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Don Whiteley

With its subsidy case against Canadian softwood lumber all but blown out of the water by NAFTA's dispute settlement panels, the U.S. Coalition for Fair Lumber Imports and its supporters are now looking at re-invigorating their frontal attack on NAFTA itself.

There is no surprise in this. That Canadian lumber is subsidized is an article of faith among U.S. lumber interests, and they've managed over the past 20 years to convert the minions in the U.S. commerce department to their religion.

A succession of independent NAFTA panels, populated in this latest case by a majority of Americans (3-2 on two, five-member panels) has trashed the case on merit. There is no injury to American producers, no threat of injury, and the commerce department can't calculate a subsidy without the use of creative mathematics.

It goes without saying, from the U.S. point of view, that the problem is with the panels, not the subsidy case. It would never in a million years occur to them that maybe, just maybe, their trade tribunals need a refresher course in their own trade law.

Such a position might be understandable if this latest battle was the first loss, but it isn't. U.S. trade rulings get trounced repeatedly by NAFTA panels, and not just on lumber.

The truth is, the panels have put under a glaring spotlight the willingness of U.S. trade tribunals to fudge whatever numbers they can to produce a countervailable subsidy, or an anti-dumping margin, that the politics of the day demand.

This latest lumber ruling, an order to the commerce department to re-calculate the subsidy, is a classic example of how the methodology is always skewed to generate the right result.

The NAFTA panel affirmed the commerce department's decision to use Canadian market prices to determine whether or not stumpage collected by provincial governments is "adequate remuneration" as defined in U.S. trade law.

However, the panel challenged the "zeroing" method the commerce department uses to calculate stumpage prices. In B.C., stumpage is assessed on a stand basis. Three or four species of trees are harvested, and an average stumpage rate is assessed based on the rates for the individual species present, and their proportion.

But the commerce department, in arriving at its average B.C. stumpage, calculated rates for specific species and compared those rates with the individual species rates derived from the benchmarks. That's okay as far as it goes, but the department then took any B.C. stumpage rate that was higher than the benchmark, and set it at zero. In other words, in calculating their average, they looked only at the species where the rates were lower, or in their view, "subsidized."

That methodology virtually guarantees a subsidy. A similar methodology was used to calculate the anti-dumping margin ("zeroing" has now been ruled illegal by the World Trade Organization on dumping). The NAFTA panel directed the commerce department to calculate the subsidy level without using zeroing.

B.C. officials are still working through the complicated formulas in this and the latest ruling from the commerce department on which Canadian benchmarks they want to use. But there is a high level of confidence that when this and other methodology changes called for by the NAFTA panel are implemented, the subsidy in B.C. will at worst be zero, and at best be "negative." A "negative" subsidy rate, means B.C. stumpage is actually higher than the benchmark.

The Coalition for Fair Lumber Imports is pushing the argument that this NAFTA panel ruling doesn't mean anything because the commerce department has changed the benchmarks it uses anyway, and is now using only market prices from the Maritimes. But that's wishful thinking. The department used exactly the same methodology in calculating the subsidies for the new benchmarks as it did for the old ones.

All of this spells serious bad news for the coalition's case, and it will likely be compounded this week when the U.S. International Trade Commission has to respond, for the third time, to a NAFTA panel's repudiation of their ruling that Canadian lumber threatens to injure U.S. producers.

And that's why the coalition's battle plan has shifted from winning the cases on legal merit to doing something about the authority of these out-of-control NAFTA panels. The strategy is a natural progression from the old tactics in pre-NAFTA days -- if you can't win by the rules, change the rules so you will win.

But changing the rules isn't as simple as it was. First of all, NAFTA is a treaty signed by nations, and the U.S. can't unilaterally alter its terms any more than Canada or Mexico can. That requires consultations and negotiations. The U.S. might be surprised to learn that Canada, too, would like to alter the rules -- mostly to keep the U.S. from frustrating and undermining the dispute settlement process as it has done so successfully.

Beyond that, the U.S., as a signatory to both NAFTA and the WTO, has to ensure that its trade rules are WTO compliant. The U.S. has already earned the wrath of most of its trading partners by passing such legislation as the Byrd Amendment, which allows money collected from duties to be disbursed to the complaining industry. Despite being ruled illegal by the WTO, it's still on the books.

Nevertheless, this next phase of the lumber war is dangerous for Canada (and Mexico). If you're at all unsure about how trade, NAFTA, and the WTO are currently playing out in the U.S., spend some time watching Lou Dobbs on CNN.

Next week, I'll get into the orchestrated campaign underway for years now in the U.S. to destroy the NAFTA dispute settlement process, and Canada's virtual acquiescence to the assault.Vancouver Sun:

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