Canada–United States softwood lumber dispute

Log driving near Vancouver, B.C., Canada

The Canada–United States softwood lumber dispute is one of the largest and enduring trade disputes between both nations. This conflict was given rise in the early 1980s and its effects are still seen today. British Columbia, the major Canadian exporter of softwood lumber to the United States, was most affected, reporting losses of 9,494 direct and indirect jobs between 2004 and 2009.

The heart of the dispute is the claim that the Canadian lumber industry is unfairly subsidized by federal and provincial governments, as most timber in Canada is owned by the provincial governments. 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 make it ineligible to be considered a subsidy under U.S. law. Under U.S. trade remedy law, a countervailable 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.

Importance of Lumber to Canada's Economy

The softwood lumber industry is a vital one to Canada. It has allowed for the employment of thousands of people. The overall forest industry has contributed to direct jobs for approximately 216,500 individuals. Indirectly, 350,000 people have been hired to work in other sectors that depend on Canada's forests. They include engineering, transportation, and construction. Such an impact from this industry can be seen in the nation's GDP, which added $19.8 billion in 2013. That accounted for around 1.25% of real GDP. Canada has the biggest trade surplus in relation to forest products ($19.3 billion in 2013). As the number one largest market, the U.S., is heavily dependent on Canada's lumber. The needs of the country outweigh the domestic supply. With the housing market on a rebound, 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 84% of Canada's exports in 2006. This number has thus decreased, to 53% in 2013. China in that same year accounted for 31%.

Softwood Lumber Agreement

In April 2006, The United States and Canada announced that they had reached a tentative settlement to end the current dispute. The Softwood Lumber Agreement (SLA), which this became known as, went into full effect in October 2006. The conditions stated that the time period for this agreement would last anywhere between seven and nine years. Both countries, in 2012, approved a two-year extension. Under the preliminary terms, the United States would lift countervailing and antidumping duties provided lumber prices continue to stay above a certain range. Below the specified range, a mixed export tax/quota regime would be implemented on imports of Canadian lumber. On Canada's part, the nation agreed to enforce regulations, such as in the form of taxes on lumber exports headed to the U.S. The provincial governments of Canada specifically, were encouraged to make changes to their pricing systems. Such changes would allow for a non-subsidizing system. As a part of the deal, more than $5 billion in duty deposits collected would be returned. The SLA establishes a dispute settlement mechanism based around the London Court of International Arbitration (LCIA), a nongovernmental institution. Either country may initiate dispute settlement of matters arising under the SLA or implementation thereof. Hearings are to be open to the public, as are pleadings and other documents. The agreement states that hearings are to be held in either the United States or Canada (the venue is selected by the arbitration tribunal). The SLA also provides that decisions of an arbitration panel are binding on the two parties.

Lumber I

The beginnings of the softwood lumber dispute, commonly referred to as Lumber I, began in 1982, when the U.S. lumber industry petitioned the U.S. Department of Commerce (DoC) to impose a countervailing duty. Ultimately, the DoC found that Canada's stumpage system was not specific to any single industry and thus not countervailable. While the DoC made this claim, the United States International Trade Commission (USITC) believed that these Canadian imports did in fact hinder U.S. producers. The U.S. lumber industry chose not to appeal.

Lumber II

The second phase, Lumber II, began in 1986, when a U.S. lumber industry group, the Coalition for Fair Lumber Imports, petitioned the Department of Commerce. The USITC once again arrived at the conclusion that Canada's exports unfairly impacted American producers. This time, the DoC did find Canadian forest programs to be countervailable and set a preliminary duty of 15%. Before the subsidy was imposed, the United States and Canada agreed to a Memorandum of Understanding that created a phased tariff. One of the terms of the MOU was that Canada levy an export tax on lumber traveling to the United States. Provinces that were affected had the chance to reduce this tax, if they performed any action meant to counterbalance their subsidies. British Columbia had the tax removed in 1987 while Quebec had it partly lifted in 1988.

Lumber III

Lumber III started in 1991, when Canada informed the United States it was withdrawing from the Memorandum of Understanding. In response, the Department of Commerce initiated a countervailing duty investigation, resulting in the DoC imposing countervailing duties.

