TORONTO – As Canada claimed victory in the softwood lumber dispute with the United States following a key NAFTA panel ruling on Wednesday, Washington replied it would keep hitting Ottawa with lumber tariffs and seek a negotiated settlement.

An Extraordinary Challenge Committee of three judges – two Canadians and one American – set up by the North American Free Trade Agreement unanimously dismissed U.S. claims that an earlier NAFTA ruling in favor of Canada violated trade rules.

That prompted Ottawa on Wednesday to demand quick repayment of billions of dollars in penalties collected by Washington since 2002.

“We fully expect the United States to abide by this ruling, stop collecting duties and refund the duties collected over the past three years,” said Canadian Trade Minister Jim Peterson.

The Bush administration imposed the tariffs in 2002 after accusing Canada of subsidizing its lumber industry. Most U.S. timber is harvested from private land at market prices, while in Canada, the government owns 90 percent of timberlands and charges fees for logging. The fee is based on the cost of maintaining and restoring the forest.

Canada has lost some 5 billion Canadian dollars ($4.1 billion) in punitive tariffs.

Canadian trade officials believe the win could be the final blow to the U.S. timber industry’s claims that Canadian producers are unfairly subsidized. But they acknowledge the battle may not be over because the Americans still have some options outside NAFTA, including a formal constitutional challenge or action under WTO regulations.

A statement from the office of the United States Trade Representative said Washington was disappointed with the ruling, but intends to keep in place its punitive tariffs on imports of Canadian softwood lumber and seek a negotiated settlement.

“We are, of course, disappointed in the ECC’s decision, but it will have no impact on the antidumping and countervailing [retaliatory] duty orders,” USTR spokeswoman Neena Moorjani said in a statement. “We continue to have concerns about Canadian pricing and forestry practices. We believe that a negotiated solution is in the best interests of both the United States and Canada, and that litigation will not resolve the dispute.”

A NAFTA panel ruled in August 2004 that the United States had failed to find a “threat of material injury” to the U.S. softwood lumber and ordered the punitive tariffs, averaging 27 percent on Canadian lumber, rescinded.

In November, the U.S. Trade Representative requested that an extraordinary commission be formed to review the panel’s action, claiming that the original NAFTA panel had violated the dispute settlement rules established under Chapter 19 of NAFTA.

Making matters even more complicated, there is a parallel debate under way by both sides at the World Trade Organization. The WTO has ruled that while Canada was indeed dumping too much lumber in the United States, the tariffs set by Washington were too high.

The U.S. Commerce Department agreed in December to cut punitive tariffs to about 21 percent, but Ottawa believes that’s still too high.

Both countries said they intended to resume negotiations over the long-standing dispute by the end of August.