(Cite as: 57 FR 22570, *22609)
restrictions, the BC border measures have the effect of reducing the price of logs sold in the BC domestic market. [FN26]
FN24 Margolick and Uhler, The Economic Impact of Removing Log Export Restrictions in British Columbia (April 1986)
(Margolick).
FN25 See also, H. Keppler, Commodity Export Taxes as a Means of Promoting International Processing Industries--A General
Equilibrium Model, in J. Weinblatt, ed., The Economics of Export Restrictions 66 (1985); cf. Galvanized Steel From Australia, 49
FR at 8,658 ("* * * it may be true in an abstract economic sense that such import restrictions, in lessening competition in the
domestic marketplace, do provide some benefits of at least a temporary nature to the domestic producers of the product * * *")
(emphasis supplied). For a discussion and explanation of Margolick, see infra.
FN26 For a discussion and explanation of Margolick, see infra.
Even the BC Select Standing Committee on Forests and Lands has acknowledged that "(t)he reduced overall demand for logs
resulting from arbitrarily restricting log exports provides the domestic processing sector with a lower log price." (See "Forest
*22610
(Cite as: 57 FR 22570, *22610)
Act-Part 12 (Log Exports) and the Vancouver
(Cite as: 57 FR 22570, *22610)
Log Market," Second Report of the British Columbia Select Standing Committee on Forests and Lands. 4th Sess., 34th Parl.,
Legislative Assembly of British Columbia 15 (1991).) Therefore, because logs constitute the major input of softwood lumber, BC
softwood lumber manufacturers enjoy a benefit in the form of lower input or production costs. See id.
Respondents contend that the Department's "direct and discernible effect" analysis is flawed. Specifically, Respondents contend
that this analysis is not based upon any empirical evidence or data that conclusively proves that, "but for" the BC export
restrictions, there would be no, or only a slight, difference between export prices and BC domestic prices.
Respondents' contention, if accepted, would preclude the Department from ever finding a "direct and discernible effect" in any
case. Contrary to Respondents' characterization of the issue, no social science study, including econometric studies, can prove
conclusively that one factor or variable is the sole "cause" of another factor or variable. See generally Lapin, Statistics For Modern
Business Decisions 95-146, 311-396 (3d ed. 1982). Rather, social science studies are based upon probability theory or correlation
analysis (i.e., regression analysis); the stronger or higher the correlation, the more likely or probable that one factor or variable is
the "cause" of the other. Id.
The Margolick study is precisely grounded upon this generally accepted social
(Cite as: 57 FR 22570, *22610)
science method of analysis. Based upon this study, we determine that there is a relatively high or strong correlation between the
BC log export restraints and the significant price differential between exported and domestically consumed logs. Stated otherwise,
it is highly probable that the BC export restrictions are primarily responsible for, or a "cause" of, this price differential. [FN27]
Significantly, Respondents have failed to place on the record any probative evidence of their own that reasonably explains why
this price gap exists in the first place.
FN27 The analysis here is entirely consistent with that of Leather. There, the Department's relied upon circumstantial evidence to
show that there was a correlation between the Argentine export embargo and changes in the price of raw hides. 55 FR at
40,213-214. Similar to our approach here, we did not have or use any empirical data in Leather that conclusively proved that the
Argentine embargo was, in Respondents' words, the "but for" cause of raw hide price changes. In contrast to our approach here, we
did not use econometric studies in Leather. Id.
The major flaw that Respondents find with the Margolick study is that it is based upon aggregate data. In making this attack,
Respondents ignore the reason why Margolick based his study upon aggregate data: to avoid studying separately several different
markets for a relatively large number of species
(Cite as: 57 FR 22570, *22610)
and grades of timber. See Margolick at 6. Such an approach is sufficiently reasonable to satisfy the substantial evidence
requirement pursuant to the Act.
Respondents also contend that, based upon the unique facts of this case, the Department cannot satisfy the "direct and discernible"
standard. This contention follows from the fact that, in contrast to Leather, where the Argentine embargo was in place
intermittently, the BC export restraints have been in place continuously since 1906. We find this line of argumentation to be
unpersuasive, because it produces an absurd result--namely, if a foreign government subsidizes continuously, it may be immune
from countervailing duty liability; if, however, that same government subsidizes intermittently, it may be subject to such
liability.
