Canadian production of widgets is almost entirely in the hands of three corporationsAltawidgeLtd.,OntwidgeLtd., andScotiawidgeLtd. All three corporations export a substantial volume of their products to the United States.

Two years ago, as a result of increased competition from Malaysian widget producers, two of the Canadian corporationsOntwidgeandScotiawidgeexperienced financial difficulties. As a result, the governments of Ontario and Nova Scotia stepped in to help save the widget industry. They provided long-term, low-interest loans to the corporations and granted other benefits, such as research grants and exemption from property taxes. By contrast,Altawidgehas received no government support but has been able to compete with its rivals because its operations are more advanced technologically.

Recently, there have been complaints from widget producers in the United States that they have lost a substantial share of the American market to imports from Canada and Malaysia. They allege that widget production in both countries is heavily subsidized. As a result of these complaints, the U.S. Department of Commerce has introduced a countervailing duty of 17 cents for each widget imported from Canada. The effect of the duty is to make Canadian widgets more expensive in the United States than domestically produced widgets.

Altawidgehas in turn complained that,whether or notthe Nova Scotia and Ontario producers receive an improper subsidy, its own products enjoy no such benefit and should not be subjected to the duty.

Discuss the issuesraised andsuggest what steps might be taken to resolve the dispute.