This time, the Department of Commerce's determination was reviewed before a binational panel organized under the Canada–U.S. Free Trade Agreement (CUSFTA), the predecessor to the North American Free Trade Agreement. Prior to the signing of CAFTA, the DoC decision would have been reviewed by the United States Court of International Trade, but under CUSFTA, Canada had the option to have it reviewed before a binational panel, and they selected that option. The panel of three Canadians and two Americans found that the DoC's determination could not be supported by substantial evidence; which was a controversial decision, because the vote was along national lines, and the majority decision was based on the concept that U.S. law required the Department of Commerce to not only establish the existence of a subsidy, but also prove that the subsidy benefited the Canadian lumber industry. The U.S. Congress subsequently amended the law to explicitly state there was no "effects test". Additionally, the United States claimed that two of the Canadian panelists had conflicts of interests, and brought it before an extraordinary challenge committee. Again, this committee split along national lines. Malcolm Richard Wilkey, a retired judge with the United States Court of Appeals for the District of Columbia judge, wrote a dissent claiming that the panelists had conflicts of interest, and that its decision violated many of the rules of an appellate review of agency decision-making. One of the Canadian judges found that while the panelists were remiss in their disclosure obligations, the alleged conflicts were not severe enough to warrant their recusal.

In 1996, the United States and Canada reached a five-year trade agreement, The Softwood Lumber Agreement, officially ending Lumber III. Under its terms, Canadian lumber exports to the United States were limited to 14.7 billion board feet (34.7 million cubic metres) per year. However, when the agreement expired on April 2, 2001, the two countries were unable to reach consensus on a replacement agreement.

Lumber IV

Many American homes are built of Canadian softwood lumber

Three days after the Softwood Lumber Agreement's expired, the U.S. lumber industry petitioned the Department of Commerce to impose countervailing duties. In addition, the U.S. industry for the first time brought an anti-dumping claim, arguing Canadian lumber companies were also engaged in unfair price discrimination. On April 25, 2002, U.S. DoC announced it had determined subsidy and anti-dumping rates, of 18.79% and an 8.43% respectively, to give a combined rate of 27.22%, although specific companies were charged varying rates. By February 26, 2003, 15,000 workers had been laid off, primarily in British Columbia, as a result of the duties imposed by the United States

On May 27, the World Trade Organization issued a non-binding ruling in Canada's favor with regard to U.S. anti-dumping duties. The decision was appealed to a legally binding NAFTA panel. On August 13, the panel ruled that while the Canadian lumber industry could be considered subsidized, the DoC had improperly calculated duties based on U.S. stumpage prices: there was no "world market price" for timber, as the DoC had asserted, and it was therefore improper for DoC to calculate duties based on U.S. timber prices rather than Canadian market conditions. It accordingly ordered DoC to reassess its method of calculating duties.

Two weeks later, a WTO panel similarly concluded that the U.S. had imposed improperly high duties on Canadian lumber. The panel agreed with the DoC's contention that provincial stumpage fees did provide a "financial benefit" to Canadian producers, but ruled that this benefit did not rise to the level that would constitute a subsidy, and could not justify the U.S. duties.

On January 19, 2004, the WTO Appellate Body issued a final ruling with respect to the countervailing duty determination largely in Canada's favor (WTO Dispute 257). On August 11 of that same year, the Appellate Body issued a final ruling with respect to U.S. anti-dumping duties (WTO Dispute 264). In the meantime, because of an adverse WTO decision, the USITC reopened the administrative record, pursuant to a special provision in U.S. law, and issued a new affirmative threat of injury determination in December 2004. This new determination allowed the countervailing and antidumping duty tariffs to remain in place.

Between June 7, 2004 and October 5, 2005, DoC submitted five revised estimates of justifiable duties to the NAFTA panel, each successively lower than the last, the last being 1.21%, but each time the NAFTA panel found errors with each one and ordered it to recalculate.

On April 15, 2005, the Canadian Minister of Trade, Jim Peterson, announced that the federal government would provide Canadian softwood lumber associations with $20 million in compensation, for their legal expenses stemming from the dispute with the United States. That same year, another NAFTA Chapter 19 panel reviewed a determination made by the USITC that the U.S. lumber industry was under a threat of injury due to Canadian imports. Since the United States ceded jurisdiction to the World Trade Organization, it was necessary for the U.S. government to establish that a domestic industry was suffering injury, or faced a threat of injury, before countervailing duties can be imposed. The NAFTA panel found the USITC's determination invalid. In addition, the panel made the controversial decision to deny the USITC to reopen the administrative record, ordering the USITC to issue a negative determination based on the existing record. Unlike the panel during the Lumber III stage, this panel's decision was unanimous. However, the U.S. government challenged its decision before an extraordinary challenge committee, which, on August 10, 2005, issued a unanimous decision against the United States, finding that the NAFTA panel's determination was not sufficiently invalid to require vacatur or remand, under the standards of NAFTA.

