(Cite as: 57 FR 22570, *22615)
economic and utilization reasons (see BC Verification Report). Also, because we were not able to trace from approved exemption
applications to permits granted to actual exports, we have no basis for evaluating Respondents' assertions as to the actual volume
of exports resulting from the OIC exemptions.
Respondents claim that in the Preliminary Determination the Department overstated the impact of the 100 percent fee-in-lieu of
manufacturing. At verification, provincial officials explained that the fee was based on the differential between the export and
domestic log prices. However, they explained that the domestic price is generally based on a three-month weighted- average
market value calculated by the MOF for the Vancouver log market (VLM). Therefore, the domestic value subject to the fee could
actually overstate or understate the real domestic value of the particular export boom (see BC Verification Report). Respondents
claim that any potential differential is a potential source of profit offering exporters the incentive to ship.
We recognize that the fee-in-lieu is applied on a weighted-average basis. Nonetheless, the "potential differential" between the
actual value and the calculated VLM value is unpredictable, both in terms of time and magnitude. Respondents infer that sellers,
therefore, would engage in arbitrage between the two markets in an attempt to capture the highest profit margin. If the VLM value
is below the real domestic price, the seller would choose not to export. Respondents provided no information on the incidence of
sales in the export
(Cite as: 57 FR 22570, *22615)
market due to such arbitrage. Indeed, we conclude that, because of the extremely low level of exports under the harvested
surplus exemption subject to the 100 percent fee, sellers do not often capture a positive differential, and, hence, do not export.
Finally, Respondents contend that, in the Preliminary Determination, the Department ignores the nature of the minimum
processing requirements of logs as a means of circumventing the export restrictions (e.g., cants come under the definition of
"processed wood product," not logs). However, because Respondents have not submitted any verifiable data regarding the extent
of this alleged circumvention, the Department has no means to evaluate this assertion and its relevance to the issue at hand.
For all of these foregoing reasons, we reaffirm our preliminary finding that the complex web of restrictions in BC, in effect, bans
what would otherwise be a significant flow of log exports abroad, resulting in a domestic supply of logs in BC that is artificially
high.
Calculation
As in the Preliminary Determination, in order to measure the benefit to lumber producers during the POI, we examined the
difference between the current domestic log price and the price that would exist if the restrictions were not
(Cite as: 57 FR 22570, *22615)
in place. However, for the final determination, we have changed some of the adjustments, as described below.
Both the Coalition and Respondents objected to the Department's basic methodology for measuring the subsidy from the log
export restrictions. The Coalition's preferred analysis is a cross-border comparison that captures the benefit from both the
stumpage programs and the log export restrictions. The Coalition states that, although not its preferred methodology, the
"price-to- price" analysis used by the Department is also a fundamentally sound manner in which to measure the subsidy. It
claims, however, that in applying the methodology, the Department overestimated the requisite adjustments and generally used
too conservative an approach.
Respondents raise numerous objections to the Department's methodology. They state that the Department has not demonstrated
that the log export restrictions have a direct and discernible effect on actual log prices; that the Department failed to take all
relevant costs into account in the calculation; and that the methodology is corrupted by the use of imperfect surrogates for actual
prices, leading to unacceptably flawed results. They summarize their objections by *22616
(Cite as: 57 FR 22570, *22616)
stating that the calculation is a "teetering compound of weighted averages" and that the "measurement potentially amounts to
nothing more than the margin of error attributable to the Department's methodology."
As we stated in the "Stumpage Preferentiality" section, we are reluctant to
(Cite as: 57 FR 22570, *22616)
resort to a cross-border price analysis when intra-provincial information is available. Rather, determining what the price of logs
in BC would be absent the restrictions is the preferred method to use for examining the benefit from this program. This
methodology follows our normal line of inquiry for most of our subsidy calculations. For example, in calculating the benefit from
a grant, we determine what a firm would have had to pay for a commercial loan in the same amount; for a tax credit, what a firm
would have paid under normal corporate tax schedules.
Respondents have exaggerated the lack of observed data in our analysis. The "derived values" to which Respondents refer are, in
fact, observed export prices gathered by Statistics Canada, as explained in the export price section below. In the Preliminary
Determination, we constructed a value for the interior domestic price because we did not have any actual prices. However, at
verification, we were able to obtain interior log values from Statistics Canada and actual log prices for the tidewater interior,
and have used these data in our final calculations.
