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Countervail Clarity

With a new countervail on lumber very possible, Canada is seeking clarification from the World Trade Organization on US export rules. 

By John Clarke 

In May of last year, Canada asked for consultations with the World Trade Organization (WTO) to stop the United States from unilaterally designating export restraints-especially those on raw logs- as hidden subsidies and therefore subject to countervailing duties. In September, International Trade Minister Pierre Pettigrew announced that the WTO had established a dispute settlement panel to rule on the issue. A preliminary decision for government eyes only is expected in early April, although the case may continue beyond then. That would take the Canada/US softwood lumber export agreement beyond its March 31, 2001 expiry date. 


The United States still insists that Canadian log export bans are part of a scheme to keep timber harvesting costs below market prices and are therefore a subsidy. But Canada has company in this-the Americans have their own export bans, notably from federal lands.

There is considerable doubt that there will be a new agreement. So the challenge to American law is not entirely academic to the Canadian forest industry or the government people leading the arguments to the panel-nor indeed to the strategists leading the Canadian campaign against unilateral American action on trade. Some people in government corridors see the move, at the very least, as a shot across the bow of the Americans. They hope it may convince Washington to hold off on any new countervail until either a new deal is signed, sealed and delivered or Canada decides simply to go without one. It's a risky tactic. It could sharpen differences between eastern Canadian producers, who favour the second option, and those in the west who favour another deal, with limitations on exports to the US if necessary, although not necessarily at the same levels as those in the expiring agreement. 

If Canada loses the case and the WTO says the US is within its rights on the countervail, the American position will have been significantly strengthened, not only on lumber but also on agricultural and other commodities. The Americans have been known to accept WTO rulings favourable to them but continue to fight against the rulings when they aren't. Even so, a decision against export restraints would be damaging to Canada, whatever Washington would do or say. Still, the point at issue is important to the whole trade relationship between Canada and the US. Ottawa's diplomatic assertion that the law on export restraints has to be "clarified" focuses attention on how much national policy can or should be qualified and even subverted by foreign interpretations of our domestic laws. Subsequent to changes in the General Agreement on Tariffs and Trade (the WTO's predecessor) in the 1994 Uruguay round of talks, the US passed new legislation on how to countervail, on what should be the basis for subsidies to be designated as countervailable and on the way duties should be imposed. 

Ottawa says the US Congress, in essence, instructed its Commerce Department to find export restraints countervailable as subsidies when and where they appear. But Canada says there are more precise tests than that. The subsidy complained of has to be specifically defined, not simply identified, before any sort of judgement can be made. There has to be evidence of a financial contribution by government and its effect on pricing clearly demonstrated. Ottawa says quite simply that none of those processes required by the WTO is covered by the US legislation. Therefore, a countervail claim on lumber exports or any other commodities can't be laid simply at the whim of Congress or some government department. Akey issue in this procedural dispute is whether there's a challenge to be answered in the absence of new countervail action by the Americans. In other words, the Americans say, Canada can't argue wrongful process unless there's something specific to argue about. 

There can't be a challenge based on general policy that hasn't been implemented with, as they say, a date certain for implementation. In other words, the challenge is academic, say the Americans. Nobody believes for a minute that the Americans won't go the countervail route once the softwood export deal has expired and nothing has replaced it. But they seem to be saying: "Wait until we do it before you go to a WTO panel. xxxxxx The future of Canadian lumber exports to American markets is on the line with the looming expiry of the Softwood Lumber Agreement on March 31, 2001. xxxxxx" Officials at the International Trade and Foreign Affairs ministries in Ottawa will not reveal the precise nature of their arguments before the panel. But they clearly see the WTO's decision to set up a panel as a significant step in the lumber trade contest and at least an initial setback for the American position. 

The WTO seems to have recognized merit in the Canadian claim that their case is not impeded by the absence of specific countervail action by Washington. In any event, the WTO's Agreement on Subsidies and Countervailing Measures doesn't list product export restraints among the definitions of subsidies open to countervail. The US still insists that Canadian log export bans are part of a scheme to keep timber-harvesting costs below market prices and are therefore a subsidy. It's a point that has some resonance in Canada. Former University of BC Prof Peter Pearse said in a 1976 Royal Commission report that an "end of the bans would be a great benefit to the Canadian industry in maximizing the value of the resource and in stabilizing employment ." He still believes that. "These log export controls are very damaging to the forest economy and the sooner we start cranking them down, the better," he says. 

Forestry professor David Haley also believes the forest industry would be better off without export restraints. Governments lose revenue with artificially low stumpage, he says. And much of the forest now inaccessible would become economic to log. But the Americans have their own export bans, notably from federal lands, and the whole question of trade controls has become confusing. Whatever the merits or otherwise of restraints, the way they are applied needs to be sorted out. It's in that context that Ottawa has taken its case to the WTO. It involves other commodities, but the core issue is lumber since it's locked in the straitjacket of the softwood export agreement. "It's important to our industry and the provinces that the US application of the rules be consistent with international obligations," says Pettigrew. "We need to clarify the rules." How readily the Americans will accept "clarification" will remain to be seen, if it goes against them, and especially with new president George W Bush in charge.

But given the confusion following the presidential election and the mood of American politicians generally at the moment, it would be unwise to expect too much cooperation. When one of Bill Clinton's last acts as president was to sign into law a measure requiring Washington to turn all antidumping duties it collects over to US companies, it's clear the Americans are determined to have their own way. The law may give individual corporations significant new incentives to pursue controls on Canadian exports. Clinton may have been motivated by a desire to help Al Gore in the presidential race. But the measure underlines how unilateral the US intends to be on international trade. International rules are for other people. 

Republicans are as egocentric as Democrats on trade, even though Democratic congressmen, especially those from the border states, have been leading the unilateral charge in recent years. There isn't much chance of a change of attitude in the new Congress, now so evenly divided. Even so, a successful appeal to the WTO may well bolster the Canadian position, whatever the response from the Americans. It may be generic rather than specific, as the Americans say. But if Canada wins, the question of Canada/US trade relations generally, not just in lumber, will beg more precise discussion. And if it's a genuine discussion, the basis of the trade may be fundamentally altered.

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