FTC Brief In the Matter of Certain Softwood Lumber Products From Canada Concerning Preliminary Determination on Injury

In 	the 	Matter 	of:
CERTAIN 	SOFTWOOD 	LUMBER
PRODUCTS 	FROM CANADA,
No. 	70l-TA-274 	(Preliminary)
BEFORE 	THE 	UNITED 	STATES
INTERNATIONAL 	TRADE 	COMMISSION
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BRIEF 	OF 'THE
FEDERAL 	TRADE 	COMMISSION
June 	1986

TABLE 	OF CONTENTS
PAGE
INTRODUCTION AND 	SUMMARY •.•.••.•.•••..•..•••..•.•.•••.••• 1
ARGUMENT ••••••••••••••••••••••••••••••••••••••••••••••••• 2
I. 	A Major 	Purpose 	of 	the 	Countervailing 	Duty
Law 	Under 	the 	Trade 	Agreements 	Act 	of 	1979
Is 	To 	Promote 	Free 	Trade 	to 	the 	Benefit
of 	United 	States 	Consumers 	and 	Businesses ..•••••... 2
II. 	The 	ITC 	Should 	Determine 	Whether 	the 	Alleged
Foreign 	SUbsidy Actually 	Caused 	Any 	Material
Injury 	that 	May 	Be 	Found 	To 	Exist ••.••••...•...•... 8
A. 	The 	1979 Act 	Is 	Consistent 	with 	the
Countervailing 	Duty 	Agreement's
Requirement 	To Consider 	the 	Effect
of 	the 	Alleged 	Subsidy ••••••••••...•.••..••..• 9
B. 	The 	Legislative 	History of 	the 	1979 	Act
Indicates 	that 	the 	ITC 	Should 	Examine 	the
Effects 	of 	the 	Alleged 	Subsidy ...•••.•.•..... 13
III. 	The 	Absence 	of 	an 	Auction 	for 	Stumpage 	Rights
Is 	Likely To 	Have 	No 	Effect 	on 	the 	Price 	or
Quantity 	of 	Canadian 	Exports 	of 	Softwood
Lumber 	Products 	to 	the 	United 	States .•.••••.•.•••. 17
A. 	Only 	Increased 	Imports 	Will 	Injure 	an
Industry 	in 	the 	United 	States •••••••••••••..• 18
B. 	The 	Stumpage 	Fee 	Does 	Not
Increase 	Canadian 	Production ..•••••••....•... 19
C. 	The 	Effect 	of 	the 	Low 	Stumpage 	Fee 	Is
Merely 	To 	Increase 	the 	Profits 	of
Canadian 	Loggers 	24
D. 	The 	High 	Profits 	Earned 	by Canadian
Loggers 	Do 	Not 	Have 	the 	Same 	Injurious
Effects 	as 	the 	Grant 	of 	a 	Subsidy .•.•.•••..•. 27
E. 	Conclusion: 	Canadian 	Stumpage 	Fee
Systems 	Do 	Not 	Injure 	the 	United 	States
Lumber 	Industry 	30
CONCLUSION 	••••.••••••••••••.•••••••••••••••••.•· ••••••.• 32
APPENDIX: 	Prehearing 	Brief 	by 	the 	Federal 	Trade 	Commission
before 	the 	International 	Trade 	Administration,
Department 	of 	Commerce, 	Certain 	Softwood 	Lumber
Products 	from 	Canada, 	Countervailing 	Duty
Proceeding, 	April 	7, 	1983
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Brief 	by 	the 	Federal 	Trade 	Commission
on 	the 	Countervailing 	Duty 	Investigation 	of
Certain 	Softwood 	Lumber 	Products 	from 	Canada
INTRODUCTION 	AND 	SUMMARY
On 	May 	19, 	1986, 	the 	Coalition 	for 	Fair 	Lumber-Imports, 	a
group 	of 	United 	States 	softwood 	lumber 	manufacturers 	and
associations 	representing 	United 	States 	lumber 	manufacturers,
-filed 	a 	countervailing 	duty 	petition 	with 	the 	International 	Trade
Commission 	("ITC"). 	The 	petition 	alleges 	that 	the 	domestic
softwood 	lumber 	industry 	is 	threatened 	with 	material 	injury 	and
is 	being 	materially 	injured 	by 	reason 	of 	imports 	of 	softwood
lumber 	that 	have 	benefited 	from 	various 	subsidies 	provided 	by 	the
Canadian 	federal 	and 	provincial 	governments. 	The 	major 	alleged
subsidy 	concerns 	the 	level 	of 	fees 	(." stumpage 	fees·") 	set 	by 	the
provincial 	governments 	for 	the 	right 	to harvest 	softwood 	timber
on 	government 	land 	("stumpage 	rights,,).l 	The 	petitioners 	request
that 	countervailing 	import 	duties 	be 	imposed 	on 	these 	products.
The 	purpose 	of 	this 	brief 	is 	to 	assist 	the 	ITC 	in 	making 	its
preliminary 	determination 	on 	injury. 	In 	Section 	I, 	we 	argue 	that
the 	countervailing 	duty 	law 	should 	be 	applied 	to 	reduce
impediments 	to 	world 	trade 	and 	to 	preserve 	the 	benefits 	of
1 	The 	petition 	alleges 	that 	in 	addition 	to 	a 	stumpage 	fee
subsidy, 	there 	are 	a 	variety 	of 	other 	subsidies 	to 	the
Canadian 	timber 	industry. 	For 	example, 	petitioners 	allege
that 	the 	Canadian 	government 	subsidizes 	its 	timber 	industry
by 	paying 	for 	the 	reseeding 	of harvested 	timberlands.
Petitioners 	also 	allege 	that 	several 	transportation 	programs
and 	expenditures 	constitute 	subsidies 	to 	the 	Canadian 	timber
industry. 	The 	analysis 	in 	this 	brief 	is 	limited 	to 	the
alleged 	subsidy 	arising 	out 	of 	the 	Canadian 	stumpage 	fee
systems.