Domestic Price
We have calculated a domestic log price based on price information from the Vancouver log market for the coast, observed log
prices in the tidewater
(Cite as: 57 FR 22570, *22616)
interior, and 1989 Statistics Canada log valuation data, adjusted for inflation, for the border interior. The Vancouver log
market price information is based on observed log prices for the coast. We obtained actual log prices from a company located in
the tidewater interior at verification. As these data are the only observed prices on the record from the tidewater interior, they
are the most accurate domestic log prices for that area. We also obtained the Statistics Canada domestic log volume and value
data for the interior at verification, and we have used these data for the border interior. Although we could not isolate border
interior prices from these data, the Statistics Canada average interior prices are the only data available on the record for that
region.
Respondents, however, find fault with the Statistics Canada data, stating that it is based on a survey of costs, not prices, and,
therefore, cannot be used to demonstrate a direct and discernible effect on domestic prices. Nonetheless, we believe that these
data accurately represent the market value of logs to the manufacturers in the survey. We were able to compare the Statistics
Canada data from the coast with the Vancouver log market prices for the coast and found that the values were very close.
Therefore, it is reasonable to assume that the Statistics Canada data for the interior are a reasonable reflection of actual
prices.
Respondents object to the Department's weighting of the coast and interior
(Cite as: 57 FR 22570, *22616)
domestic log prices according to the total BC log harvest in calculating the domestic log price. They contend that such weighting
results in a grossly understated domestic log price that artificially creates a subsidy. Given the virtual absence of exports from the
interior, they argue that the Department should eliminate the interior from the calculation or weight the interior harvest by the
percentage of total exports from the interior.
As we explained above, we have included only those areas of the interior in our calculation that would be affected by the lifting of
the export restrictions. The BC domestic log price used in our calculation should be based on, and weighted according to, the
harvest from the areas under consideration, not the exports used from those areas. To weight according to the current level of
minuscule exports from those areas would imply that we are calculating the effect of the restrictions only on the tiny volume of
logs currently exported. Instead, we must calculate the effect of the restrictions on all of the logs potentially affected by the lifting
of the restrictions.
We weight-averaged the price/value data according to the percentage of harvest from each area included in the calculation of the
benefit: Approximately 64 percent of the harvest under consideration occurs in the coast, 10 percent occurs in the tidewater
interior, and 26 percent occurs in the border interior.
(Cite as: 57 FR 22570, *22616)
Species/Grade Adjustment
In the Preliminary Determination, we adjusted the weighted-average domestic log price for the different species/grade
distributions between the export and domestic markets so that the domestic price would be comparable to the export price and a
fair comparison could be made. The species/grade adjustment reflected differences in the value of log prices on the coast based on
the domestic and export species and grade distribution by volume. Because we lacked any data describing the domestic
species/grade profile for the two interior areas under consideration, we applied the coastal species/grade adjustment to the
interior as the best information available. Both Respondents and the Coalition object to this application.
Respondents claim that exported logs from the tidewater interior are of the same quality as exported logs from the coast, but that
logs sold in the domestic market from the interior are inferior to coastal logs sold in the domestic market. Therefore, they assert
that the species/grade adjustment for the tidewater interior should be larger than that for the coast. Conversely, the Coalition
believes that the exports from the tidewater interior are of lower quality than those from the coast and, therefore, the adjustment
should be smaller for the tidewater interior.
We must make a species/grade adjustment for the tidewater and border interior
(Cite as: 57 FR 22570, *22616)
areas because we have included these areas in our overall calculation. We recognize that quality differences do exist between logs
from the coast and those from the interior. These differences apply to both export and domestic logs. However, Respondents have
placed no information on the record indicating that the interior species/grade adjustment should be lower or higher than that
calculated for the coast. On the one hand, since interior species and grades are generally of lower quality than those on the coast,
it would seem that the potential interior adjustment should be lower than that for the coast. On the other hand, given the lower
quality of interior logs, export prices would also be lower. On balance, based on the information we have, there is no reason to
conclude that the potential interior adjustment should be any different than the coastal adjustment. Therefore, we have applied
the species/grade adjustment for the coast to interior logs as well.