Having established that the BC log export restraints can be considered a "domestic subsid(y)" practice within the meaning of the
Act, and having established that such restraints have a "direct and discernible effect" upon the BC domestic price of logs and,
thereby, confer a benefit upon BC softwood lumber manufacturers, we now must determine whether this benefit is "specific" within
the meaning of the Act. See PPG, at 1568 (Fed. Cir. 1991) (domestic subsidies that provide benefits countervailable only if
provided to "specific" class of recipients).
Specificity Test
(Cite as: 57 FR 22570, *22610)
To make this determination, we must ascertain whether BC provided this domestic benefit "to a specific enterprise or industry, or
group of enterprises or industries" within the meaning of the Act. 19 U.S.C. 1677(5)(A)(ii). In the Preliminary Determination, we
found that BC log export restrictions were "specific" to a group of industries within the meaning of section 701(5) (A) and (B) of the
Act. Specifically, we determined that the compilation of laws and regulations governing log exports in BC de jure conferred
domestic benefits upon the primary timber processing industries.
Respondents argue that because the Department did not separately analyze the effects and the specificity of the BC log export
restrictions, the agency did not substantiate its conclusion that the BC log export restrictions are specific to the primary timber
processing industries. First, although the Department did not undertake a separate specificity analysis for the log export issue in
the Preliminary Determination, we now reaffirm our earlier finding that the BC log export restrictions are "specific" to essentially
two industries: the solid wood products industry and the pulp and paper products industry.
Second, Respondents' contention that some other group of industries (other than those producing products possibly made by
stumpage holders, as discussed more fully above,) may derive a benefit from the BC log export restrictions is
(Cite as: 57 FR 22570, *22610)
unsupported by the facts of this case. The BC log export restrictions, on their face, benefit only BC users of logs (i.e., the solid
wood products industry and the pulp and paper products industry). See Part 12, section 135, 136, and 137 of the BC Forest Act.
Accordingly, the domestic benefits conferred by these export restraints are de jure limited to a specific group of industries. See
Leather at 40,213 ("The embargo applies only to cattle hides, which are sold primarily, if not exclusively, to leather tanners (and,
therefore,) is limited to a specific industry.")
Respondents also contend that the Department should take into account the differential impact that the log export regulations
would have based upon different geographical locations and log quality. This argument has no persuasive relationship to a
determination of specificity. If anything, this argument would seem to reduce the number of users of the program, making the
program even more specific.
Because the BC log export restrictions constitute a "domestic subsid(y)" that, as demonstrated below, provides a measurable
benefit to "a specific enterprise or industry, or group of enterprises or industries" within the meaning of the Act, the Department
determines that these export restrictions constitute a countervailable domestic subsidy. See Hammond Lead, 306 F. Supp. at 469
(quoting Nicholas, 7 Ct. Cust. Appls. at 106 T.D. 36426 (1916)), aff'd, 249 U.S. at 34.
(Cite as: 57 FR 22570, *22610)
GATT and GATT Subsidies Code
The Department's determination that the BC export restraints covering logs constitute a countervailable domestic subsidy
pursuant to U.S. law conforms with the GATT and the GATT Subsidies Code as well. [FN28] Similar to the Act, *22611
(Cite as: 57 FR 22570, *22611)
neither the GATT nor the GATT Subsidies Code provides a universally accepted definition of the term "subsidy." Nonetheless, a
careful reading of the GATT text demonstrates that border measures, such as export taxes or restrictions, can constitute a
"subsidy" within the meaning of Articles VI or XVI of the GATT, as implemented by the GATT Subsidies Code. Just as the doctrine
of ejusdem generis applies as an aid to interpret a U.S. statute, so this doctrine is equally applicable when interpreting an
international agreement, such as the GATT or the GATT Subsidies Code. In this regard, Article 11(3) of the GATT Subsidies Code
sets forth a non-exhaustive list of illustrative domestic subsidies that includes, among other domestic practices, fiscal incentives.
GATT Subsidies Code, art. 11, para. 3.
FN28 We find Respondents' FTA arguments unpersuasive. First, nothing in the FTA precludes the Department from applying the
U.S. countervailing duty law against a countervailable program. FTA, art. 1902, para. 1. U.S.
(Cite as: 57 FR 22570, *22611)
countervailing duty law for FTA purposes includes the Department's interpretation of the "relevant statutes, legislative
history, regulations, administrative practice, (including Leather,) and judicial precedents." Id. Second, the Department's
determination to countervail BC's log export restrictions does not prohibit BC from continuing to implement and enforce these
restrictions; the Department is merely imposing a countervailing duty to offset the countervailable benefit enjoyed by the
BC softwood lumber producers.