competition 	for 	United 	States 	consumers 	while 	protecting 	domestic
firms 	from 	unfair 	practices. 	In 	Section 	II, 	we 	argue 	that 	the
ITC 	should 	examine 	the 	causal 	link, 	if 	any, 	between 	an 	alleged
subsidy 	and 	injury 	to 	a 	domestic 	industry. 	If 	a 	domestic
industry's 	lost 	sales 	are 	not 	traceable 	to 	an 	alleged 	subsidy,
then 	no 	injury 	"by 	reason 	of" 	such 	imports 	should 	be 	found.
In 	Section 	III, 	we 	conclude 	on 	the 	basis 	of 	the 	analysis 	by
our 	Bureau 	of 	Economics 	of 	the 	effects 	of 	the 	Canadian 	stumpage
fee 	systems 	that, 	while 	the 	Canadian 	stumpage 	fee 	systems
increase 	the 	profits 	of 	Canadian 	lumber 	producers, 	they 	do 	not
increase 	the 	quantity 	of 	logs 	harvested 	in 	Canada 	or 	the 	quantity
of 	lumber 	products 	exported 	to 	the 	United 	States. 	Accordingly,
we 	conclude 	that 	the 	Canadian 	stumpage 	fee 	systems 	do 	not 	injure
a 	domestic 	industry.
ARGUMENT
I. 	A Major 	Purpose 	of 	the 	Countervailing 	Duty 	Law 	Under 	the
Trade 	Agreements 	Act 	of 	1979 	Is 	To 	Promote 	Free 	Trade 	to 	the
Benefit 	of 	United 	States 	Consumers 	and 	Businesses.
The 	first 	United 	States 	countervailing 	duty 	law 	was 	enacted
as 	part 	of 	a 	general 	tariff 	statute 	in 	1890. 2 Over 	the 	next
several 	decades, 	Congress 	modified 	the 	countervailing 	duty 	law
several 	times 3 	and 	supplemented 	it 	with 	antidumping 	laws 	in 	1916
2 	Tariff 	Act 	of 	1890, 	ch. 	1244, 	§ 237, 	26 	Stat. 	584 	(1890).
3 	Tariff 	Act 	of 	1894, 	ch. 	349. 	§ 182 	1/2, 	28 	Stat. 	521 	(1894):
Tariff 	Act 	of 	1897, 	ch. 	11, 	§ 	5, 	30 	Stat. 	205 	(1897): 	Tariff
Act 	of 	1909," 	ch. 	6, 	§ 	6, 	36 	Stat. 	85 	(1909): 	Tariff 	Act 	of
1922, 	ch. 	356, 	§ 	303, 	42 	Stat. 	935 	(l922).
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and 	1921 4 	and 	with 	an 	unfair 	practices 	provision 	of 	the 	tariff
law 	in 	1922. 5 The 	countervailing 	duty 	law 	was 	amended 	in 	1979,
when 	the 	Trade 	Agreements 	Act 	of 	1979 	("1979 	Act")6 	added 	the
"injury" 	test 	that 	the 	ITC 	is 	applying 	in 	this 	proceeding. 7 The
tests 	for 	injury 	under 	the 	countervailing 	duty 	law 	are 	derived
from 	those 	in 	the 	1921 	antidumping 	law, 	and 	Congress 	has 	stated
that 	it 	expects 	the 	ITC 	will 	construe 	injury 	the 	same 	way 	under
both 	1aws. 8 The 	Trade 	and 	Tariff 	Act 	of 	1984 9 further 	amended
the 	countervailing 	duty 	law, 	including 	the 	addition 	of 	a
provision 	that 	enumerated 	factors 	to 	be 	considered 	in 	determining
whether 	an 	industry 	in 	the 	United 	States 	is 	threatened 	with
material 	injury 	by 	reason 	of 	subsidized 	imports. 10
The 	history 	of 	their 	enactment 	suggests 	that 	the 	basic
purposes 	of 	these ·four 	tariff 	laws 	-- 	the 	countervailing 	duty
law, 	the 	two 	antidumping 	laws, 	and 	the 	unfair 	practices 	law 	--
are 	consistent 	with 	the 	basic 	purposes 	of 	the 	antitrust 	laws.
4 	15 	U.S.C. 	§§ 	71-77: 	Tariff 	Act 	of 	1921, 	ch. 	14, 	§ 201, 	42
Stat. 	11 	(1921).
5 	19 	U.S.C. 	§ 1337.
6 	See 	19 	U.S.C. 	§§ 	1671-1677g, 	2501 	et. 	~., 	Pub. 	L. 	No. 	96-
~ 93 	Stat. 	144 	(1979).
7 	19 	U.S.C. 	§ 	1671(b): 	see 	19 	U.S.C. 	§ 	1677(7). 	In 	1974,
Congress 	added 	an 	injury 	test 	for 	nondutiab1e 	imports. 	19
U.S.C. 	§ 1303(a)(2).
8 	See 	H.R. 	Rep. 	No. 	317, 	96th 	Cong., 	1st 	Sess. 	at 	45-46 	(1979)
-r'H.R. 	Rep. 	No. 	96-317"): 	S. 	Rep. 	No. 	249, 	96th 	Cong., 	1st
Sess. 	at 	57, 	87 	(1979) 	(liS. 	Rep. 	No. 	96-249").
9 	Pub. 	L. 	No. 	98-573, 	98 	Stat. 	2948 	(1984).
10 	19 	U.S.C. 	§ 	1677(7)(F).
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Both 	through 	these 	tariff 	provisions 	and 	through 	the 	antitrust
laws 	enacted 	during 	the 	same 	era, 	Congress 	sought 	to 	create 	a
legal 	environment 	that 	would 	foster 	an 	efficient 	allocation 	of
resources. 11 	Moreover, 	the 	legislative 	history 	of 	the 	tariff
laws 	demonstrates 	Congressional 	concern 	about 	foreign 	companies
unfairly 	expanding 	their 	sales 	in 	the 	United 	States 	at 	prices
that 	United 	States 	firms 	of 	equal 	or 	greater 	relative 	efficiency
could 	not 	match. 	That 	history 	does 	not 	show 	that 	Congress
intended 	the 	tariff 	laws 	to 	exclude 	from 	the 	United 	States 	market
those 	foreign 	firms 	that 	have 	a 	comparative 	advantage 	or 	are
relatively more 	efficient 	than 	United 	States 	firms.
11 	The 	first 	countervailing 	duty 	statute 	was 	passed 	in 	the 	same
year 	as 	the 	first 	federal 	antitrust 	law, 	the 	Sherman 	Act.
Congress 	passed 	the 	first 	antidumping 	statute, 	15 	U.S.C.
§ 	71-77, 	in 	1916, 	two 	years 	after 	passing 	the 	other 	two
major 	antitrus~ laws, 	the 	Clayton 	Act 	and 	the 	Federal 	Trade
Commission 	Act. 	The 	purpose 	of 	the 	1916 antidumping 	law 	was
to 	place 	foreign 	firms 	selling 	in 	the 	United 	States 	in 	the
same 	position 	"with 	reference 	to 	unfair 	competition" 	as
domestic 	firms. 	H.R. 	Rep. 	No. 	922, 	64th 	Cong., 	1st 	Sess. 	9-
10 	(1916). 	In 	1921, 	Congress 	passed 	another 	antidumping
law, 	Tariff 	Act 	of 	1921, 	Ch. 	14, 	§ 201, 	42 	Stat. 	11 	(1921):
H.R. 	Rep. 	No.1, 	67th 	Cong., 	1st 	Sess. 	23-24 	(1921). 	In
1922, 	Congress 	made 	minor 	changes 	to 	the 	countervailing 	duty
law 	and 	enacted 	legislation 	prohibiting 	imports 	associated
with 	unfair 	methods 	of 	competition. 	19 	U.S.C. 	§ 	1337.
Senator 	Smoot, 	one 	of 	the 	sponsors 	of 	the 	1922 	tariff
legislation, 	said 	that 	these 	provisions 	were 	an 	extension 	of
the 	existing 	antidumping 	laws 	and 	the 	existing
countervailing 	duty 	law 	in 	order 	to 	protect 	United 	States
firms 	against 	"unfair 	competition." 	62 	Congo 	Rec. 	5874
(1922). 	See 	S. 	Rep. 	No. 	595, 	67th 	Cong., 	2d 	Sess. 	2-3
(1922). 	See 	also 	the 	statements 	of 	Senator 	Danforth 	and
Senator 	Heinz 	in 	the 	debates 	on 	the 	Trade 	Agreements 	Act 	of
1979. 	125 	Congo 	Rec. 	S. 	10306, 	10317 	(daily 	ed. 	July 	23,
1979).
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The 	countervailing 	duty 	law 	is 	intended 	to 	eliminate 	the
harm 	resulting 	from 	"unfair" 	competition 	and 	to 	assure 	that
United 	States 	consumers 	realize 	the 	benefits 	of 	"fair"
competition. 	Thus, 	if 	the 	Canadian 	lumber 	industry 	competes
successfully 	in-the 	United 	States 	because 	the 	Canadian 	firms 	have
a 	comparative 	advantage 	or 	are 	more 	efficient, 	and 	not 	because 	of
government 	subsidy, 	then 	United 	States 	consumers 	should 	receive
the 	benefits 	of 	the 	heightened 	competition 	engendered 	by 	those
imports. 	12
Both 	the 	language 	and 	the 	legislative history 	of 	the 	1979
Act 	establish 	that 	Congress 	did 	not 	intend 	the 	countervailing
duty 	laws 	to 	be 	narrowly 	protectionist. 	Rather, 	the 	purposes 	of
the 	1979 Act 	are 	"to 	foster 	the 	growth 	and 	maintenance 	of 	an 	open
'world 	trading "system; 	to 	expand 	opportunities 	for 	the 	commerce 	of
the 	United 	States 	in 	international 	trade; 	and 	to 	improve 	the
rules 	of 	international 	trade 	and 	to provide 	for 	the 	enforcement
of 	such 	rules." 	19 	U.S.C. 	§ 	2502(2), 	(3), 	(4). 	See 	also 	S. 	Rep.
No. 	96-249, 	supra, 	at 	31 	and 	H.R. 	Rep. 	No. 	96-317, 	supra, 	at
38. 	In 	particular, 	Congress 	was 	concerned 	about 	"the 	use 	of
practices 	which 	can 	distort 	trade 	or 	create 	unfair 	competition 	or
12 	However, 	domestic 	producers 	may 	allege 	they 	are 	seriously
injured 	by 	an 	increase 	in 	fairly 	traded 	imports 	in 	section
201 	escape 	clause 	proceedings. 	Such 	allegations 	are 	not 	at
issue 	here.
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trade 	discrimination, 	such 	as 	subsidies 	. 	. 	• 	" 	H.R. 	Rep. 	No.
96-317, 	supra, 	at 	11.13 	Congress 	has 	sought 	through 	the
countervailing 	duty 	laws 	to 	discipline 	only 	those 	firms 	that 	are
selling 	in 	the 	United 	States 	market 	on 	the 	basis 	of 	an 	unfair
advantage 	conferred 	upon 	them by 	their 	government 	(or 	by 	other
sources). 	On 	the 	other 	hand, 	Congress 	intended 	United 	States
consumers 	to 	receive 	the 	substantial 	benefits 	that 	flow 	from
unrestricted 	access 	to 	foreign 	firms 	that 	compete 	in 	United
States 	markets 	on 	the 	basis 	of 	comparative 	advantage 	or 	relative
efficiency.
Countervailing 	duties 	can 	be 	imposed 	on 	subsidized 	imports
only 	if 	the 	ITC 	determines 	that 	there 	is 	material 	injury 	or 	the
threat 	of 	material 	injury 	to 	a 	domestic 	industry. 	Trade
Agreements 	Act 	of 	1979, 	§ 701(a)(2), 	19 U.S.C. 	§ 	1671(a)(2).
This 	injury 	standard 	does 	not 	indicate 	protectionist 	intent 	on
the 	part 	of 	Congress. 	To 	the 	contrary, 	the 	injury 	standard 	was
13 	In 	the 	congressional 	debates 	on 	the 	1979 Act, 	Senator 	Heinz
said 	that 	the 	countervailing 	duty 	and 	antidumping 	provisions
of 	the 	1979 Act 	are 	aimed 	at 	countries 	that 	do 	not 	rely 	on
"free 	market 	principles 	and 	••• 	on 	competition 	and 	the 	law
of 	comparative 	advantage 	as 	arbiters 	of 	the 	marketplace."
Congo 	Rec. 	510306 	(daily 	ed. 	July 	23, 	1979). 	In 	the 	same
debates 	Senator 	Danforth 	explained 	that 	the 	countervailing
duty 	and 	antidumping 	provisions 	were 	aimed 	at 	"adverse
distortions 	of 	free 	trade." 	Id. 	at 	510317. 	He 	said 	that
subsidized 	imports 	are 	not 	in-the 	best 	interest 	of 	the
United 	States 	consumer, 	since 	"the 	long 	run 	impact 	is 	likely
to 	be 	higher 	prices 	and 	greater 	profits 	for 	the 	foreign
producers 	once 	the 	domestic 	competition has 	been
crippled." 	Id. 	at 	510317.
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added 	by 	the 	1979 Act 	to 	narrow 	the 	application 	of 	tariffs 	under
the 	countervailing 	duty 	law. 14
Congress 	was 	mindful 	of 	the 	potentially adverse 	effects 	on
United 	States 	business 	of 	retaliatory 	tariffs 	imposed 	by 	foreign
-
governments 	on 	United 	States 	exports, 	and 	Congress 	intended 	the
1974 	Act 	"to 	expand 	opportunities 	for 	the 	commerce 	of 	the 	United
States 	'in 	international 	trade" 	by 	improving 	the 	rules 	of
international 	trade. 	19 	U.S.C. 	§ 	2502. 	In 	passing 	the 	1979 	Act,
Congress 	foresaw 	benefits 	to 	United 	States 	exports 	if 	the
agreements 	it 	implemented 	were 	fairly 	carried 	out:
These 	rules 	could 	be 	important 	in 	reducing 	the
number 	of 	foreign 	subsidy 	practices, 	and 	thus 	the
need 	for 	countervailing 	duties. 	Furthermore, 	if
vigorously 	enforced 	by 	the 	United 	States 	and
14 	Before 	1979, 	there 	was 	no 	requirement 	of 	injury 	to 	a
domestic 	industry 	in 	order 	to 	impose 	countervailing 	duties
on 	subsidized 	dutiable 	imports. 	In 	the 	Trade 	Act 	of 	1974,
Congress 	determined 	that 	"barriers 	to 	(and 	other 	distortions
of) 	international 	trade" 	were 	adversely 	affecting 	United
States 	exports 	and 	authorized 	the 	President 	to 	negotiate
international 	agreements 	to harmonize, 	reduce, 	or 	eliminate
these 	barriers 	and 	distortions. 	19 U.S.C. 	§ 2ll2(a). 	The
United 	States 	subsequently 	negotiated, 	as 	part 	of 	the 	Tokyo
Round 	of 	Multilateral 	Trade 	Negotiations, 	the 	Agreement 	on
Interpretation 	and 	Application 	of 	Articles 	VI, 	XVI, 	and
XXIII 	of 	the 	General 	Agreement 	on 	Tariffs 	and 	Trade
("Countervailing 	Duty Agreement"). 	As 	part 	of 	this
negotiation, 	the 	United 	States 	agreed 	to 	add 	to 	our
countervailing 	duty 	law 	the 	requirement 	that 	such 	duties
will 	be 	imposed 	only 	if 	a 	United 	States 	industry 	is 	injured
by 	reason 	of 	the 	subsidized 	imports, 	and 	the 	countervailing
duty 	provisions 	in 	the 	1979 Act 	had 	the 	specific 	purpose 	of
implementing 	"the 	international 	agreements 	relating 	to 	new
disciplines 	on 	trade 	distorting 	subsidies 	and 	dumping
practices 	and 	procedures 	for 	taking 	countervailing 	and
antidumping 	measures." 	H.R. 	Rep. 	No. 	96-317, 	supra, 	at 	2.
The 	requirement 	that 	an 	additional 	legal 	test 	be 	satisfied
prior 	to 	levying 	a 	countervailing 	duty 	obviously 	was
intended 	by 	Congress 	to 	make 	it 	more 	difficult 	for 	the
United 	States 	to 	impose 	countervailing 	duties.
-7-

