Last week, the U.S. International Trade Commission (USITC) issued its decision to impose countervailing duties on Canadian exports of supercalendered paper, which is mainly used for magazines, catalogues, corporate brochures and advertising inserts.

Paper companies in New Brunswick, Nova Scotia, Quebec and British Columbia will have their products hit with U.S.-imposed import duties ranging from 17.9 per cent to 20.2 per cent. In response, Port Hawkesbury Paper, one of the companies affected by the imposition of countervailing duties, announced that it will join the Government of Nova Scotia and the Government of Canada in requesting a review of the USITC’s decision under Chapter 19 of the North American Free Trade Agreement (NAFTA). An appeal through the World Trade Organization (WTO) is also being considered.

According to U.S. trade law, a program initiated by a foreign government can justify the imposition of countervailing duties when it provides an export subsidy or when it provides benefits to a specific enterprise or industry.

A number of benefits specific to individual Canadian companies were identified by the USITC in its investigation of complaints levied by two American producers of supercalendered paper. The investigation and analysis done by the USITC highlights the complexity of the issues that typically underlie countervailing duty cases, and they also illustrate why such cases, most notably the bilateral dispute over exports of Canadian softwood lumber, can drag on for years through multiple review processes under either the NAFTA or the WTO.

The typical basis for complaints by U.S. companies to the USITC is that a foreign government or government agency has provided one or more specific companies with a direct or indirect subsidy that enables that company or companies to sell output at a lower price in the U.S. market than would otherwise be the case, and that imports from the foreign country in question are seriously harming U.S. producers.

The contentious issue in the resulting USITC investigation is usually what actions constitute a direct or indirect subsidy, and foreign companies can expect the USITC to cast a wide net in its search for government subsidies.

For example, in the case of Port Hawkesbury Paper, the USITC argues that the company did not pay Nova Scotia Power the full applicable fixed-costs incurred by the utility to provide electricity, although Port Hawkesbury paid somewhat more than the incremental costs associated with its electricity usage.

While an economist would argue that the efficient recovery of fixed-costs should be based on charging lower mark-ups over incremental costs to more price-sensitive customers, and that Port Hawkesbury was a price-sensitive customer given its financial difficulties, the USITC contends that the rate charged to Port Hawkesbury was a departure from the utility’s standard pricing practice.

Since the major part of the alleged subsidy to Port Hawkesbury is the rate it was charged by Nova Scotia Power, a critical issue is whether the relevant review panel will accept the USITC’s argument that a departure from standard pricing practice is a subsidy even when circumstances change.

The review panel will also need to assess the likely argument to be made by the Government of Nova Scotia that the province’s Utility and Review Board, which reviews power rates charged to customers, is independent of the government. That the important bilateral trade relationship can hinge on such matters of interpretation is a major flaw of the countervailing duty process and supports an argument for eliminating countervailing duty provisions entirely.