The BC export restraints covering logs are based in part upon a complex fiscal tax system (i.e., 100 percent export tax) that taxes
logs destined for the export market, but exempts from the tax logs sold in the BC home market. The net result of this fiscal regime,
as demonstrated above, is a partial reduction in the production costs of the BC softwood lumber manufacturers.
Because the BC export restraint is based in part upon a fiscal tax regime, this measure is similar in nature or analogous to one of
the illustrative examples of an internationally recognized domestic subsidy. [FN29] Application of the maxim of ejusdem generis,
therefore, warrants that the United States treat BC log export restrictions as another kind of illustrative "domestic subsidy"
pursuant to the GATT Subsidies Code.
FN29 Cf. Hammond Lead, 306 F. Supp at 470, rev'd on procedural grounds, 440
(Cite as: 57 FR 22570, *22611)
F.2d at 1024 (complex fiscal regime that taxed input product upon exportation, but exempted input from taxation when sold
domestically, deemed countervailable).
That BC confers this domestic subsidy indirectly does not take this practice outside the purview of the GATT either. Both Article
VI of the GATT and Article 1 of the GATT Subsidies Code expressly provide that the term "countervailing duty" include "a
special duty levied for the purpose of off- setting any bounty or subsidy bestowed directly or indirectly upon the manufacture,
production or export of any merchandise * * *." GATT Subsidies Code, art. 1, n. 4. (emphasis added).
Furthermore, Respondents' "financial contribution" argument is overstated. Neither the GATT text nor the GATT Subsidies Code
text, as currently drafted, per se requires a signatory country to make an affirmative showing of "financial contribution" before
finding a countervailable subsidy. Although Respondents cite to Item (I) of the Illustrative List--"(a)ny other charge on the public
account"--to support their "financial contribution" theory, no GATT panel or Working Group has issued a decision or report that
reads a "financial contribution" requirement into the GATT or the Subsidies Code. [FN30] Moreover, the so-called "Dunkel text"
appears to eliminate any potential doubt in this regard: If, as Respondents suggest, the GATT or the Subsidies Code currently
contained such a per se requirement, then the "Dunkel text" would not be
(Cite as: 57 FR 22570, *22611)
attempting to perform the redundant exercise of creating a standard that already was in existence.
FN30 In fact, a 1961 Report on Subsidies by a Group of GATT Experts expressly recognizes, contrary to Respondents' contention,
that a subsidy does not require a "financial contribution" so long as a benefit is provided by the foreign government. In discussing
the question of levy and subsidy schemes, the Group expressly recognized that although such schemes are not countervailable
when purely "voluntary," such schemes are subject to the strictures of Article XVI of the GATT when they are "dependent for their
enforcement on some form of government action." Review Pursuant to Article XVI:5, GATT, 9th Supp. BISD 192 (1961).
Respondents next marshal the argument that the Department's attempt to countervail BC's log export restrictions is GATT illegal,
because border measures, such as export restrictions, fall within the exclusive domain of the bilateral and multilateral
consultative mechanism of Article XI of the GATT. This argument ignores the express language of Article VI of the GATT and
Article 19(l), footnote 38, of the GATT Subsidies Code.
Article VI, paragraph 3, of the GATT provides in relevant part:
The term "countervailing duty" shall be understood to mean a special duty levied for the purpose of offsetting any bounty
or subsidy bestowed, directly
(Cite as: 57 FR 22570, *22611)
or indirectly, upon the manufacture, production or export of any merchandise.
GATT, art. VI, para. 3 (emphasis supplied).
The express terms of this definition do not in any manner carve out an exception for subsidy practices described elsewhere in the
GATT. To the contrary, the unambiguous language quoted above covers without qualification "any bounty or subsidy bestowed,"
regardless of whether that subsidy practice falls within the purview of another article of the GATT.
More important, footnote 38 to Article 19, paragraph 1, of the GATT Subsidies Code expressly provides that paragraph 1 of Article
19 (i.e., "No specific action against a subsidy of another signatory can be taken except in accordance with the provisions of the
General Agreement, as interpreted by (the GATT Subsidies Code)") "is not intended to preclude action under other relevant
provisions of the General Agreement, where appropriate." GATT Subsidies Code, art. 19, para. 1, n.38. Thus, the GATT Subsidies
Code--the agreement that constitutes the agreed interpretation of Article VI of the GATT--specifically envisions that signatory
countries may invoke Articles VI and XVI of the GATT in addition to "other relevant provisions of the General Agreement" to
address a specific unfair trade practice. Id.
