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July Aug 2003

Guest Column

With pressure on both sides to resolve the softwood dispute, flexibility varies on the key issues.

By Senator Pat Carney

The softwood lumber trade war between Canada and the US seems to have faded from the summer’s political radar screen, despite the $10 billion that lumber exports to the US earn annually for the Canadian economy. The chatter at the annual Premiers’ Conference in July and in the media is about SARS, mad cow disease, auto insurance and federal-provincial funding disputes, but not one premier stepped up to the open microphones to talk about the devastating impact of countervail and anti-dumping duties on Canadian lumber shipments to American markets.

While negotiations on how to reduce duties that average 27 per cent dragged on during the summer, competitive pressures on Canadian provinces and producers increased with the rise in value of the Canadian dollar. Changes in the exchange rate in 2003 imposed an additional cost burden of about 17 per cent on Canadian lumber exports, which are priced in American dollars in the US market. That is starting to bite Canadian producers who have managed to ship into the American market despite the duties by increasing production and decreasing unit costs. In 2002, Canadian lumber production actually rose by about one billion board feet to 29.5 billion board feet.

The trade war is causing American casualties too. As Canadian producers ramp up production, lumber exports have stayed constant or increased while prices and profits have plummeted on both sides of the border. “This is no way to run a business,” pointed out John Allan, president of the BC Lumber Trade Council, which represents the leading BC lumber producers, at an industry conference this spring. He reminded his audience that the world was awash in fibre. Europe is self-sufficient and increasing its US market share.

The Japanese market remains soft. China is a possibility, but the Russians are moving to fill the gap. Since BC supplies 54 per cent of the softwood lumber exports to the US, the softwood war and the global oversupply of wood have wrought havoc on the BC economy. A report released in June by the Senate Standing Committee on Foreign Affairs assesses the damage over the last five years: permanent closure of 27 mills, job losses affecting at least 13,000 forest industry employees, a one-third drop in provincial forestry revenues and the loss of the industry’s leading position in BC.

Other regional impacts vary. Quebec, which supplies 20 per cent of softwood exports, is also affected. Smaller export shares supplied by Ontario (nine per cent) and Alberta (seven per cent) imply lesser damage—small consolation to the forest communities that have lost mills and jobs. The Maritimes have been exempt from countervailing duties, but face an anti-dumping duty of 8.43 per cent. The window of opportunity to settle this dispute is narrowing with the departure this summer of Canada’s “Mr. Softwood,” Doug Waddell, Assistant Deputy Minister for Trade Economics and Environment with the federal Department of Foreign Affairs and International Trade.

After 34 years with government, more than half of them on the softwood file, the popular and patient diplomat is calling it quits at the end of August. Waddell was on the file in 1986 when I served as Minister of International Trade responsible for the Canada-US Free Trade negotiations. US lumber interests initiated a countervail action against Canadian lumber, claiming that Canadian stumpage policies subsidized Canadian producers. Amid heavy criticism from the industry, my officials and I avoided the American trade hammer by imposing an export tax on Canadian lumber bound for the US. The tax revenues remained in Canada and were returned to the provinces.

No mills closed and few jobs were lost, except for the remanufacturing sector, which we failed to protect. We imposed the tax as an interim measure to allow time for provinces to change their forestry practices to reduce the countervail threat. We knew that once a countervail duty is applied it is very tough to discharge. This is proving to be the case 17 years later.

While both sides are under pressure to resolve the dispute, they have shown varying flexibility on three key issues: changes in forest policy issues, an end to litigation and interim border measures. Waddell’s American counterpart, US Department of Commerce Undersecretary Grant Aldonas, has issued a draft policy bulletin outlining the forest policy changes that Canadian provinces must adopt to qualify for a “changed circumstances” review needed to lift the countervailing duty order. BC’s new forest legislation, passed this spring, incorporates many of these demands.

Quebec is still considering them while claiming it already meets the crucial criteria of setting stumpage rates on illusive “market prices” rather than administrative methods. There is also general agreement between the two industries that a negotiated settlement is preferable to costly litigation, including appeals to the World Trade Organization and various NAFTA panels. Two NAFTA decisions are expected this summer concerning both the countervailing duties and the troublesome anti-dumping duties, but the time consuming and costly appeals processes offer little prospect of immediate relief.

The third issue, interim measures, has proved to be the most difficult, including the sharing of the billion dollars of duties already collected. The Canadian industry is pushing for a return to the cumbersome quota system, with both sides far apart on the level of exports permitted under quota. The Americans are touting an onerous border tax system on all Canadian softwood until the market pricing benchmarks are met. Both sides appear to be some distance apart still. Maybe the hot and humid August weather in both Ottawa and Washington will heat up negotiations.

Senator Pat Carney is a former federal Minister of International Trade and was responsible for the Canada-US Free Trade negotiations.

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