It appears as though Canada and the U.S. are preparing for a trade war over softwood lumber exports. The U.S. and Canada have been long at loggerheads on the Canadian softwood exports to the U.S. and now that the one-year “standstill period” tacked onto the 2006 Canada-U.S. Softwood Lumber Agreement has expired, the chances for negotiating a timely agreement are dwindling.
This opens the door to what could be years of costly litigation, mill closures and job losses in Canada and higher lumber prices in the United States.
Even though some key Canadian mills have diversified exports, primarily to Asia, the U.S. continues to remain, as key market. The imposition of U.S. duties would impact softwood timber exports to the US, thereby leading to Canadian mill shutdowns and job losses. In B.C alone, five mills could be impacted a well as other mills across Canada.
According to reports, Quebec-based Resolute Forest Products (RFP) has already announced that jobs would be at risk if Canada agrees to accept the US proposal.
The heart of the dispute is the U.S. claim the Canadian lumber industry is unfairly subsidized by federal and provincial governments. Unlike the U.S. provincial governments own a majority of the timber in Canada. (However, most of the lumber in Eastern Canada is privately owned and thus would be exempt from U.S. duties). The prices charged to harvest the timber (stumpage fee) are set administratively, rather than through the competitive marketplace, the norm in the United States. The United States claims this constitutes an unfair subsidy, and is thus subject to U.S. trade remedy laws, where foreign goods benefiting from subsidies can be subject to a countervailing duty tariff to offset the subsidy and bring the price of the commodity back up to market rates.
The Canadian government and lumber industry dispute this assertion, based on a number of factors, including that Canadian timber is provided to such a wide range of industries, and that lack of specificity makes it ineligible to be considered a subsidy under U.S. law. Under U.S. trade remedy law, a countervailing subsidy must be specific to a particular industry. This requirement precludes imposition of countervailing duties on government programs, such as roads, that are meant to benefit a broad array of interests. Since 1982, there have been four major iterations of the dispute.
But with the housing market on a rebound south of the border this demand is growing. Canada has also been expanding rapidly into the Asian market, with China being the second-largest importer. The U.S. accounted for 69% of Canada's softwood lumber exports in 2015. This is an increased share of Canadian softwood lumber exports, which reached its lowest level in 2011 accounting for only 54%.
Softwood Lumber Agreement
The Softwood Lumber Agreement expired on October 12, 2015. Canadian producers of softwood lumber now have unfettered access to the US softwood lumber market.
There are several impediments that have kept Canada and the US from negotiating a new agreement to replace the SLA. Some producers in Western Canada have expressed a desire to renew the SLA as it currently stands, while others are demanding revisions. Some officials in Quebec believe that the province has made the necessary changes to their forestry practices to make them exempt from any future agreement, much the same as the Maritime Provinces. And some producers in Saskatchewan have expressed a desire to switch to the Option A system used in BC and Alberta, which assesses a larger tax but has no quota restrictions.
Perhaps the greatest hope for the industry is the fact that in early March 2016, Canadian Prime Minister Justin Trudeau and U. S. President Obama instructed their respective cabinet members responsible for international trade to explore all options for solving the trade dispute. Canada's international trade minister, Chrystia Freeland, said that "what we have committed to is to make significant, meaningful progress towards a deal — to have the structure, the key elements there a 100 days from now."
