Canada’s softwood lumber capitulation

I don’t generally like Gary Mason’s columns, but in this one he does a good job of showing how bad the softwood lumber deal is for BC:

… The agreement would allow the U.S. to keep about $1-billion of the $5-billion in penalties collected on Canadian softwood since 2002, and limit shipments to the United States if lumber prices begin to fall south of the border.The deal is intended to last for seven years with an option to renew for another two. However, according to the draft text, the U.S. insisted a clause be added that allowed either side to opt out of the agreement after 23 months has elapsed, with one month’s notice. The B.C. government and industry had requested the deal be for three years, with six months’ notice required for termination.

Set aside for a moment the fact that, contrary to the spirit of the North American free-trade agreement, Canada is agreeing to subject one aspect of the economy to certain tariffs and quotas, implicitly acknowledging we were somehow doing something wrong.

Let’s ignore for a minute that as part of the deal we are agreeing to give the Americans $1-billion of what court case after court case, trade tribunal after trade tribunal, ruled was illegally collected duties.

Forget for a second that the deal comes just as the industry in Canada was expected to start seeing the results of the more than $200-million it had spent on litigation — litigation that those companies now must agree to drop as part of the agreement.

And banish from your mind, if you can, the fact that under the deal, every move by Canadian forest companies related to the export of lumber will be subject to bureaucratic scrutiny, while U.S. companies will not face the same examination of their practices.

There are a number of additional problems with this agreement that still make it untenable. Because we’re talking softwood lumber, of course, these problems aren’t easy to explain or understand. Beyond that, the subject matter is as dry as tree bark.

But let’s examine one of the issues upsetting B.C. forest companies, especially in the Interior. They are upset that border tax and quotas will be assessed monthly and will be based on shipment, not sale. Additionally, they will not be able to carry their quotas over to the following month. This is a particular problem for a business as cyclical as the forest industry. Home-building, as we all know, has peaks and valleys.

But there is another problem. Forest companies in the Interior have been having a difficult time getting their product to market because of a shortage of rail cars.

Under this agreement, a B.C. company could theoretically sell its January quota but not be able to ship it to market, could sell its February quota and not be able to ship it to market and then, in March, sell its quota and finally clear up the backlog from the previous two months.

Because the quotas would be managed monthly, and be based on shipment, not sale, the company would be dinged a “surge penalty” of 22 per cent for going over quota in March — even though it sold the bulk of the product in January and February but was unable to get it to market. Who does the company pass that cost on to?

In other words, the core of this deal is not commercially viable for many B.C. companies.

Back in 2002, when the latest dispute was still new, I wrote in the CCPA’s BC Commentary:

The softwood lumber dispute hinges on domestic political pressures in the world’s most powerful nation. US producers are seeking to restrict access to the US market by Canadian producers. This has the effect of increasing prices for wood in the US, which directly contributes to the US industry’s bottom line. In addition, recent changes to US trade law now mean that the complaining US companies actually receive the duties, giving them an additional monetary incentive.

Since 1982, the US forestry industry has continuously lobbied Washington to levy duties on Canadian softwood exports. Their argument is that stumpage fees paid for timber harvested in BC and other provinces on Crown land are too low and thus constitute a subsidy to the Canadian industry. In recent years, the US has argued that bans on raw log exports are also a subsidy.

A series of battles were fought over the issue in the 1980s and 1990s, with Canada consistently appearing as the winner. However, US producers have not accepted no for an answer. Even when Canada wins a dispute, the US response has been to stall and change tactics, thereby continuing to harm the Canadian industry. These ongoing legal battles culminated in the 1996 Softwood Lumber Agreement, which set quotas on tariff-free Canadian access to the US market, in exchange for an end to the harassment.

The current dispute is essentially a rerun of this drama, with the US pushing Canada to make new concessions. Yet, the fact that this is happening demonstrates the failure of the original Canada-US Free Trade Agreement and the subsequent NAFTA. Canada was unable to get a clear exemption from US trade laws, or to get the US to agree to binding dispute settlement procedures. The best Canada was able to do was to negotiate a review process to oversee whether the other country was properly enforcing its own trade laws—hardly the teeth that Canada needs in situations like softwood lumber.

And so we are now back in a managed trade deal, one that is worse that the 1996 Softwood Lumber Agreement. Not to worry: Paul Martin launched a NAFTA-wide Security and Prosperity Partnership framework just over a year ago, and current PM Harper seems to like it just as much. Maybe this time we’ll finally get guaranteed market access . . . oh, forget it.

One comment

  • CuriosityKilledTheCat

    The alternative to the craven New Tory party’s capitulation to Bush on the softwood issue is very simple.

    The NDP, Bloc and Liberals have the majority votes in Parliament. They could agree to pass legislation which would direct the government to table the following revised proposal with the Bush government:

    1. Term – The term should be ten years, with no early termination possible unless both sides agree, and the Canadian government is to agree only if a majority of MPs through a free vote (on a non-party basis) in Parliament for an earlier renewal.

    2. Automatic renewals – Renewal period should be for automatic five year periods, unless notice of termination is given by either side 12 months before the end of a term (and the Government of Canada would need a majority vote of MPs to give such notice, through a free non-party vote).

    3. Payment – Full payment of the $5 billion (yes, that is right, the amount owed under the applicable laws), plus interest on overdue amounts at 5% p.a..

    4. No litigation – American lumber companies to agree not to litigate the settlement.

    5. Reaffirmation of NAFTA – American government to reaffirm its commitment to the NAFTA treaty.

    6. Failure of US to agree –

    a. Should the US government not agree to this proposal, then Canada to continue with litigation.

    b. Canadian government to fund such litigation by Canadian companies.

    c. If the USA takes steps to penalize lumber imports from Canada due to failure to reach agreement as above, the Canadian government is to appoint a Royal Commission with a mandate to review what steps should be taken by the Canadian government to uphold the NAFTA, including whether to terminate the NAFTA (what is the point of an agreement with a government which does not honour its commitments?).

    d. Royal Commission to report by February 28 2007.

    e. Canadian government to review the findings of the Royal Commission and take such steps as the majority of MPs agree to through a free non-party vote.

    f. Canadian government would use taxpayers money to assist Canadian companies who needed assistance due to the non-payment by the Americans of the debt they are refusing to pay.

    So, you see: the answer is really simple. All you need is a bit of backbone as the Prime Minister of a country which entered into a treaty with another government in full expectation that the other government would honour its obligations, and not welsh when it suited it.

    Our MPs would be in a position where they could reflect the views of their various constituents, as the later votes would be a non-party vote on the issues set out above.

    Who will take the lead to stand up for Canada?

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