Softwood Lumber Act of 2008
Customs and Border Protection Established Required Procedures, but Agencies Report Little Benefit from New Requirements Gao ID: GAO-10-220 December 18, 2009In 2006, the United States and Canada signed the Softwood Lumber Agreement. The agreement, among other things, imposed export charges and quotas on Canadian lumber exports to the United States. To assist in monitoring compliance with the agreement, in 2008 Congress passed the Softwood Lumber Act, which imposed several data collection and analysis requirements on the Department of Homeland Security's U.S. Customs and Border Protection (CBP) and required two reports from GAO. This report discusses (1) CBP's processes for meeting the act's requirements and (2) how these requirements contribute to U.S. efforts to monitor compliance with the 2006 Softwood Lumber Agreement. GAO issued a report in June 2009 on U.S. agency efforts to monitor compliance with the 2006 agreement. This report includes an update on these efforts. GAO analyzed information from relevant U.S. agencies, interviewed knowledgeable officials, and discussed these issues with U.S. and Canadian industry representatives.
CBP has developed processes to reconcile and verify data provided by the exporter and importer as required by the act, but officials acknowledge continuing issues with data quality. CBP reconciles aggregated export prices from the U.S. entry forms with aggregated export prices from Canadian export permits. To meet the act's verification requirement that the importer has correctly reported the export price, the tax to be paid by exporters to the Canadian government (the export charge), and other information, CBP has created a process within its existing data system to collect these data. However, CBP has acknowledged continuing problems with data quality. For example, CBP port officials manually enter data into this system, which could lead to miscoding. CBP reported that the initial implementation of the act required extensive effort for the agency, but officials stated that ongoing activities need fewer resources. According to CBP, Department of Commerce, and Office of U.S. Trade Representative officials, the information produced through the reconciliation and verification requirements under the act adds little assurance of compliance with the 2006 Softwood Lumber Agreement. Some of the act's requirements are to ensure the proper operation of international agreements on softwood lumber and enforcement of these obligations. The agreement with Canada contains mechanisms for monitoring compliance, and, according to U.S. government officials, the added requirements of the 2008 U.S. legislation do not provide the U.S. government with additional assurance of compliance with the bilateral trade agreement. Specifically, CBP officials told GAO the requirements under the act do not provide the United States with assurance that the Canadian exporter paid the export charge, because the United States does not have access to company-level tax data from Canada. While the agreement is scheduled to expire in 2013, the act does not have an expiration date. CBP officials said they have not yet determined how they will fulfill their requirements under the act when the agreement expires, but they would no longer have the estimated export charge data that are used in implementing the act.
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Director: Team: Phone:GAO-10-220, Softwood Lumber Act of 2008: Customs and Border Protection Established Required Procedures, but Agencies Report Little Benefit from New Requirements
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
December 2009:
Softwood Lumber Act of 2008:
Customs and Border Protection Established Required Procedures, but
Agencies Report Little Benefit from New Requirements:
GAO-10-220:
GAO Highlights:
Highlights of GAO-10-220, a report to congressional committees.
Why GAO Did This Study:
In 2006, the United States and Canada signed the Softwood Lumber
Agreement. The agreement, among other things, imposed export charges
and quotas on Canadian lumber exports to the United States. To assist
in monitoring compliance with the agreement, in 2008 Congress passed
the Softwood Lumber Act, which imposed several data collection and
analysis requirements on the Department of Homeland Security‘s U.S.
Customs and Border Protection (CBP) and required two reports from GAO.
This report discusses (1) CBP‘s processes for meeting the act‘s
requirements and (2) how these requirements contribute to U.S. efforts
to monitor compliance with the 2006 Softwood Lumber Agreement. GAO
issued a report in June 2009 on U.S. agency efforts to monitor
compliance with the 2006 agreement. This report includes an update on
these efforts.
GAO analyzed information from relevant U.S. agencies, interviewed
knowledgeable officials, and discussed these issues with U.S. and
Canadian industry representatives.
What GAO Found:
Table: Key Elements of the 2006 Softwood Lumber Agreement and the
Softwood Lumber Act of 2008:
2006: Softwood Lumber Agreement:
Overview:
Bilateral agreement between the United States and Canada establishing a
framework for managing the U.S.-Canadian softwood lumber trade;
Key provisions:
* export charge and quota on Canadian exports;
* information exchange requirements;
* anticircumvention measures;
* dispute settlement mechanisms.
2008: U.S. Softwood Lumber Act:
Overview: U.S. legislation creating additional requirements for CBP
regarding softwood lumber trade;
Key provisions:
* importer declaration;
* reconciliation of export price data;
* periodic verification of information on U.S. entry forms;
* semiannual reports on implementation of act requirements
2013:
Softwood Lumber Agreement expires, unless extended;
Softwood Lumber Act continues.
Source: GAO.
[End of table].
CBP has developed processes to reconcile and verify data provided by
the exporter and importer as required by the act, but officials
acknowledge continuing issues with data quality. CBP reconciles
aggregated export prices from the U.S. entry forms with aggregated
export prices from Canadian export permits. To meet the act‘s
verification requirement that the importer has correctly reported the
export price, the tax to be paid by exporters to the Canadian
government (the export charge), and other information, CBP has created
a process within its existing data system to collect these data.
However, CBP has acknowledged continuing problems with data quality.
For example, CBP port officials manually enter data into this system,
which could lead to miscoding. CBP reported that the initial
implementation of the act required extensive effort for the agency, but
officials stated that ongoing activities need fewer resources.
According to CBP, Department of Commerce, and Office of U.S. Trade
Representative officials, the information produced through the
reconciliation and verification requirements under the act adds little
assurance of compliance with the 2006 Softwood Lumber Agreement. Some
of the act‘s requirements are to ensure the proper operation of
international agreements on softwood lumber and enforcement of these
obligations. The agreement with Canada contains mechanisms for
monitoring compliance, and, according to U.S. government officials, the
added requirements of the 2008 U.S. legislation do not provide the U.S.
government with additional assurance of compliance with the bilateral
trade agreement. Specifically, CBP officials told GAO the requirements
under the act do not provide the United States with assurance that the
Canadian exporter paid the export charge, because the United States
does not have access to company-level tax data from Canada. While the
agreement is scheduled to expire in 2013, the act does not have an
expiration date. CBP officials said they have not yet determined how
they will fulfill their requirements under the act when the agreement
expires, but they would no longer have the estimated export charge data
that are used in implementing the act.
What GAO Recommends:
GAO recommends that the Secretary of DHS direct the Commissioner of CBP
to report to Congress on how CBP plans to fulfill the requirements of
the act upon the expiration of international agreements related to
softwood lumber. CBP concurred with the recommendation.
View [hyperlink, http://www.gao.gov/products/GAO-10-220] or key
components. For more information, contact Loren Yager at (202) 512-4347
or yagerl@gao.gov.
[End of section].
Contents:
Letter:
Background:
CBP Has Developed Processes to Meet the Requirements of the Act but
Acknowledges Data Weaknesses:
Agency Officials Believe That the Act's Requirements Add Little to
Their Efforts to Monitor Compliance with the Bilateral Trade Agreement;
Requirements Are Likely to Continue after the Agreement Expires:
Conclusions:
Recommendation for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Key Provisions of the 2006 Softwood Lumber Agreement:
Appendix III: CBP Continues to Address Challenges to Reconciling Value
Data under the 2006 Softwood Lumber Agreement:
Appendix IV: U.S. Agencies Continue Monitoring the 2006 Softwood Lumber
Agreement and Have Identified Concerns:
Appendix V: Comments from the Department of Homeland Security:
Appendix VI: Comments from the Department of Commerce:
Appendix VII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: CBP Implementation of Key Requirements in the Softwood Lumber
Act of 2008:
Table 2: Export Control Options under the 2006 Softwood Lumber
Agreement:
Figures:
Figure 1: CBP's Process for Reconciling Export Price Data under the
Act:
Figure 2: Lumber Price and Export Charge Rates, October 2005 through
September 2009:
Abbreviations:
CBP: U.S. Customs and Border Protection:
DFAIT: Canada's Department of Foreign Affairs and International Trade:
ESCM: Entry Summary Compliance Measurement:
SLA 2006: 2006 Softwood Lumber Agreement:
TIB: Temporary Importation under Bond:
USTR: Office of the United States Trade Representative:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
December 18, 2009:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
The United States and Canada have been involved in a decades-long
dispute regarding trade in softwood lumber. Canada is the primary
exporter of softwood lumber to the United States. In 2008, Canada
exported approximately $3.2 billion worth of softwood lumber products
to the United States, about 17 times the amount supplied by the next
biggest exporter to the United States. After several years of
litigation related to U.S. allegations of unfair Canadian subsidies,
the United States and Canada signed the 2006 Softwood Lumber Agreement.
