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 nondiscriminatory, 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%).⁷⁶Influenced 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:2.⁷⁷The 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).⁷⁸The Appellate Body found that the Philippines violated Article III:2 as there was enough evidence to suggest a significant degree of competitiveness or substitutability for those distilled spirits in the Philippines market.⁷⁹It 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).⁸⁰A 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 1994.⁸¹At 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. [Page314:]

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 WTOsanctioned 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)⁸²against 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.⁸³The “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.⁸⁴Following 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.⁸⁵

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.⁸⁶The 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[Page315:]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”.
• 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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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 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.⁸⁷

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 woodframing 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[Page318:]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 subsidy⁸⁸– 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.…”⁸⁹Normally, 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?

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.

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.

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.⁹⁰The US Commerce Department found that stumpage was “used within Canada by several groups of industries….”⁹¹The 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.…”⁹²The 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.⁹³

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

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.”⁹⁴The 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.⁹⁵

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.⁹⁶The panels threw out the US Commerce Department’s subsidy determination (by a 3-2 vote on national lines) and the ITC’s injury determination.⁹⁷The United States then appealed to an Extraordinary Challenge Committee (ECC) set up under the USCFTA, which while not [Page320:]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.⁹⁸

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.⁹⁹

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 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.¹⁰⁰The 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.¹⁰¹

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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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 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 antidumping 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. [Page322:]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 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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