This analysis reinforces the general GATT precept that the coverage of a particular practice under one GATT article does not
necessarily supplant or preempt a proceeding against that practice under another, equally applicable
(Cite as: 57 FR 22570, *22611)
article. See GATT, arts. VI, XVI (contracting party may invoke either article to remedy actionable subsidy). In fact, there is only
one instance in which the GATT drafters created an exclusive remedy for an unfair trade practice. In this regard, Article VI,
paragraph 5, of the GATT provides:
No product of the territory of any contracting party imported into the territory of another contracting party shall be subject to
both anti-dumping and countervailing duties to compensate for the same situation of dumping or export subsidization.
GATT, art. VI, para. 5.
This requirement demonstrates that the GATT drafters knew how to impose a restriction on the availability of the
countervailing duty remedy and, therefore, could have provided such a restriction for measures covered by Article XI.
The striking absence of such a requirement in Article XI, coupled with the existence of such a requirement in Article VI,
paragraph 5, is additional evidence that the GATT drafters did not intend to limit the availability of the countervailing duty
as a remedy when Article XI measures were involved.
Hence, contrary to Respondents' contentions, treating export restrictions as a subsidy would not result in Articles VI and XVI
subsuming the entire GATT or rendering Article XI mere surplusage. If export restrictions conferred *22612
(Cite as: 57 FR 22570, *22612)
countervailable benefits, then a contracting party would have the
(Cite as: 57 FR 22570, *22612)
option of seeking relief pursuant to either Article VI of the GATT or Article XI, or both. Article VI of the GATT would provide the
legal mechanism to impose countervailing duties to offset the countervailable benefits conferred by the restrictions.
Article XI, on the other hand, could result in the other contracting party having to dismantle its export restrictions.
If, however, the export restrictions in question did not confer countervailable benefits, then the contracting party could not
impose any countervailing duties; the contracting party under such circumstances could seek relief only pursuant to
Article XI of the GATT. Such a construction of the GATT frustrates not one article of the Agreement, but rather gives force and
effect to all of its provisions, "so that no part will be inoperative or superfluous, void, or insignificant." Sutherland Stat. Const. §
46.06 (4th ed. 1984).
Because the GATT specifically envisions that contracting parties may invoke multiple articles to remedy a single unfair trade
practice, there is no reason for creating a conflict between Articles VI and XI. In fact, it is a well-settled canon of treaty
interpretation to construe a treaty or an international agreement to avoid such a conflict. See Corfu Channel, I.C.J. Reports (1949)
1, 23-24, 26 (1949).
For the reasons set forth above, the Department's determination to countervail BC's log export restraints pursuant to the U.S.
countervailing duty law is
(Cite as: 57 FR 22570, *22612)
consistent with the GATT and the GATT Subsidies Code. BC's export restrictions are similar in nature to one of the Subsidies Code's
illustrative examples of a domestic subsidy. Furthermore, that these restrictions fall within the purview of Article XI of the GATT
does not preclude the United States from countervailing this measure pursuant to Articles VI and XVI of the GATT, as
implemented by the GATT Subsidies Code.
Accordingly, we determine, based upon the Act, legislative history, prior judicial and administrative precedent, as well as the
GATT and the GATT Subsidies Code, that the BC export restrictions covering logs constitute a countervailable domestic subsidy.
In so doing, we decline to follow our pre- Leather precedent and, instead, embrace the holding of Leather. For these reasons, we
determine to countervail the BC export restrictions in the amount of the measurable benefit as calculated and explained in a
subsequent subsection of this notice.
Measurement of Benefit
Areas of Consideration
In order to understand much of the following discussion, as well as the calculation, it is important to start with a brief discussion
of the
(Cite as: 57 FR 22570, *22612)
administrative geography of BC, as defined by the BC MOF.
For administrative purposes, the MOF has divided the province into two principal areas, the administrative coast region (which
includes the Vancouver forest region plus the North Coast forest district of the Prince Rupert forest region), referred to in this
notice as the coast, and the administrative interior region, which we will refer to as the interior. During verification, Respondents
described three areas within the interior. The first, the tidewater interior, refers to that portion of the interior with access to
tidewater ports. This area includes the Kispiox, North Kalum, South Kalum, and Cassiar forest districts of the Prince Rupert forest
region as defined by the MOF. [FN31] The second area is the border interior, which includes those forest districts approximately
within 100 miles of the U.S.-Canadian border, exclusive of the coast and tidewater interior. These forest districts are Cranbrook,
Invermere, Arrow, Boundary, and Kootenay in the Kamloops forest region, and Vernon, Penticton, and Lillooet in the Nelson
forest region, again as defined by the MOF. The final area, the north/central interior, is defined as the interior area less the
tidewater interior and the border interior.