Export Price
Respondents object to the use of the export unit value used in the Department's calculation on the grounds that it was "derived"
from Statistics Canada volume and value figures provided by the Coalition. Respondents assert that since the Department
lacked actual empirical evidence on which to base its export price benchmark, it cannot produce any evidence of a "direct and
(Cite as: 57 FR 22570, *22616)
discernible effect" on actual prices, as required by the Department's decision in Leather from Argentina.
We disagree with Respondents' assertion. The Department verified that the Statistics Canada data are based on empirically
observed prices taken from Customs records (see Federal *22617
(Cite as: 57 FR 22570, *22617)
Government Verification Report). In its questionnaire responses, BC reported the same volume and value data from Statistics
Canada as we used in our calculation, only on an aggregate basis. Also, the information on log exports published by Statistics
Canada is the only complete information available concerning BC log export prices. The export unit values calculated from
the Statistics Canada information are not "derived" values, but rather originate from actual transactions and, thus, can be
used to demonstrate a direct and discernible effect.
Respondents then assert that the Statistics Canada volume and value figures reflect export prices for logs harvested and
marketed on the coast alone. They contend that the export data do not accurately reflect a mix of coast and interior export prices,
as the Department claimed in the Preliminary Determination. Respondents argue that because no export prices for the interior
region are included in the Statistics Canada data, the interior should not be included in the Department's calculation of the
average export log price or, at a minimum, the Department should use actual export prices for the interior that reflect the lower
quality of interior logs. The Coalition suggests that, if
(Cite as: 57 FR 22570, *22617)
the Department decides to perform a separate analysis for the coast and interior, a weighted-average delivered log price from the
Eastern Washington and Northern Idaho region should be used as the interior export price.
We determine that the use of cross-border information would be inappropriate when intra-provincial information is available (see
the "Stumpage Preferentiality" section of this notice). In addition, we believe that Respondents have mischaracterized the origin of
the log exports. The Statistics Canada data represent log exports that originate primarily from the tidewater interior and the
coast, not simply the coast. A small portion of exports also originates from the border interior (see BC Verification Report). As
discussed above, we used the coast, the tidewater interior and the border interior in our calculations; we did not include the
north/central interior. We used the BC unit value for log exports from Statistics Canada as an export price for the coast, the
tidewater interior and the border interior. Moreover, it is the only information on the record regarding export prices.
Economic Adjustment
In the Preliminary Determination, the Department adjusted the export price downward by a price equilibrium factor to account
for the decrease in the BC export price that would result from lifting the log export restrictions.
(Cite as: 57 FR 22570, *22617)
Respondents object to the Department's analysis. They suggest that "the Department substituted various assumptions purporting
to be generally accepted principles of economics," rather than perform an actual empirical analysis of the effects of BC's
restrictions as required by the Department's determination in Leather.
As we stated in the Preliminary Determination, the factual circumstances in this case are more complicated than those in Leather
and, as such, the measurement surrounding BC log export restrictions and Argentine hide restrictions are dissimilar. The
Argentine hide restrictions were in place sporadically, allowing for an analysis of the on-and-off effects. The BC log export
restrictions have been in place in some form or another since 1906, thereby forcing the Department to use economic models as a
measurement tool. Respondents seem to be suggesting that, because the facts in this case are different from those in Leather, the
Department is precluded from using a more appropriate methodology and therefore precluded from following the Leather
precedent. This suggestion is impermissible. The Department must examine the relevant facts in each case and choose an
appropriate methodology to deal with those facts.
We maintain that if the log export restrictions are lifted, the supply of logs available in the Pacific Rim market (the market for 99
percent of BC exports) would increase and the price of exported logs would decrease. The Margolick
(Cite as: 57 FR 22570, *22617)
study analyzed the effects on the BC coastal economy of the complete removal of the restrictions on the quantity of logs exported.
It attributes a 22 percent decrease in the BC export price for logs to the removal of the log export restrictions.
The Coalition contends that the Margolick study provides an accurate representation of the impact of log export restrictions. (see
Coalition Case Brief, Vol 1, Section 3 at 62.) In support of its assertion, it placed on the record a study by Newport which reviews
the Margolick study and updates the Margolick factor ("Margolick/Newport factor").
Conversely, Respondents have numerous objections to the Department's use of the Margolick study. They state that the study
"significantly understates the steep drop from export prices to the domestic price level, in the event of any difference between
such prices" (see Respondents Rebuttal Brief).
