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U.S. - Canada Softwood Lumber Agreement Update

The latest chapter in the ongoing softwood lumber trade dispute between the United States and Canada has taken another turn. A March 4th decision by the London Court of International Arbitration illustrates some very real problems with the United States’ support of its own domestic timber industry and workers, as well as problems with the defense of fair trade under agreements such as NAFTA. The London court found that Canada breached its commitments under the 2006 Softwood Lumber Agreement (SLA) by failing to properly apply export quotas into the United States. But the court also found that Canada’s additional failure to accurately calculate “surge volumes,” or exports exceeding the allowable quantity, did not violate the agreement.                                   

The SLA was designed to protect America’s lumber industry against unfair imports of government-subsidized Canadian lumber. Yet, the fact that this central provision of the Agreement was disputed at all, and the court’s subsequent decision, undermines the limitations agreed to by both countries to stop an oversupply of subsidized Canadian softwood lumber from disrupting the U.S. market. And worse, the U.S. government seems to lack the power or the resolve to ensure compliance. The United States and Canada signed the Softwood Lumber Agreement in October of 2006 to end years of crossborder litigation over Canada’s government- subsidized softwood lumber trade practices. The Agreement was a system of quotas and tariffs to offset Canadian government subsidies of lumber shipped to the United States.                                   

The Agreement was designed to apply restrictive measures to Canadian exports in down markets (such as the current U.S. lumber market) when Canada’s trading practices are the most harmful to the U.S. industry and workers. In balance, tariffs and quotas become less restrictive during strong markets. The Agreement is fair and benefits both countries, provided they commit to compliance. Regrettably, some Canadian interests are now focused on avoiding compliance by prospecting for loopholes in the Agreement, rather than honoring a commitment to the fundamental principles.                                   

At the heart of the most recent dispute is Canadian evasion of the socalled “surge” provision. This provision requires Canada to impose additional taxes in falling markets to deter large shipments. Contrary to the intent of the Agreement, some in Canada now claim the “surge” triggers should be less restrictive in western provinces than in the rest of Canada, arguing a technicality of the Agreement language. As a result, large British Columbia and Alberta producers over-shipped the falling market and evaded paying roughly $89 million in surge taxes. These actions accelerated the steep lumber market decline of the past year and added to U.S. sawmill closures and curtailments.                                   

Now the London court has rewarded that behavior, jeopardizing the balance of the entire Agreement. This fundamental building block of the Agreement should not have been part of any arbitration proceeding at all. Yes, the actual Agreement language is complicated and open to some different interpretations. Yet officials in both U.S. and Canadian governments who negotiated this pact know what it intended to accomplish and how it was to be applied. BOTH countries should have quickly rejected this attack on the Agreement fundamentals without lengthy and costly arbitration. Sadly, they did not. In a way, Canada’s association with their domestic timber industry is admirable.                                   

Excellent cooperation exists between industry and government, which results in forest management and job creation. This is a winning formula in the increasingly globalized world economy. It is also an important lesson for the United States—we desperately need to evolve better partnerships between our government and our forest industries, rather than the adversarial relationships of today. However, this excellent Canadian business/government model does not excuse unfair trade subsidies for Canadian industry. Nor does it excuse bad faith in implementation of the 2006 Softwood Lumber Agreement. The real issue with Canadian lumber and the depressed U.S. market is a fundamental problem with the North American Free Trade Agreement (NAFTA). Well-crafted trade agreements should promote trade. These agreements should also end disputes, not create them. NAFTA, particularly its provisions which encourage disputes from our trading partners, needs to be re-examined. U.S. trade policy and formal trade agreements should reflect zero tolerance for dumping, unfair subsidies, and substandard labor and environmental practices from our trading                  partners. Only upon such a foundation can fair and free trade be established. Meanwhile, both Canadian and U.S. governments need to fully commit to good faith compliance with the Softwood Lumber Agreement.                                   

Canada should recognize that the path to long-term success is to fully honor the commitments made to their U.S. trading partners in signing the SLA. Stabilizing and strengthening lumber markets is critical to both national economies and can only be accomplished by implementing this Agreement as it was intended. The U.S. government should take the added step of requiring that all softwood lumber entering the United States from Canada be formally certified by Canadian shippers as complying with the terms of the SLA. This straightforward accountability measure will demonstrate Canadian dedication to compliance with the agreement and will provide clear audit trails to quickly control any new evasions.                 

U.S. companies and workers deserve to get what they bargained for in the tough negotiations with Canada. The U.S-Canada Softwood Lumber Agreement can provide a more level playing field against subsidized Canadian lumber and serve as a lasting alternative to renewed trade litigation— as long as all parties honor their commitments under the Agreement. James Riley is President and CEO of Intermountain Forest Association as well as a member of the Executive Committee for the Coalition for Fair Lumber Imports.