FN31 The harvest in the Cassiar forest district is quite small relative to the other forest districts in the tidewater interior, and the
majority of the harvest in Cassiar is concentrated in the extreme southern portion. As
(Cite as: 57 FR 22570, *22612)
was shown during verification, only this area in the extreme southern portion of assiar is considered part of the tidewater interior
region.
In the Preliminary Determination, the Department stated that "(d)uring the POI, 52 percent of total exports were from the coast
and 48 percent were from the interior." We based these percentages on information submitted by Respondents in their
questionnaire responses.
At verification and in their briefs, Respondents stated that 99.24 percent of exports originate from the coast and that 0.76
percent originate from the interior. In this instance, they dismiss any administrative mapping of the province and delineate the
coast as the administrative coast plus the tidewater interior; they define the remainder of the province as the interior. This
delineation, however, leads to confusing and misrepresentative results in Respondents' analysis due to the different definitions of
the coast.
Rather than rely on Respondents redefinition, we have defined the regional breakdown of the province within the framework of
the MOF's own administrative mapping. We do not agree with Respondents' new delineation of the coast and interior because it is
essentially an arbitrary reclassification of areas designed for purposes of this investigation. The coast and the interior are
statutorily defined areas with different appraisal systems, different scaling systems, different grading systems, different stumpage
rates, different species types and, as Respondents have continually pointed out, different timber
(Cite as: 57 FR 22570, *22612)
quality.
Although Respondents claim that a reclassification is necessary in order to account for the transportation costs in the tidewater
interior (which has coastal access), we determine that export transportation costs are not cause to redefine administrative
regions. Export transportation costs are an adjustment that the Department has accounted for in its calculation (see below).
Based on our analysis, we determine that BC's log export restrictions artificially depress the domestic log prices on the coast and
in the tidewater and border interior areas of BC. Based on information on the record and as described in the following sections of
this notice, we find that, absent these restrictions, tenure holders from these areas would respond to the demand present in the
Pacific Rim market for BC logs by increasing the volume of BC logs sold on the Pacific Rim market. The result of the increased
exports would be to increase the current domestic log prices in the domestic market caused by the restrictions in the first place.
However, we find that the north/central interior of BC would experience no such price effect. Because of its geographic
characteristics and the costs of transporting logs from this area, both under current market conditions and under conditions that
would prevail absent the restrictions, we determine that the north/central interior would not exhibit any significant level of
exports even without the restrictions. Therefore, the domestic price of logs in the north/central interior would not
(Cite as: 57 FR 22570, *22612)
be subject to the same type of upward price pressure if the restrictions were lifted.
Export/Domestic Differential
While Respondents argue that any difference between the current export and domestic prices is due to differences in quality and
costs, the Department agrees with the Coalition's assessment *22613
(Cite as: 57 FR 22570, *22613)
that "(b)y placing a tax on the differential between export and domestic prices, British Columbia implicitly concedes that, for
identical species and grades, export prices are higher than domestic prices" (see Coalition Case Brief).
Given the minuscule volume of BC logs exported, under present market conditions, BC is a price-taker in the Pacific Rim market
for logs (see discussion below). What is taxed is the differential between the world market price and the domestic log price in BC.
Respondents claim that the differential between the prices is equal to the costs of exporting and any species/quality differences.
According to Respondents, when comparing identical species and quality, as the province does when computing a tax, the
differential it calculates is due only to export costs. Essentially, then, BC is claiming that it taxes exporters on their export costs,
an assertion that is nonsensical.
Respondents have placed on the record a study by Dr. Kalt that uses the change
(Cite as: 57 FR 22570, *22613)
in the fee-in-lieu of manufacturing in BC to test whether changes in the export volumes have affected the price for domestic logs
relative to the price for export logs. Kalt uses a regression analysis purportedly to show that the changes in the export volumes as
a result of changes in the fee had no effect on the ratio of export to domestic log prices.
A fundamental error in Kalt's analysis is his misuse of the fee-in-lieu of manufacturing. During the 1980s, this fee was raised in
steps from 15 percent to 100 percent. However, as Respondents themselves have stated, the 100 percent fee covered less than 35
percent of the logs exported from BC during the POI. Blanket exemptions under various orders-in-council (OICs), along the Mid-
and North Coast, bear a maximum fee-in-lieu of manufacturing of 15 percent, not 100 percent. These exports accounted for more
than 65 percent of the log exports from BC during the POI, as was shown during verification. Kalt, however, assumed that all of the
exports were subject to the 100 percent fee, an incorrect assumption. Since Kalt did not apply the fee-in-lieu of manufacturing
correctly in his analysis, his study is invalid.
