Zeroing in on a Benchmark Price: US- Softwood Lumber (DS533)

On 24th August 2020, a Panel Report was circulated as “United States — Countervailing Measures on Softwood Lumber from Canada” (DS533). Canada had filed a complaint on the following grounds:

1. The rejection of in-market benchmarks from British Columbia, Alberta, Ontario, Quebec and New Brunswick, and the use of other benchmarks was improper and in violation of Article 14(d) of the Agreement On Subsidies and Countervailing Measures (SCM Agreement);

2. The use of ‘zeroing’ in the benefit determination was in violation of Article 1.1(b), 14(d), 19.3 and 19.4 of the SCM Agreement;

3. Various subsidy programs were assessed wrongly, and were therefore in violation of Articles 1.1 and 12(d) of the SCM Agreement.

This blog post is dedicated to understanding Canada’s claim regarding regional benchmark prices and zeroing in benefit determination.

Rejection of Regional Benchmarks

Article 14(d) requires an investigating authority to use a benchmark which reflects the ‘prevailing market conditions’ for that good in the country of provision. Where it is shown that the country of provision has different prevailing market conditions, the investigating authority is obligated to provide a reasoned and adequate explanation. The Panel found that the USDOC acted inconsistently with Article 14(d) by failing to provide a reasoned and adequate explanation for rejecting the regional benchmarks proposed by the Canadian interested parties for determining adequacy of remuneration for Crown timber.

What are prevailing market conditions?

Prevailing market conditions are ‘generally accepted characteristics of an area of economic activity in which the forces of supply and demand interact to determine market prices’. However, from this panel report, it becomes clear that the same good sold in different parts of the same country will have the same quality, availability, marketability, transportation related costs, and conditions of sale. All of these factors must be taken into consideration while determining ‘prevailing market conditions’.

Zeroing for the Purposes of Calculating Benefit Provided

The finding of the panel in US – Anti-Dumping and Countervailing Duties (China) was reaffirmed that there is no general obligation under Article 14(d) for an investigating authority to aggregate all comparison results, positive as well as negative, but that in doing so, it may be necessary in specific circumstances to satisfy certain requirements. By setting the negative comparison results to zero, the USDOC failed to assess the adequacy of remuneration in relation to the prevailing market conditions of the Crown timber provided to the investigated producer. This is because by so doing, the USDOC calculated a benefit amount that included price differences that arose solely due to the asymmetry between average geographic conditions of various private transactions based on which the benchmark price was calculated on the one hand, and the specific geographic conditions relating to the individual transactions that were priced less than the benchmark price on the other.

For the same reason, the USDOC also acted inconsistently with Article 14(d) of the SCM Agreement by setting-to-zero comparison results where the timbermark/species-specific transaction prices were found to be more than the corresponding benchmark price in its benefit determination for provision of stumpage by British Columbia and other Canadian countries.

Appeal

USA has appealed the Panel Report pursuant to Article 16 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). Since the Appellate Body stands defunct, the Panel Report remains in a limbo.