Respondents challenge the Department's use of the Margolick study by questioning the model's external and internal validity.
Respondents then contest the study's application to the facts in BC.
First, with respect to the model's external validity, Respondents claim that the Margolick study does not take into account the
multiple factors that influence supply and demand in the BC coastal log market. These factors include the "feedback effects"
postulated by Kalt, Japanese trade policies and resulting demand elasticities, U.S. trade policies, the potential for increased
(Cite as: 57 FR 22570, *22617)
supply of logs from the Commonwealth of Independent States (CIS), and associated misapplication of elasticities. They state that
these multiple factors can only be accounted for in a general equilibrium model. The Margolick study, on the other hand, is,
according to Kalt, based on a partial equilibrium analysis.
We maintain that most, if not all, econometric studies are, by their very nature, based on a partial equilibrium analysis. That is,
only an econometric model in which the market in question is represented entirely by behavioral relationships, and in which no
assumptions external to the model are necessary, can truly be considered a general equilibrium analysis. Due to their prohibitive
cost, general equilibrium models are rarely, if ever, constructed. As a practical matter, external assumptions are required to
construct econometric models, as was true in the case of the Margolick study. The application of such assumptions does not
render the partial equilibrium model invalid. As such, we do not agree with Respondents' contention that the Department should
reject the Margolick study simply because it is a partial equilibrium analysis.
Second, Respondents dispute the internal validity of the Margolick study. We note that their first challenge, that the Margolick
study fails to establish an equilibrium price that adequately reflects the likely decline in export prices that would result from
lifting the restrictions, rests simply on
(Cite as: 57 FR 22570, *22617)
a mathematical error; Respondents failed to note that the Margolick study measured the percentage increase or decrease in the
prices, not the percentage increase or decrease on the difference between the prices, as Respondents incorrectly contend.
The other major contentions, raised by Respondents with respect to the internal validity of the Margolick study, are the statistical
reliability of the results, incorrect appropriation of *22618
(Cite as: 57 FR 22570, *22618)
independently-derived elasticities into the model, and the use of out-of-date information.
All of these objections state that improvements in the Margolick model can be made, but we note that this is also the case for all
econometric studies. The Margolick study had been reviewed before it was published, presumably by the BC government officials
who provided partial funding for this study. We also note that Respondents did not submit any post-publication unfavorable
critiques suggesting that the model was invalid, that is, until the Department used the study in its Preliminary Determination.
With respect to Respondents' criticism regarding statistical validity, we note that this concept is related to what economic
modelers call "model validation." Model validation encompasses how well the model performs in relation to theory and whether
the predictions appear reasonable and are statistically significant. As noted above, we believe that the Margolick study conforms
to accepted economic theory. As to the model's prediction of the effect of
(Cite as: 57 FR 22570, *22618)
lifting BC's log export restrictions, we believe that the Margolick study passes the test of reasonableness. Although we agree with
Respondents that it would have been preferable to have a measure of the statistical significance of the predictions, we note that
the lack of such a test does not invalidate the results of the Margolick study.
Respondents contend that the Margolick study cannot be used in the Department's calculation because the study is based on 1983
data, which is outside of the period of investigation. In arguing against the Margolick factor, Respondents have asserted that the
study does not take into account changes that have occurred in the Pacific Rim market since 1983. The Department acknowledges
that to the extent that world market conditions were different in 1983 than in 1990, the Margolick factor, which was 22 percent in
the Preliminary Determination, is inaccurate and could lead to an overstatement or understatement of the benefit.
As noted above, the Coalition has placed on the record a study by Newport, which updates the Margolick study using 1990 data.
The results of the Newport update indicate that the BC market price, after removal of the export restrictions, would be 27 percent
higher, and the corresponding Pacific Rim market price 18 percent lower. We have used information from the Newport update, the
Margolick/Newport factor, in the calculation of the benefit.
Finally, Respondents contend that the Margolick study does not examine
(Cite as: 57 FR 22570, *22618)
the effects of price equilibration in the interior. We do not agree with Respondents that our application of the Margolick factor in
the Preliminary Determination was "wholly unreasonable." In their own analysis, even Respondents infer that the study applies to
both to the coast and tidewater interior, [FN33] although it was based only on prices from the coast. While it may not be ideal to
apply the Margolick factor across the entire province, we do not find such an application unreasonable. We have simply added the
border interior region, another geographic area that would be directly affected by the removal of the restrictions. Therefore, for
purposes of this final determination, we consider it appropriate to apply the price equilibrium factor to the tidewater interior and
border interior.
