The decision also provided a boost to the U.S.'s use of a controversial methodology used when calculating anti-dumping duties on Canadian lumber. In the past, the WTO has struck down American use of the process, called zeroing, which typically results in higher duty margins. That part of the ruling is a victory for the U.S.

"The WTO rules do not prohibit 'zeroing'," U.S. Trade Representative Robert Lighthizer said in a statement Tuesday, saying any previous WTO appellate body decisions that prohibit zeroing are erroneous and not binding. "The United States commends this panel for doing its own interpretive analysis, and for having the courage to stand up to the undue pressure that the appellate body has been putting on panels for many years."

The ruling marks the latest stage in a decades-long disagreement between the two nations, with the U.S. alleging its northern neighbor unfairly subsidizes lumber production. The WTO decision comes as Canada and the U.S. grapple with ratification of their new trade deal with Mexico, and over ongoing steel and aluminum tariffs.

Canadian Foreign Minister Chrystia Freeland has unsuccessfully urged Lighthizer to roll back the steel and aluminum tariffs as part of the new U.S.-Canada-Mexico trade deal, and regularly raises the softwood issue with him. Canada is running out of time to ratify the deal before its next election and has said it won't do so if the metals tariffs remain in place.

Freeland applauded part of the ruling but said Canada was considering an appeal based on the decision's views on zeroing.

"We are pleased to see the WTO has found the United States did not follow the rules in calculating the anti-dumping margins, however, we are concerned by the WTO's ruling on zeroing," she said Tuesday in Ottawa. "This is a practice which in past rulings has often been condemned, and we are now looking at next steps," including a WTO appeal, she said.

The U.S. and Canada have 60 days to decide whether to appeal the WTO ruling. Canada has also targeted the U.S. duties under the North American Free Trade Agreement's dispute settlement process.

If the WTO ruling stands on appeal, the U.S. will be required to roll back some of its restrictions on Canadian lumber imports, which may undercut sales from American producers such as Weyerhaeuser Co. and Georgia-Pacific LLC.

The U.S. imported $5.9 billion worth of softwood lumber from Canada in 2018, according to data complied by the Geneva-based International Trade Center.

The WTO dispute centers on a series of U.S. tariffs -- countervailing duties of up to 18 percent and anti-dumping duties of up to 7.28 percent -- on imports of Canadian softwood lumber products.