[Footnote 1] The agreement ended ongoing litigation and requires, among
other things, the Canadian federal and provincial governments to
establish export charges and quotas[Footnote 2] for Canadian lumber
exports. It also requires the two countries to exchange information to
support monitoring compliance with the agreement.[Footnote 3]
In 2008, the United States passed the Softwood Lumber Act that
requires, among other things, that the U.S. government reconcile and
verify softwood lumber trade data.[Footnote 4] The act also requires
GAO to report on (1) whether countries that export softwood lumber or
softwood lumber products to the United States are complying with
international agreements entered into by those countries and the United
States[Footnote 5] and (2) the effectiveness of the U.S. government in
carrying out the reconciliations and verifications mandated by the
Softwood Lumber Act.[Footnote 6] In response to the first mandate, GAO
reported in June 2009 that the U.S. and Canadian governments have
established mechanisms to monitor compliance with the 2006 Softwood
Lumber Agreement, but face operational challenges.[Footnote 7]
This report primarily addresses the second mandate on U.S. efforts to
reconcile and verify softwood lumber data as required by the act. In
addition, in accordance with our agreement with the Senate Committee on
Finance and the House Committee on Ways and Means, in appendixes III
and IV we include updated information on U.S. efforts to monitor
compliance, on which we first reported in June 2009.[Footnote 8] This
report (1) describes U.S. Customs and Border Protection's (CBP)
processes for meeting the act's requirements and (2) describes how
these requirements contribute to U.S. efforts to monitor compliance
with the 2006 Softwood Lumber Agreement.
To address these objectives, we obtained and reviewed planning and
programmatic documents describing CBP reconciliation and verification
procedures to implement the requirements of the act. We also
interviewed officials from CBP, the Department of Commerce (Commerce),
and the Office of the United States Trade Representative (USTR), to
obtain their perspectives on how the act's requirements contribute to
monitoring compliance with the bilateral trade agreement and to obtain
updated information on compliance concerns with the agreement. We
traveled to the ports in Buffalo, New York, and Blaine, Washington, to
meet with CBP port officials as well as customs brokers
representatives. In addition, we interviewed officials from Canada's
Department of Foreign Affairs and International Trade (DFAIT). We also
interviewed industry representatives in both the United States and
Canada to obtain their perspectives on the act's requirements and the
implementation of the bilateral trade agreement. We determined that the
information used is sufficiently reliable for the purposes of this
report. (See appendix I for more information about our scope and
methodology.)
We conducted this engagement from December 2008 to December 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
In this report, we recommend that the Secretary of the Department of
Homeland Security direct the Commissioner of CBP to report to Congress
on how CBP plans to fulfill the requirements of the act upon the
expiration of international agreements related to softwood lumber. We
provided a draft of this report to CBP, Commerce, and USTR. CBP
concurred with the report recommendation, stating that it will consult
with Congress on how to proceed when the Softwood Lumber Agreement
expires. Commerce also responded that it concurred with the report. We
received technical comments from CBP and USTR, and incorporated these
comments as appropriate. We also provided relevant sections to Canadian
officials for technical comment, which we incorporated as appropriate.
Background:
Since the 1980s, the United States and Canada have been engaged in a
trade dispute regarding softwood lumber.[Footnote 9] One of the main
causes of the dispute is differences in costs for timber harvested on
public land in Canada as compared with timber from private land in the
United States. In Canada, federal and provincial governments own
approximately 90 percent of the timberlands and set harvest fees and
allocations. In contrast, in the United States, only about 40 percent
of the timberland is publicly owned, and the timber from that land is
sold through competitive auctions. The U.S. lumber industry is
concerned that the use of government-set fees in Canada raises the
possibility that private industry in Canada has access to timber at
less than market prices.
The decades-long softwood lumber dispute has alternated between periods
with a softwood lumber trade agreement and periods of litigation
without an agreement. In 2006, the United States and Canada ended a
period of antidumping and countervailing duty proceedings by signing
the Softwood Lumber Agreement, a 7-year agreement with an option for a
2-year renewal. The agreement established a framework for managing
Canadian exports of softwood lumber to the United States. Key
provisions of the agreement include variable export measures,[Footnote
10] information exchange requirements, anticircumvention measures,
dispute settlement mechanisms, and a settlement agreement to end
numerous claims that were pending when the agreement was signed.
(Appendix II contains more information on the provisions of the 2006
Softwood Lumber Agreement.).
In 2008, Congress passed the Softwood Lumber Act imposing additional
requirements on CBP for monitoring the softwood lumber trade. According
to the legislation, the required reconciliations are to ensure the
proper operation and implementation of international agreements related
to softwood lumber.[Footnote 11] Furthermore, the importer declaration
program established by the act is intended to assist in the enforcement
of any international obligations arising from international agreements
related to softwood lumber. The act does not contain language
specifying an end date for these efforts. Under the act, CBP is to
implement the following requirements related to softwood lumber imports
from all countries:
* Importer declaration program: CBP is to establish an importer
declaration program requiring that importers from any country declare,
among other things, that they have made an appropriate inquiry and that
to the best of the person's knowledge and belief:
- the export price is determined as defined in accordance with the act;
- the export price is consistent with the export price on the export
permit, if any, granted by the country of export; and:
- the exporter has paid, or committed to pay, all export charges.
* Reconciliation: To ensure the proper implementation and operation of
international agreements related to softwood lumber, CBP is to
reconcile the export price (or revised export price) declared by the
importer with the export price (or revised export price) on the export
permit, if any.
* Verification: To verify the importer declaration, the act requires
CBP to periodically verify that (1) the export price declared by the
importer is the same as the export price provided on the export permit,
if any, issued by the country of export and (2) the estimated export
charge is consistent with the applicable export charge rate as provided
by Commerce.
* Semiannual reports: CBP is to report to Congress every 6 months:
- describing the reconciliations and verifications programs and
identifying the manner in which the U.S. importers subject to
reconciliations and verifications were chosen;
- identifying any penalties imposed under the act and any patterns of
noncompliance with the act; and:
- identifying any problems or obstacles encountered in the
implementation and enforcement of the act.
CBP Has Developed Processes to Meet the Requirements of the Act but
Acknowledges Data Weaknesses:
As shown in table 1, CBP has taken a variety of steps to implement key
provisions of the Softwood Lumber Act of 2008.
Table 1: CBP Implementation of Key Requirements in the Softwood Lumber
Act of 2008:
Softwood Lumber Act of 2008 requirements: Establish an importer
declaration program, including that the importer has made an
appropriate inquiry, and that to the best of the person's knowledge and
belief:
* the export price is determined as defined in accordance with the act;
* the export price is consistent with the export price on the export
permit, if any, granted by the country of export; and;
* the exporter has paid, or committed to pay, all export charges;
CBP implementation: Created a rule for importers of certain softwood
lumber products exported from any country to the United States,
including the provision of the following data requirements on the U.S.
entry form:
* The export price for each line of softwood lumber;
* The estimated export charge, if any;
* An importer declaration.
Softwood Lumber Act of 2008 requirements: Reconcile the export price
declared by the importer with the export price on the export permit;
CBP implementation: Collects export price data from the U.S. entry form
(importer) and Canadian export permit (exporter):
* Reconciliation is done monthly;
* Reconciliation is done at the aggregate Canadian regional level.
Softwood Lumber Act of 2008 requirements: Verify the export price,
estimated export charge, and importer declaration;
CBP implementation: Created a softwood lumber subcomponent in its
existing Entry Summary Compliance Measurement program:
* Entries selected by random statistical sampling;
* CBP port officials review entry forms to check that required
information is included;
* CBP port officials request documentation from importers to verify
that the information on the entry form is correct and enter findings
into a database.
Softwood Lumber Act of 2008 requirements: Report semiannually on
implementation of the act;
* Describe the reconciliation and verification processes and results;
* Identify penalties imposed under the act and patterns of
noncompliance under the act;
* Identify problems or obstacles to implementation;
CBP implementation: Issued reports in May and October 2009.
Source: GAO analysis of the Softwood Lumber Act of 2008 and CBP data.
[End of table].
CBP Revised Its Entry Form and Databases to Collect Additional Data
Required by the Act:
CBP added three new fields to the U.S. entry form to collect data on
the export price, estimated export charge, and importer declaration
needed for the reconciliation and verification processes. CBP started
enforcing the new requirements imposed by the act in September 2008.
The act and CBP require these three data elements for softwood lumber
imports from all countries.[Footnote 12] However, according to CBP
officials, only imports from Canada include export charge information
because of the 2006 Softwood Lumber Agreement. Furthermore, CBP
reported in October 2009 that importers of softwood lumber products
from non-Canadian countries have a difficult time in determining the
correct amount to list as the export price because the export price
definition in the act contains references specific to Canadian softwood
lumber, such as "remanufacturer.".
