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Established Required Procedures, but Agencies Report Little Benefit 
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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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