I!
!
fairly 	carried 	out 	by 	all 	parties, 	these
provisions 	should 	expand 	the 	competitive
opportunities 	of 	u.s. 	exporters 	who 	currently 	face
subsidized 	competition 	in 	foreign 	markets.
S. 	Rep. 	96-249, 	supra, 	at 	38 	(emphasis 	added). 	Congress 	realized
in 	1979 	that, 	because 	of 	the 	precedential 	value 	of 	countervailing
duty 	decisions 	by 	this 	country, 	such 	decisions 	could 	themselves
have 	a 	significant 	impact 	on 	United 	States 	exports. 	If 	the 	ITC
finds 	that 	an 	action 	by a 	foreign 	government 	has 	led 	to 	injury 	in
the 	United 	States, 	and 	if 	comparable 	actions 	are 	regularly 	taken
in 	the 	United 	States, 	then 	our 	exports 	may be 	impaired 	because 	of
retaliatory 	countervailing 	duties, 	based 	on 	our 	own 	precedent.
This 	potential 	impairment 	is 	relevant 	in 	determining 	whether
Congress 	intended 	particular 	foreign 	practices 	to 	lead 	to 	the
imposition 	of 	countervailing 	duties.
In 	sum, 	we 	suggest 	that 	in 	administering 	the 	countervailing
duty 	law, 	the 	ITC 	should 	be 	guided 	by 	the 	legislative 	purpose 	of
the 	law: 	to 	reduce 	impediments 	to 	world 	trade 	while 	preserving
the 	benefits 	of 	competition 	for 	consumers 	and 	protecting 	domestic
firms 	from 	unfair 	practices.
II. 	The 	ITC 	Should 	Determine 	Whether 	the 	Alleged
Foreign 	Subsidy Actually 	Caused 	Any Material
Injury That 	May 	Be 	Found 	To 	Exist.
We 	suggest 	that 	the 	language 	of 	the 	Countervailing 	Duty
Agreement, 	the 	language 	of 	the 	1979 Act 	implementing 	the
Countervailing 	Duty Agreement, 	and 	the 	legislative history 	of 	the
1979 Act 	all 	require 	the 	ITC 	to 	apply 	a 	sensitive 	causation
test: 	countervailing 	duties 	should 	be 	imposed 	only 	if 	the
subsidy 	is 	determined 	by 	the 	ITC 	to 	be 	a 	cause 	of 	material 	injury
-8-

to 	a 	domestic 	industry.ls 	In 	the 	instant 	case, 	the 	ITC 	should
attribute 	to 	the 	alleged 	sUbsidy 	only 	the 	injury 	to 	the 	United
States 	lumber 	industry 	that 	results 	from 	the 	alleged 	subsidy.
Any harm 	to 	the 	domestic 	industry 	resulting 	from 	factors 	not
attributable 	to 	the 	Canadian 	stumpage 	systems 	should 	not 	be 	the
basis 	for 	a 	finding 	of 	injury 	within 	the 	meaning 	of 	the
countervailing 	duty 	statute.
A. 	The 	1979 	Act 	Is 	Consistent 	with 	the
Countervailing 	Duty Agreement's 	Requirement
To Consider 	the 	Effect 	of 	the 	Alleged 	Subsidy.
The 	United 	States 	statutory 	scheme 	concerning 	subsidies,
causation, 	and 	injury 	is 	in 	accord 	with 	the 	Countervailing 	Duty
Agreement,16 	negotiated 	as 	part 	of 	the 	Tokyo 	Round 	of
Multilateral 	Trade 	Negotiations. 	The 	article 	of 	the
Countervailing 	Duty 	Agreement 	governing 	"determination 	of 	injury"
provides, 	in 	pertinent 	part:
It 	must 	be 	demonstrated 	that 	the 	subsidized
imports 	are, 	through 	the 	effeets 	of 	the 	subsidy,
causing 	injury 	within 	the 	meaning 	of 	this
Agreement.
Countervailing 	Duty Agreement, 	Article 	6, 	Paragraph 	4 	(footnote
omitted) 	(emphasis 	added). 	Several 	other 	provisions 	of 	the
Countervailing 	Duty Agreement 	reinforce 	this 	provision. 	For
15 	As 	the 	petition 	recognizes 	at 	page 	99, 	there 	are 	those 	who
believe 	that 	a 	causal 	link 	must 	be 	established 	between 	an
unfair 	practice 	and 	injury.
16 	Reprinted 	in 	Agreements 	Reached 	in 	the 	Tokyo 	Round 	of 	the
Multilateral 	Trade 	Negotiations, 	H.R. 	Doc. 	No. 	153, 	96th
Cong., 	1st 	Sess., 	Pt. 	1 	(June 	19, 	1979).
-9-

I
II
I
I example, 	the 	preamble 	to 	the 	Agreement 	recognizes 	that 	"the
emphasis 	of 	this 	Agreement 	should 	be 	on 	the 	effects 	of
subsidies." 	Additionally, 	Article 	2, 	governing 	domestic
procedures 	for 	conducting 	investigations 	of 	alleged 	subsidies,
provides 	that 	"[a]n 	investigation 	shall 	be 	terminated 	when 	the
investigating 	authorities 	are 	satisfied 	either 	that 	no 	subsidy
exists 	or 	that 	the 	effect 	of 	the 	alleged 	subsidy 	on 	the 	industry
is 	not 	such 	as 	to 	cause 	injury." 	Id., 	Article 	2, 	Paragraph 	12.
The 	1979 Act 	implements 	the 	Countervailing 	Duty Agreement,
19 	U.S.C. 	§ 	2503, 	and 	adopts 	the 	requirement 	of 	a 	causal 	link
between 	subsidy 	and 	injury by 	expressly 	authorizing 	the 	lTC, 	in
examining 	an 	alleged 	threat 	of 	material 	injury, 	to 	consider 	"the
effects 	likely 	to 	be 	caused 	by 	the 	subsidy." 	Act 	at
§ 771(7)(E)(i), 	19 U.S.C. 	§ 	1677(7)(E)(i): 	19 	C.F.R. 	§ 	207.26(d)
(1981).17 	It 	follows 	that 	the 	ITC 	should 	consider 	"the 	effects
likely 	to 	be 	caused 	by 	the 	subsidy" 	not 	only 	when 	there 	is
alleged 	to 	be 	a 	threat 	of 	material 	injury, 	but 	also 	when 	material
injury 	is 	alleged 	to 	be 	actually 	present. 	The 	1979 	Act 	adopts 	a
causal 	link 	between 	a 	subsidy 	and 	alleged 	present 	injury by
requiring 	imposition 	of 	a 	countervailing 	duty 	only 	if 	the 	ITC
"determines 	that 	an 	industry 	in 	the 	United 	States 	(i) 	is
materially 	injured, 	or 	(ii) 	is 	threatened 	with 	material 	injury
• 	• 	. 	by 	reason 	of 	imports 	of 	[subsidized] 	merchandise 	or 	by
17 	Section 	771(7)(E)(i) 	is 	taken 	almost 	directly 	from 	the
Countervailing 	Duty 	Agreement, 	supra 	at 	Article 	6, 	para. 	1,
n. 	17, 	which 	authorizes 	the 	use 	of 	inferences 	when 	there 	is
no 	direct 	evidence 	because 	the 	actual 	injury 	is 	as 	yet 	only
threatened.
-10-

reason 	of 	sales 	(or 	the 	likelihood 	of 	sales) 	of 	[subsidized]
merchandise 	for 	importation." 	19 	U.S.C. 	§1671(a)(2).18
Examining 	the 	nature 	and 	likely 	effect 	of 	the 	subsidy 	is
especially 	appropriate 	when, 	as 	here, 	injury 	and 	threat 	of 	injury
both 	are 	alleged. 	Petition, 	at 	1, 	102.
Factors 	other 	than 	a 	subsidy 	can 	cause 	injury, 	and 	the
countervailing 	Duty 	Agreement 	and 	the 	lTC's 	regulations 	are 	in
accord 	that 	other 	factors 	should 	be 	considered. 	The 	Agreement
recognizes 	that 	if 	"other 	factors" 	are 	causing 	injury 	to 	a
domestic 	industry 	at 	the 	same 	time 	that 	the 	subsidy 	is 	causing
injury, 	the 	injuries 	caused 	by 	such 	"other 	factors" 	need 	not 	be
attributable 	to 	the 	subsidized 	imports. 	Countervailing 	Duty
Agreement, 	Article 	6, 	Paragraph 	4. 	The 	Agreement 	lists 	some 	of
these 	representative 	"other·factors." 	This 	list 	is 	incorporated
verbatim 	in 	the 	lTC's 	injury 	regulations, 	19 	C.F.R. 	§ 	207.27
(1981), 	in 	which 	the 	ITC 	states 	it 	will 	take 	into 	account
information 	concerning 	such 	other 	factors. 19 	In 	general, 	most 	of
18 	The 	1984 Act 	amended 	this 	section 	to 	make 	explicit 	that 	the
ITC 	may 	reach 	an 	affirmative 	injury 	determination 	if 	the
harm 	is 	caused 	by 	sales 	for 	future 	delivery 	or 	by 	future
sales. 	Trade 	and 	Tariff 	Act 	of 	1984, 	§ 	602(a)(1), 	19 U.S.C.
§ 	1671(a) (2).
19 	The 	"other 	factors" 	identified 	in 	the 	footnote 	to 	Article 	6,
Paragraph 	4 	of 	the 	Countervailing 	Duty 	Agreement, 	as 	listed
in 	the 	ITC 	injury 	regulations, 	19 	C.F.R. 	§ 	207.27 	(1981),
are 	"volume 	and 	prices 	of 	non-subsidized 	imports 	or 	imports
not 	sold 	at 	less 	than 	fair 	value, 	contraction 	in 	demand 	or
changes 	in 	patterns 	of 	consumption, 	trade 	restrictive
practices 	of 	and 	competition 	between 	the 	foreign 	and
domestic 	producers, 	developments 	in 	technology, 	and 	the
export 	performance 	and 	productivity 	of 	the 	domestic
industry."
-11-

