By Alan M. Field

Like peanut butter and jelly, countervailing duties and antidumping duties go hand-in-hand. Explains Susan Kohn Ross, a partner at Mitchell Silberberg & Knupp LLP, a Los Angeles international law firm. Dumping occurs when you are charging a lower price in a foreign market than you are charging in your domestic market, or you are charging less in a foreign market than it costs you to make that product.

Subsidies occur when you receive financial support from the government in your country, enabling you to undersell your foreign competition. Countervailing duties arise where “the government provides what is viewed as an improper subsidy to the exporting community, which reduces the price of the product into the market.” Around the world, everyone engages in these processes a little bit differently. Adds Ross, “There are clear biases in the system in favor of domestic industry which, from a legal perspective, mean that the burden of proof is relatively low. But in the U.S., you file a petition simultaneously with the U.S. International Trade Commission and the International Trade Administration (ITA).”

Thus, the U.S. ITA sends out questionnaires to a select group of companies in the exporting country. They gather other information based on the information. Then, based on the information they gathered, there is a preliminary submission made to the ITC, which makes a preliminary finding of dumping or no dumping. “In the case of alleged dumping, a lengthy process is initiated whereby additional information is gathered. Eventually the ITA comes up with some numbers about what it calculates is the ‘dumping margin,’ based on those numbers, and makes a recommendation to the ITC. Typically, the ITC goes along, and there’s usually about three years of litigation that follows.”

Every year after dumping is found, the domestic industry can request – and is typically granted – an annual review. Thus, the government goes back, asks for some more information; and may add companies to the dumping case. Companies may decide that they should have their own dumping margin or countervailing duty margin, so they can self-initiate a request. “This goes on for five years, and then there are sunset reviews; meaning that in the fifth annual review, a determination is not only made about what the margins should be for the year, but whether the case should terminate. In a lot of these cases, it does not terminate, and it goes on for periods of time longer,” Ross goes on.

Those companies that are importing merchandise into the U.S. for commercial purposes that are valued over $2,500, or importing a commodity subject to other federal agencies’ requirements (i.e., firearms or food), must post a U.S. Customs bond to ensure that all duties, taxes and fees owed to the federal government will be paid. For importers that are required to post such a bond, “this is all enormously disruptive,” adds Ross. Moreover, the bonding companies – which assume the risk of a surety bond by guaranteeing payment on the bond in the event of a default or failure to perform contracted services — have gotten hit hard by this process. The typical import bond costs between $50,000 and $100,000 – except in the case of really large companies, and the bond is typically acquired on a simple, one-page application form with no collateral. However, when it comes to anti-dumping or countervailing duty, such a bond can be more expensive. In one case that took place about 20 years ago, one of the bonding companies got hit with a cost of $9 million dollars.”

The other pain, adds Ross, is that lots of products are made in more than one country, adding to the complexity of determining a product’s cost structure, by country. “So customs [in North America] needs to be on the look-out to make sure that there is not transshipment or other activities that in one form or another try to evade the anti-dumping or countervailing duty. It’s a headache to the private sector; and a headache to the government from an enforcement point of view.”

Wendy Wagner, partner at Gowling WLG law office in Ottawa, explains, “Every country has its own anti-dumping and countervailing duty rules; but its laws need to be consistent with the rules and disciplines imposed by the WTO’s anti-dumping agreement. The U.S. and Canadian laws are generally quite consistent. “

In both Canada and the U.S., there are two relevant agencies. One agency determines whether there have been dumping or subsidies; and the amount of that. The other agency determines whether the domestic industry has been injured or is threatened to be injured by that dumping or subsidy. In Canada, those agencies are Canada Border Services Agency, which determines if dumping has occurred and the amount; and Canadian International Trade Tribunal, which determines whether there is an injury or a threat of injury.

Over the years, there have been significant differences between application of these laws in the U.S. and Canada. In the U.S., until 2005, the so-called Byrd Amendment caused a lot of controversy. Whatever duties were collected on imports of dumped and subsidized goods were redistributed back to the actual producer who had been injured by the dumping or the subsidies. The result, notes Wagner, was that there was “a real incentive for domestic producers to bring a case, because they could stand to benefit to a great extent if they were getting those duties redistributed; rather than the government obtaining those duties.” Since the repeal of the Byrd amendment, the companies that win anti-dumping and countervailing duty cases have, quite naturally, become more profitable after their unfair competition goes away, but the impact of their victory is blunted by the fact they don’t derive the direct payoff from their victory.