CBP Reconciles Aggregated Export Price Data from Canada with Aggregated
Export Price Data from U.S. Entry Forms:
To implement the act's reconciliation requirement,[Footnote 13] CBP
compares publicly available aggregate regional export price data from
Canada with aggregate export price data from the U.S. entry form.
(Under the act, CBP is reconciling this information only for Canadian
exports because Canada is the only country with which the United States
has an international agreement specifically on softwood lumber.) As
shown in figure 1, CBP obtains the export price from the U.S. entry
form, which the U.S. importer should copy from the Canadian export
permit. CBP then compares aggregate monthly data from the U.S. entry
forms with the publicly available export price data that are posted on
the Web site of Canada's DFAIT.
Figure 1: CBP's Process for Reconciling Export Price Data under the
Act:
[Refer to PDF for image: illustration].
Canadian exporter fills out Canadian export permit;.
Canadian exporter sends Canadian export permit to Department of Foreign
Affairs and International Trade (DFAIT);.
Canadian exporter sends Canadian export permit to importer
DFAIT posts aggregate regional export price data on Web site;.
U.S. importer fills out U.S. entry form by copying export price from
the Canadian export permit;.
U.S. importer sends U.S. entry form to U.S. Customs and Border
Protection (CBP);.
CBP compares aggregate information. Are the total export prices the
same?.
Sources: GAO analysis of CBP data; map (Map Resources); clip art (Art
Explosion).
[End of figure]
According to CBP officials, on a monthly basis, they reconcile
aggregate export price data based on the Canadian region of export. CBP
first combines the individual-level export price data from each U.S.
entry form for all shipments during a 1-month period and reconciles
these values with the aggregate Canadian export data. According to CBP,
each month, analysts run a computer program to compare the U.S. and
Canadian data and to identify discrepancies. In its October 2009
semiannual report to Congress, CBP reported that the overall variance
between the export price on the entry summary form and the export price
received from the "country of export" for the 6-month period between
October 2008 and March 2009 was 1 percent.
CBP Adapted Existing Mechanisms to Comply with the Verification
Requirements under the Act:
As required by the act, CBP has developed processes to verify the
importer declaration,[Footnote 14] which includes verifying that:
* the export price declared by the importer is the same as the export
price provided on the export permit, if any, issued by the country of
export;
* the estimated export charge is consistent with the applicable export
charge rate as provided by Commerce; and:
* importers have "made appropriate inquiry, including seeking
appropriate documentation from the exporter," and to the best of the
importer's knowledge and belief that the exporter has paid or committed
to pay all applicable export charges.[Footnote 15]
To meet these legislative requirements, CBP adapted its existing Entry
Summary Compliance Measurement program[Footnote 16] to include softwood
lumber as a subcomponent. The program selects softwood lumber entries
for verification via random statistical sampling. When an entry is
selected for verification, import specialists at the ports review the
entry form to ensure that all of the required information is included
and request supporting documentation from the importers to verify that
the information on the entry document has been recorded correctly. The
import specialists then enter the results into an electronic database
system that CBP headquarters accesses and analyzes.
In its October 2009 semiannual report to Congress, CBP reported that
approximately 82 percent of the samples its officials verified during
the first 6 months of the process, from October 2008 to March 2009,
correctly reported the export price--with a higher rate, almost 85
percent, for imports from Canada.[Footnote 17] Regarding the export
charge, about 77 percent of the entries CBP sampled from Canada had
that value reported correctly. In addition, CBP reported that about 90
percent of the importer declarations were reported properly. According
to CBP, the requirements did not apply to an additional 5 to 10 percent
of the selected Canadian samples because they were exempt from the
provisions of the bilateral trade agreement. Officials stated that the
combination of samples that were reported correctly and those for which
the requirements were not applicable brought the overall results for
the softwood lumber samples for Canada close to what they see for other
commodities.
CBP Officials Attribute Discrepancies Partly to Data Entry Errors:
Because the importer or customs broker should copy the export price
from the Canadian export permit onto the U.S. entry form, CBP officials
said they expect discrepancies in the data to result mainly from the
following: (1) human errors in copying the export price from one form
to another and (2) differences caused by converting from Canadian to
U.S. dollars. In addition, CBP officials explained that the export
price for a shipment could be listed as one line on the Canadian export
permit, but broken into multiple lines on the U.S. entry form. CBP has
instructed importers in how to resolve this issue,[Footnote 18] but
officials said that importers sometimes do not perform this calculation
correctly.
In its October 2009 report to Congress, CBP reported that discrepancies
between the export price reported on the Canadian export permit and the
export price reported on the U.S. entry form have decreased over time.
CBP reported a variance of almost 16 percent between the U.S. and
Canadian data in October 2008, the first month of reconciliations under
the act. By March 2009, the variance between the U.S. and Canadian
export prices had decreased to approximately 2 percent.
CBP officials told us that 5 to 10 percent of the entries randomly
selected for review as part of the verification process were not
recorded correctly due to data entry errors by either the importer or
CBP's import specialists. These errors may have been caused by an
import specialist incorrectly recording the verification data in CBP's
database or not following the instructions consistently. CBP officials
added, however, that the errors are not surprising considering that the
requirements are new, and that the importers and the CBP import
specialists are still learning how to correctly record information.
We identified the following two reasons for data entry errors:
* Miscoding: Import specialists manually type specially developed
softwood lumber codes into the remarks section of CBP's existing
electronic database system, which could lead to miscoding. For example,
preliminary results from the first round of the verification cycle from
October 2008 to March 2009 show "over-reporting" for the importer
declaration. The verification involves the import specialist obtaining
documentation to substantiate the importer declaration. There is no
calculation or number associated with the declaration itself; correct
reporting would be considered either "not reported" or "reported
correctly." There should be no over-or underreporting.
Officials told us they are migrating from the existing system and will
be using a new system, Automated Commercial Environment, starting
January 2010. They stated that the new system will allow them to create
custom data entry fields, which they believe will most likely diminish
errors associated with miscoding.
* Inconsistent application of guidance: Guidance for the import
specialists conducting the verifications at the ports states that the
export price on the U.S. entry form could be within a 2 percent margin
of the export price reported on the Canadian export permit to be
considered correctly reported. However, at one of the two ports we
visited, we observed that some, but not all, import specialists had
inappropriately applied the 2 percent margin to the export charge as
well. CBP officials at headquarters stated that they were unaware of
the differences in the application of the guidance, but that they were
continuing to provide outreach to import specialists regarding how to
correctly conduct the verifications and record the results.
CBP officials attribute issues with the quality of the data used in the
reconciliation and verification processes to the relative newness of
the process. The act was enacted in June 2008 and went into effect in
August 2008, 60 days later. According to CBP's May 2009 report to
Congress, CBP delayed enforcement of the importer declaration program
30 days, to give CBP time to publish the interim rule describing the
new entry requirements and to give the trade community time to make the
necessary changes to provide the three new data elements required for
each line of softwood lumber articles on the entry form. Industry
representatives also said they had very little time to reprogram their
computer systems to collect the necessary data. CBP began selecting
random samples of softwood lumber entry summaries on October 1, 2008.
CBP officials told us they conducted a series of training and outreach
programs to educate import specialists and importers on how to
correctly fulfill the new requirements the act imposed on shipments of
softwood lumber. For example, they established an e-mail box to receive
questions and a "Frequently Asked Questions" section on the agency's
Web site to address the new requirements. CBP officials told us they
consider the first 6 months of the verification process a dry run to
observe the process and determine areas that need improvement. The
officials stated that they have ongoing efforts to provide further
guidance and clarification. As an example, they cited memorandums sent
to import specialists every 6 months identifying specific examples that
were entered into the system incorrectly and needed to be corrected. In
addition, headquarters conducts quarterly conference calls with staff
at the ports and hosts an annual meeting to discuss issues related to
the overall Entry Summary Compliance Measurement process used for all
commodities, with softwood lumber being one subcomponent of this
process.
CBP Reported Incurring Initial Costs to Implement the Act, but
Indicated That Ongoing Resource Requirements Are Very Limited:
In CBP's May and October 2009 reports on the agency's implementation of
the act, CBP reported that it undertook extensive changes to its
systems to collect the required data elements on the U.S. entry form.
The reprogramming of these systems, training personnel, and providing
advice to the trade community on changes to the entry form required
extensive effort for the agency. CBP further reported that headquarters
had to divert resources from import safety, intellectual property
rights, and other areas to implement the act. However, CBP officials
told us that, now that they have established the reconciliation and
verification processes required by the act, the agency's ongoing
efforts related to the act's requirements do not consume as much time
as did its initial efforts. For example, CBP officials at headquarters
and at the ports we visited said that work on softwood lumber
verifications in particular is not time intensive.