the 	ITC 	regulations 	implementing 	the 	injury 	requirement 	are 	the
same 	as 	the 	language 	of 	the 	Countervailing 	Duty 	Agreement. 20
The 	statutory 	language 	on 	causation 	and 	actual 	injury 	tracks
the 	language 	of 	the 	Countervailing 	Duty Agreement, 	although 	it
does 	not 	repeat 	verbatim 	the 	Agreement's 	language. 	Nevertheless,
the 	statutory 	language 	on 	injury 	supports 	an 	interpretation 	that
is 	consistent 	with 	the 	language 	of 	the 	Countervailing 	Duty
Agreement, 	and 	the 	ITC 	should 	employ 	an 	interpretation 	of 	the
statute 	that 	gives 	recognition 	to 	this 	congruity.21 	It 	is 	well-
settled 	that 	when 	a 	treaty 	and 	statute 	"relate 	to 	the 	same
subject, 	the 	courts 	will 	always 	endeavor 	to 	construe 	them 	so 	as
to 	give 	effect 	to 	both, 	if 	that 	can be 	done 	without 	violating 	the
language 	of 	either." 	United 	States 	v. 	Lee 	Yen 	Tal, 	185 	U.S. 	213,
221 	(1902): 	see 	John 	T. 	Bill 	Co. 	v. 	United 	States, 	104 	F.2d 	67,
20 	In 	the 	"Factors 	considered 	in 	determination 	of 	material
injury," 	19 C.F.R. 	§ 	207.26 	(1981), 	section 	(a) 	is 	taken
directly 	from 	Article 	6, 	Paragraph 	1 	of 	the 	Tokyo 	Agreement:
sections 	(b)(l) 	and 	(b)(2) 	from 	Paragraph 	2: 	sections 	(b)(3)
and 	(c)(2) 	from 	Paragraph 	3: 	and 	part 	of 	section 	(d) 	from
Paragraph 	1 	(footnote).
21 	While 	section 	3(a} 	of 	the 	1979 Act, 	19 U.S.C. 	§ 2504(a),
states 	that 	the 	1979 Act 	prevails 	if 	there 	is 	a 	"conflict"
between 	the 	statute 	and 	the 	Countervailing 	Duty Agreement,
Congress 	did 	not 	believe 	that 	there 	was 	such 	a 	conflict.
S. 	Rep. 	No. 	249, 	96th 	Cong., 	1st 	Sess. 	(1979) 	at 	36. 	The
Senate 	Report, 	in 	summarizing 	the 	Countervailing 	Duty
Agreement, 	states 	that 	the 	Agreement 	provides 	for 	"a 	'causal
link' 	between 	the 	subsidization 	••• 	and 	the 	injury
(Article 	2 	of 	the 	[Countervailing 	Duty] 	Agreement)." 	Id. 	at
41. 	The 	Senate 	Report 	goes 	on 	to 	say 	that 	the 	1979 	Ac~
"would 	establish 	the 	conditions 	for 	imposition 	of
countervailing 	duties 	consistent 	with 	the 	[Countervailing
Duty] 	Agreement." 	Id. 	at 	44. 	In 	enacting 	section 	3(a) 	of
the 	1979 Act, 	Congress 	was 	concerned 	that 	there 	might 	be 	a
conflict 	in 	the 	future 	if 	the 	Countervailing 	Duty Agreement
was 	amended. 	S. 	Rep. 	No. 	249, 	at 	36.
-12-

74 	(C.C.P.A. 	1939) 	(construing' 	371 	of 	the 	Tariff 	Act 	of 	1930 	so
as 	to 	be 	consistent 	with 	Article 	VII 	of 	the 	1925 	Treaty 	between
the 	United 	States 	and 	Germany).
In 	sum, 	the 	language 	of 	the 	Countervailing 	Duty Agreement
and 	the 	1979 Act 	support 	an 	interpretation 	that 	the 	ITC 	should
examine 	the 	causal 	link 	between 	an 	alleged 	subsidy 	and 	injury 	to
a 	domestic 	industry.
B. 	The 	Legislative 	History 	of 	the 	1979 Act
Indicates 	that 	the 	ITC 	Should 	Examine
the 	Effects 	of 	the 	Alleged 	Subsidy.
The 	legislative history of 	the 	1979 Act 22 also 	indicates
that 	Congress 	intended 	the 	ITC 	to 	determine 	whether 	an 	alleged
sUbsidy 	is 	the 	actual 	cause 	of 	injury 	to 	a 	domestic 	industry.23
22 	Title 	VI 	of 	the 	Trade 	and 	Tariff 	Act 	of 	1984 did 	not 	amend
the 	portions 	of 	the 	countervailing 	duty 	law 	that 	are 	at
issue 	here.
23 	The 	legislative 	history may 	be 	used 	to 	construe 	a 	statutory
phrase 	even 	when 	its 	meaning 	appears 	to 	be 	"clear."
Train 	v. 	Colorado 	Public 	Interest 	Research 	Group, 	Inc., 	426
U.S. 	1, 	10 	(1976) 	(legislative history 	of 	Federal 	Water
Pollution 	Control 	Act 	("FWPCA") 	indicates 	that 	the
Environmental 	Protection 	Agency 	("EPA") 	does 	not 	regulate
radioactive 	nuclear 	waste 	sUbject 	to 	regulation 	by 	the
Atomic 	Energy 	Commission 	even 	though 	the 	FWPCA says 	the 	EPA
regulates 	"radioactive 	materials")~ Philko 	Aviation 	Inc. 	v.
Shacket, 	462 	U.S. 	406, 	409-10 	(1983) 	(legislative history 	of
§ 	S03{c) 	of 	the 	Federal 	Aviation 	Act 	of 	1958 	is 	a 	better
indicator 	of 	the 	meaning 	of 	the 	statute 	than 	is 	the 	literal
language 	of 	the 	statute)~ A1 	Tech 	Speciality 	Steel 	Corp. 	v.
United 	States, 	6 	ITRD 	1161, 	1167-69 	(Fed. 	Cir. 	1984)
(legislative 	history of 	1979 	Act 	indicates 	that
"investigation" 	in 	section 	776(a) 	of 	the 	1979 Act, 	U.S.C.
§ 	1677e{a), 	includes 	a 	"periodic 	review" 	under 	section 	751
of 	the 	1979 	Act, 	19 	U.S.C. 	§ 	1675, 	even 	though 	the
Department's 	regulations 	consider 	a 	"periodic 	review" 	to 	be
a 	"proceeding" 	rather 	than 	an 	"investigation").
-13-

As 	discussed 	below, 	the 	drafters 	of 	the 	bill, 	in 	explaining 	its
operation, 	frequently 	used 	the 	statutory 	phrase 	"injury 	..• 	by
reason 	of 	imports" 	as 	a 	synonym 	for 	the 	phrase 	"injury 	through
the 	effects 	of 	a 	subsidy."
The 	President, 	in 	1979, 	submitted 	to 	Congress 	both 	a 	trade
bill 	and 	Statements 	of 	Administrative 	Action, 	which 	described
"the 	manner 	in 	which 	the 	proposed 	legislation 	is 	to 	be
administered." 	Statements 	of 	Administrative 	Action, 	96th 	Cong.,
1st 	Sess., 	House 	Document 	No. 	96-153, 	Part 	II 	(June 	19, 	1979)
[hereinafter 	"Statements"], 	at 	389. 	In 	its 	discussion 	of 	the
"determination 	of 	material 	injury," 	the 	Statements 	explained:
It 	is 	expected 	that 	in 	its 	investigation 	the
Commission 	will 	continue 	to 	focus 	on 	the
conditions 	of 	trade 	and 	development 	within 	the
industry 	concerned. 	For 	one 	industry, 	an
apparently 	small 	volume 	of 	imports 	may 	have 	a
significant 	impact 	on 	the 	market: 	for 	another 	the
same 	volume 	might 	not 	be 	significant. 	Similarly,
for 	one 	type 	of 	eroduct, 	price 	ma~ be 	the 	key
factor 	in 	determIning 	sales 	elastIcity, 	and 	a
small 	price 	differential 	resulting 	from 	the 	amount
of 	the 	subsidy 	or 	the 	margin 	of 	dumping 	can 	be
decisive: 	in 	others 	the 	size 	of 	the 	margin 	may 	be
of 	lesser 	significance.
The 	petitioner 	must 	demonstrate, 	and 	the
Commission 	must 	satisfy 	itself 	that, 	in 	light 	of
all 	the 	information 	presented, 	there 	is 	the
requisite 	causal 	link 	between 	the 	subsidization 	or
dumping 	and 	material 	injury.
-14-

Statements, 	at 	434-35 	(emphasis 	added). 	Congress 	approved 	these
Statements 	submitted 	to 	it 	by 	the 	President. 	Trade 	Agreements
Act 	of 	1979, 	§ 	2(a), 	19 	U.S.C. 	§ 	2503(a).
Both 	the 	House 	and 	Senate 	reports 	covering 	the 	1979 	Act
indicate 	that 	Congress 	expected 	the 	ITC 	to 	determine 	the 	effects
of 	a 	sUbsidy. 	The 	Senate 	report 	notes 	that 	in 	determining
whether 	injury 	is 	"by 	reason 	of" 	subsidized 	imports, 	the 	ITC
considers, 	inter 	alia, 	"how 	the 	effects 	of 	the 	[subsidy] 	relate
to 	the 	injury." 	S. 	Rep. 	No. 	249, 	96th 	Cong., 	1st 	Sess. 	(1979),
at 	57. 	The 	Senate 	Report 	elaborates 	on 	this 	point 	as 	follows:
It 	is 	expected 	that 	in 	its 	investigation 	the
Commission 	will 	continue 	to 	focus 	on 	the
conditions 	of 	trade, 	competition, 	and
development 	regarding 	the 	industry
concerned. 	For 	one 	industry, 	an 	apparently
small 	volume 	of 	imports 	may have 	a
significant 	impact 	on 	the 	market: 	for
another, 	the 	same 	volume 	might 	not 	be
significant. 	Similarly, 	for 	one 	type 	of
product, 	price 	may 	be 	the 	key 	factor 	in
making 	a 	decision 	as 	to 	which 	product 	to
purchase 	and 	a 	small 	price 	differential
resulting -from 	the 	amount 	of 	the 	subsidy 	or
the 	margin 	of 	dumping 	can 	be 	decisive: 	for
others, 	the 	size 	of 	the 	differential 	may 	be
of 	lesser 	significance.
-15-