There are also differences between the way these kinds of duties are calculated in the two countries. In Canada, these duties are only charged prospectively – that is to say, paid henceforward — whereas in the U.S., duties are charged going retrospectively. As a result, there is a difference in financial impact. However, concludes Wagner, “Basically there are a lot of disciplines imposed [on all WTO-member nations] by the WTO anti-dumping agreement, so you don’t get that much variation in the actual law” from one country to the other.

Softwood Lumber Agreement (SLA)

Even experienced trade attorney Wagner finds it “somewhat astounding” that the tortuous tale of the Canada-U.S. Softwood Lumber Agreements has been going on ever since 1982. The fourth phase of the SLA was enforced until 2013 and was later renewed until 2015. On Oct. 15, 2016, it expired, leaving the U.S. Lumber Coalition – the U.S. trade group for the sector — or anyone else in the U.S. free to file another case against Canada under the anti-dumping law under U.S. law.

Since the expiration of the last SLA, there haven’t been any restraints on what lumber producers in Canada can do in terms of selling their softwood into the United States. So the market share of Canadian producers in the U.S. market has increased, which is what U.S. lumber producers had been trying to prevent ever since 1982. Now that there is no moratorium on the filing of new cases, U.S. lumber producers are expected to file new anti-dumping cases under U.S. law and under U.S anti-subsidies law.

Two kinds of allegations have been made against Canada: The first is that Canadian lumber producers are dumping softwood into the U.S. market. Dumping would be taking place if someone either sold lumber at lower than his cost of production, or selling it at a lower price than he could sell the same product in his home market. U.S. lumber producers also alleged that Canadian provinces subsidized the cost of their softwood by charging a very low fee—known as the stumpage fee – for harvesting that lumber in Canada. Notes Wagner, “The reason this comes up, time and time again, is because the structure of the market is completely different in Canada versus the U.S. Almost all lands on which softwood lumber is harvested in Canada are owned by the provincial governments. So they set the prices at which companies can harvest that lumber – which is the stumpage fee. In the U.S., most timber land is privately owned.”

The stumpage fee is paid to the provincial governments to use the timber – because the governments own the land. In the U.S., there is a fee that is the equivalent of that, paid for harvesting American timber, but it is paid by lumber companies in order to harvest the privately owned lands based on current market prices. “The allegation on the part of the U.S. has always been that in Canada the stumpage fee charged is lower than what a market price would be.”

Given the fundamental historical and cultural differences on this issue, how does anyone imagine that this issue can ever be resolved? In the past, the only way that this issue has been resolved is for Canada to impose some sort of measure to restrict the export of softwood lumber into the U.S., notes Wagner. “That restriction has taken different forms in different agreements. In the two previous SLAs, such measures have taken the form of either a quota restriction on how much you can export to the United States – or an export tax, which operates as an export restriction because you are going to pay only so much [in terms of tax] before your product is not competitive [in the U.S. market]. Or a combination of the two – the quota and a tax.”

If the U.S. Lumber Coalition brings an additional anti-dumping case and the outcome is that U.S. duties are charged on softwood lumber imports from Canada, those duties will be imposed by the United States government, which always benefits from any new duties charged on imports from Canada. On the other hand, if Canada agrees to a restriction in the form of an export tax on softwood lumber, it will be the Canadian provinces that wind up getting those export taxes, Wagner explained. Ultimately, in either case, however, there will be less softwood lumber going into the U.S. market, which is good from the perspective of the U.S. producers, because they will wind up facing less competition from Canadian lumber producers in the U.S. lumber market. On the other hand, the latter method of achieving a resolution to such a dispute will have greater benefits for the Canadian government because Canada will wind up collecting export taxes on Canadian exports to the U.S. Thus, concludes Wagner, “You can see why there is a motivation [for Canada] to enter [another Software Lumber] Agreement, rather than let the U.S. initiate another [anti-dumping] case and impose duties”.