ABSTRACT
A long-running conflict between Canada and the United States demonstrates other difficulties that exist in interpreting subsidy provisions. In the case of softwood lumber production, British Columbia allows local firms to harvest lumber on provincially owned land in exchange for stumpage fees which are considerably lower than those prevailing in the United States. These cost savings are available on all lumber cut on this land, including that which is sold to Canadian buyers. Canadians argue that such a benefit is a windfall gain that does not alter the marginal cost of production or optimal level of output. The US lumber industry, however, views the lower Canadian stumpage fees as an unfair cost advantage for British Columbia, and argues that a subsidy exists which calls for a countervailing duty. This situation has given rise to several countervailing duty cases in the 1980s and 1990s. At one point the US Department of Commerce ruled that a 15 percent subsidy margin existed, but the case was resolved by Canada levying a 15 percent export tax. Subsequent rulings by the GATT and by a binational trade dispute settlement panel set up under the 1989 US-Canada Free Trade Agreement both favored the Canadian position. Further WTO action still has not resolved this case.
