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Report Complicates Approach on Lumber Trade with US

 

By John Clark


A
seminal study of the North American forest industry by West Coast economist Doug Smyth, reported in the Spotlight section at the front of this issue of Logging and Sawmilling Journal, has seriously complicated the question of what to do with the softwood lumber agreement. It has exposed so many anomalies that it would be very difficult to resolve them all in any new agreement. 

Technically, Smyth's numbers have reduced the options open to the federal government in designing a new approach to the Americans. It has strengthened the hand of the Free Trade Lumber Council, which wants Canada to walk away from the deal when it runs out next year. Politically, it has made renegotiation a long odds challenge, if that ends up being the option selected. 

The American argument for a quota based arrangement with Canada has always seemed purely political to Canadians anyway-protection for their producers and their bottom lines against competition which several international panels have ruled fair. But what to do with the agreement will, presumably, continue to be a political issue because that's the way the 

Americans want it, regardless of the Smyth numbers. The US Coalition for Fair Lumber Imports has consistently had the ear of the US government. Up to now, Washington has accepted the claim that the stumpage system (what governments charge for publicly owned timber) subsidizes Canadian producers by offering raw wood at costs below market priced logs. 

The Clinton administration has ignored the rulings to the contrary by those international panels. And there's no indication that either an Al Gore or a George W. Bush government would treat the issue any differently. So the solution for the Americans probably will still be a political agreement. Even so, the Smyth report will make it hard for either Ottawa or Washington to make that choice, if it's looked at frankly and fairly. 

As with investment firm E F Hutton in the old television commercials, when Smyth speaks (or writes) people listen. He has a record for thorough and precise research. The fact that he's the research director for the Industrial, Wood and Allied Workers Union (IWA Canada) is incidental. His reputation transcends the professional connection. He's regarded by many in the corporate boardrooms as a premier numbers man, the kind of economist they've been known to envy for their side of the business. 

They know of his work in the Washington offices of the coalition, too, and they'll be aware of what's in this latest analysis of the softwood agreement. To the considerable chagrin of the Coalition, some of Smyth's material from earlier studies found its way into a 1985 US International Trade Commission assessment of the competitive values of Canadian and American lumber. The Americans aren't likely to be any more inclined to appreciate his latest findings. Smyth's fundamental conclusion is that the deal has created so many market distortions that it would be unwise to continue with it. 

The inherent problems are potentially just as damaging to the Americans as to the Canadians. The agreement has been unable to stem a flood of lumber into the US market, from both American and foreign sources or to protect American producers or those bottom lines. Aggregate exports from the four provinces covered by the agreement- British Columbia, Alberta, Ontario and Quebec-may have been cut. But they've been largely replaced by shipments from Nova Scotia and New Brunswick and by increased production in the US West and South. 

From the point of view of national purpose, it's one thing to see the Atlantic provinces benefiting from the distortions. They need the money. It's another for BC to see its sawmills idled because they can't bid on raw timber in their own backyard because of those export quotas. That means more lumber produced elsewhere and jobs lost in the BC industry, not only to the US but also across the country to Eastern Canada. Under the pricing penalties in the agreement it's impossible for BC, even with its higher quality timber, to export over quota to the US. Those same penalties have been converted into bigger market share for eastern Canadian producers who already pay significantly lower stumpage costs than BC. 

BC may have only itself to blame for its high wood costs. But producers there may be inclined to think Eastern Canada is taking a bit too much advantage of the agreement rules to strengthen their positions in US and Canadian markets, positions that might survive should free trade ever return to the business. The fact that the agreement has been unable to prevent this remarkable growth in supply-despite the quotas-gives the Americans a number of options, should they wish to play them. 

They can seek to end over quota sales, try to raise the penalties to truly prohibitive levels or even press for all the provinces to be covered by the deal. But for Canada, Smyth's analysis makes the options considerably more complicated. By far the best is, of course, free trade. Lumber prices have remained generally soft in the past four years. So the agreement hasn't been much help. But if not free trade, then what kind of managed trade? The exposure of the inequities in the current arrangement will sharpen rivalries between the East and the West, not just the Maritimes against the rest but between Ontario Quebec and BC. 

How, for instance, can BC, having lost much of its market in Japan and elsewhere in Asia, get a larger quota without hurting other regions busily establishing new markets for themselves under the current rules? Should BC even get a bigger share? Reallocating quotas would take the wisdom of many Solomons. What kind of free trade would the Americans accept? They would want open log markets and competitive log pricing, which would mean a fundamental change in the way Canada does business with its producers. If Canada wants genuine free trade, why have rules against open log markets anyway? Or so the Americans might argue. 


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