On August 15, 2005, the United States said it would not abide by the NAFTA decision, due to the fact that the Section 129 determination superseded the decision which was reviewed by the NAFTA panel. Two weeks later, on August 30, the WTO, which had previously ruled against the ITC, this time upheld their new Section 129 "threat of injury" ruling. In September 2005, a U.S. lumber industry associate filed suit in the U.S. Court of Appeals for the District of Columbia Circuit, challenging the constitutionality of the NAFTA Chapter 19 dispute settlement system. On November 24, 2005, the U.S. Commerce Department announced it would comply with a separate NAFTA panel's order to cut a 16 percent duty on Canadian softwood lumber imports for now. The following month, the DoC announced recalculated countervailing and anti-dumping duties on softwood, totaling 10.8 percent.

In March 2006, a NAFTA panel ruled in Canada's favor, finding that the subsidy to the Canadian lumber industry was de minimis, i.e., a subsidy of less than one percent. Under U.S. trade remedy law, countervailing duty tariffs are not imposed for de minimis subsidies. A tentative deal was reached in July 2006, in which Canada got $4 billion of the $5.3 billion it lost because of the penalties with no additional tariffs to be imposed. After initial opposition from several large Canadian lumber concerns, the Harper government, without specifying how many companies endorsed it, was confident that there would be enough support to culminate the deal. In August 2006, Prime Minister Stephen Harper brought the new deal to Parliament for discussion and a possible confidence vote. If the House of Commons voted against the deal, it would have automatically forced a general election and annulled the deal. The Conservatives were in favor of the deal, while the New Democratic Party and the Liberal Party were against, leaving the Bloc Québécois as the deciding party. On September 7, Bloc Québécois Leader Gilles Duceppe endorsed the softwood lumber deal, effectively neutralizing any chance of an election coming out of a non-confidence vote. Five days later, Canadian International Trade Minister David Emerson, along with U.S. counterpart Susan Schwab, officially signed the deal in Ottawa. Despite supporters claims that it was the best deal possible, Elliott Feldman, an international and economic law specialist from the firm Baker & Hostetler in Washington, D.C., and a former director of the Canadian–American Business Council criticized the deal as "... one-sided ..." and a "... bad deal for Canada". On September 19, 2006, the deal passed its first reading in the Canadian House of Commons with a 172–116 majority. On September 27, the Canadian Press reported that Canada did not meet an October 1 deadline imposed by itself to implement the agreement. Withdrawal of some of the 30 issues regarding the deal was the main reason for the delay on complying to the deal.

On March 30, 2007, the United States requested formal consultations with Canada to resolve concerns regarding Canada’s lack of implementation of the export measures. The following month, on April 19, formal consultations took place between the two governments On August 7, the United States, pursuant to a settlement mechanism established in the 2006 Softwood Lumber Agreement (SLA), initiated arbitration in the London Court of International Arbitration (a private body). The official request for arbitration took place on August 13. Canada responded to this request for arbitration on September 12. The next year, on January 18, the U.S. government filed a second arbitration request, this one focused on the provincial implementation programs of Ontario and Québec. Canada responded on February 18, 2008. On March 4, the London Court of International Arbitration ruled (in the first arbitration) that Canada was in violation of the 2006 SLA in its eastern provinces, but not in its western provinces. The panel had been made up of a Belgian arbitrator nominated by Canada, a British arbitrator named by the United States, and a panel president from Germany. On February 26, 2009, the London Court of International Arbitration announced its ruling in the second arbitration case: Canada was in breach of the softwood lumber agreement as a result of its failure to properly calculate quotas from January to June in 2007. The arbitration body ordered that sawmills in the provinces of Ontario, Quebec, Manitoba, and Saskatchewan pay an additional ten percent export charge (up to $68.26 million). The tribunal imposed a 30-day deadline to rectify the breach.

Looking ahead

The Softwood Lumber Agreement is going to expire in October 2015. But there is large uncertainty as to whether or not both countries will renew the settlement. It is difficult to tell if the agreement will be renewed, renegotiated, or dropped altogether. Canada's stance is that the SLA should be renewed under the current conditions and provisions. The president of the B.C. Lumber Trade Council has stated that although there are cracks present, the SLA has benefited both countries. The United States, on the other hand, does not want to renew the contract. Executive director of the U.S. Lumber Coalition Zoltan Van Heyningen has expressed his disapproval for the ongoing format of the agreement. One of the reasons for this is due to changing timber costs, which the U.S. believes has not been incorporated in B.C. lumber costs.

See also

• Economy of Canada
• Economy of the United States
• Byrd Amendment

External links

Official

• Foreign Affairs and International Trade Canada - Softwood Lumber
  • Frequently Asked Questions on the Softwood Lumber Agreement (Canada)
• United States Trade Representative (USTR) - Softwood Lumber

Text

• Text of Softwood Lumber Agreement (SLA), 2006 (USTR)
  • Amendments to Softwood Lumber Agreement (USTR)
• SLA Texts and US-Canada Dispute related documents (Foreign Affairs and International Trade Canada)