Agency Officials Believe That the Act's Requirements Add Little to
Their Efforts to Monitor Compliance with the Bilateral Trade Agreement;
Requirements Are Likely to Continue after the Agreement Expires:
CBP, Commerce, and USTR officials stated that the information produced
through the reconciliation and verification requirements under the act
do not directly help them monitor compliance with the 2006 Softwood
Lumber Agreement with Canada. The purpose of some of these legislative
requirements is to ensure the proper implementation and operation of
international agreements on softwood lumber and assist in the
enforcement of these obligations.[Footnote 19] The 2006 agreement with
Canada contains mechanisms for monitoring compliance, and, according to
U.S. government officials, the added reconciliation and verification
requirements of the Softwood Lumber Act of 2008 do not provide the U.S.
government with additional assurance of compliance with the bilateral
agreement. Specifically, CBP officials told us the requirements of the
act do not provide them with direct assurance that the Canadian
exporter paid the export charges owed to the Canadian government under
the agreement.
CBP officials said that comparing the aggregate export price data from
the Canadian export permits with the aggregate export price data from
the U.S. entry forms provides no additional information on the
collection of the Canadian export charge. CBP does not examine any
export charge data in the reconciliation process under the act. The
export price, as defined in the act,[Footnote 20] does not contain any
information on the export charge. The export price on the export permit
is an estimated price at the time of shipment. According to CBP
officials, because the export price on the Canadian export permit and
the U.S. entry form is not the final revised export price reported by
the exporter to the Canada Revenue Agency, it does not represent the
value upon which the export charge is paid.[Footnote 21]
Similarly, CBP officials said the verification process for imports from
Canada does not provide the agency with additional information about
whether Canadian exporters are complying with the provisions of the
bilateral trade agreement, because the U.S. government does not have
access to the Canadian government's tax records and therefore has no
means to confirm whether Canadian companies actually paid the export
charge. None of the data elements the act requires CBP to verify--the
export price, estimated export charge, or importer declaration--provide
additional evidence that the exporter paid the export charge, according
to CBP officials. As with the reconciliation process, the export price
is copied from the Canadian export permit to the U.S. entry form and
does not contain export charge information. The estimated export charge
on the entry form is reported by the importer based on the estimated
export price and Commerce's determination of the export charge rate for
that month and province. Furthermore, the importer declaration only
requires importers to affirm that they made the appropriate inquiry
that the exporter has paid, or committed to pay, any applicable export
charges. Finally, for CBP to impose a penalty on importers who violate
the act, CBP is required to prove that the importer committed a
"knowing violation."[Footnote 22] CBP officials told us that this
violation is harder to prove than other violations of customs laws. In
October 2009, CBP reported that it has not initiated any penalty
actions for violations of the act.
The requirements of the act, however, may have an indirect effect on
Canadian exporters' compliance with the bilateral trade agreement,
according to USTR and Commerce officials, because the act's
requirements demonstrate that the United States is looking closely at
softwood lumber imports. A representative of the U.S. softwood lumber
industry said that the act's requirements may also have improved the
accuracy of the Canadian data, and that the importer declaration
program is useful because he believes that it provides additional
information on whether the export charge was paid.
Some of the act's requirements are to ensure the proper implementation
and operation of international agreements on softwood lumber and assist
in the enforcement of these obligations.[Footnote 23] The 2006 Softwood
Lumber Agreement is in force until 2013; however, the act does not have
an expiration date. As a result, it is unclear whether, or to what
extent, CBP will need to continue to implement the U.S. legislative
requirements when the bilateral trade agreement expires. CBP officials
said they have not yet determined how they will fulfill their
requirements under the act when the agreement expires, but assume that
they will have to continue implementing the verification and importer
declaration requirements. However, without the bilateral trade
agreement, CBP would no longer have the data for the export charge
calculation that are included as part of the verification process. A
senior CBP official said that the agency would probably devote more
attention to this issue closer to 2013.
Conclusions:
One purpose of the Softwood Lumber Act of 2008 is to ensure the proper
operation and implementation of international agreements related to
softwood lumber. CBP has established mechanisms to comply with its
requirements. However, officials from USTR, Commerce, and CBP told us
the act's requirements add little direct benefit to their efforts to
monitor compliance with the 2006 Softwood Lumber Agreement, although
U.S. officials and some industry representatives stated there may be
some indirect benefit resulting from the increased scrutiny of softwood
lumber imports from Canada. The act does not state what CBP's
reconciliation and verification requirements would be in 2013--when the
bilateral trade agreement is currently scheduled to expire. It is
unclear how CBP would implement its continuing requirements under the
act and what purpose these requirements would have in the absence of an
international agreement.
Recommendation for Executive Action:
To provide Congress with sufficient time to clarify the U.S. Customs
and Border Protection's requirements under the Softwood Lumber Act of
2008, we recommend that the Secretary of Homeland Security direct the
Commissioner of CBP to report to Congress on how the agency plans to
fulfill the requirements of the act upon the expiration of
international agreements related to softwood lumber.
Agency Comments:
We provided a draft of this report to the U.S. Customs and Border
Protection, Department of Commerce, and Office of the U.S. Trade
Representative. We received written comments from CBP and Commerce,
which are reprinted in appendixes V and VI. CBP concurred with the
report recommendation, stating that it will consult with Congress on
how to proceed when the Softwood Lumber Agreement expires. Commerce
also concurred with the draft report. We also received technical
comments from CBP and USTR, which we incorporated as appropriate. We
also provided relevant sections to Canadian officials for technical
comment, which we incorporated as appropriate.
We are sending copies of this report to interested congressional
committees, the Secretary of Commerce, the Secretary of Homeland
Security, and the U.S. Trade Representative. In addition, this report
will be available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact Loren Yager at (202) 512-4347 or yagerl@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Individuals who made key
contributions to this report are listed in appendix VII.
Signed by:
Loren Yager:
Director, International Affairs and Trade:
[End of section]
Appendix I: Scope and Methodology:
To describe U.S. Customs and Border Protection's (CBP) processes for
meeting the reconciliation and verification requirements of the
Softwood Lumber Act of 2008, we reviewed related documents and
interviewed CBP officials. We analyzed planning and programmatic
documents describing CBP reconciliation and verification procedures,
reviewed CBP reports covering the results of its efforts and discussed
these results with CBP officials in Washington, D.C. We also traveled
to Blaine, Washington, and Buffalo, New York, to interview CBP port
officials to determine how they conduct verifications under the act. We
met with lumber industry and customs brokers in Washington, D.C.;
Blaine; and Buffalo to discuss the impact of the act's requirements on
industry.
To better understand how the act's requirements for reconciliations and
verifications contribute to U.S. monitoring of the 2006 Softwood Lumber
Agreement,[Footnote 24] we interviewed knowledgeable officials, and
obtained information from the Department of Commerce (Commerce), the
Office of the U.S. Trade Representative (USTR), and CBP. We also met
with lumber industry representatives and customs brokers in Washington,
D.C.; Blaine; and Buffalo to discuss the effect of the act's
reconciliation and verification processes on U.S. government agencies'
monitoring efforts of compliance with the bilateral trade agreement.
To update our June 2009 report[Footnote 25] about the U.S. government's
efforts to monitor compliance with the 2006 Softwood Lumber Agreement,
we obtained documents summarizing the LCIA (formerly the London Court
of International Arbitration) decisions and agency documents on
compliance concerns. We also discussed the status of current compliance
concerns with officials from Commerce, USTR, and CBP. Our review
focused on Canada because it is the only country with which the United
States has an agreement specifically related to softwood lumber and is
by far the largest exporter of softwood lumber to the United States.
Shipment-level data for the reconciliations under the bilateral trade
agreement were not publicly available. GAO did not independently verify
the results of these reconciliations done under the agreement. CBP
provided data on U.S. imports from Canada at the regional level. We
compared these CBP regional-level data with Census data for volume and
value to assess the accuracy and consistency of the two data sets. We
interviewed officials from Canada's Department of Foreign Affairs and
International Trade (DFAIT) to update the status of Canadian efforts to
comply with the bilateral trade agreement and its related coordination
efforts with U.S. agencies.
We conducted this performance audit from December 2008 to December 2009
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Key Provisions of the 2006 Softwood Lumber Agreement:
The 2006 Softwood Lumber Agreement established a framework for managing
the U.S.-Canadian softwood lumber trade and includes key provisions
that are summarized below:
* Export measures:[Footnote 26] The agreement allows Canadian regions
[Footnote 27] to choose between two export control systems, with export
measures that vary according to the prevailing monthly price of lumber
(see table 2).[Footnote 28] All of the regions were allocated a
percentage of U.S. softwood lumber consumption based on the regions'
historic exports to the United States.[Footnote 29] That share of a
region's U.S. consumption is used by the Canadian government to
calculate quotas.
