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Two Sides on Softwood
Representatives of U. S. and Canadian Lumber Interests Give Their Views in Lumber Dispute

By Staff
Date Posted: 9/3/2002

Editor’s Note

The U.S. and Canada have been embroiled in a dispute over softwood lumber since an agreement between the two countries expired 18 months ago.

After the lumber pact expired, the Coalition For Fair Lumber Imports, a U.S. group, immediately sought duties on imported Canadian softwood lumber and accused Canadians of unfairly dumping cheap lumber in U.S. markets.

After an investigation by the U.S. Department of Commerce, the U.S. International Trade Commission voted to affirm anti-dumping and countervailing duties on softwood lumber imported from Canada, and the Department of Commerce subsequently imposed the duties.

The duties have had a significant impact on the Canadian softwood lumber industry. Several companies have been forced to shut down, and thousands of jobs have been lost.

We invited leaders on both sides of the dispute to submit an editorial espousing their view, and both agreed. Below we publish an editorial by W. J. ‘Rusty’ Wood of the Coalition For Fair Lumber Imports, representing U.S. lumber interests, and an editorial by Carl Grenier of the Free Trade Lumber Council, representing Canadian lumber interests.

Let the Market Set Price for Timber

By W. J. ‘Rusty’ Wood, Chairman

Coalition For Fair Lumber Imports

Canadian provinces own 95% of the timber and prohibit open and competitive sales of their timber. While the market establishes prices for timber in the U. S., timber prices in British Columbia, Alberta, Ontario and Quebec are set administratively by provincial bureaucrats at prices that are one-quarter to one-half of the timber's market value. By charging its lumber mills less than full value for the raw material, the Canadian government subsidizes Canadian lumber production and protects its mills from competition. These government policies and others, such as the tenure system, harvesting and processing requirements, and restrictions on log exports, distort the U.S. lumber market at the expense of U.S. lumber mills.

After a full investigation, the U.S. Department of Commerce found that Canadian lumber mills are subsidized and dumping by over 27%. The International Trade Commission found that this unfair trade threatens the U.S. lumber industry, which led to the imposition of duties in May of this year. Since the Canadian subsidies have been offset, Canadian lumber companies have opted to pay over $2 billion (Canadian) in duties to the U.S. Treasury each year rather than pay the Canadian people a fair price for timber.

The U.S. lumber industry would prefer the Canadian government collect the full value of its trees than to have our government impose duties at the border. We believe the Canadian government, not the U.S. lumber industry, should benefit for the uncollected value of Canadian trees.

U.S.-Canadian negotiations to settle the dispute have not progressed because Canada refuses to consider any proposal that would reform or fully offset the unfair trade advantages of its timber policies. Canada's unfair trade policies are currently offset through U.S. and international trade laws. However, the Coalition for Fair Lumber Imports believes the best way to resolve the softwood lumber conflict is through free and competitive markets for timber and lumber. The U. S. has repeatedly stated that it will consider any reasonable counter-proposals from Canada.

Canadian subsidies and dumping force U.S. mills to absorb virtually the entire adjustment when North American lumber demand and prices fall. For example, 27 U.S. sawmills closed permanently between August 2000 and March 2001, the last seven months of the 1996 Softwood Lumber Agreement, while only 2 mills closed in Canada. Dr. Peter Pearse, the renowned British Columbia forest expert, in a report last year commissioned by the British Columbia Ministry of Forests, said that 50% of British Columbia coastal sawmills were uneconomical and would be forced to close if the province’s lumber industry operated on market principles. It is Canadian subsidies -- not Canadian efficiencies -- that allow these inefficient mills to remain open while more efficient U.S. mills are forced to close.

While total U.S. lumber demand has fallen slightly in recent years from its 1999 peak, Canadian imports have continued to increase. If production cutbacks had been shared proportionately on both sides of the border, U.S. mills would have produced an additional 860 mmbf in 2001-- equivalent to the production capacity of 20 medium-sized sawmills.

The duty rates set by the U.S. government brought a quick response from Canada. The Canadians are challenging the duties in every possible forum. Canadian newspaper articles have reported that Canadian interests will likely continue spending $100 million a year in legal fees with the goal of eliminating what they believe are outrageous duties while maintaining unlimited subsidies.

Canada has filed eight appeals with the World Trade Organization (WTO) and three challenges under the North America Free Trade Agreement (NAFTA). Only the NAFTA panel decisions have the power to reduce or eliminate duties if they find the duties violate U.S. law. Responding to these appeals will be the most extensive effort undertaken to offset the unfairly subsidized Canadian lumber imports.

Canadian government officials have stated repeatedly that they will win at the WTO, and that there is no need to draw this out. We believe that the outcome is not a certainty for Canada and remain confident that the actions of the U.S. government are consistent with international commitments.

Canada has two central claims at the WTO. The first is the highly legalistic argument that giving undervalued timber to Canadian lumber producers is not a subsidy because the lumber companies receive only the right to cut timber and that is not a "good;" therefore, if it is not a good or service, there cannot be a subsidy. The same argument was made in 1992, and it was rejected.

