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SPOTLIGHT

Hidden ironies in US lumber dispute

The softwood lumber dispute with the US is rich in seen-and unseen-ironies.

By John Clarke

Shipment of Canadian lumber destined for the US: there are as many ironies in the current softwood dispute as there are knots in a Ponderosa pine.

When the latest chapter in the Hundred Years War over softwood lumber in North America comes to be written, it may well be the definitive study text on how not to manage trade disputes involving resource commodities. As events play out, there are as many ironies in the affair as there are knots in a Ponderosa pine, some of them seen, some unseen, but all of them together a boil on the nose of the concept of free trade. Here are some of them. 

On the day in March when negotiations to head off final US Commerce Department duties (an average of 27 per cent) collapsed, President George W Bush was down in San Salvador promising expanded trade if San Salvador would help him negotiate a Free Trade of the Americas Agreement (FTAA). Of course Bush needs congressional support, too, for fast track authority to negotiate the FTAA. 

Whether he or the senators are aware of the irony in this little dance might provoke some satire around the water cooler. But it should not escape notice by the Central and South Americans that US senators apparentlybelieve it would be all right to support free trade (if they give Bush authority) and erect barriers against it at the same time when US jobs are at stake. 

The fact that there were any negotiations at all before the softwood duties were set was itself an embarrassing irony, given Ottawa's difficulty in resolving its differences between Quebec-which wanted to litigate the case through the North American Free Trade Agreement and/or the World Trade Organization-and the West, which wanted to talk turkey to avoid lengthy litigation. 

Eighteen months of possible bargaining time was lost while Ottawa dithered, or so the BC industry believed. Some analysts believe privatizing Canadian forests is the only answer, however. Reid Carter of National Bank Financial believes this would defang American allegations of subsidy. And TimberWest Forest Corp chief executive officer Paul McElligott says broader privatization has to come, although he acknowledges it would be a hard sell in BC where the public likes owning its forests. 

Other analysts are less sure about privatization. The presumption is that it would satisfy the Americans, most of whose timberlands are held privately. But the Americans would look for other complaints to make, since restricted volume is their real objective, not necessarily a "fair" system. But privatization might also defang environmentalists in Canada who want reform to provide more protection for the forests and find themselves strange bedfellows with the Americans. In a column in the Globe and Mail, officials of the Wildlands League, the Sierra Club and the West Coast Environmental Law Society said that when laws don't adequately protect the environment, the industry is subsidized. 

Companies do not have to pay the associated costs of bad logging practices. Perhaps not exactly the kind of support the Americans might have expected. They'll take it anyway. But if privatization becomes the way of reform, there might be less protection for the forests. Public ownership gives the lobbies legitimate access to the forests, which would be out of bounds to them in private hands. If it wasn't ironic, it was certainly puzzling to Canadian negotiators that also about the time the Commerce Department was calculating the softwood duties, Washington was exempting Canada (and Mexico) from restrictions on imported steel, a move that brought haughty disapproval from the European Union and others. 

For Canada, why steel and not softwood lumber? The Commerce Department's calculations would add an estimated $1,500US to the cost of an average new home in the US and price 450,000 families out of the US housing market. That's collateral damage the lumber coalition might not concern itself with. But the US is likely to need more-not less-Canadian wood over the long haul and a duty system would lead the trade into a truly Orwellian fantasy of winners and victims. 

Since, in the scenario created by this dispute, the revenue from the duties is to be distributed among American lumber producers, the home buyers will, in effect, be the purveyors of the bounty going straight into the wood producers' margins. A penalty against Canadians becomes a penalty against Americans. Meanwhile American corporations like Weyerhaeuser pay duties on exports from their Canadian operations and collect from them south of the border. 

An act of absurd theatre too much even for Weyerhaeuser, which has opposed the US restrictions from the beginning. Under a regime like that, says Kevin Mason, an industry analyst with Equity Research Associates, Canadian producers are likely to raise production to cut unit costs, pay the duties and put more lumber onto the American market. And if the duties raise the price of softwood they will encourage more imports from other countries, which will presumably hurt the Americans as much as Canadian imports. 

The ultimate irony, however, is one already discussed in Logging and Sawmilling Journal-the persistently weak Canadian dollar which is beyond Washington's reach to do anything about. The US dollar is the safest currency and investors continue to seek shelter in it. Canadian producers will continue to benefit from the exchange rate premium. All these anomalies became increasingly clear as the dispute dragged on. 

They might even be hugely entertaining were it not for the fact that they are the backdrop to much deeper complexities, as a trend toward more economic integration with the US picks up steam. The huge American market can dictate terms in world trade, which is why its politicians pay so much lip service to free trade while insisting on their own trade laws. 

But a weak Canadian dollar is a cursed benefit. It may help sell softwood lumber, but it also makes Canadian corporations a cheap buy for American investors. The Canadian forest industry is already on the integration train along with continental energy policy, trans-border auto manufacture, increasingly common transportation policies and so on. Deputy Prime Minister John Manley says Canada should have no fear of integration because it already has a strong economy and plenty of political self-assurance. But integration will change the structure and character of the Canadian economy as a whole, perhaps in ways not yet apparent. 

Former Finance Minister Paul Martin pointed to the Canadian lumber and farm industries as victims of politically motivated hit-and-run attacks by the US Congress. He says there are "very, very serious problems in the Canadian-American trade relationship". Free trade has always been accounted a handsome net benefit for Canada, creating all sorts of new jobs and business opportunities. 

Martin's blunt warning is a cold shower reality check that puts a whole different perspective on the Canada-US trade relationship. The anomalies exposed in the wood trade negotiations show how difficult managing any integration process will be on the broader scale. The US has the big battalions. If Canada is treated as an insignificant little platoon in a continental market, it will have little influence on the pace and shape of integration in lumber or anything else.

US Commerce decision on lumber is puzzling

In May, the United States International Trade Commission (ITC) threw the Canadian forest industry a puzzling bone. It ruled Canadian softwood imports into the US market were threatening to injure American producers, which meant that countervailing duties and anti-dumping penalties totalling 27 percent would finally be applied. 

But it did not rule that there was any actual injury. This prompted Canadian officials to ask how the US Department of Commerce, which set the duties, could make such precise calculations in the absence of hard evidence. The American Coalition for Fair Lumber Imports says it was enough to show that there is an immediate threat to their industry. 

Canadian companies will now be eligible for the return of $1.2 billion in bonds posted since last spring. But the bone will lose much of its flavour as the cost of the duties begins to hit home. Whether Canada can use the ITC judgements in its appeal to the World Trade Organization this summer is moot. 

Even if it were to win at the WTO, John Allan, of the BC Lumber Trade Council, says the case could take as long as eight years. The most likely outcome is thought to be negotiations in which Canada may be able to use the ITC action to broker a deal more favourable than might have been the case without it.

 

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