Chopping Down Canadian Lumber Industry

When one thinks of Canada and the United States, the image of friendly neighbors usually comes to mind, close allies sharing a common border, with tourists from both countries easily traveling back and forth. Bad blood, hardly, except maybe a friendly rivalry when the Toronto Blue Jays are playing the New York Yankees.

But that peaceful camraderie may be weakening under strain from a trade dispute over American imports of Canadian softwood lumber. What started as a little-known lumber industry issue has escalated into a national uproar in Canada, with many calling on the government in Ottawa to get tough with the Bush administration.

The rumblings started in August when the U.S. Commerce Department slapped a 19.3 percent anti-subsidy duty on Canadian softwood lumber, retroactive to March. At the end of October, tension heightened when the U.S. added an anti-dumping duty of 12.57 percent. The combined 31.9 percent penalties may cripple the softwood industry, a major employer in Canada, and force large scale layoffs across the country.

Ongoing talks to resolve the dispute broke down in mid-December after U.S. lumber envoy Marc Racicot, the former Governor of Montana, met in early November with Prime Minister Jean Chrétien and International Trade Minister Pierre Pettigrew in hopes of settling the impasse by Christmas. Such optimism was dashed when talks between the two parties abruptly broke off on Dec. 19, as U.S. lumber industry representatives dismissed a series of Canadian proposals as not going far enough.

The dispute has grown out of claims that the Canadian lumber industry is subsidized by the government which sets artificially low prices for logging on Crown land. The provincial governments, however, have adamantly dismissed such charges.

Racicot issued an ultimatum that the U.S. lumber industry come up with a way to resolve the long-running battle by Monday, January 14th, but the deadline passed with no proposal forthcoming. A second deadline came and went, and now, though a new U.S. proposal is still expected any day now, there's no guarantee, or even likelihood, that representatives of the Canadian lumber industry will consider it acceptable or fair.

Members of the Washington-based Coalition for Fair Lumber Imports, which is preparing the plan to resolve the dispute, huddled in Dallas last week reportedly putting final touches on its proposal, expected to be based on a market-based pricing system. Meanwhile, British Columbia softwood producers are meeting with provincial officials to reconsider its proposal of selling 13 percent of its timber on the open market, which was recently rejected.

It has been reported that the Coalition of Fair Lumber Imports is considering such ideas as imposing export taxes, duties or pricing Canadian timber using U.S. benchmarks.

"We live with this every day and its crippling the industry, especially in B.C.," said one Canadian softwood purchaser based in Toronto. "We have no idea what the U.S. proposal will be, or even if there will be one. It's a different world now in the lumber industry."   

According to the Toronto purchaser, the Coalition for Fair Lumber Imports may just decide to wait until March 21st when the final anti-dumping and countervailing duties are announced. One ray of hope in Canada's bargaining position is the fact that the 19.3 percent countervailing duty on Canadian softwood expired on Dec. 15th and cannot be legally reapplied for two months, though the 12.6 percent anti-dumping duty remains in place.

Still, even with the slight reprieve, few in the industry can predict what will happen regarding ultimate resolution of the current softwood dispute, and at what cost.

Since August, British Columbia, which produces about half the $10 billion of exports of Canadian softwood lumber to the United States, has suffered about 18,000 layoffs. There is fear that if the dispute is not resolved soon that another 12,000 will lose jobs in British Columbia, resulting in about half the province's work force in the softwood industry.

With hopes of a settlement, and the expiration of the countervailing duty, at least for now, some B.C. lumber producers have started calling employees back to work, but several companies are operating with about half the work force they had prior to November before the 32 percent in duties and penalties hit the industry.

The U.S. penalties are based on claims that forest companies have been subsidized by Canadian provincial governments due to low timber-cutting fees on Crown land, known as stumpage.

British Columbia Forest Minister Mike de Jong has described the duty as "a kick in the teeth" and was quoted in the Toronto Star, stating, "Someone should tell the American people that while their attention is understandably focused elsewhere in the world, there's a small group of bureaucrats and politicians and a few industrialists who are doing a hatchet job on their closest ally."

The British Columbia Chamber of Commerce fired off a letter last fall to 7,000 U.S. chambers charging that penalties imposed on Canadian softwood lumber was a "lose-lose" situation in both countries.

The letter maintained that the duty won't be of any benefit to the U.S. lumber industry in the long run because the industry's problems are based on an inadequate supply of timber, and not because of Canadian exports. The Chamber letter labeled the combined duty as "crushing" and "unfair, possibly unlawful."

Appealing to the U.S. chambers in the letter, John Winter, president of the B.C.Chamber, stated, "In these tough economic times, it is in your best interests to overturn this ruling and preserve the value trading relationship between our two nations."

The duties were applied after U.S. lumber producers complained that Canadian softwood was unfairly subsidized. As a result of the penalties, Canadian saw mills have been forced to lay off thousands and as Canadian lumber becomes much more expensive, giant hardware retailers, like Home Depot, may turn to European producers.

Adamantly rejecting U.S. claims that the Canadian softwood industry is unfairly subsidized and has dumped their product at below cost prices south of the border, Ottawa has announced that it will appeal the 19.3 percent duty to the World Trade Organization, though a decision may not be coming for at least two years.

Last week, Pettigrew took steps to ensure that the decision would not take that long, asking the the WTO's director general to appoint a panel to hear Canada's case. Once a panel is appointed, proceedings can be completed in six months.

Prime Minister Chretian has noted that Canada wants free trade in lumber, just as it has free trade in oil and natural gas under the North American Free Trade Agreement. He stated that the free trade agreement Canada signed with the United States was not only about oil and gas, it was also about wood.

It is estimated that the anti-dumping duty will net the U.S. Treasury between $68 and $70 million US dollars a month, with the proceeds of both finalized duties slated to go to U.S. companies who claimed that they were harmed by Canadian exports.

Several members of Congress, and some Canadian lumber producers, have called on Ottawa to voluntarily impose an export tax on Canadian lumber to resolve the dispute, a suggestion that was curtly rejected with the Canadian government accusing the United States of breaking the spirit and the law of the North American Free Trade Agreement.

For its part, the United States, according to a spokesperson for the U.S. Coalition for Fair Lumber Imports, which filed the original trade complaint, is "enforcing the law consistent with our international obligations."

As parties on both sides wait and hope for a solution, it is still uncertain whether a friendly atmosphere will return by spring when the Blue Jays once again take the field against the Yankees during the new baseball season.