Furthermore, the Kalt analysis implicitly assumes that the change in the fee- in-lieu of manufacturing policy would have an impact
on the export price of logs from BC. That is, explaining the export/domestic log price ratio using the change in the fee-in-lieu of
manufacturing policy assumes a causal relationship between export log price and the change in the fee policy. Given
(Cite as: 57 FR 22570, *22613)
the very small volume of BC logs on the export market (owing to the very effective export restrictions), BC, under present
conditions, is a price-taker in the Pacific Rim market for export logs (i.e., it is highly improbable that the current tiny volume of BC
exports could have any significant effect on Pacific Rim log market prices). As such, even assuming arguendo that the change in
the fee policy in BC did not cause a change in the domestic/export differential one way or the other, such a conclusion says
nothing about the potential effect of the lifting of BC's restrictions in toto. Therefore, Kalt's thesis cannot prove or disprove the
Department's contention that the lifting of the BC restrictions, in toto, would have a significant effect on the BC domestic price of
logs.
Respondents have also placed on the record a study by Dr. Finan. The objective of this study is to evaluate whether there was a
causal relationship between BC log exports and the differential between export log prices and BC domestic log prices. Finan claims
that the Department has incorrectly theorized that, as export levels rise (or the ratio of export to domestic sales increases), the
differential between export prices and domestic prices should decrease. His study uses a regression analysis to demonstrate a lack
of evidence to support the Department's hypothesis. Finan concludes that no such causal relationship exists.
We agree with Finan's hypothesis that there is a correlation relationship
(Cite as: 57 FR 22570, *22613)
between the volume of BC's log exports and BC domestic log prices. However, we disagree that Finan has disproved such a causal
relationship. Finan bases his conclusion on a showing that minuscule changes in the current level of log exports have no
significant effect on the differential between BC domestic and export prices. As noted above, this conclusion is unfounded, given
the current tiny volume of export sales in comparison with the high Pacific Rim log demand. BC, under present market conditions,
holds no sway over Pacific Rim log prices. Additionally, while Kalt applied the fee-in-lieu of manufacturing incorrectly, Finan
completely disregarded it, taking no account of the possibility that the fee might have had a significant impact on the incentive to
export and, therefore, on export volumes. Given the weaknesses, we conclude that Finan's study falls short of disproving a causal
relationship between export volumes and domestic prices.
Benefit on the Coast and Tidewater Interior
Respondents allege that BC's log export restrictions do not distort the market and, therefore, do not confer a benefit on the
province's lumber producers, either on the coast or in the interior. Respondents maintain that the coast and the tidewater interior
are differentiated from the border and north/central interior of the province and the other provinces in Canada by their
access to
(Cite as: 57 FR 22570, *22613)
tidewater ports and the distortions introduced by Japanese and U.S. trade policies. On the coast and in the tidewater interior,
Respondents assert that the log export restrictions merely serve to offset the distortive effects of Japanese and U.S. trade policies.
By counteracting these policies, Respondents claim that the restrictions allow for the same allocation of resources that would
prevail in an undistorted market, i.e., a market absent Japanese and U.S. trade distortive policies. [FN32] Therefore, Respondents
assert that, in order to determine whether the log export restrictions actually distort the market and lead to a misallocation of
resources, the Department must net out the distortive effects of the Japanese and U.S. policies, rather than hold them constant as
the Department did in the Preliminary Determination.
FN32 We note that, on the one hand, Respondents have argued that there really is no price differential between export and
domestic logs, that any apparent differential is due to export costs and species/quality differences. On the other hand, they imply
that there is a price differential because the government has stepped in to control the market. This is done by restricting exports
which then depresses the domestic price. Consequently, Respondents admit that the domestic prices would rise absent the
restrictions, given the current market conditions, and that a price differential actually exists between the export price and the
depressed
(Cite as: 57 FR 22570, *22613)
domestic price.
Respondents' arguments with respect to the trade distortive effects of Japanese trade policies, and U.S. trade distortive activities
for that matter, are relevant only to the extent that world market conditions may have been different in 1983, the year in which
Margolick based his study, and 1990, the POI. Kalt implicitly recognizes this potential measurement problem in stating that one of
the reasons the Margolick study cannot be used is that U.S. restrictions on log exports have increased since 1983. To account for
this possibility, we have relied on the Newport submission, which uses 1990 pricing data to update the Margolick study.