Id. 	at 	88 	(emphasis 	added). 	The 	House 	of 	Representatives 	Report
contains 	nearly 	identical 	language. 24
Accordingly, 	the 	legislative history 	of 	the 	1979 	Act
supports 	the 	view 	that 	the 	ITC 	should 	evaluate 	the 	effect 	of 	an
alleged 	sUbsidy 	on 	a 	domestic 	industry 	in 	order 	to 	properly
determine 	whether 	the 	domestic 	industry 	is 	being 	injured 	or 	has
been 	injured 	within 	the 	meaning 	of 	the 	statute.
In 	sum, 	the 	statutory 	language 	and 	legislative history 	of
the 	1979 Act 	are 	consistent 	with 	the 	language 	of 	the
Countervailing 	Duty 	Agreement 	that 	the 	ITC 	should 	examine 	"the
effects 	of 	the 	subsidy." 	We 	turn 	now 	to 	an 	examination 	of 	the
effects 	of 	the 	major 	subsidy 	alleged 	in 	the 	petition.
24 	It 	is 	expected 	that 	in 	its 	investigation 	the
ITC 	will 	continue 	to 	focus 	on 	the 	conditions
of 	trade 	and 	development 	within 	the 	industry
concerned. 	For 	one 	industry, 	an 	apparently
small 	volume 	of 	imports 	may have 	a
significant 	impact 	on 	the 	market: 	for 	another
the 	same 	volume 	might 	not 	be 	significant.
Similarly, 	for 	one 	type 	of 	product, 	price 	may
be 	the 	key 	factor 	in determining 	the 	amount
of 	sales 	elasticity, 	and 	a 	small 	price
differential 	resulting 	from 	the 	amount 	of 	the
subsidy 	or 	the 	margin 	of 	dumping 	can 	be
decisive: 	in 	others 	the 	size 	of 	the 	margin
may 	be 	of 	lesser 	significance.
H.R. 	Rep. 	No. 	317, 	96th 	Cong., 	1st 	Sess. 	(1979),
at 	46 	(emphasis 	added).
-16-

III. 	The 	Absence 	of 	an 	Auction 	for 	Stumpage 	Rights
Is 	Likely 	To 	Have 	No 	Effect 	on 	the 	Price 	or
Quantity 	of 	Exports 	of 	Softwood 	Lumber
Products 	to 	the 	United 	States.
Economic 	analysis 	suggests 	that 	our 	domestic 	lumber 	industry
is 	not 	injured 	by Canadian 	stumpage 	fees. 25 This 	conclusion
follows 	from 	a 	sequence 	of 	four 	observations: 	(1) 	A domestic
industry 	can 	be 	injured 	only 	if 	the 	alleged 	subsidies 	increase
the 	quantity 	(and 	decrease 	the 	price) 	of 	a 	commodity 	imported 	in
competition 	with 	the 	domestic 	output. 	(2) 	Here, 	however, 	the
quantity 	of 	Canadian 	timber 	put 	up 	for 	harvest 	each 	year 	on
public 	lands 	is 	set 	by 	a 	government 	decision, 	just 	as 	it 	is 	in
the 	United 	States. 	It 	is 	not 	determined 	by market 	forces 	and,
therefore, 	it 	does 	not 	depend 	upon 	the 	amount 	of 	timber 	that
might 	be 	profitably 	produced 	at 	a 	particular 	stumpage 	fee.
Consequently, 	a 	low 	fee 	cannot 	increase 	the 	quantity of 	timber
ultimately produced. 	(3) 	A low 	stumpage 	fee 	may 	merely 	increase
25 	The 	United 	States 	timber 	industry 	filed 	a 	countervailing
duty 	petition 	in 	October 	1982 	that 	is 	similar 	to 	the 	instant
petition 	in 	many 	respects. 	In 	both 	petitions, 	the 	major
allegation 	is 	that 	Canadian 	lumber 	producers 	are 	being
subsidized 	by 	the 	methods 	used 	by 	the 	Canadian 	national 	and
provincial 	governments 	to 	allocate 	and 	charge 	for 	the 	rights
to harvest 	timber. 	In 	early 	1983, 	Dr. 	David 	Tarr 	of 	the
Federal 	Trade 	Commission 	("FTC") 	staff 	conducted 	an 	economic
analysis 	of 	this 	allegation. 	The 	results 	are 	contained 	in 	a
brief 	that 	the 	FTC 	filed 	with 	the 	Department 	of 	Commerce 	on
April 	7, 	1983, 	in 	connection 	with 	its 	investigation 	of 	the
earlier 	petition. 	Prehearing 	Brief 	by 	the 	Federal 	Trade
Commission before 	the 	International 	Trade 	Administration,
Department 	of 	Commerce, 	Certain 	Softwood 	Lumber 	Products
from 	Canada, 	Countervailing 	Duty 	Proceeding, 	April 	7, 	1983
(hereinafter 	"1983 	FTC 	brief"). 	That 	analysis 	is 	reproduced
in 	the 	appendix 	of 	this 	brief. 	The 	current 	petition 	does
not 	allege 	that 	the 	Canadian 	stumpage 	fee 	system 	operates
differently 	today 	than 	it 	did 	in 	1983.
-17-

the 	profits 	of 	Canadian 	logging 	companies, 	because 	their 	total
costs 	are 	lower 	while 	the 	market 	value 	of 	their 	timber 	is
unchanged. 	Those 	companies 	cannot 	increase 	production, 	however,
because 	the 	Canadian 	national 	and 	provincial 	governments, 	not 	the
loggers, 	control 	the 	rate 	at 	which 	timber 	may be harvested. 	(4)
This 	situation 	is, 	therefore, 	quite 	different 	from 	an 	ordinary
sUbsidy 	because 	it 	does 	not 	increase 	production 	and hence 	does
not 	increase 	exports 	to 	the 	United 	States.
For 	this 	set 	of 	reasons 	we 	suggest 	that 	the 	domestic 	lumber
industry has 	not 	been 	injured, 	and 	that 	countervailing 	duties
would 	not 	be 	appropriate 	here. 	These 	four 	considerations 	will 	be
discussed 	in 	sequence.
A. 	Only 	Increased 	Imports 	Will 	Injure
an 	Industry 	in 	the 	United 	States.
In 	evaluating 	an 	alleged 	subsidy, 	it 	is 	important 	to
recognize 	that 	a 	United 	States 	industry 	can be 	injured 	only 	if
the 	alleged 	subsidy 	increases 	the 	quantity 	of 	imports 	coming 	into
the 	United 	States. 	·If 	the 	sUbsidy 	does 	not 	increase 	the 	supply
of 	imports 	at 	any 	particular 	price, 	then 	the 	subsidy 	will 	not
cause 	the 	price 	of 	the 	product 	to be 	lower 	than 	it 	would
-18-

otherwise have 	been. 26 If 	the 	price 	of 	the 	domestic 	product 	does
not 	fall 	because 	of 	the 	alleged 	subsidy, 	then 	the 	alleged 	subsidy
does 	not 	cause 	the 	output 	of 	the 	domestic 	industry 	to 	decline.
This, 	in 	turn, 	would 	mean 	that 	all 	other 	measures 	of 	industry
well-being, 	such 	as 	employment 	and 	profits, 	will -not 	be 	adversely
affected 	by 	the 	alleged 	subsidy 	and 	any 	observed 	deterioration 	in
the 	domestic 	industry's 	condition 	must 	be 	due 	to 	factors 	other
than 	the 	alleged 	sUbsidy. 	Thus, 	in 	determining 	whether 	the
alleged 	subsidy has 	caused 	injury 	to 	a 	domestic 	industry, 	the 	ITC
should 	consider 	whether 	the 	alleged 	sUbsidy has 	increased 	the
quantity 	of 	the 	good 	being 	imported 	into 	the 	United 	States.
B. 	The 	Stumpage 	Fee 	Does 	Not 	Increase 	Canadian 	Production.
Canadian 	stumpage 	fee 	systems 	do 	not 	result 	in 	an 	increase
in 	the 	quantity 	of 	Canadian 	lumber 	imported 	into 	the 	United
States 	because 	the 	stumpage 	fee 	systems 	do 	not 	lead 	to 	an
increase 	in 	the 	quantity 	of 	logs 	harvested 	in 	Canada. 	In
general, 	the 	quantity 	of 	logs 	harvested 	under 	the 	current
26 	When 	the 	imported 	and 	domestic 	products 	are·homogeneous,
they 	will 	sell 	in 	the 	domestic 	market 	at 	a 	single 	price
determined 	by 	total 	supply 	(imports 	plus 	domestic 	output)
and 	domestic 	demand. 	Domestic 	supply 	and 	domestic 	demand
are 	not 	affected 	by 	a 	foreign 	sUbsidy. 	Therefore, 	if 	the
supply 	of 	imports 	is 	not 	increased, 	the 	domestic 	price 	must
be 	unchanged. 	If 	the 	products 	are 	non-homogeneous
substitutes, 	it 	will 	still 	be 	true 	that 	the 	equilibrium
price 	of 	the 	domestic 	product 	will 	not 	be 	reduced 	unless 	the
supply of 	the 	import 	is 	increased 	as 	a 	result 	of 	the 	alleged
SUbsidy. 	In 	this 	case, 	the 	domestic 	industry 	can be 	injured
only 	if 	the 	price 	of 	the 	imported 	product 	declines, 	which 	in
turn 	reduces 	the 	demand 	for 	the 	domestically 	produced
good. 	However, 	the 	price 	of 	imports 	will 	fall 	only 	if 	the
supply 	of 	imports 	is 	increased.
-19-