Canada's second argument is that if its timber is subsidized, you cannot measure the subsidy by looking to U.S. market prices. Canada relies on WTO language that says a subsidy must be measured "in the country" in question. In situations where the alleged subsidy distorts the competitive market price, the WTO goes on to say that a subsidy must be measured "in relation to" the market "in the country" in question. Canadian governments set the price for 95% of the harvestable timber without competition, which severely distorts the market for competitively sold timber in Canada. Therefore, a comparison to the nearest market, in this case the U.S., is needed to determine the amount of subsidies provided to Canadian mills and conforms with the WTO rulings.

In a recent case brought by the U. S. against Canadian dairy subsidies, a WTO panel used a similar cross-border comparison to U.S. milk prices to determine if Canadian milk was subsidized. Canada had argued that a cross-border comparison was necessary in the milk case, as it showed Canada was not subsidizing its dairy industry. The Coalition for Fair Lumber Imports believes that WTO is not likely to accept the hypocritical Canadian argument that a cross-border comparison is inappropriate today because it shows massive timber subsidies. In fact, the European Community supported the U.S. legal position on both points.

If Canadian mills really believe that they are more efficient than U.S. mills and that Canadian timber is not heavily subsidized, they would have endorsed competitive timber sales a long time ago. Instead, Canada faces years of additional litigation to keep the subsidies flowing.

The U. S. has tabled offers to settle the case by providing a border tax to offset subsidies until and unless market reforms are implemented. The Coalition For Fair Lumber Imports believes that the U.S. proposals should be given a serious review by both sides if there is to be a durable settlement.

All the U.S. lumber industry has ever asked of Canada is to let the market set the price for timber rather than the government.

New Twists in Softwood Dispute

By Carl Grenier

Free Trade Lumber Council

No one in the North American softwood lumber industry was really surprised when the U.S. Coalition for Fair Lumber Imports filed a countervailing duty petition on April 2, 2001, only two days after the 1986 Softwood Lumber Agreement (SLA) lapsed. The surprise was that this very successful group also filed a dumping complaint covering the same products. How could Canadian exporters have been dumping when the SLA-induced price differential between Canada and the U.S. reached nearly $100 (U.S.) per thousand board feet for most of the five-year agreement?

Be that as it may, and because the existing rules on dumping (due to be re-negotiated in the current World Trade Organization Round) are clearly deficient, a dumping margin of 12.58%, was found, later reduced to 9.67 % in the final determination. This was the first new twist in the perpetual lumber saga between Canada and the U.S.

The second new twist came when the Department of Commerce, in clear breach with its own past practices and international trade rules, accepted the Coalition's contention that there were no private markets for standing timber in Canada. Commerce decided that the U.S. was justified in using cross-border comparisons to establish whether stumpage (the price paid for standing timber) was being subsidized in Canada. In doing so, Commerce came up with the highest subsidization margin ever, 19.31%.

Just for reminders, the last time that Commerce investigated Canadian softwood lumber, 10 years ago, it had found a subsidization margin of 6.51%. Since then, Canadian stumpage has more than doubled, on average. Logic would dictate that a similar examination, done under the same rules, would have found a much lower margin. Again, just for reminders, the 6.51% was thrown out by a Free Trade Agreement (now NAFTA) panel in 1994. This is the second new twist item: when the rules do not give the ‘right’ results, just ignore them and make up new rules as you go.

This brings me to the third new twist in this tangled tale. Canada and its industry have taken the matter to the dispute settlement systems under both the WTO and NAFTA. The first decision (there are still half a dozen to come) was given to both governments on July 29 by the WTO. The matter under review was the preliminary determination of subsidization that gave us that infamously high 19.31% countervailing duty rate.

While still confidential, the content of the decision was widely reported in the media. On the key point of using cross-border comparisons, the panel ruled unequivocally in favor of Canada, outlawing the practice. Similarly, on the matter of the existence of private markets for standing timber in Canada, the WTO panel concluded -- largely from evidence put on the record by the U.S. -- that such markets do indeed exist in Canada.

The decision did not change anything for U.S. importers of Canadian softwood lumber as the preliminary countervailing duty now has been replaced with a final countervailing duty rate (18.79%) since May 23. This final rate is under challenge as is the final antidumping duty of 8.43%, and a decision on these challenges is due in early 2003.

If the July 29 WTO decision is any indication, and I believe that the closely argued and very well-written decision is a landmark ruling, then the U.S. is headed for most certain defeat. This very predictable outcome should make the U.S. Coalition and U.S. authorities eager for a negotiated solution where the U.S. can exert its formidable leverage, as it has done twice in the past (1986 MOU and 1996 SLA). Yet, intransigence on the part of the Coalition, which insisted for a 32% levy, led to the March 21 breakdown of talks that had been underway since last August.

What is the significance of all this for downstream users of softwood lumber products in the U.S.? One consequence is clear from past experience. When you put severe restraints on one-third of your supplies, prices for the total supply are bound to rise, including from U.S. and third-country sources. After all, that is the point of protectionism.

Another consequence is that some U.S. producers of downstream products feel the urge to ask for protection for themselves. On July 29, Senators Baucus and Grassley wrote to the U.S. International Trade Commission, requesting that it investigate trusses and structural panels used in the housing industry. Such investigations often lead to trade action.

There is no question that well over 20,000 forestry and sawmill workers have already lost their jobs in Canada, and dozens of plants have been either curtailed or permanently shut down. Unless those affected, including those affected in the U.S., stand up and say, ‘No more,’ the damage will spread, and it will not be confined to Canada. Think about it.


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