Margolick relied on U.S. export prices as the Pacific Rim log market price *22614
(Cite as: 57 FR 22570, *22614)
because the United States supplies the overwhelming majority of softwood logs to that market. That the United States maintains
its own export restrictions, or that Japan has high import barriers to lumber products, does not make the U.S. export price any
less the appropriate Pacific Rim log market price. It may not be the perfectly competitive price that would exist in a perfectly
competitive world with no national boundaries or national trade policies, but, during the POI, it was the market price that
reflected world market conditions at that time, including Japanese trade barriers and U.S. trade policies. In fact, as a Pacific Rim
market price, it is supposed to reflect these conditions; if it did not, it would be distorted.
(Cite as: 57 FR 22570, *22614)
The countervailing duty law is aimed at particular government programs that provide subsidies to specific industries. Our
analysis and line of inquiry focus on the effects of those government programs within the relevant jurisdiction, which is the
country of exportation. We do not seek to determine what prices, interest rates, or exchange rates would be in a completely free
world without borders and political entities. Nor do we examine the reasons that governments put particular programs into place.
We are interested only in the effects of those programs on industries that export to the United States. In this case, we have
measured what would happen to BC domestic log prices if the restrictions were lifted--all other things being equal. If world market
conditions change, such as by Japan's lifting its import barriers, the export demand for logs would drop, and the Margolick factor
would likely fall. There are many other factors that could affect world market demand for logs, such as a change in deductible
mortgage interest policy in the United States. As these changes occur, export market prices will automatically reflect them, and
the Margolick factor, or some other similar factor, would rise or fall depending on the change.
Benefit in the North/Central and Border Interior
Respondents then argue that log export restrictions have no significant effect
(Cite as: 57 FR 22570, *22614)
in the north/central and border interior areas of BC. They contend that these interior areas share the same geographic and
economic characteristics as those provinces in the interior of Canada with respect to which the Department determined that
no benefit is conferred on lumber producers from log export restrictions (see Alberta, Ontario, and Quebec section below).
Therefore, they allege that the same factors that led the Department to conclude that log export restrictions in the other
investigated provinces do not confer a subsidy should be applied to the BC interior, with similar results. The tidewater interior is
affected by none of the geographic and economic constraints that Respondents attribute to the rest of the administrative interior,
nor do Respondents make such an assertion. Therefore, the following contentions do not relate to the tidewater interior.
Respondents argue that, like Alberta, the timber harvested in the interior is of low quality, and the principal harvesting areas are
more than 150 miles from any export location. They note that average haul distances range from 41 to no more than 66.5 miles in
the interior, and that it is cost- prohibitive to transport these low-quality logs longer distances for export. Respondents refer to
Kalt, and explain:
Professor Kalt noted that, due to those factors, the Northern and Central Interior--which account for 68 percent of the B.C.
harvest--are, as a consequence, beyond the range that would make logs harvested there exportable.
(Cite as: 57 FR 22570, *22614)
Professor Kalt indicated that 'for very simple and powerful reasons, the logs harvested there are also milled there.' Indeed,
Professor Kalt stated that, given the economic constraints that transportation costs impose on moving logs in the Interior, an
'outer limit of 100 miles can be used to conservatively define the likely area' of any potential exports from the Interior. (see
Respondents Case Brief, p.54).
We accept that it would be inefficient and prohibitively expensive, both under current market conditions and under conditions
that would prevail absent the log export restrictions, to export from the north/central interior. We have determined that the
100-mile limit recommended by Respondents, arguing in the alternative, accurately describes the area of potential exports from
the border of the interior.
Next, Respondents allege that, like Ontario, the low level of exports and the unfilled export quotas in the interior indicate that BC's
log export restrictions have no impact there. They explain that only 0.76 percent of total exports during the POI originated from
the interior, and virtually all of these were within 25 miles of the U.S. border; all other exports originated from the coast and the
interior tidewater. Respondents also allege that the province routinely grants export exemptions in the interior that often go
unfilled or result in no exports.
We note that there are significant differences between the Ontario log export
(Cite as: 57 FR 22570, *22614)
quotas and the procedures through which logs are exported from the BC interior. The export quotas in Ontario place no
restrictions whatsoever on the export of logs other than a general quantitative ceiling. In Ontario, exporters apply for export
permits in writing, and these are routinely granted as long as the overall quota is unfilled. Despite this, the log export quotas have
never been filled.