FN33 Respondents lack of clarity on what constitutes the coast and what constitutes the interior is further demonstrated when
they state "* * * the only reasonable conclusion is that, due to the Interior's geographic isolation from tidewater ports, there
would be no price effects in the Interior." As noted above, and as explained to the Department during verification, the tidewater
interior is one of three areas in the interior, and, as defined, has access to tidewater ports. See Respondents' Joint Case Brief, April
21, 1992, Vol IV-A at 99.
We judge this in no way to be an adverse adjustment towards Respondents.
(Cite as: 57 FR 22570, *22618)
Indeed, if the Department did not decrease the interior export price, as was proposed by the Coalition, the differential between
the interior export and domestic prices would be significantly greater, thereby raising the benefit.
Finally, many of the above criticisms are not unique to the Margolick study, but apply to many econometric models published in
peer-reviewed journals. The standards that Respondents have argued the Department should hold the Margolick model to far
exceed any standards applied to econometric models by academic, government, and industry researchers who construct, apply,
and review such models.
Export Costs
In the Preliminary Determination, we adjusted the average log export price for the incremental sort costs involved in dry land
sorting and lost volume, and for export transportation costs.
Respondents assert that they have established the basis for the costs they claimed, that the Department has verified the
information, and that the Coalition's experts have conceded that the costs are reasonable. Respondents conclude, therefore, that
the province's costs are the only information available to the Department and must form the basis of the Department's
determination. The Coalition disagrees and charges that Respondents have
(Cite as: 57 FR 22570, *22618)
mischaracterized the position of the Coalition's expert regarding these costs. While the Coalition's expert agrees with the general
description of the costs, he does not agree with Respondents' characterization that all the costs, particularly falldown sort costs,
are costs of exporting logs.
Contrary to Respondents' claim, we did not verify all of the cost data. Rather, what we "verified" consisted largely of individual
testimonials and hypothetical examples illustrative of potential costs. We did examine several random invoices, chosen by
Respondents, pertaining to some of the costs. Respondents were unable to demonstrate the representativeness of such invoices,
and we were unable to trace most claimed costs to any background documentation. Therefore, we have made cost adjustments
based upon the reasonableness of the testimonials and invoices vis-a-vis other information on the record, not upon definitively
verified costs.
Respondents assert that sellers incur incremental sort costs (dry land sort and volume lost costs) when exporting logs. They claim
that these costs, as reported in the questionnaire responses, are representative of the vast majority of export sales from the
province. They maintain that the Department correctly adjusted for these costs in the Preliminary Determination by using the
costs that Respondents reported in the questionnaire responses. They add that, at verification, they provided testimony of an
industry expert documenting these costs, which they state were subsequently confirmed by other
(Cite as: 57 FR 22570, *22618)
industry representatives.
The Coalition asserts that the adjustments the Department applied in the Preliminary Determination for incremental costs were
overestimated. For a tidewater interior plus coast analysis, it proposes reducing the dry land sort adjustment based on revised
estimates of the difference between the weighted average dry land sorting costs associated with export logs and the weighted
average dry land sorting costs associated with domestic logs. The Coalition recommends not making any dry land sort cost
adjustment for the rest of the interior. The Coalition alleges that the costs of the volume lost claimed by Respondents were
exaggerated and proposes that the costs be reduced. It claims that a significant amount of the costs of the volume lost is
recoverable through the sale of the discarded volume *22619
(Cite as: 57 FR 22570, *22619)
on the open market, as is true in the United States.
We disagree that such costs are recoverable. At verification, we interviewed the manager of a dry land sorting operation who
indicated that most of the volume lost is burned as waste and not sold on the open market. However, we did correct the volume
lost claimed by Respondents for the coast. We discovered at verification that this cost was based on the same hypothetical
example discussed above in the "Export Costs" section that Respondents did not substantiate. Nonetheless, we have accepted this
hypothetical as an adjustment to the export price for the coast because this is the only information on the
(Cite as: 57 FR 22570, *22619)
record. However, rather than allocating the cost of volume lost to the export sort as Respondents did, we have reallocated the
cost of volume lost to the original sort, from which the volume lost originated.
