US Imposition of Preliminary Countervailing Duties

On April 24th, 2017, the United States Department of Commerce (USDOC) announced the imposition of preliminary countervailing duties ranging from 3.02% to 24.12% on imports of softwood lumber from Canada.

These are the first duties to result from the anti-dumping and countervailing duty investigations that were initiated on November 25th, 2016 by a petition filed on behalf of a US industry coalition, i.e., the “Committee Overseeing Action for Lumber International Trade Investigations or Negotiations”. The USDOC is scheduled to issue a preliminary determination in the other, separate anti-dumping investigation on June 23rd, 2017. This determination is likely to result in the imposition of additional duties on softwood lumber imports from Canada. The final anti-dumping and countervailing duty determinations will be issued on the same date, which is currently scheduled for no later than September 6th, 2017. The related investigation by the United States International Trade Commission (ITC) into whether Canadian softwood lumber is causing or threatening injury to the US industry is expected to be completed by the end of the year.

The implications of these investigations go beyond the adverse impact on the Canadian lumber trade. The way in which the USDOC conducts the two investigations will reflect on the broader question of how Canada and the United States will address trade issues going forward under the Trump administration: diplomacy and mutually beneficial cooperation or increased litigation? Will the USDOC’s approach be balanced? Or will it be aggressive? Based on this first indication, it may be the latter. Canada-US trade relations could be in for a rough ride in the months and years ahead.

In its preliminary determination, the USDOC found that the five Canadian exporters that it investigated have received countervailable subsidies and assessed the following rates of duty: West Fraser Mills Ltd. at 24.12%; Canfor Corporation at 20.26%; Tolko Marketing and Sales Ltd. at 19.50%; Resolute FP Canada Inc. at 12.82%; and J.D. Irving, Limited at 3.02%. All other Canadian softwood lumber exporters to the United States will be required to pay a 19.88% duty, which is the weighted average of the foregoing five duty rates.

The impact of the preliminary countervailing duties and any future duties further to the final determinations will cause a substantial adverse impact on Canadian softwood lumber exports, US purchasers of that lumber, the US housing market, and, ultimately, the US consumer. In its announcement of the preliminary duties, the USDOC estimated that imports of softwood lumber from Canada were valued at $5.66 billion in 2016.

Preliminary Finding of Critical Circumstances

This adverse impact will be compounded by a separate preliminary determination by the USDOC of “critical circumstances” with respect to both the anti-dumping and countervailing duty investigations. Critical circumstances were found against one of the five companies subject to the investigation, J.D. Irving, and “all other” Canadian softwood lumber exporters. What this means is that the duties can be applied retroactively to imports from these companies, up to 90 days prior to the publication of the affirmative preliminary determination that countervailable subsidies have been provided at above de minimis rates. This would mean that duties can be applied to imports that have entered the United States since the end of January 2017.

The USDOC found that the statutory requirements for critical circumstances had been met — namely, that the alleged countervailable subsidy was inconsistent with the WTO Agreement on Subsidies and Countervailing Measures. In this respect, it found that there was a reasonable indication that the Export Guarantee Program administered by Export Development Canada was a prohibited export subsidy, that there was a history of dumping and material injury by reason of dumped imports (i.e., it took note of its previously issued anti-dumping order on softwood lumber from Canada and the associated ITC injury determinations), and that there had been massive imports of the subject merchandise over a relatively short period of time. With respect to the latter point, it found that Canadian softwood lumber exporters knew a proceeding was likely because of the expiry of the Softwood Lumber Agreement and compared import volumes before and after the expiry date.

Navigating the Softwood Lumber Dispute Going Forward

The immediate future will see the Government of Canada, the provincial governments, and Canadian producers and exporters of softwood lumber engaging in the administrative proceedings leading to the final anti-dumping and countervailing duty determinations and the ITC injury proceeding. Based on the long history of Canada-US softwood lumber disputes, Canada can be expected to initiate challenges in the World Trade Organization (WTO) soon after the USDOC issues its final determinations in September. If the ITC also makes an affirmative injury determination, a similar challenge of that determination is also expected. Further, the governments and exporters can also be expected to initiate parallel challenges under the binational panel review process in Chapter 19 of the North American Free Trade Agreement (NAFTA). Finally, throughout the entire process, it is expected that Canada will be attempting to secure a mutually advantageous negotiated resolution of the dispute.