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SPOTLIGHT

Focus on volume 

For the Americans, the dispute over softwood lumber comes down to one thing-volume.

By John Clarke

For the Americans, it's all about volume. Everything else is secondary to their bottom line, which is that the amount of softwood lumber going into their market must not get any bigger. One way or another it has to be controlled. For Canada, it's about a lot of other things-forest management reform, rising production costs, market-based stumpage pricing on the 95 per cent of timber land in the public domain and free access to the United States market. 

The five-year quota agreement that ended last March 31 never worked. The volume of softwood circulating in the US during the life of the agreement actually went up by huge and, to the Americans, alarming increments. Lumber finding its way into their market increased by about 15 per cent to more than 53 billion board feet. Home grown production went up by something like 16 per cent. Canadian sales in the same period rose by about one billion board feet, yet percentage market share fell to 34 per cent. 

Before the agreement, market share was in the 35 per cent to 36 per cent range. Production doubled in the privately owned woodlots of the Atlantic provinces, which were not covered by the quota. It rose because US customers wanted quality Canadian lumber, regardless of American industry complaints about alleged Canadian subsidies and/or dumping. Under the deal, two billion board feet were vacated by the four provinces covered by the agreement-Quebec, Ontario, Alberta and British Columbia. But one billion board feet were added by Nova Scotia, New Brunswick and Newfoundland. 

Shipments from the signatory provinces occasionally exceeded the limits when lumber prices made it economic to pay prescribed penalties for over-quota production. But overall, BC shipments suffered the most, with a five per cent drop. Helping to flood the US market were one billion board feet in imports from third countries in Europe and elsewhere whose lumber was not restricted. But by far the biggest volume increases came in the US itself. The harvest in the Pacific Northwest, Montana and California has risen as more second growth has become available and cutting regulations have become less of an impediment. 

The attempt to blame Canadian forest management practices and stumpage "subsidies" ignores problems created by American producers themselves.

It is now a sort of mantra in that region that the day of the spotted owl is over, a reference to protection for an endangered species in certain parts of the forest habitat. With more wood from outside the protected areas and with less going to depressed Asian markets, Americans in the Northwest have had no trouble getting more softwood to market.

The Deep South, even with a depleting resource and lesser quality wood, has been shipping huge volumes all over the US. It's being called bankruptcy logging and is expected, by one Canadian lumber official's estimate, to be gone in a very few years. "That area has mortgaged its future for short term immediate gain," the official says. There's too much product for an economy in or near recession to absorb. 

The attempt to blame Canadian forest management practices and stumpage "subsidies" ignores problems created by American producers themselves. They can't restrict trade within their own borders, which leaves complaints about Canadian softwood imports as their only or at least best option. This is the situation in which any new model for crossborder softwood trade will have to fit. It's also the situation in which Canada's own problems will have to be resolved. Forest management practices, especially in BC, would need modernizing, with or without the softwood lumber dispute. Quebec, Ontario and Alberta insist not as much fixing is needed in their jurisdictions where, they say, stumpage rates are closer to economic levels even by American calculations. 

This East-West divide makes it hard for Canada to develop a coherent national policy immune to American hardball politics on exports.

BC has always been the biggest target for the US Coalition for Fair Lumber Imports, not only because it ships the biggest volumes but because forest practices there have been the most vulnerable in American eyes. BC has been accused of using forest management policy to engineer social objectives. Tenures and sawmill production rules have been designed to ensure that forestry is based in communities near the wood. Through appurtenancy regulations in the Forest Act, timber must be processed at sawmills near where the logging takes place, even when it might be more economic to ship logs to other mills. 

Annual harvesting minimums are criticized by the industry itself as irrational because they ignore market conditions and impose costs bigger than they need to be. In a report published in November, former University of BC forestry professor Peter Pearse said bluntly that the BC industry is in crisis. At $559 per thousand board feet- year 2000 figures-the cost of production on the coast is by far the highest in the world. The labour component at $228 is also the highest in the world. US Inland wood at $450 per thousand board feet (labour $124) comes second. Eastern Canadian costs, at $304 per thousand board feet, are 45 per cent less than on the BC coast. Even in the younger BC Interior industry, the comparative number is $343 per thousand board feet. 

The cheapest softwood comes from Chile where it costs $202 per thousand board feet, with labour at a mere $49. By 1999, return on capital in coast production had dropped from a 10-year average of 9.8 per cent to a five-year average of seven per cent, according to Pearse. "All the usual measures of economic performance lead to the conclusion that the industry cannot sustain itself on its present path," he says. Since 1997, eight sawmills, two panelboard mills and one pulp mill out of 47 mills have been closed. 

Pearse says others should be closed and replaced by more modern plants. But with the cost of capital averaging 11 to 12 per cent, the industry has been seriously unattractive to investors. And the investment problem has been worsened by the volume restrictions on exports to the US. Capital will not be attracted unless costs can be reduced or exports increased. Yet the American argument has been that Canadian stumpage rates are not high enough, are often open to manipulation to keep them artificially low and are set administratively with scant relation to actual market conditions. Pearse calls stumpage in BC "one of the most confusing and poorly understood issues of forest policy". 

BC Forest Minister Mike De Jong has promised broad reforms but warns that they will not come without a price. Logging communities will be hurt and some may even eventually disappear. The number of jobs may decline as the provincial government seeks greater efficiency. The government is ready to put more of the harvest up to auction, though not all of it, as the US coalition wants. Yet extrapolating general stumpage rates from a partial auction system to a broad range of species from widely diverse geographic regions and terrains would not be easy, even it were to satisfy the Americans. 

Smaller operators are apprehensive about any auction system falling under the control of wealthier large tenure holders. If, under big licensee pressure, auction prices raised the cost of timber to them, the small operators fear they would go out of business and the industry would come under the control of fewer hands. The auction issue has deepened resentments between the two countries. The US demand for broad-based competitive bidding for timber is seen as patently unfair since only 11 per cent of US timber (the harvest on public lands) is open to auction. Nor, in the opinion of Canadian industry officials, is the coalition playing fair by insisting on changes cast in legislation on this side of the border while refusing to guarantee similar protection on their side. 

Negotiation, in any case, has not been a universally preferred solution within Canada. The CD Howe Institute has said Canada would be better served in the long run by litigating the dispute before the World Trade Organization. And Douglas McArthur, a senior fellow in public policy at the University of BC, calculates that pursuing a winning legal challenge while paying the countervail and dumping duties would save the industry nationally $2.8 billion. McArthur's study has been cited by the Montreal-based Canadian Free Trade Lumber Council. 

The litigation solution has always had more appeal in Eastern Canada than in the West, which believes it would take too long and lead to too many potential bankruptcies. This East-West divide makes it hard for Canada to develop a coherent national policy immune to American hardball politics on exports. And it will hang over any new trading model over the long haul.

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