April 2001 - Logging and Sawmilling Journal -

Softwood Saga Continues With the expiry of the CanadaUS Softwood Lumber Agreement, the various parties have assembled for battle

The first five-year softwood lumber export agreement-which expired March 31- exposed so many points of disagreement, dispute and outright distrust between Canada and the US that there was never a chance there'd be a second one. So bitter has the rhetoric been at times across the border that any new trade relationship is certain to be fraught with the same suspicions. It may take years for it to restore any semblance of the stability that used to mark the trade. The old agreement made a shambles of normal market practices. American builders blamed it for pushing up house prices by restricting supply from Canada.

The quota system under the softwood lumber export agreement, which split 14.7 billion board feet of allowable lumber exports among BC, Alberta, Ontario and Quebec and expired March 31, became patently unworkable.

Yet a study last year by Canadian timber economist Doug Smyth said lumber prices in the US had actually dropped by $36 a thousand board feet from 1996 because supply increased from the US northwest and the southern states and from the Canadian Atlantic provinces from which access was not restricted. Growing opposition loosened the hold of the US lobby group, the Coalition for Fair Lumber Imports, on American public opinion. So much so that, according to the Canadian Free Trade Lumber Council, 12 industry associations among American builders, lumber wholesalers, retailers and house groups joined in Canada's campaign against the agreement. The quota system, which split the 14.7 billion board feet of allowable exports among BC, Alberta, Ontario and Quebec, became patently unworkable.

The rush by producers to meet quarterly deadlines for shipments to the States played havoc with tenured cutting schedules. Regions that lost traditional markets elsewhere, such as Japan, couldn't get into the quota. The Atlantic Provinces gained market share in the US while other provinces languished. Canadian efforts to develop new markets with predrilled studs and notched and rougherheaded lumber were stopped by American Customs, which ruled they were included in the restricted total. Ottawa accused Washington of unilaterally changing the agreement in midstream with these reclassifications. American insistence on calling our stumpage systems a subsidy that made logs cheaper than they would be in an open, competitive market was seen here as an attempt to dictate Canadian timber policy.

Because the trees in the four controlled provinces are 95 per cent owned by the public, the governments there argued they couldn't be sold on an open market, as they are from privately owned forests in the US. Misunderstanding and misinterpretations abounded. Shortly before the old deal died, Senate Majority Leader Trent Lott accused Canada of using tricks to get around the export restrictions and blamed Canadian anticompetitive practices for the closure of 100 lumber mills in the US in the last six months. "We're not going to cut the finehewn points with Canada or argue over customs on whether a hole is driven in a piece of lumber or not," he said. "We're going to enforce the law ." To which Canadians asked: "What law?" Before the old deal died, two resolutions had been introduced in the US Congress calling for free trade, one signed by 119 members of the House of Representatives and 16 in the Senate.

Since the American election, a new resolution has been introduced with the same purpose, signed by eight senators, Republican and Democrat, from six different states. Under American law consumers have virtually no standing in trade adjudication processes, which gives point to a comment by Senate Assistant Majority Leader Don Nickles (Lott's deputy) calling for an end to managed trade in lumber. "Trade restrictions have proven particularly detrimental for first time American home buyers," he said. "They have artificially created unnecessary volatility in prices and supply to the detriment of hundreds of thousands of families in the housing market ." The dynamics of the dispute have significantly changed in the US in the last two years. They've changed in Canada as well.

An East West divide has developed on the stumpage subsidy issue. Quebec believes its forest tenure system doesn't subsidize its industry and lays blame for American arguments on BC. Quebec Industry Minister Guy Julien says his province can beat any countervail duty any time. And in the House of Commons in February, the Bloc Quebecois took a Quebec first approach by claiming that its province "has paid a heavy price for the subsidies paid by BC". All this skirmishing has been going on while Ottawa has been pursuing a World Trade Organization (WTO) ruling against the Americans on the grounds that stumpage doesn't fit the WTO definition of subsidy.

If Quebec thinks it does, the Americans will gleefully point that out to the WTO. It is to the WTO that Canada will have to resort if new trade arrangements don't ultimately resolve differences and allow a normal trade relationship to develop. The forest industry is not covered by the North American Free Trade Agreement (NAFTA). At the time NAFTA was negotiated, Canada didn't want its natural resources-of which forestry is still the most significant in the value of our trade balance with the US-to be bound by an agreement that might give Washington an opportunity to interfere in Canadian domestic affairs. It seems now that this suited the Americans who, in the Canadian view, are interfering too much through the softwood agreement. Now there's growing sentiment on this side of the border that NAFTAmight have provided better protection.

But NAFTA wouldn't and the WTO won't solve the problems exposed on the Canadian side. The industry is far from a homogeneous whole, for which a national policy can be easily designed. Tensions have intensified among the regions. Even as Michael Hart, who helped negotiate NAFTA, and the FTA before it, was encouraging a stand and fight resolve against the US, Frank Dottori, chief executive officer of Tembec, with interests across the country, was calling for courage on this side of the border. "Getting free trade is a question of how confident you are of getting there," he said. At the same time, BC Lumber Trade Council president Bob Plecas was worrying about the risk of punishment from the Americans, "half of which would be borne by the West Coast ."

The Coalition for Fair Lumber Imports has stoked the fire a little more by warning the Atlantic provinces they might be facing antidumping charges for shipping product into the US at less than domestic cost, even though their lumber is taken from the same kind of private tenure as in the US. It's on the wreckage of the old agreement that a new trade relationship will have to be built. Long range solutions to cross border problems won't come without solutions to some of Canada's own difficulties at the same time. But the biggest irritant of all to the Americans isn't even a player in the current drama. It's the Canadian dollar. The currency exchange rate is a far more potent factor in the performance of Canadian sales than all the others combined. A study by the University of Alberta a couple of decades ago found that the rise and fall of our dollar closely tracked the rise and fall of the Canadian share of the US market.

That was when there was no export restriction agreement. Professor Michael Percy, dean of the U of A's business faculty, says that during the 1970s and 1980s there was a tendency in Canada to treat a fall in the Canadian dollar as permanent, even when it was transitory, and add more production capacity to meet increased demand. "You had a number of American industry associations then lobbying for a fixed exchange rate or even a common currency," he says. "Given our levels of productivity and current dollar values as indicative of our lack of productivity, if either of these things occurred we would lose a lot of Canadian industries ."

The exchange rate is the biggest subsidy of all, yet it's beyond the grasp of the Americans or anyone else to claim it legally as a subsidy. The Canadian forest industry may be vulnerable to any move toward a common currency, an idea that has been getting more attention lately among a number of economists. But for the moment it's safe from any unilateral action by Washington. And it will continue to be a factor in any postMarch 31 trade regime.

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