Canadian 	stumpage 	fee 	systems 	is 	the 	same 	as 	it 	would 	be 	if 	a
competitive 	auction 	system 	like 	that 	used 	by 	the 	United 	States
Forest 	Service 	("USFS") 	were 	employed. 27
Although 	the 	price 	charged 	for 	the 	right 	to 	harvest 	a 	tract
of 	forest 	land 	is 	lower 	under-the 	Canadian 	stumpage 	fee 	systems,
a 	Canadian 	logger's 	ability 	to 	harvest 	more 	land 	is 	limited 	by
the 	supply 	made 	available 	by 	the 	Canadian 	governments. 	Because
the 	amount 	of 	land 	made 	available 	by 	the 	Canadian 	governments 	is
determined 	without 	regard 	to 	price, 	the 	number 	of 	trees 	cut 	is
independent 	of 	the 	price 	paid 	for 	pUblic 	timberland. 	A price
lower 	than 	market 	value 	will 	not 	result 	in 	additional 	harvesting
because 	of 	the 	~overnmental limitations 	on 	the 	supply 	of 	timber
land 	made 	available.
If 	the 	national 	and 	provincial 	governments 	of. 	Canada 	were
willing 	to 	make 	as 	much 	land 	available 	for 	cutting 	at 	a 	constant
price 	as 	logging 	companies 	wanted 	to harvest, 	then 	lower 	stumpage
fees 	would 	lead 	to 	additional 	harvesting. 	The 	Canadian
governments, 	however, 	determine 	the 	amount 	of 	land 	to 	be
harvested 	and 	then 	use 	the 	Canadian 	stumpage 	fee 	systems 	to
27 	For 	reasons 	discussed 	in 	more 	detail 	in 	footnote 	31 	below,
the 	quantity 	of 	logs 	harvested 	in 	Canada 	might 	increase 	if
the 	Canadian 	governments 	were 	to 	adopt 	a 	system 	closer 	to
that 	used 	by 	the 	USFS.
-20-

allocate 	the 	land 	and 	to 	collect 	stumpage 	fees. 28 	This
governmental 	limitation 	on 	the 	available 	land 	for 	timber
harvesting 	is 	not 	unlike 	the 	process 	in 	the 	United 	States. 29
Here 	the 	USFS 	determines 	what 	land 	should 	be 	cut 	and 	then 	holds
competitive 	auctions 	to 	allocate 	the 	stumpage 	rights 	and 	to 	-
determine 	the 	stumpage 	fees. 30 Under 	either 	system, 	because 	the
28 	If 	the 	Canadian 	loggers 	could 	get 	as 	much 	timber 	land 	as
they 	desired 	at 	a 	constant 	price, 	they 	would 	not 	be 	willing
to 	purchase 	other 	timber 	at 	prices 	that 	exceed 	the
government 	rate. 	However, 	petitioners 	cite 	evidence 	that
Canadian 	mills 	located 	in 	Quebec 	purchase 	stumpage 	in Maine
for 	several 	times 	the 	price 	of 	government 	stumpage 	in
Quebec. 	Similarly 	they 	cite 	claims 	that 	stumpage 	on 	private
lands 	in 	British 	Columbia 	sells 	for 	considerably more 	than
the 	price 	of 	provincial 	stumpage. 	See 	Petition, 	at 	63-65.
Further, 	it 	appears 	that 	from 	an 	economic 	vantage 	point, 	the
Canadian 	governments 	have 	allocated 	too 	little, 	rather 	than
too 	much, 	of 	Canada's 	virgin 	forests 	for 	harvesting. 	See
Western 	Transition 	(Economic 	Council 	on 	Canada, 	1984),~·
48-51 	(hereinafter 	"Western 	Transition").
29 	As 	Ken 	Drushka 	states 	in 	chapter 	5 	of 	his 	book 	Stumped,
which 	is 	included 	as 	Exhibit 	8 	of 	the 	Petition, 	"our 	forests
both 	in 	B.C. 	and 	the 	U.S. 	are 	administered 	by 	the 	name 	of
'even-flow 	sustained 	yield.' 	Sustained 	yield 	policies
further 	compromise 	the 	free 	market. 	Restricting 	yearly
harvests 	to 	an 	allowable 	cut 	in 	a 	particular 	sustained 	yield
unit 	means 	that 	there 	is 	a 	point 	above 	which 	the 	supply
cannot 	be 	increased 	no 	matter 	what 	price 	buyers 	are 	willing
to 	pay." 	(As 	quoted 	in 	the 	Congressional 	Record
(October 	10, 	1985, 	p. 	513031, 	column 	2). 	See 	also Western
Transition, 	at 	47-49.
30 	We 	do 	not 	address 	the 	issue 	of how 	the 	United 	States 	or 	the
Canadian 	governments 	determine 	the 	quantity 	of 	timber 	land
to 	make 	available 	for 	harvesting. 	Of 	course, 	Canadian
government 	decisions 	concerning 	the 	quantity of 	timber 	to 	be
cut 	can 	affect 	the 	price 	of 	lumber 	imported 	from 	Canada 	and
therefore 	the 	well-being 	of 	the 	United 	States 	lumber
industry. 	However, 	as 	we 	understand 	petitioners'
allegations, 	they 	are 	claiming 	that 	the 	subsidy 	arises 	only
-21-

land 	to 	be 	harvested 	is 	determined 	by 	an 	administrative 	process,
the 	quantity 	will 	not 	vary 	with 	the 	system 	used 	to 	allocate 	the
lands 	to 	specific 	purchasers 	or 	with 	the 	price 	paid 	under 	that
system. 31 All 	of 	the 	land 	made 	available 	will 	be harvested 	under
30 	(footnote 	continued)
because 	the 	Canadians 	do 	not 	hold 	a 	competitive 	auction 	or
otherwise 	charge 	a 	competitively-determined 	price 	for 	the
right 	to 	cut 	the 	land 	that 	they have 	decided 	to 	make
available. 	The 	petition 	does 	not 	argue 	that 	the 	Canadians
subsidize 	their 	lumber 	industry by 	the 	quantity of 	land 	they
make 	available 	for 	harvesting.
31 	Indeed, 	there 	are 	three 	reasons 	for 	believing 	that 	the
Canadian 	stumpage 	fee 	systems 	actually 	may 	lead 	to 	fewer
logs 	being harvested 	and 	exported 	to 	the 	United 	States 	than
would 	be 	the 	case 	under 	a 	competitive 	auction 	system.
First, 	with 	some 	versions 	of 	the 	Canadian 	stumpage 	fee
systems, 	the 	government 	establishes 	a 	fixed 	fee 	for
harvesting 	a 	tract 	rather 	than having 	a 	fee 	that 	depends 	on
the 	costs 	of 	harvesting 	the 	tract 	and 	the 	quality 	of 	the
timber 	there. 	In 	such 	a 	case 	the 	government 	may 	set 	the
stumpage 	fee 	too high 	and 	impose 	a 	fixed 	fee 	that 	exceeds
the 	profit 	that 	could 	be 	earned 	by harvesting 	the 	tract.
Such 	tracts 	will 	not 	be 	cut 	but 	will 	remain 	standing. 	With
a 	competitive 	auction 	system, 	on 	the 	other 	hand, 	some 	firm
would 	enter 	a 	bid 	which 	was 	lower 	than 	the 	fee 	required
under 	the 	Canadian 	system but 	which 	would 	make harvesting
that 	tract 	profitable. 	Thus, 	under 	a 	competitive 	auction
system, 	the 	tract 	would 	be 	cut.
Second, 	the 	method 	used 	to 	charge 	loggers 	the 	appraised
value 	of 	stumpage 	in 	British 	Columbia 	may 	also 	reduce 	the
quantity 	of 	trees 	cut 	vis-a-vis 	a 	competitive 	auction, 	even
if 	the 	appraised 	value 	were 	equivalent 	to 	the 	auction
value. 	In 	a 	manner 	methodologically 	similar 	to 	the 	United
States 	system, 	British 	Columbia 	determines 	the 	appraised
value 	of 	a 	tract. 	If, 	as 	occurs 	in 	the 	United 	States
system, 	the 	logger 	paid 	that 	value 	to 	the 	government 	in 	a
lump 	sum, 	all 	trees 	for 	which 	the 	price 	from 	the 	sale 	of 	the
logs 	exceeded 	the 	cutting 	and 	hauling 	costs 	would 	be
-22-

either 	system. 32 	Thus, 	the 	total 	quantity 	of 	logs 	going 	to
market 	in 	any 	period 	is 	unaffected 	by 	the 	stumpage 	fee 	system
employed.
31 	(footnote 	continued)
harvested. 	Instead 	of 	the 	lump 	sum 	charge, 	however, 	British
Columbia 	charges 	loggers 	the 	average 	appraised 	value 	of
stumpage 	for 	each 	particular 	species 	on 	the 	tract, 	on 	a 	per-
log 	basis. 	As 	a 	result, 	some 	trees 	for 	which 	the 	price 	of
the 	logs 	would 	exceed 	the 	costs 	of 	cutting 	and hauling, 	and
which 	therefore 	would 	be 	cut 	under 	a 	lump 	sum 	scheme, 	will
not 	be 	cut 	if 	the 	average 	appraised 	value 	is 	greater 	than
the 	difference 	between 	the 	log 	price 	and 	the 	cutting 	and
hauling 	costs. 	See 	Western 	Transition, 	at 	55.
Third, 	Canadian 	stumpage 	fee 	systems 	may 	be 	more 	likely 	than
an 	auction 	to 	allocate 	harvesting 	rights 	to 	inefficient
firms. 	It 	may 	not 	be 	profitable 	for 	the 	firm 	with 	the
harvesting 	rights 	to 	cut 	a 	tract, 	although 	a 	more 	efficient
firm 	would 	find 	harvesting 	profitable. 	Again, 	this 	can
result 	in 	fewer 	trees 	sent 	to 	market.
We 	also 	note 	that 	the 	USFS 	establishes 	a 	minimum 	price 	in
the 	bidding 	for 	United 	States 	lands. 	Establishing 	such 	a
minimum price 	may mean 	that 	the 	harvesting 	rights 	to 	some
tracts 	are 	not 	awarded 	if 	none 	of 	the 	bids 	is 	high 	enough.
The 	purpose 	of 	the 	minimum price, 	however, 	appears 	to 	be 	to
insure 	that 	the 	government 	receives 	the 	value 	of 	the 	timber
being 	auctioned 	and 	not 	to 	limit 	the 	quantity 	of 	timber
auctioned. 	If 	the 	minimum bid 	values 	are 	set 	correctly,
there 	would 	always 	be 	bids 	that 	meet 	the 	minimum 	and 	all 	the
land 	made 	available 	would 	be 	harvested.
If 	the 	USFS 	systematically overstated 	the 	value 	of
timberlands, 	the 	quantity of 	land harvested 	could 	be
reduced. 	Such 	a 	situation 	would 	represent 	a 	distortion 	in
the 	United 	States 	system.
32 	In 	order 	for 	this 	to be 	strictly 	true, 	it 	is 	necessary 	that,
in 	addition 	to 	avoiding 	the 	problems 	discussed 	in 	footnote
31, 	the 	revenue 	that 	can be 	realized 	by 	selling 	the 	logs 	on
any 	tract 	must 	be 	greater 	than 	the 	costs 	of 	building 	any
roads 	needed 	to 	gain 	access 	to 	the 	timber, 	the 	costs 	of
-23-