At verification, we also obtained cost information on volume lost from a company located in the tidewater interior. We used this
figure as the average volume lost for the tidewater interior. We weight-averaged, according to the percent of exports from the
tidewater interior and the coast, the cost of volume lost in order to calculate a cost for volume lost for the entire area under
consideration. We have no evidence indicating that the volume lost in export sorts is different from domestic sorting costs in the
border interior. Therefore, we did not adjust for any volume lost cost in that area.
Based on information obtained at verification, we corrected the dry land sort costs claimed by Respondents. The claimed dry land
sort costs used were based upon the reported incremental sorting costs between domestic and export sorts, $5.00 and $13.50,
respectively, for the Vancouver area. At verification, we learned that the sorting costs, as well as all of the claimed export costs,
were based upon a hypothetical example (see BC Verification Report). We obtained cost information from a private company
while visiting a dry land sort location in the Vancouver area. We determine that this new, actual information is preferable to the
hypothetical information submitted by Respondents and have, therefore, based the dry land sort adjustment on that
(Cite as: 57 FR 22570, *22619)
private company's costs.
We also obtained sort cost information for the tidewater interior at verification. We weight-averaged, according to the percent of
exports from the tidewater interior and the coast, the incremental sort costs in order to calculate an incremental dry land sort
cost for the entire area under consideration. We have no information indicating that export sorting costs are different from
domestic sorting costs for the border area. Therefore, we did not adjust for any incremental sorting costs for the border area.
Additional export transportation costs (towing, storage, and yarding) on the coast occur when log exports are sold on a
free-along-side (FAS) basis. Respondents maintain, based on their hypothetical example, that vendors on the coast sell logs
approximately 25 percent of the time on an FAS basis (75 percent of the time logs are sold on a F.O.B. raft basis, the same terms
used in domestic sales). The Coalition claims that, compared with those in the United States, not only are the FAS costs
exaggerated, but the frequency of FAS sales is also excessive. Therefore, according to the Coalition, the export transportation
costs for the coast should be reduced.
We used the export transportation costs for the coast provided by Respondents because there is no other information on the
record regarding transportation costs on the coast. At verification, we obtained export transportation costs for the tidewater
interior.
(Cite as: 57 FR 22570, *22619)
For the interior, Respondents assert that the Department failed to incorporate export transportation costs associated with any
potential log exports. They claim that, had the Department calculated an average transportation cost from the central interior to
either tidewater ports or the U.S. border, the entire alleged subsidy would be eliminated. The Coalition argues that no export
transportation adjustment is needed in the interior. It claims that logs transported to the United States from the BC interior are
likely to be treated and transported in exactly the same manner as logs sold domestically. Therefore, the Coalition contends that
no adjustment for export transportation costs should be made for log exports from the interior.
We have determined that an export transportation cost adjustment is appropriate for log exports from the border interior. During
verification, BC provided evidence of log hauling costs and distances for the interior from the Ministry of Forests Interior Logging
Cost Survey. This survey indicated that the average haul distances for the Kamloops and Nelson regions, the regions included in
the border area, were 79 and 95 kilometers respectively (52 miles on average). Using Kalt's 100-mile limit, described above, to
define the border interior, we calculated the average shipping distance from the border region to be approximately 110 miles
based on our delineation of the border area and the general location of U.S. mills at approximately 60 miles from the border. The
incremental export distance is therefore approximately 60 miles.
(Cite as: 57 FR 22570, *22619)
We multiplied the incremental export distance by the haul rate for the area that we examined at verification to calculate the
incremental export transportation cost for the border region.
We weight-averaged, according to the percent of exports from the coast, the tidewater interior, and the border interior, the cost
of export transportation in order to calculate a total export transportation cost adjustment for the entire area under
consideration.
Respondents assert that falldown sort costs should be deducted from the export value. They maintain that falldown sort costs are
the costs associated with disposing of those logs that remain after the high grade and high within-grade logs have been removed
for exportation. Respondents claim that "the reduction in value attributable to the falldown boom is a part of the cost of obtaining
the potential extra returns that come from exporting the better quality logs" (see Respondents' Case Brief). They contend that such
costs are not duplicative of the Department's species/grade adjustment, as the Department claimed in the Preliminary
Determination. Respondents further assert that the Vancouver log market prices on which the species/grade adjustment was
based included only prices reported for the first arm's-length sale of logs. They claim that most falldown sorts are second sales and
that prices charged for falldown sorts, therefore, are not included in the average Vancouver log market price. As a result,
Respondents claim that the species/grade adjustment fails
(Cite as: 57 FR 22570, *22619)
to take into account the important reductions in value associated with such falldown sorts.