By contrast, many of the exemptions for export granted from the border interior were for economic or utilization reasons. These
types of exemptions are highly restrictive in scope relative to the quotas of Ontario. For example, they apply only to particular
stands of timber deemed by the province to be sufficiently unprofitable if harvested for domestic sale. The exporter must submit
detailed analyses of harvesting costs relative to expected domestic return. Furthermore, the exemption process is lengthy,
entailing a significant amount of paperwork. In addition, by their very nature, economic or utilization exemptions cover stands
that are expensive to harvest, increasing the likelihood that, even in an unrestricted market, logs from these stands would not be
exported.
There were also several exemptions for export granted from the border interior based on the surplus criterion. Under such an
exemption, the exporter must pay a 100 percent fee-in-lieu of manufacturing on the differential between the export and domestic
log price. Unlike the coast (see below), the domestic
(Cite as: 57 FR 22570, *22614)
price used in this fee calculation in the interior is based on a survey of potential purchasers in the area and reflects the current
market value of the domestic log. Therefore, all surplus exemptions are subject to the full 100 percent fee. Consequently, there is
no incentive for sellers to export logs from the border interior, as evidenced by the low volume of exports.
Respondents note that, in determining that Quebec's log export policies have no significant economic effect, the Department
relied on the fact that Quebec imported far more logs that it exported. Respondents state that the balance of trade in logs in
Quebec is not as much of a distinguishing factor between BC (including the interior region) and Quebec as the Department
believes. Respondents further argue that in the Preliminary Determination, the Department overlooked the fact that the United
States bans the export of logs from public lands in the Western half of the United States, but imposes no similar ban on exports
from public land in the east. Thus, according to Respondents, the limited volume of imports relative to exports in BC reflects the
effect of the U.S. log ban as much as any other factor.
*22615
(Cite as: 57 FR 22570, *22615)
We disagree with Respondents' assertion regarding the similarities between the Quebec's and BC's respective log trade balances.
First, a significant amount of the timber harvested in Quebec (about 22 percent) is from privately owned forests and is statutorily
unencumbered by any log export restrictions. Despite the significant amount of unrestricted land, Quebec's
(Cite as: 57 FR 22570, *22615)
log exports are still only a fraction of its imports. Concerning U.S. log export restrictions, we note that in Washington, Montana,
and Idaho, all of which border BC, almost two-thirds of the 1990 timber harvest was from private lands, whose logs are free to be
exported. In addition, timber from significant portions of public land is eligible for exportation.
In conclusion, we determine that, because of the cost of transportation and the subsequent unlikelihood of exports from the
north/central area even if the restrictions were lifted, there was no benefit accruing to lumber producers in the north/central
region of BC during the POI. The border region of the interior, however, does not experience from such prohibitive costs, due to
the proximity to export markets in the United States. Consequently, tenure holders in the border interior would likely export logs
if there were no export restrictions. Also, we do not find the current low level of exports or the balance of trade situation to be
indications that there is no effect from the log export restrictions in the border region of the interior.
Flow of Exports
Respondents maintain that the export restrictions do not hinder the exportation of logs and that certain procedural aspects of the
log export regulations demonstrate the slackness of the restrictions and the resulting
(Cite as: 57 FR 22570, *22615)
price equilibration between export and domestic log prices.
Respondents assert that the logic applied by the Department in the Preliminary Determination regarding BC's log export
restrictions is flawed, insisting that the Department stated that "a significant amount of logs are exported despite a de facto
embargo on exports" (see Respondents Case Brief, p.IV-82). They claim that the Department's reasoning is illogical and that "a
substantial volume of exports can hardly be deemed evidence that the restraints are restrictive." They conclude that "the
restrictions do permit a significant flow of exports and that the price equilibration the Department claims would take place in the
absence of Provincial controls has, to a great extent, already taken place" (see Respondents Case Brief, p. IV-82).
We disagree with Respondents. The various procedural features they cite as an illustration of the porousness of the restrictions do
not, in fact, demonstrate such a porousness nor any resulting price equilibration. First, Respondents assert that various blanket
OIC exemptions, which account for over 65 percent of all log exports, provide for the "virtually unfettered" export of logs. This is a
mischaracterization. The parameters of blanket OICs are defined by the province. Since most have a maximum volume of
allowable exports and a specified expiration date, they do not all provide for "virtually unfettered" exportation. Indeed, at
verification, Respondents pointed out the existence of only one OIC that allowed for unlimited exports. This OIC was granted for