C. 	The 	Effect 	of 	the 	Low 	Stumpage
Fee 	Is 	Merely 	To 	Increase 	the
Profits 	of 	Canadian 	Loggers.
If 	the 	low 	stumpage 	fee 	does 	not 	influence 	the 	quantity 	of
logs 	produced, 	what 	effects 	does 	it 	have? 	The 	answer 	is 	that 	it
merely 	reduces 	the 	total 	costs 	and 	increases 	the 	profits 	of
Canadian 	loggers. 	Economic 	theory 	suggests 	that 	Canadian
loggers, 	like 	their 	United 	States 	counterparts, 	seek 	to 	maximize
their 	profits. 	Therefore, 	the 	prices 	that 	they 	charge 	for 	logs
are 	determined 	not 	by 	what 	the 	logs 	cost 	to 	cut 	but, 	given 	a
fixed 	quantity 	of 	logs, 	by 	the 	demand 	for 	logs. 	The 	mere 	fact
that 	loggers 	are 	permitted 	to harvest 	a 	tract 	of 	timber 	land 	at
an 	advantageous 	price 	does 	not 	affect 	the 	market 	price 	at 	which
those 	logs 	are 	later 	resold. 33
32 	(footnote 	continued)
actually 	cutting 	the 	trees, 	the 	costs 	of 	transporting 	the
logs 	to 	market, 	and 	the 	cost 	of 	reforesting 	the 	area, 	if
that 	is 	part 	of 	the 	obligation 	of 	the 	logging 	firm. 	If, 	for
some 	tracts 	made 	available 	by 	the 	government, 	the 	costs 	of
logging 	exceed 	the 	revenues 	that 	can be 	earned 	by 	selling
the 	timber 	on 	the 	tract, 	these 	tracts 	will 	not 	be 	harvested
under 	either 	a 	competitive 	auction 	or 	under 	the 	Canadian
stumpage 	fee 	system. 	(For 	a 	discussion 	of 	the 	more 	general
case 	where 	some 	tracts 	will 	not 	be 	cut, 	see 	the 	1983 	FTC
brief 	in 	the 	Appendix). 	While 	all 	tracts 	may 	not 	be 	cut 	in
this 	more 	general 	case, 	it 	is 	still 	true 	that 	there 	are 	no
tracts 	that 	would 	be 	cut 	under 	the 	Canadian 	stumpage 	systems
that 	would 	not 	be 	cut 	under 	a 	competitive 	auction 	system.
33 	The 	price 	also 	would 	not 	be 	affected 	when 	a 	vertically
integrated 	firm 	uses 	a 	log 	it 	has 	harvested 	because 	the 	firm
would 	incur 	an 	opportunity 	cost 	equal 	to 	the 	price 	it 	would
have 	received 	if 	it 	sold 	the 	log 	to 	another 	sawmill. 	See
-24-

In 	effect, 	Canadian 	logging 	firms 	are 	permitted 	to 	realize
part 	of 	the 	economic 	rents 	resulting 	from 	the 	governmental 	limits
on 	the 	quantity 	of 	trees 	available 	for 	harvesting 	in 	any 	period
of 	time. 34 If 	the harvesting 	rights 	were 	sold 	under 	a
competitive 	auction, 	these 	rents 	would 	go 	to 	the 	government 	in
the 	form 	of 	increased 	stumpage 	fee 	payments. 	Thus, 	the 	Canadian
stumpage 	fee 	systems 	reduce 	the 	payments 	received 	by 	the
government 	for 	stumpage 	sales 	and 	increase 	the 	profits 	of 	the
firms 	doing 	the 	harvesting.
33 	(footnote 	continued)
page 	10 of 	the 	Appendix 	to 	the 	1983 FTC 	brief. 	It 	would 	not
make 	sense 	for 	the 	firm 	to 	put 	a 	log 	to 	an 	inefficient
internal 	use 	when 	it 	could 	sell 	the 	log 	for 	a 	greater 	amount
on 	the 	open 	market. 	The 	sawmill's 	production 	of 	lumber 	will
be 	the 	same 	as 	if 	it 	was 	purchasing 	all 	of 	its 	logs 	from
independent 	logging 	firms. 	The 	ITC 	made 	a 	similar
observation 	in 	its 	report 	Conditions 	Relating 	to 	the
Importation 	of 	Softwood 	Lumber 	into 	the 	United 	States, 	USITC
Publication 	1765, 	October 	1985, 	at 	80.
34 	The 	payment 	to 	the 	government 	is 	an 	economic 	rent, 	and 	not 	a
cost, 	because 	the 	availability 	of 	the 	land 	for 	harvesting
does 	not 	depend 	on 	the 	price 	received 	by 	the 	government. 	~y
contrast, 	the 	price 	that 	the 	logger 	must 	pay 	for 	gasoline 	is
a 	cost 	because 	if 	the 	price 	is 	not 	paid he 	will 	not 	receive
any 	gasoline. 	(For 	a 	further 	discussion 	of 	why 	the 	payment
for 	harvesting 	rights 	is 	a 	rent 	and 	not 	a 	cost, 	see 	the 	1983
FTC 	brief 	in 	the 	appendix). 	The 	total 	economic 	rents
resulting 	from 	the 	harvesting 	of 	a 	tract 	of 	timberland 	are
the 	difference 	between 	the 	price 	for 	which 	the 	logs 	on 	the
tract 	can be 	sold 	and 	the 	costs, 	not 	including 	a 	payment 	to
the 	government, 	incurred 	in harvesting 	the 	logs 	and
transporting 	them 	to 	market. 	This 	rent 	is 	the 	maximum 	a
logger 	would 	pay 	for 	the 	right 	to harvest 	a 	tract 	of
timber. 	In 	a 	competitive 	auction 	system, 	such 	as 	that 	in
the 	United 	States, 	these 	rents 	would 	accrue 	to 	the
government. 	If 	the 	stumpage 	fee 	systems 	in 	Canada 	result 	in
payments 	less 	than 	those 	generated 	by 	an 	auction, 	a 	portion
of 	the 	rents 	would 	be 	captured 	by 	the 	logging 	firms.
-25-

The 	petition 	itself 	contains 	information 	suggesting 	that 	the
low 	stumpage 	fees 	are 	resulting 	in high 	profits 	for 	the 	Canadian
logging 	firms 	rather 	than 	in 	an 	increase 	in 	the 	quantity 	of 	logs
harvested 	or 	in 	a 	decline 	in 	the 	price 	of 	logs. 	Petitioners
report 	that 	firms 	located 	in 	Quebec 	are 	purchasing 	Maine 	stumpage
rights 	at 	an 	average 	price 	of 	$60.33 	per 	thousand 	board 	feet 	at
the 	same 	time 	that 	the 	charge 	for 	harvesting 	timber 	located 	on
government 	lands 	in 	Quebec 	was 	only 	$11.96 	per 	thousand 	board
feet. 35 	Similarly, 	the 	petitioners 	also 	refer 	to 	considerably
higher 	prices 	being 	paid 	for 	timber 	on 	private 	lands 	in 	British
Columbia 	than 	is 	paid 	for 	stumpage 	on 	pUblic 	lands. 36 A profit-
maximizing 	firm 	would 	only 	buy 	stumpage 	from 	private 	lands 	or
from 	the 	United 	States 	at 	prices 	that 	exceed 	those 	charged 	under
the 	Canadian 	stumpage 	fee 	systems 	if 	the 	prices 	for 	which 	the
more 	costly 	logs 	can 	be 	sold 	is 	sufficient 	to 	cover 	their
costs. 	That 	Canadian 	firms 	do 	purchase 	these 	logs 	is 	evidence
that 	the 	prices 	charged 	under 	the 	Canadian 	stumpage 	fee 	systems
are 	well 	below 	market 	prices: 	that 	the 	Canadian 	governments 	do
not 	capture 	all 	of 	the 	economic 	rents 	in 	the 	sale 	of 	stumpage
rights; 	and, 	hence, 	that 	the 	rents 	not 	captured 	by 	the 	stumpage
fees 	must 	be 	appearing 	as 	increased 	profits 	for 	those 	firms 	given
access 	to 	government 	forest 	land.
35 	See 	Petition, 	at 	63-64.
36 	See 	Petition, 	at 	65-66 	and 	exhibits 	26 	and 	27.
-26-

D. 	The 	High 	Profits 	Earned 	by 	Canadian 	Loggers
Do 	Not 	Have 	the 	Same 	Injurious 	Effects 	as
the 	Grant 	of 	a 	Subsidy.
The 	high 	profits 	earned 	by 	Canadian 	loggers 	are 	not, 	in
their 	effect 	on 	the 	United 	States 	industry, 	the 	same 	thing 	as 	a
subsidy 	on 	either 	finished 	lumber 	or 	on 	logs 	harvested. 	The
profits 	here 	are 	different 	from 	a 	subsidy because, 	standing
alone, 	they 	will 	have 	no 	tendency 	to 	increase 	output 	to 	the
detriment 	of 	the 	domestic 	industry.
First, 	the 	high 	profits 	do 	not 	have 	the 	same 	effect 	on
production 	that 	a 	subsidy 	on 	finished 	lumber 	would have.
Economic 	theory 	suggests 	that 	the 	supracompetitive 	profit 	is
entirely 	captured 	at 	the 	logging 	stage, 	and 	so 	will 	have 	no
tendency 	to 	increase 	output 	in 	lumber 	production 	or 	other
downstream 	stages 	of 	the 	industry. 	In 	other 	words, 	because 	the
quantity 	of 	logs 	being harvested 	is 	not 	affected 	by 	the 	Canadian
stumpage 	fee 	systems, 	the 	price 	of 	logs 	is 	not 	affected. 	That
the 	quantity 	of 	logs 	is 	the 	same 	under 	either 	an 	auction 	system
or 	the 	Canadian 	stumpage 	systems 	means 	that 	the 	quantity 	of
lumber 	produced 	from 	those 	logs 	will 	be 	unchanged. 	This 	in 	turn
means 	that 	the 	price 	realized 	for 	that 	lumber 	is 	unchanged. 	The
price 	and 	quantity 	of 	lumber 	produced 	in 	Canada 	are 	the 	same 	as
if 	the 	Canadians 	employed 	a 	competitive 	auction 	system 	to
allocate 	stumpage 	rights 	and 	determine 	the 	price 	to be 	paid 	for
the 	right 	to 	cut 	that 	stumpage.
Because 	the 	price 	and 	quantity 	of 	lumber 	are 	not 	affected 	by
the 	stumpage 	fee 	systems, 	the 	quantity 	of 	lumber 	Canadian 	firms
will 	choose 	to 	export 	to 	the 	United 	States 	will 	not 	be 	altered 	by
-27-