* Option A consists of an export charge, but no quota.[Footnote 30]
Additionally, a region is subject to a surge penalty if the total
volume of exports for that region exceeds its trigger volume, which is
calculated, in part, by its share of U.S. consumption in a month.
[Footnote 31]
* Option B consists of an export charge and a quota.[Footnote 32]
Table 2: Export Control Options under the 2006 Softwood Lumber
Agreement:
Prevailing monthly price per thousand board feet (US$): Over $355;
Option A - export charge rate (percentage of export price): No export
charge;
Option B - export charge plus quota: Export charge rate (percentage of
export price): No export charge;
Option B - export charge plus quota: Quota (based on region's share of
U.S. consumption): No quota.
Prevailing monthly price per thousand board feet (US$): $336-$355;
Option A - export charge rate (percentage of export price): 5.0%;
Option B - export charge plus quota: Export charge rate (percentage of
export price): 2.5%;
Option B - export charge plus quota: Quota (based on region's share of
U.S. consumption): Region's share of 34% of the expected U.S.
consumption for the month.
Prevailing monthly price per thousand board feet (US$): $316-$335;
Option A - export charge rate (percentage of export price): 10.0%;
Option B - export charge plus quota: Export charge rate (percentage of
export price): 3.0%;
Option B - export charge plus quota: Quota (based on region's share of
U.S. consumption): Region's share of 32% of the expected U.S.
consumption for the month.
Prevailing monthly price per thousand board feet (US$): $315 or under;
Option A - export charge rate (percentage of export price): 15.0%;
Option B - export charge plus quota: Export charge rate (percentage of
export price): 5.0%;
Option B - export charge plus quota: Quota (based on region's share of
U.S. consumption): Region's share of 30% of the expected U.S.
consumption for the month.
Source: GAO analysis of the 2006 Softwood Lumber Agreement.
[End of table]
* Information exchange:
- The United States and Canada are required to exchange information to
identify changes in Canadian federal and provincial forest management
and timber pricing policies.[Footnote 33] Canada is required to notify
the United States of changes made to certain timber pricing or forest
management systems and, among other information, provide evidence of
how these changes improve statistical accuracy and reliability of a
timber pricing or forest management system or maintain and improve the
extent to which stumpage charges[Footnote 34] reflect market
conditions.[Footnote 35] The agreement requires each party to respond
to requests from the other for information relevant to the operation of
the agreement.[Footnote 36]
- The United States and Canada also are required to exchange
information to reconcile value and volume data on a region-specific
basis.[Footnote 37] If the two countries are unable to reconcile region-
specific aggregated data, the agreement requires the two countries to
compare more specific data, including comparing information on the
Canadian export permit with that on the U.S. entry summary form.
[Footnote 38] The agreement calls for "complete reconciliation" within
9 months of each quarter where the parties cannot reconcile region-
specific data.[Footnote 39]
* Anticircumvention: Under article XVII of the agreement, neither party
shall take action to circumvent or offset commitments made under the
agreement, including any action having the effect of reducing or
offsetting the export measures or undermining the commitments set forth
in article V.[Footnote 40] Article XVII(2) of the agreement provides
clarification with respect to the types of actions parties consider
would or would not reduce or offset the export measures. Some of the
actions listed under article XVII(2) include provincial timber pricing
and forest management systems as they existed on July 1, 2006, any
modifications or updates to those systems that meet specified criteria,
and other government programs that provide benefits on a
nondiscretionary basis in the form and total aggregate amount in which
they existed and were administered on July 1, 2006. For an elaboration
of the programs, please see the 2006 Softwood Lumber Act, article
XVII(2).
* Dispute settlement: The agreement has mechanisms to resolve disputes
over compliance, which includes arbitration under the auspices of the
LCIA.
In addition, the agreement ended existing U.S. trade remedy
investigations. It also established the Softwood Lumber Committee, with
joint Canadian-U.S. representation, and several technical working
groups to oversee implementation of the agreement. Because of recent
low softwood lumber prices, the Canadian softwood lumber industry has
been paying the highest export charge rates mandated by the agreement
since the enactment of the agreement. (See figure 2.).
Figure 2: Lumber Price and Export Charge Rates, October 2005 through
September 2009:
[Refer to PDF for image: illustrated line graph].
Prevailing monthly price of softwood lumber products:
Month: Oct-05;
U.S. dollars per thousand board feet: $366.
Month: Nov-05;
U.S. dollars per thousand board feet: $359.
Month: Dec-05;
U.S. dollars per thousand board feet: $365.
Month: Jan-06;
U.S. dollars per thousand board feet: $382.
Month: Feb-06;
U.S. dollars per thousand board feet: $379.
Month: Mar-06;
U.S. dollars per thousand board feet: $369.
Month: Apr-06;
U.S. dollars per thousand board feet: $367.
Month: May-06;
U.S. dollars per thousand board feet: $354.
Month: Jun-06v
U.S. dollars per thousand board feet: $326.
Month: Jul-06;
U.S. dollars per thousand board feet: $313.
Month: Aug-06;
U.S. dollars per thousand board feet: $296.
Month: Sep-06;
U.S. dollars per thousand board feet: $292.
Month: Oct-06 (2006 Softwood Lumber Agreement);
U.S. dollars per thousand board feet: $278.
Month: Nov-06;
U.S. dollars per thousand board feet: $275.
Month: Dec-06;
U.S. dollars per thousand board feet: $288.
Month: Jan-07;
U.S. dollars per thousand board feet: $295.
Month: Feb-07;
U.S. dollars per thousand board feet: $287.
Month: Mar-07;
U.S. dollars per thousand board feet: $282.
Month: Apr-07;
U.S. dollars per thousand board feet: $287.
Month: May-07;
U.S. dollars per thousand board feet: $287.
Month: Jun-07;
U.S. dollars per thousand board feet: $306.
Month: Jul-07;
U.S. dollars per thousand board feet: $302.
Month: Aug-07;
U.S. dollars per thousand board feet: $289.
Month: Sep-07;
U.S. dollars per thousand board feet: $276.
Month: Oct-07;
U.S. dollars per thousand board feet: $263.
Month: Nov-07;
U.S. dollars per thousand board feet: $262.
Month: Dec-07;
U.S. dollars per thousand board feet: $267.
Month: Jan-08;
U.S. dollars per thousand board feet: $249.
Month: Feb-08;
U.S. dollars per thousand board feet: $244.
Month: Mar-08;
U.S. dollars per thousand board feet: $239.
Month: Apr-08;
U.S. dollars per thousand board feet: $251.
Month: May-08;
U.S. dollars per thousand board feet: $279.
Month: Jun-08;
U.S. dollars per thousand board feet: $268.
Month: Jul-08;
U.S. dollars per thousand board feet: $267.
Month: Aug-08;
U.S. dollars per thousand board feet: $282.
Month: Sep-08;
U.S. dollars per thousand board feet: $272.
Month: Oct-08;
U.S. dollars per thousand board feet: $234.
Month: Nov-08;
U.S. dollars per thousand board feet: $224.
Month: Dec-08;
U.S. dollars per thousand board feet: $213.
Month: Jan-09;
U.S. dollars per thousand board feet: $198.
Month: Feb-09;
U.S. dollars per thousand board feet: $199.
Month: Mar-09;
U.S. dollars per thousand board feet: $195.
Month: Apr-09;
U.S. dollars per thousand board feet: $208.
Month: May-09;
U.S. dollars per thousand board feet: $198.
Month: Jun-09;
U.S. dollars per thousand board feet: $222.
Month: Jul-09;
U.S. dollars per thousand board feet: $238.
Month: Aug-09;
U.S. dollars per thousand board feet: $239.
Month: Sep-09;
U.S. dollars per thousand board feet: $236.
Also indicated on the graph are the following:
Option A Provinces:
0.0% Export charge rate;
5.0% Export charge rate;
10.0% Export charge rate;
15.0% Export charge rate
Option B Provinces:
0.0% Export charge rate and no quota;
2.5% Export charge rate and quota[A];
3.0% Export charge rate and quota[B];
5.0% Export charge rate and quota[C].
Source: GAO analysis of Department of Commerce and 2006 Softwood Lumber
Agreement data.
[A] Region's share of 34 percent of the expected U.S. consumption for
the month.
[B] Region's share of 32 percent of the expected U.S. consumption for
the month.
[C] Region's share of 30 percent of the expected U.S. consumption for
the month.
[End of figure].
[End of section].