The Coalition argues that while the falldown sort that remains after export logs have been removed from a domestic sort is worth
less than an average domestic sort, this does not represent a true cost of exporting, nor does the creation of a falldown sort affect
export prices in any manner. The Coalition contends that falldown sort costs are not real expenses borne in order to prepare logs
for export.
We reaffirm our Preliminary Determination not to adjust the export value for the alleged falldown sort costs. We find Respondents'
falldown sort claim both confused and misplaced. We *22620
(Cite as: 57 FR 22570, *22620)
do not dispute that a falldown sort may result when an export sort is removed from a camp-run sort (i.e., the collection of total
logs in the boom representing the entire harvest of a forest stand). The camp-run sort is the sum of the "export sort" (created by
removing exportable logs from the "true" domestic sort), the falldown sort (the sort that remains after the exportable logs are
removed) and the volume lost (see infra). We dispute that the falldown sort is a cost of exporting.
We disagree with the method Respondents use to measure the potential effects of the falldown sort. As we understand
Respondents' argument, because higher quality logs are exported, leaving lower quality logs (the falldown sort), the price of those
export logs (comprising the higher quality logs of the grade)
(Cite as: 57 FR 22570, *22620)
cannot be compared directly with the price of the domestic logs. However, the value of falldown sorts and the quantification of
within-grade variations are separate issues.
We agree with the Coalition that the creation of a falldown sort is not a cost of exporting, especially when the falldown sort is sold
for its market value, as we found at verification. Indeed, if it were correct that "the reduction in value attributable to the falldown
boom is a part of the cost of obtaining the potential extra returns that come from exporting the better quality logs" (see
Respondents' Case Brief), as Respondents claim, then the increase in the value is a benefit of exporting logs.
The exporter does not suffer from the creation of a falldown sort. He would have had to sell these logs in the domestic market
anyway. We recognize that the overall value of the true domestic sort is lower without the exportable logs, since the "cream" has
been skimmed off the top, so to speak (creating the falldown sort). Nonetheless, this "loss" is more than compensated for by the
much higher price received for the top quality logs in the export market than would have been received if those same top quality
logs were sold in the domestic market. Viewed in this way, we would add the benefit from increasing the value of the export logs to
the cost of exporting logs and arrive at an even higher overall subsidy. Obviously, this is not Respondents' intent.
Therefore, we have not made an allowance for the falldown sort cost. We have
(Cite as: 57 FR 22570, *22620)
accounted for these differences in the species/grade adjustment. [FN34] Also, we were told, but were presented no supporting
evidence at verification, that falldown sorts are generally second-stage sales and therefore not included in the calculation of the
average VLM domestic log price. Indeed, if this were true, the inclusion of the price of a falldown sort in the VLM average should
reduce the VLM average domestic log price and increase the differential between the export and domestic values (thereby
increasing the overall subsidy).
FN34 Using the hypothetical example provided to the Department during verification (see BC Verification Report), we identify the
incremental gain of the export sort (($120/m3-$70/m3) * 585 m3=$29,250) where $120/m3 is the export price, $70/m3 is the
camp-run price, and 585 m3 is the export volume. The incremental loss of the falldown is (($70/m3-$54.60/m3) * 395
m3=$6,083) where $54.60 is the value of the falldown and 395 m3 is the falldown volume. This yields a difference of $23,167,
which, when carried on the original camp run volume of 1000 m3, yields an incremental gain of $23.17 m3.
That this replaces the species and quality adjustment is evident from the fact that all camp-run logs are all sorted into export or
falldown sorts, and the dry land sort is a sort by grade and species. The Department also notes how similar in magnitude the
$23.17 is to the species and quality
(Cite as: 57 FR 22570, *22620)
adjustment used in this determination.