the 	system. 	The 	choice 	between 	selling 	for 	export 	and 	selling
for 	use 	within 	Canada 	will 	depend 	on 	the 	prices 	that 	can be
obtained 	by 	selling 	in 	each 	country; 	and 	this 	in 	turn 	will 	depend
on 	the 	demand 	for 	lumber 	in 	each 	country. 	Because 	the 	demand 	for
lumber 	in 	each 	country 	is 	unrelated 	to 	the 	stumpage 	fee 	system
employed, 	the 	quantity 	of 	lumber 	imported 	into 	the 	United 	States
is 	not 	increased 	because 	the 	Canadian 	governments 	do 	not 	employ a
competitive 	auction 	to 	determine 	the 	price 	of 	stumpage 	rights.
Similarly, 	the 	supracompetitive 	profit 	to 	loggers 	does 	not
have 	the 	same 	effects 	as 	a 	sUbsidy 	given 	on 	logs 	cut. 	The 	profit
brings 	no 	new 	timberland 	into 	production 	and 	does 	not 	increase
Canadian 	exports 	to 	the 	detriment 	of 	our 	domestic 	industry.
Petitioners 	claim, 	at 	page 	24 	of 	the 	petition, 	that 	the
Canadian 	stumpage 	systems 	are 	no 	different 	from 	a 	system 	in 	which
a 	competitive 	price 	is 	charged 	for 	stumpage 	and 	then 	a 	sUbsidy 	of
so 	much 	per 	log harvested 	is 	granted. 	It 	is 	therefore 	useful 	to
consider 	how 	the 	two 	practices 	are 	in 	fact 	different.
In 	order 	to"analyze 	this 	contention, 	it 	is 	useful 	to 	explore
a 	slightly more 	complicated hypothetical 	situation. 	Up 	to 	now,
we 	have 	assumed 	that 	all 	tracts 	of 	lumber 	offered 	by 	the
government 	are 	logged. 	That 	is, 	we 	have 	assumed 	that 	the 	revenue
that 	can 	be 	received 	for 	the 	logs 	on 	each 	tract 	is 	greater 	than
the 	costs 	of 	harvesting 	those 	logs 	-- 	not 	including 	any 	economic
rent 	paid 	to 	the 	government. 	However, 	some 	tracts 	made 	available
by 	the 	government 	may 	be 	unprofitable 	because, 	for 	example, 	of
location 	or 	accessibility. 	These 	tracts 	would 	remain 	unharvested
-28-

under 	either 	a 	competitive 	auction 	system 	or 	the 	Canadian
stumpage 	fee 	systems.
If 	the 	government 	offered 	a 	payment 	for 	each 	log harvested,
however, 	it 	might 	be 	profitable 	to harvest 	some 	tracts 	for 	which
harvesting 	would 	not 	otherwise 	be 	profitable, 	because 	the
revenues 	from 	selling 	the 	timber 	plus 	the 	payment 	from 	the
government 	would 	exceed 	the 	cost 	of 	cutting. 	If 	there 	are 	tracts
that 	are 	profitable 	to 	cut 	with 	the 	government 	payment 	but 	that
are 	not 	profitable. to 	cut 	without 	that 	payment, 	then 	payment 	of
the 	per 	unit 	sUbsidy 	will 	increase 	the 	quantity 	of 	trees 	cut 	and
reduce 	the 	price 	of 	logs. 	This, 	in 	turn, 	will 	lead 	to 	a 	lower
price 	and 	a 	larger 	quantity 	of 	lumber 	produced 	and 	to 	a 	larger
quantity 	of 	lumber 	being 	exported 	to 	the 	United 	States. 	As 	a
result, 	the 	United 	States 	lumber 	industry 	could 	be 	injured.
Thus, 	payment 	of 	a 	per 	unit 	subsidy 	could 	cause 	injury 	to 	a
United 	States 	industry because 	such 	payments 	could 	increase 	the
quantity 	of 	imports 	into 	the 	United 	States. 	This, 	however, 	is
not 	at 	all 	the 	same 	thing 	as 	the 	Canadian 	stumpage 	fee 	systems
because 	those 	systems 	do 	not 	increase 	the 	quantity 	of 	xogs
harvested 	and 	therefore 	cannot 	result 	in 	injury 	to 	the 	United
States 	industry.37
37 	There 	is 	another 	difference 	between 	the 	current 	Canadian
stumpage 	fee 	systems 	and 	a 	competitive 	auction 	combined 	with
a 	per 	unit 	subsidy. 	If 	it 	is 	known 	that 	the 	subsidy 	will 	be
paid 	before 	the 	auction 	is 	held, 	this 	will 	cause 	the
competitive bids 	to 	be 	increased 	to 	reflect 	the 	value 	of 	the
promised 	sUbsidy. 	As 	a 	result, 	the 	logging 	firms 	will 	not
earn 	any 	above 	normal 	profits 	as 	a 	result 	of 	the 	sUbsidy.
-29-

E. 	Conclusion: 	Canadian 	Stumpage 	Fee 	Systems 	Do
Not 	Injure 	the 	United 	States 	Lumber 	Industry.
In 	conclusion, 	based 	on 	our 	understanding 	of 	the 	Canadian
stumpage 	fee 	systems, 	it 	does 	not 	appear 	that 	the 	United 	States
logging 	or 	lumber 	industries 	are 	injured 	by 	reason 	of 	the 	methods
by 	which 	the 	Canadian 	national 	and 	provincial 	governments
allocate 	timber 	land 	and 	charge 	for 	stumpage 	rights 	as 	compared
with 	a 	competitive 	auction. 38 	Injury 	could 	occur 	only 	if 	the
37 	(footnote 	continued)
Unlike 	the 	current 	Canadian 	system, 	the 	approach 	that
petitioners 	suggest 	is 	analogous 	would 	not 	transfer 	any
economic 	rents 	to 	the 	logging 	firms. 	Rather, 	all 	rents
would 	be 	captured 	by 	the 	government, 	just 	as 	if 	a
competitive 	auction 	were held 	without 	a 	subsidy.
38 	We 	assume 	that 	the 	comparison between 	the 	Canadian 	stumpage
fee 	systems 	and 	a 	competitive 	auction 	is 	the 	only 	relevant
comparison 	for 	purposes 	of 	determining 	whether 	the 	alleged
sUbsidy 	injures 	the 	domestic 	industry. 	This 	assumption
seems 	consistent 	with 	the 	petitioners' 	complaints.
The 	Canadian 	stumpage 	fee 	systems 	could 	lead 	to 	an 	increase
in 	the 	quantity 	of 	timber 	harvested 	if 	the 	timber 	companies
successfully 	lobbied 	the 	Canadian 	federal 	or 	provincial
governments 	to 	expand 	the 	quantity 	of 	cutting 	permitted
because 	of 	the 	increased 	economic 	rents 	the 	would 	earn 	b
cutting 	additional 	trees 	at 	the 	low 	stumpage 	ee.
At 	least 	one 	of 	the 	petitioners' 	exhibits 	suggests 	that 	this
kind 	of 	behavior 	has 	occurred 	in 	the 	past. 	According 	to
Peter 	Griffiths, 	Equity, 	April 	1984: 	"[M]any 	mills
overbuilt 	their 	capacity 	in 	relation 	to 	the 	actual 	timber
supply, 	as 	a 	means 	of 	consolidating 	their 	domination 	of 	the
resource. 	The 	British Columbia 	Forest 	Service 	was 	forced 	to
exceed 	allowable 	cuts 	under 	pressure 	from 	politicians 	afraid
of 	mill 	closures 	and 	lost 	jobs 	in 	their 	constituencies."
(Petition, 	exhibit 	12). 	This 	statement, 	if 	true, 	could
imply 	that 	the 	low 	stumpage 	fees 	have, 	at 	least 	in 	the 	past,
resulted 	in 	an 	increase 	in 	the 	quantity 	of 	timber
harvested. 	Such 	behavior 	would 	not 	be 	profitable 	under 	a
competitive 	auction 	system 	where 	loggers 	only 	earn 	a 	normal
profit 	level. 	Evidence 	that 	sawmill 	capacity 	is 	being
-30-

Canadian 	stumpage 	fee 	systems 	resulted 	in 	a 	greater 	quantity 	of
logs 	being 	cut 	than 	would 	be 	cut 	under 	an 	auction 	system.
However, 	this 	does 	not 	appear 	to 	be 	the 	case. 	Based 	on 	the
analysis 	of 	FTC 	staff, 	we 	conclude 	that 	the 	Canadian 	stumpage 	fee
systems 	result 	in 	the 	same 	level 	of 	cutting 	as 	would 	a
competitive 	auction 	system. 	As 	a 	result, 	the 	quantity 	of 	lumber
imported 	into 	the 	United 	States 	is 	unaffected 	by 	use 	of 	the
Canadian 	systems 	and 	the 	domestic 	lumber 	and 	logging 	industries
are 	not 	injured 	by 	the 	alleged 	sUbsidy.
38 	(footnote 	continued)
expanded 	beyond 	the 	level 	necessary 	to 	process 	current
allowable 	cuts 	in 	order 	to 	convince 	Canadian 	federal 	or
provincial 	governments 	to 	expand 	the 	allowable 	cut 	could
suggest 	that 	the 	low 	stumpage 	fee 	charged 	by 	the 	Canadians
could 	be 	injuring 	the 	United 	States 	timber 	industry.
In 	evaluating 	claims 	of 	this 	kind 	of 	"rent 	seeking"
behavior, 	it 	is 	important 	to 	differentiate 	between 	building
new 	capacity 	to 	justify 	expansions 	in 	cutting 	and 	urging
that 	cutting 	levels 	be 	maintained 	so 	as 	to 	utilize 	existing
capacity 	and 	to 	avoid 	unemployment. 	While 	the 	former
behavior 	is 	only 	rational 	when 	the 	firm 	can 	obtain 	economic
rents 	by 	cutting 	timber, 	the 	latter 	is 	rational 	even 	if 	no
return 	above 	a 	normal 	profit 	is 	earned 	by harvesting 	timber.
-31-

CONCLUSION
For 	the 	reasons 	stated 	above, 	the 	ITC 	should 	conclude 	that
there 	is 	no 	injury 	to 	the 	domestic 	industry by 	reason 	of 	the
Canadian 	stumpage 	fee 	systems.
Respectfully 	submitted
on 	behalf 	of
the 	Federal 	Trade 	Commission,
David 	T. 	Scheffman
Acting 	Director
Bureau 	of 	Economics
Richard 	S. 	Higgins
Deputy 	Director 	for
Regulatory 	and
Industry 	Analysis
Bureau 	of 	Economics
Keith 	B. 	Anderson
Assistant 	Director 	for
Regulatory 	Analysis
Bureau 	of 	Economics 	.
John 	R. 	Woodbury
Deputy Assistant
Director 	for 	Regulatory
Analysis
Bureau 	of 	Economics
Amanda 	B. 	Pederson
Acting 	Director
Bureau 	of 	Consumer
Protection
J. 	Howard 	Beales
Acting 	Deputy
Director
Bureau 	of 	Consumer
Protection
June 	1986
-32-
Walter 	T. 	Winslow
Acting 	Director
Bureau 	of 	Competition
Edward 	F. 	Glynn, 	Jr.
Assistant 	Director
(International
Antitrust)
Bureau 	of 	Competition
Steven 	B. 	Feirman
Attorney
Bureau 	of 	Competition

.:\ .t
APPENDIX
Prehearing 	Brief 	by 	the 	Federal 	Trade 	Commission
before 	the 	International 	Trade 	Administration,
Department 	of 	Commerce,
Certain 	Softwood 	Lumber 	Products 	from 	Canada,
Countervailing 	Duty 	Proceeding,
April 	7, 	1983