Appendix III: CBP Continues to Address Challenges to Reconciling Value
Data under the 2006 Softwood Lumber Agreement:
In June 2009, GAO reported on the challenges that U.S. and Canadian
officials identified in reconciling the U.S.-entered value and the
Canadian export price data.[Footnote 41] Under the 2006 Softwood Lumber
Agreement, the United States and Canada are required to compare and
reconcile the import volume and value data from the United States to
the export volume and value data from Canada by region on a quarterly
basis.[Footnote 42] As of early November 2009, the two countries had
reconciled 6 quarters of volume data but had not been able to fully
reconcile the value data for any quarter since the 2006 Softwood Lumber
Agreement went into effect. (CBP stated that they planned to have
additional meetings with Canadian officials about the reconciliations
in November 2009.) We previously reported the factors that U.S. and
Canadian officials have identified that make comparing and matching the
U.S. import values to Canadian export values challenging. The Canadian
value data on the Canadian export permit uses an approximate value
determined at the time of shipment based on the export price definition
in the 2006 Softwood Lumber Agreement, while the U.S.-entered value on
the U.S. entry summary form is defined by statute[Footnote 43] and is
expected to be higher because it may include export charges, which are
not part of the Canadian export price data. More broadly, factors that
may cause the U.S. values to be different from the Canadian values
include the following: (1) inconsistent units of measurement, (2)
estimated versus actual values, (3) inconsistent inclusion of export
charges in the prices, (4) remanufactured goods, (5) a $500 cap, and
(6) a mismatch of shipment dates and entry dates. (For a more detailed
discussion of each of these factors, see GAO-09-764R.).
CBP officials stated that they have made progress in value
reconciliation as the quality of data has improved. They acknowledged
that, despite this improvement, larger differences persist at regional
levels compared with aggregate countrywide data. CBP officials believe
remanufactured goods[Footnote 44] account for the majority of
differences, based on their review of an analysis conducted by Canadian
officials. As provided in the 2006 Softwood Lumber Agreement, the U.S.
value reported on the U.S. entry summary form is the value of the final
finished product, while the Canadian value on the export permit should
be the original cost of the wood and should not include the value-added
by the remanufacturer. According to CBP, the difference between the
value of the original wood and the final product can exceed thousands
of dollars. According to CBP officials, they reviewed an analysis by
Canada of 1 quarter, which showed that remanufactured goods accounted
for about 5 percent of the total value of softwood lumber shipments for
that quarter, but 95 percent of the total value discrepancies.[Footnote
45] CBP officials told us they have not independently analyzed the
impact of remanufacturers on the value differences observed in value
reconciliation. They told us that they have not yet developed the
programming capacity to identify and separate exports from
remanufacturers from other exports.
Representatives from the U.S. industry group continue to be skeptical
of the reconciliation under the bilateral trade agreement and believe
Canada may be undercollecting export charges based on its own data
analysis. This analysis, using publicly available data from the U.S.
Census Bureau, showed that the actual tax collected is consistently
lower than the amount that the representatives estimate should be
collected. Representatives from the group told us that they do not
believe it is possible for the factors identified by the U.S. and
Canadian officials to explain the level of differences in the values
they observed. The U.S. and Canadian trade data used in the official
reconciliation are not publicly available. GAO did not conduct
independent evaluation of the reconciliation results.
However, CBP provided us with data on U.S. imports from Canada at the
regional level. Our analysis comparing the CBP data with the Census
data revealed many differences and inconsistencies. For example, the
regional differences between CBP value and Census data are not in
proportion with the size of exports from the region. Quebec accounts
for about 20 percent of the exports from Canada, but close to 40
percent of the value differences between CBP and Census. In addition,
the differences between CBP and Census data are usually proportionally
larger for the value data than for the volume data. CBP officials
stated it is not possible to replicate the official reconciliation
using the Census data.
[End of section]
Appendix IV: U.S. Agencies Continue Monitoring the 2006 Softwood Lumber
Agreement and Have Identified Concerns:
U.S. agencies continue to monitor Canada's compliance with the 2006
Softwood Lumber Agreement and have identified a number of concerns.
[Footnote 46] U.S. agencies monitor compliance through a variety of
sources, including notifications from Canada that are required under
the agreement, news reports, and provincial and federal government Web
sites for announcements of changes to forest policies and programs.
According to U.S. officials, they have spent substantial resources to
determine whether some Canadian or provincial programs represent a new
or substantial change to existing programs that might be exempted from
the anticircumvention provision of the agreement.[Footnote 47] U.S.
agencies state that they investigate their concerns and, where
appropriate, request additional information from Canada. Should the
concerns remain unaddressed, the United States may resort to the
dispute settlement mechanisms contained in the agreement, which can
include arbitration under the auspices of the LCIA.
LCIA decisions regarding Canada's calculation of volume measures. The
first arbitration regarding Canada's calculation of volume measures
began in August 2007 (LCIA Case No. 7941). The Canadian government
contended that adjusting U.S. consumption only applied to provinces
under the quota provision, and that the adjustment mechanism only
applied beginning in July 2007. The United States contended that the
adjustment mechanism applied to calculating expected U.S. consumption
for all provinces and should have been used beginning the first quarter
of 2007. The arbitration tribunal found that, although the adjustment
of expected U.S. consumption did not apply to the provinces without a
quota, Canada should have begun applying the adjustment mechanism to
the provinces with quotas in January 2007.
The arbitration tribunal determined that 30 days from the remedy award
was a reasonable period of time for Canada to cure its breach of the
agreement. Pursuant to the agreement, the arbitration tribunal
determined that if Canada failed to cure the breach within the 30 days,
as compensation for the breach, Canada shall be required to collect an
additional 10 percent export charge on softwood lumber products
exported to the United States from the option B regions until they had
collected CDN$68.26 million (US$54.8 million).[Footnote 48]
On April 2, 2009, the Canadian government requested arbitration to
determine whether its proposed payment of US$34 million plus interest
to the United States had cured the breach (LCIA Case No. 91312). The
U.S. government did not consider Canada's offer to make a payment as
having cured the breach. In addition, because the United States
considered that Canada failed to either cure its breach or impose the
compensatory measures determined by the arbitration tribunal, on April
15, 2009, pursuant to the agreement, the United States imposed a 10
percent customs duty on imports of softwood lumber products from
Ontario, Quebec, Manitoba, and Saskatchewan.[Footnote 49]
In September 2009, the LCIA issued a decision in which it did not
consider Canada's tender of US$36.66 million (US$34 million plus
interest) to the U.S. government as having cured the breach and
determined that the remedy required Canada to impose export charges on
the involved regions. The LCIA decision did not issue any ruling on
whether the United States was required to remove its 10 percent ad
valorem customs duty on softwood lumber products from the involved
Canadian provinces at this time. The decision encouraged both parties
to agree on an amicable settlement regarding this issue. According to
Canadian government officials, the Canadian government has developed
mechanisms to collect the 10 percent export charge from these
provinces. Canada has proposed to the United States that the two
countries coordinate on establishing a mutually acceptable date to lift
the U.S. duty and impose a Canadian export charge. According to USTR
officials, the United States is considering Canada's proposal.
U.S. request to LCIA regarding Ontario and Quebec provincial programs.
In January 2008, the United States requested arbitration to determine
whether six provincial programs or other measures in Ontario and Quebec
circumvent the agreement (LCIA Case No. 81010). The U.S. government
contends that these measures include a number of grants, loans, loan
guarantees, tax credits, and programs to promote wood production that
circumvent the commitments made by Canada in the agreement. Canada
maintains that these measures are in full compliance with the
agreement. A decision on this case is expected in 2010.
Concern about the large amount of low-grade timber harvested in Central
British Columbia. U.S. agency officials remain concerned about the
large amount of lumber being produced from low-grade timber from the
mountain pine beetle-infested British Columbia interior region.
Although the grade definitions existed prior to the agreement,[Footnote
50] U.S. agencies question whether the grading system is being
appropriately applied. Lumber producers pay the minimum harvest fee of
CDN$0.25 per cubic meter for this low-grade wood. Since the mid-1990s,
large sections of central British Columbia have been infested with the
mountain pine beetle, a bark beetle that attacks and kills mature
lodgepole pine trees. Natural Resources Canada, a federal agency,
anticipates that the beetle will kill 80 percent of British Columbia's
mature pine forests by 2013. As a result of the beetle infestation,
lumber companies in the British Columbia interior region are currently
harvesting a large volume of dead trees. British Columbia's lumber
industry has adopted the practice of heating mountain pine beetle-
infested timber to reveal any preexisting cracks, a process that they
contend allows for correct lumber grading. U.S. industry contends that
this process inflates the amount of low-grade timber and thus reduces
cost for British Columbia lumber producers.
