Time to Ponder the Next Lumber Deal

Federal Trade Minister Sergio Marchi will have to wrap his head around a lot more questions than simply whether to renew or abandon the Canada-US softwood lumber export agreement when it runs out in March 2001.

In fact, abandoning the deal is not really an option. Notwithstanding MacMillan Bloedel Ltd. chief executive officer Tom Stephens’ recent injunction to stand and fight, the Americans would just resort to the old countervail strategy that worked so well before 1995.

Nobody liked it when Ottawa collected the countervail money to keep it in Canada and then doled it out to the provinces. So what Marchi has to consider is not whether but what to renegotiate and how to renegotiate it.

It doesn’t say much for our sovereignty to have to admit, as Marchi does, that the Americans have really managed our trade in lumber. He believes managed trade is "a dangerous omen of things to come because it’s one-way trade and one-way trade is a dead end".

But the fact is there will have to be another softwood deal and that the real renegotiation will be within Canada— between the primary exporting provinces and Ottawa.

The existing document can’t be renewed. There are too many problems on our side of the border, never mind what the Americans might bring to the table next time. Washington is systematically short-circuiting every Canadian attempt to ease the impact of their import quotas.

To rewrite the deal, we have to decide how far we want to go to get the Americans off our backs. Should we end the stumpage rules, which vary all over the map across Canada with eastern Canadian producers paying about one-third of BC rates? What would replace stumpage?

The Americans want an open log market in Canada and an end to log export restrictions. That idea sounds loud alarm bells through the country about what uncontrolled log shipments would lead to–everything from a huge drain of our raw wood south right through to some profound restructuring of the way provincial governments man-age publicly owned forest land.

If tenure systems are to be changed, should they be harmonized across the country to make open markets work better and simplify our dealings with the Americans?

Would it be even better just to privatize the forests and have done with it? About 95 per cent of the forests here are in the public domain, much less than that in the US. Open log markets would be a neat fit for privately held land owners and the Americans would have little to complain about.

Privatization is a radical idea in Canada but private forest land is not. The Irving family in New Brunswick holds a large amount of timberlands and there are many small woodlot stakeholders throughout the Atlantic provinces. All were spared the American countervail and the export quotas that have been levied on other provinces.

The problem is how to convert lands which have never been privately held merely to satisfy a customer-nation that likes to throw its weight around in negotiations on any subject affecting Canada. It would take a daring government to even consider such an idea.

How would any new quota system be shared among Canadians? Quebec and Ontario have fared better than BC under the current deal. The Asian meltdown has sent the BC coast industry into a long hibernation, since it has only a small quota share. How would a new agreement giving that region a larger quota be accepted by eastern producers, especially if they were to lose some of theirs?

The American notion of what constitutes a subsidy is at the bottom of all the disagreements with Canada. Yet it’s hard to argue with their claim that Canada has been subsidizing the industry’s costs through managed stumpage and log export controls.

Professor David Haley of the faculty of forestry at the University of BC says bluntly that the provinces deliberately kept stumpage rates down in the 1970s and early 1980s to promote economic development. Government revenue was captured in other ways, primarily through other taxes.

The market was so big in those days that nobody seemed to mind. At least the Americans didn’t make as big a fuss as they are now.

But when the Americans began complaining, we started raising stumpage, regardless of real log market prices, to placate the US and, incidentally, to line government pockets.

Stumpage is administered in most of the country through regulation, in BC through complex regional formulas reflecting its many more varied species. BC simply tar-gets its revenue needs and sets stumpage rates accordingly.

The Americans still believe we’re subsidizing logging costs. So Haley says stumpage has to be set by some form of competitive pricing. If 35 to 40 per cent of the output from Tree Farm Licences and other tenures were subject to competitive bidding, stumpage could be based on the resulting prices and applied throughout the industry.

It’s a controversial idea, condemned by some people within the industry who believe it will lead to mill closures and all sorts of unemployment. But more and more economists are pushing it, not just to get out from under the Americans, but as the fair thing to do.

It’s true the Americans are really less interested in a fair and open log market in Canada than in doing whatever it takes to fatten their bottom lines. Even if we bring in competitive pricing, the Americans may still look for ways to restrict exports. But they’re the buyers.

The best that Canada can do is to make it as hard as possible for them to complain. For Sergio Marchi that should mean a made-in-Canada offer the Americans can’t refuse. So this is where the renegotiation needs to start.