During verification, Respondents began arguing falldown sort costs from another perspective, that is, that a falldown adjustment
is really a within- grade adjustment. Respondents attempted to measure a within-grade variation between export and true
domestic sorts using the difference in value between a falldown sort and a true domestic sort. As for this variation between export
and domestic sorts, we do not contest that a quality range can exist within statutory log grades. However, we were presented no
evidence that only the high quality logs within a grade were exported. Because we have no evidence of a within-grade average
difference between exported and domestic logs, we cannot accept that such an adjustment is in order, much less quantify the
difference or make an adjustment to the export value. More important, we have no reason to believe that the species/grade
adjustment we made does not account for within-grade differences.
Application of Benefit
Respondents contend that the effect, if any, of the log export restrictions would be limited to firms purchasing logs in arm's-length
transactions. In addition, Respondents state that the Department's analysis incorrectly focuses on the logs that an integrated firm
does not (or would not) process into
(Cite as: 57 FR 22570, *22620)
lumber, instead of examining the effect on logs processed into lumber. Respondents argue that the Department's extension of the
benefits of log export restrictions to integrated firms is based solely on assertion, speculation, and one vague reference to
"generally accepted economic principles." Finally, Respondents state that the Department made no effort to measure the cash-flow
effects on integrated firms arising from log export restrictions.
In contrast, the Coalition argues that the Department's methodology correctly applies the benefit to all logs, including those
harvested for use by integrated firms. It notes that integrated firms will assign the same market value to internally and externally
sourced logs, indicating that the "decline in the market price of logs that is caused by the export restrictions rebounds
substantially to the benefit of the integrated producers' lumber divisions." (See Coalition brief at III-125.)
The clear intention of a restriction on the exportation of logs is to encourage the conduct of value-added processing within a
jurisdiction, in this case BC, rather than in another area. The very fact that BC, while pursuing its employment, development, and
other goals, feels compelled to enact (and strengthen as recently as 1990) laws and regulations severely restricting the export of
logs is the most eloquent argument possible for the proposition that absent the restrictions, the rational, profit-maximizing firm
would choose to export at least some of its harvest. To the extent that an integrated firm is
(Cite as: 57 FR 22570, *22620)
prohibited from following its first, best use of a resource, which undoubtedly in certain instances would likely be the exportation
of logs, it would then turn to the next best use. In this case, the next best use would be additional lumber production. In fact, the
Percy study demonstrates that an increase in log exports would have the effect of reducing the export competitiveness of the B.C.
wood products industry by increasing costs. (See Percy study at page 49- 50.) It is precisely this outcome which the maintenance
and strengthening of the B.C. government's log export restrictions, in place for nearly 90 years, seeks to avoid.
Country-Wide Rate Calculation for BC Log Export Restrictions
To calculate the country-wide rate, we divided the benefit for the program by the value of BC's lumber shipments plus the value of
its by-product shipments produced during the lumber production process. We then weight averaged this rate by BC's share of
exports to the United States of the subject merchandise to calculate a country-wide rate of 3.60 percent ad valorem. See
"Calculation of the Country-Wide Rate for Stumpage Programs" section.
*22621
(Cite as: 57 FR 22570, *22621)
Alberta, Ontario, and Quebec
(Cite as: 57 FR 22570, *22621)
The Coalition has made a number of arguments against the Department's Preliminary Determination that the log export
restrictions in Alberta, Ontario, and Quebec do not provide a benefit to lumber producers. These comments focus on the
restrictiveness of the laws and log import and export levels. Concerning the restrictiveness of the laws, the Coalition states that
even though the laws in these provinces do not cover private and federal lands, the Federal controls under the Export and Import
Permits Act (EIPA) sufficiently restrict log exports from these lands. In addition, the Coalition states that, based on the
verification reports, these provinces explicitly restrict exports as a matter of policy and employ such means as a "surplus to
domestic needs" test. The Coalition states that the low level of exports is in and of itself evidence of the restrictiveness of the laws
and that even in provinces like Quebec, where there is a significant amount of unrestricted private land, log exports are kept low
by the Federal law rather than a lack of export demand. It states that a high level of log imports into Ontario and Quebec does not
indicate that exports would not increase following a lifting of the restrictions and that the restrictions themselves are what cause
log imports to predominate over exports.
The Coalition provides nothing beyond anecdotal evidence to support its claim that Federal laws effectively restrict exports from
the three provinces or that there is a large export demand for logs from the three provinces. At verification, we found that the
Federal Government grants export permits