U.S. agency officials visited British Columbia in summer 2008 to
investigate the grading of beetle-killed timber. Subsequently, the
United States sent Canada a number of technical questions, including
questions on the grading system. In spring 2009, a delegation from
British Columbia traveled to Washington, D.C., and briefed U.S.
government officials on grading and the mountain pine beetle issues. In
October 2009, the delegation again met with U.S. government officials
and provided specific responses to each of the outstanding questions
that the United States had sent to the province prior to this meeting.
According to USTR and Commerce officials, the United States is now
reviewing and analyzing these data and other information provided.
Concern about reduced fees for harvesting timber in coastal British
Columbia. U.S. government officials have questions about the January
2009 reduction in the fees charged for harvesting timber in the British
Columbia coast. The British Columbia Ministry of Forests and Range uses
an equation, under the coast market pricing system, to determine the
fees charged for harvesting timber from public land. The equation is
updated annually to account for changes in the market value of timber
and in other factors, such as the cost of road construction or
replanting trees, and is also adjusted quarterly to reflect changes in
market conditions. The equation was grandfathered into the agreement;
however, U.S. officials are concerned with how British Columbia has
adjusted the equation. According to British Columbia officials, the
January 2009 fee reduction was the result of the confluence of the
annual and quarterly updates of the timber fee equation. U.S. agency
officials have requested additional information from Canada. USTR
officials stated in September 2009 that Canadian officials have invited
U.S. econometricians to British Columbia to discuss the details of the
adjustments with the British Columbia provincial officials who made the
adjustments to the equation.
Concern about potential abuse of the Temporary Importation under Bond
program. CBP headquarters and port officials expressed concern that the
Temporary Importation under Bond (TIB) program could be abused by the
softwood lumber industry. According to data from CBP, a comparison of
TIB imports to total softwood imports shows that TIB represented less
than 0.08 percent of total softwood lumber imports for fiscal year
2009. Although officials acknowledge that TIB imports are a small
amount of total imports, they stated that they are examining the issue.
TIB is a procedure whereby, under defined circumstances, merchandise
may enter into a U.S. Custom's territory temporarily, for a period of
up to 1 year.[Footnote 51] Such goods must be covered by a bond, and
the importer must agree to export or destroy the merchandise within a
specified time or pay liquidated damages, normally double the estimated
duties applicable to the entry.[Footnote 52] Although softwood lumber
products from Canada covered under the Softwood Lumber Agreement are
subject to the export measure and export charge, they are not subject
to a U.S. import duty.[Footnote 53] The liquidated damages for products
under TIB is limited to $100 per entry. For example, according to CBP
port officials in Blaine, some softwood lumber products that enter the
United States from Canada under TIB are not required to be accompanied
by a permit issued under the Canadian export permit program, because
the intent is to manufacture the lumber into wood siding at a U.S.
plant. Port officials pointed to the positive economic benefits for
local U.S. businesses from such shipments. However, these port
officials also raised concerns that they are limited to applying a $100
liquidated damages fee if they are not supplied with proof of export.
These officials stated that the $100 liquidated damages would represent
a small fraction of the 15 percent Canadian export tax that would
normally be applied to softwood lumber exports. The port officials
stated that in recent years, about 9 percent of softwood lumber entries
at that port were under the TIB program and that for fiscal year 2009,
about 5 percent of these entries had not been properly closed out
showing export. The officials stated that they are not certain whether
the failure to close these TIB movements was a paperwork oversight or
represented cases where the goods had stayed in the United States
without making formal entry and without paying the Canadian export
charge.
[End of section]
Appendix V: Comments from the Department of Homeland Security:
U.S. Department of Homeland Security:
Washington, DC 20528:
December 9, 2009:
Mr. Loren Yager:
Director, International Affairs:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Mr. Yager:
RE: Draft Report GAO 10-220 (Reference # 320645) Softwood Lumber Act of
2008: Customs and Border Protection Established Required Procedures,
but Agencies Report Little Benefit from New Requirements:
Thank you for providing us with a copy of the Government Accountability
Office's (GAO) draft report entitled, "Softwood Lumber Act Of 2008:
Customs and Border Protection Established Required Procedures, but
Agencies Report Little Benefit from New Requirements." This report
discusses Customs and Border Protection's (CBP) processes for meeting
the Softwood Lumber Act's requirements and how these requirements
contribute to the United States' (U.S.) efforts to monitor compliance
with the 2006 Softwood Lumber Agreement. GAO analyzed information from
relevant U.S. agencies, interviewed knowledgeable officials from those
agencies, and discussed these issues with U.S. and Canadian industry
representatives.
The draft report contains one recommendation. CBP concurs with this
recommendation. The recommendation and CBP's actions to address them
are described below.
Recommendation: "In order to provide Congress with sufficient time to
clarify CBP's requirements under the Softwood Lumber Act of 2008, we
recommend that the Secretary of DHS direct the Commissioner of CBP to
report to Congress on how the agency plans to fulfill the requirements
of the act upon the expiration of international agreements related to
softwood lumber.".
CBP Response: CBP concurs with this recommendation. The Softwood Lumber
Agreement does not expire until 2013 (and it can be extended). In the
absence of the current Softwood Lumber Agreement (including
extensions), CBP will not have data to reconcile nor verify any
information to report to Congress. As the expiration date approaches,
CBP will consult with the Congress on how to proceed when the Softwood
Lumber Agreement expires.
Thank you for the opportunity to comment on this Draft Report and we
look forward to working with you on future homeland security issues.
Sincerely,.
Signed by:
Jacqueline L. Lacasse, for:
Jerald E. Levine:
Director:
Departmental GAO/OIG Liaison Office:
[End of section]
Appendix VI: Comments from the Department of Commerce:
United States Department Of Commerce:
The Under Secretary for International Trade:
Washington. D.C. 20230:
November 30, 2009:
Dr. Loren Yager:
Director, International Affairs and Trade:
U.S. Government and Accountability Office:
441 G. Street, N.W.
Washington, DC 20548:
Dear Dr. Yager:
Thank you for forwarding the draft report, Softwood Lumber Act of 2008:
Customs and Border Protection Established Required Procedures, but
Agencies Report Little Benefit from New Requirements, GAO-10-220, for
the Department of Commerce's review. The International Trade
Administration (ITA) concurs with the report and does not have any
comments.
We appreciate the opportunity to provide comments on the draft report.
If you have any comments about ITA's review of the draft, please
contact Mr. Victor E. Powers,Director, Office of Management and
Operations, at (202) 482-1422.
Sincerely,.
Signed by:
Michelle O'Neill, Acting:
[End of section].
Appendix VII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Loren Yager, (202) 512-4347 or yagerl@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Celia Thomas, Assistant
Director; Jason Bair; Ming Chen; Karen Deans; David Dornisch; Tim
Fairbanks; Rachel Girshick; Grace Lui; and Christina Werth made key
contributions to this report. Kate Brentzel and Etana Finkler provided
technical support.
[End of section].
Footnotes:
[1] Softwood Lumber Agreement between the Government of Canada and the
Government of the United States of America, September 12, 2006
(hereafter referred to as "SLA 2006" in the footnotes of this report).
[2] The agreement uses the term "volume restraint." However, for the
purposes of this report, we use the term "quota" as an equivalent for
the term "volume restraint."
[3] SLA 2006, arts. VI and VII.
[4] Softwood Lumber Act of 2008, Pub. L. No. 110-246, § 3301, 122 Stat.
1651, 1844-1853 (codified at 19 U.S.C. §§ 1683-1683g). The act named
the Department of the Treasury to implement these requirements, which
Treasury delegated to the Department of Homeland Security's U.S.
Customs and Border Protection.
[5] To address this mandate, we reviewed U.S. efforts to monitor
compliance with the 2006 Softwood Lumber Agreement. We did not conduct
a legal compliance review.
[6] 19 U.S.C. § 1683g.
[7] GAO, U.S. and Canadian Governments Have Established Mechanisms to
Monitor Compliance with the 2006 Softwood Lumber Agreement but Face
Operational Challenges, [hyperlink,
http://www.gao.gov/products/GAO-09-764R] (Washington, D.C.: June 18,
2009).
[8] [hyperlink, http://www.gao.gov/products/GAO-09-764R].
[9] Softwood lumber is obtained primarily from evergreen, coniferous
trees, mainly from the spruce, pine, and fir families. The main use of
softwood lumber products is for new home and building construction and
remodeling.
[10] The bilateral trade agreement allows Canadian regions to choose
between two export control systems, with export measures that vary
according to the prevailing monthly price of lumber. All of the regions
were allocated a percentage of U.S. softwood lumber consumption based
on the regions' historic exports to the United States. That share of a
region's U.S. consumption is used by the Canadian government to
calculate quotas. Option A consists of an export charge, but no quota.
