December January 2000

Nnothing illustrates better what ails the softwood lumber agreement with the US than the tale of the J S Jones Timber Ltd. mill in Boston Bar, BC. Here we have what is now one of the ten most efficient sawmills in North America, according to a recent Canadian study, which upgraded itself to compete better and sell more product to the US. But it doesn't have enough quota under the agreement to keep operating. So it will be closing down March 8 and, as a result, 200 people will be thrown out of work. J S Jones isn't the only mill in trouble. Many other independent operators face the same problems. There are so many holes in the agreement and the Americans are trying to drive through every one of them. They keep adding new categories that have to fall under the 14.7 billion board feet national quota Canada can ship to the US without penalty. Predrilled studs, notched and rougher headed lumber, once excluded and free of the quota and export fees, now have to be included. Another 15 classes are on the hit list. The J S Jones quota is 30 per cent of its annual production-200 million board feet in a full year. Efficient as it is, it can't pay increased fees on BC lumber shipped above quota to the US. The company has become a poster boy for the Free Trade Lumber Council (FTLC). The council, headquartered in Montreal, wants the export agreement scrapped after it runs out in 2001 and a return to free trade. It's prepared to fight any retaliation, including countervail, by the Americans. The council has 70 members, 21 of them in BC, who class themselves among the quota "havenots".

The supporters of free trade in softwood lumber with the US-as opposed to the managed trade of the current agreement-argue that quota allocations were arbitrary, favouring some producers at the expense of others.

They have either none or too little quota. Their fight is as much with the haves in Canada as with the Americans. Eastern producers believe they're among the havenots. They would have much to gain from free trade. Sawmills in Quebec particularly have been chafing at BC's preponderant share of the national quota. When the deal was launched in 1996, the proportions were: BC 59 per cent, Quebec 23, Ontario 10.3 and Alberta 7.7. The latest available data, from 1997, shows a significant change: BC 56 per cent, Quebec 24.7, Ontario 11.3, Alberta 8. The balance changed because mills given provisional quota in 1996 got their share when they came on stream. Eastern companies don't like the artificial restraints. Before the agreement, they were raising their share of the American market and are confident they could make even bigger gains under free trade. Their logging costs are considerably below BC's, which are the highest in the world. BC stumpage is $33 per cubic metre on the Coast and a combined $16.55 in the Interior. Quebec's stumpage is $11.95. Logging costs overall, including stumpage, are $160 per thousand board feet there compared with $220 in BC. So Frank Dottori, chief executive officer of Tembec and chairman of the FTLC, welcomed US Trade Ambassador Peter Sher's announcement in October that his government doesn't want to renew the agreement. Dottori called this a "step in the right direction". He wasn't so thrilled with the American condition that negotiations start on reforming the "distorting aspects of provincial forestry practices". That's American speak for opening log sales to competitive bidding in place of stumpage. Dottori says it's unfortunate the Americans are bringing up that old saw again after failing to prove at three tribunals over 15 years that Canada is subsidizing exports. American Tom Stephens, who's stepping down as CEO of MacMillan Bloedel after its takeover by Weyerhaeuser, has tried to move Canada to a log market. But producers who want free trade say they're still not ready to give up the stumpage system. Dottori believes that "with the support of our allies in the US we can get back to a normal trading regime". That's doubtful, at least in the near term.

International Trade Minister Pierre Pettigrew told US representative Sher that Canada is not ready to abandon the deal. He said it's better than the uncertainties of American policy toward softwood imports and the costs of fighting endless legal cases to prove over and over that stumpage is not a subsidy. Jake Kerr, CEO of Lignum Ltd. of Vancouver, who led the industry's original negotiating team, says managed trade is the only alternative for now. The consistent advice from Ottawa, Victoria and the industry's own an expert in Washington, DC, shows free trade isn't a realistic option. The US Congress never liberalizes trade in an election year, he says, and 2000 is an election year. So if the agreement is to be renegotiated, what's it to contain? How will eastern and western interests reconcile their differences? What's to become of the have-nots like J S Jones and others? J.S. Jones vice-president Allen Staheli says his company's production numbers during the qualifying period for quota allocation didn't reflect what it was capable of doing. After it had built roads into a harvest area, a spotted owl was discovered-and that was that. Its production doesn't suit offshore markets like Australia and Japan but does fit the two-by-four market in the US. Staheli says if only four per cent were taken from the haves and distributed among the have-nots, "everybody would be on an equal playing field ." The J S Jones case highlights a deeply resented imbalance in the treatment of the players in an industry unable to grow. In BC, the have-nots and bottom feeders face a double whammy. When the province was threatened with American counter action for reducing its stumpage rates last summer to help the industry cut its costs, it negotiated a "compromise". It can keep its new stumpage, but anybody exporting to the US above quota numbers will face a new super export fee-ticket price, as it's called-of $146 ($210 Can.) per thousand board feet.

The haves get reduced stumpage costs and the have-nots pay a higher penalty for anything they can export. David Gray, vice-president of Mill and Timber Products of BC, and John Suhrweier, of Sundance Forest Products of Alberta, have produced a manifesto for the have-nots. They have circulated it to Ottawa, Victoria, the other capitals and to anyone else who will listen. They want the focus of any renegotiation to be on the quota system. For them a "rigid system of entrenched entitlements was wrong from the start." They insist: "A fixed onetime allocation system was wrong, base years were arbitrary, heavily favouring some producers at the expense of others, and volumes and calculations for base years were flawed. The people that negotiated the agreement and set up the allocation methodology are the same people defending the process and participating in the renewal process." Gray and Suhrweier want quota allocation to be based on current calendar year numbers and on overall sales worldwide, not on production figures to the US. They say production capacity can be too ambiguous for the security of all companies dependent on the US market. For them it's also important that the allocation system be transparent and easily measured and enforced. For the FTLC, free trade is still the preferred option. FTLC vice-president Carl Grenier has said that all Canadian producers will be at risk in 2001, including the companies with enough quota. Free trade is the only way to get equal access to the US for everybody. But to succeed that option needs the organized support of the American homebuilders, mortgage lenders and lumber wholesalers, all of whom resent the restrictions imposed at the behest of the American Coalition for Fair Lumber Imports.

The Coalition needs to be confronted by enough countervailing influence to make a difference in Congress. It has been working for years and is apparently confident it still has the US government on its side. Even though its opponents in the US far outnumber the Coalition, they are not yet well organized. To become so will take a long time. That likely means free trade will not come easily. So one thing seems certain on the Canadian side. The tension between the haves and have-nots will need to be dealt with before any renegotiation begins.

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Quotas Questioned

The quota allocation and the entire softwood lumber agreement continue to come under fire.

By John Clarke