Additionally, a region is subject to a surge penalty if the total
volume of exports for that region exceeds its trigger volume, which is
calculated, in part, by its share of U.S. consumption in a month.
Option B consists of an export charge and a quota. The export charge is
paid by the exporter to the Canadian federal government.
[11] Canada is the only country with which the United States has an
agreement specifically related to softwood lumber.
[12] 19 U.S.C. § 1638a and 19 C.F.R. § 12.142.
[13] 19 U.S.C. § 1683d.
[14] 19 U.S.C. § 1683e.
[15] 19 U.S.C. § 1683a.
[16] According to CBP, the Entry Summary Compliance Measurement (ESCM)
program is a primary method by which the agency measures risk in the
areas of trade compliance and revenue collection. The program is also a
key performance indicator used to determine whether CBP's internal
controls are operating effectively as they pertain to ensuring
compliance with laws and regulations. ESCM is intended to provide an
indication of how compliant the importer universe is based on a random
sample and statistical weighting of all import transactions. CBP
utilizes ESCM to measure the effectiveness of its control mechanisms
currently in place and the execution in collecting revenue rightfully
due.
[17] CBP analyzed 309 entries of softwood lumber from all countries
occurring between October 2008 to March 2009. Of these entries, 194
were from Canada.
[18] On its Web site for frequently asked questions about the act, CBP
provided the following example of how to perform this calculation: "If
the export price listed on the export permit is $1,000 and you have two
lines on the entry summary, divide the $1,000 [between] the two lines.
If 75 percent of the entered value is on one line and 25 percent is on
the other, then list $750 as the export price on the first line and
$250 as the export price on the other line. The export price listed on
both lines on the entry summary should add up to the export price on
the one line of the export permit."
[19] 19 U.S.C. § 1683d and H.R. Rep. No. 110-627.
[20] 19 U.S.C. § 1683(5).
[21] The act states that CBP is to reconcile the export price (or
revised export price) declared by the importer with the export price
(or revised export price) on the export permit, if any. In its
semiannual reports to Congress, CBP has stated that it does not receive
revised export price data from any country and therefore is unable to
reconcile revised export price data. The revised export price data
would provide more information about the final export price upon which
the Canadian export charges under the agreement would actually be
based. However, since the Canadian government is not obligated to
provide that information to the United States, CBP cannot reconcile the
revised export price.
[22] 19 U.S.C. § 1683f.
[23] 19 U.S.C. § 1683d and H.R. Rep. No. 110-627.
[24] Softwood Lumber Agreement between the Government of Canada and the
Government of the United States of America (Sept. 12, 2006).
[25] GAO, U.S. and Canadian Governments Have Established Mechanisms to
Monitor Compliance with the 2006 Softwood Lumber Agreement but Face
Operational Challenges, [hyperlink,
http://www.gao.gov/products/GAO-09-764R] (Washington, D.C.: June 18,
2009).
[26] (SLA 2006, art. VII.) The export measures do not apply to certain
softwood lumber products that are first produced in the Maritimes from
logs originating in the Maritimes. (See SLA 2006, art. X(1) for more
details on excluded products from the Maritimes.) The export measures
also do not apply to softwood lumber products first produced in and
from logs originating in the Yukon, Northwest Territories, or Nunavut.
(SLA 2006, art. X.) The agreement also excludes certain companies from
the export measures. (SLA 2006, annex 10.)
[27] The agreement defines "region" as Alberta, the British Columbia
Interior, the British Columbia Coast, Manitoba, Ontario, Saskatchewan,
or Quebec. (SLA 2006, art. XXI(45).)
[28] The prevailing monthly price is defined by annex 7A of the
agreement. In January 2010, the provinces will have their first
opportunity to change which export control option they implement. (SLA
2006, art. VII(9).)
[29] The regions' shares of U.S. consumption are set forth in table 1
of annex 7B of the agreement.
[30] Option A was chosen by Alberta, the British Columbia interior, and
the British Columbia coastal regions. (The agreement divides British
Columbia into two regions.)
[31] Under article VIII of the agreement, if the volume of exports from
a region exceeds its trigger volume by 1 percent or less in a month,
Canada shall reduce the applicable trigger volume for that region
during the next month equal to the overage. Furthermore, if the volume
of exports from a region exceeds the region's trigger volume by more
than 1 percent in a month, Canada shall retroactively apply to all
exports to the United States from that region an additional export
charge equal to 50 percent of the applicable export charge for that
month. Trigger volume is calculated in annex 8 of the agreement.
[32] The quota for option B is calculated in annex 7B of the agreement.
Option B was chosen by Saskatchewan, Manitoba, Ontario, and Quebec.
[33] SLA 2006, art. XV(13).
[34] According to a Congressional Research Service report, stumpage
charges are fees for the right to harvest timber from province-owned
timberlands.
[35] SLA 2006, art. XV(14).
[36] SLA 2006, art. XV(B)(13).
[37] SLA 2006, art. XV(6).
[38] SLA 2006, art. XV(8).
[39] SLA 2006, art. XV(8).
[40] SLA 2006, art. XVII(1).
[41] GAO-09-764R.
[42] SLA 2006, art. XV(6).
[43] 19 U.S.C. § 1401a.
[44] An export charge is applied to the price at primary processing,
rather than after it has undergone additional processing by a
remanufacturer. The agreement defines remanufactured softwood lumber
products as softwood lumber that has been processed to "produce
components, semi-finished and/or finished Softwood Lumber Products."
Specifically, article XXI of the agreement states: "'Remanufactured
Softwood Lumber Products' means Softwood Lumber Products that are
produced by reprocessing lumber inputs by subjecting such inputs to one
or more of the following: a change in thickness; a change in width; a
change in length; a change in profile; a change in texture; a change in
moisture; a change in grading; joining together by finger joisting;
turning; or other processes that produce components, semi-finished and/
or finished Softwood Lumber Products."
[45] According to officials from Canada's DFAIT, they have conducted
this analysis for other quarters as well.
[46] Our June 2009 report (GAO-09-764R) discussed a variety of
compliance concerns. We provide in this report an updated status of
these issues as well as descriptions of more recent concerns.
[47] Under article XVII of the agreement, neither party shall take
action to circumvent or offset commitments made under the agreement,
including any action having the effect of reducing or offsetting the
export measures or undermining the commitments set forth in article V.
Article XVII(2) of the agreement provides clarification with respect to
the types of actions parties consider would or would not reduce or
offset the export measures. Some of the actions listed under article
XVII(2) include provincial timber pricing and forest management systems
as they existed on July 1, 2006, any modifications or updates to those
systems that meet specified criteria, and other government programs
that provide benefits on a nondiscretionary basis in the form and total
aggregate amount in which they existed and were administered on July 1,
2006. For an elaboration of the programs, please see SLA 2006, art.
XVII(2).
[48] The tribunal ruling is in Canadian dollars. The U.S. dollar amount
is based on the exchange rate at the time of the award.
[49] In the Federal Register notice announcing the imposition of the
duty, USTR stated that the 2006 Softwood Lumber Agreement provides that
in the event the complaining party finds that the defending party has
failed to cure the breach or impose the compensatory adjustments
determined by the tribunal within 30 days of an award, the complaining
party is entitled to impose the compensatory measures itself.
Accordingly, with regard to Canada's 2007 breach of the agreement, the
agreement authorizes the United States to impose duties in an amount
not to exceed the additional export charges that the tribunal has
specified as compensation for the breach. 74 Fed. Reg. 16436 (Apr. 10,
2009).
[50] Under article XVII of the agreement, neither party shall take
action to circumvent or offset commitments made under the agreement,
including any action having the effect of reducing or offsetting the
export measures or undermining the commitments set forth in article V.
Article XVII(2) of the agreement provides clarification with respect to
the types of actions parties consider would or would not reduce or
offset the export measures. Some of the actions listed under article
XVII(2) include provincial timber pricing and forest management systems
as they existed on July 1, 2006, any modifications or updates to those
systems that meet specified criteria, and other government programs
that provide benefits on a nondiscretionary basis in the form and total
aggregate amount in which they existed and were administered on July 1,
2006. For an elaboration of the programs, please see SLA 2006, art.
XVII(2).
[51] An item imported under TIB must be exported within 1 year from the
date of importation. However, upon application, this period may be
extended but cannot exceed a total of 3 years. The importer must
present proof to CBP that the item was exported to avoid paying
liquidated damages. See 19 C.F.R §§ 10.31-10.40
[52] 19 C.F.R. § 10.39.
[53] However, softwood lumber imports from Ontario, Quebec, Manitoba,
and Saskatchewan are subject to the current ad valorem tax of 10
percent.
[End of section].
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