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Lumber Export Deal Unlikely to Last?

Summary: The quota on US-bound softwood ends the countervail threat, but it deals NAFTA a body blow, imposes new problems on producers, and doesn't address serious differences between the two countries.

By John Clarke
Copyright 1996. Contact publisher for permission to reprint

The new five-year softwood export agreement with the Americans looks simple enough, but it may fundamentally change the way Canada does business with our biggest trading partner, not only in lumber but in other commodities as well. Exports from Quebec, Ontario, Alberta and BC will be cut to 14.7 billion board feet per year _ 1.5 bbf below pre-agreement levels.

According to US trade ambassador Mickey Kantor, this should bring our share of the US market down to 32.8 per cent from the 36 per cent it rose to in the five years preceeding 1995. Kantor is interested only in the overall reduction. Shipments beyond the agreed levels will be taxed by Ottawa at $50 per 1,000 bf for the first 650 mbf and $100 on anyting above 16.2 bbf.

This is considered an effective deterrent because the dollars reflect profit ratios. But Jake Kerr, co-chairman of the Canadian Forest Industries Council and chief Canadian negotiator, insists that 91 per cent of our lumber will go to the US tax-free. Federal trade minister Art Eggleton thinks the figure may go even higher. He expects lumber prices to move to levels where, under the agreement, higher shipments will be permitted without tax. In the unlikely event that the tax were to kick in, the penalties would come to $117 million, based on 1995 shipments.

A threatened US countervail of 10 per cent would have cost the industry about $800 million. This is why Eggleton and others are calling this a good deal. But it has exposed some serious weaknesses on the Canadian side. The federal government was essentially missing from the bargining, yet it's the only entity that can enter into an agreement with the US. The provinces own the resource in Canada and they were squabbling like fractious puppies. BC favoured a cap on shipments from the beginning as a way of avoiding stumpage increases favoured by the eastern provinces. Quebec's offer to double its stumpage to $12 /m 3 would still have left it at least 30 per cent below BC rates.

BC feared that under a "national" stumpage strategy, Quebec would try to increase its share of the American market, now at 20 per cent but growing since the 1980s when it discovered that 2x4s were more valuable than chips for the pulp industry.

BC's stumpage costs have gone up 400 per cent in the last decade and the industry now pays most of the reforestation and silviculture costs formerly financed by government. Quebec 's stumpage strategy was not universally approved, even in Quebec.

Many producers shared the view of Frank Dottori of Tembec Inc. in Montreal that a quota system wouldn't destroy their cost base and would let them pursue other markets more readily. To them the stumpage strategy was a "lose-lose" proposition. (Quebec imposed new stumpage rates on April 1 but whether they will remain in place was not known at our press deadline.)

In the end Ottawa had to step in with what is now considered the only rational solution _ the quota and tax. But this solution is still a leap in the dark. The consequences are going to be difficult to predict and harder to manage. Free t rade has taken a body blow. Canada's ambassador to Washington , Raymond Chretien, may claim that 95 per cent of cross-border trade is trouble-free, and he's right. But when Mickey Kantor and the American producers can strong-arm us into this kind of deal, NAFTA is exposed as a vulnerable instrument indeed.

There's a gaping hole that Ottawa chose to ignore in order to get a NAFTA agreement: there is no definition of what constitutes a subsidy. Having lost disputes in panels under NAFTA in the past, the US simply changed its law in a way that defined our stumpage system as unfair. After all, NAFTA can't supervene the internal laws of participating nations. When wood, Canada's third largest export behind automobiles and energy, can't be protected, how many other commodities become vul-nerable?

Some analysts don't think the quota agreement will last the full five years. The American Coalition for Fair Lumber Imports calculates our wholesale log costs are 40 per cent below those of the Pacific Northwest. If the deal still doesn't work for them, the American producers will go to Washington with more complaints. Washington has moved to stop any further countervail attempts.

But they also signed on to NAFTA, which is now shown to offer less protection than we thought. So now there's a large question mark over our administered pricing system. According to some analysts who prefer not to be quoted by name, we may come under increasing pressure to move closer to American-style open market log sales. That may force changes in the way we manage our publicly owned forests.

To Charles Widman, of Widman World Wood Review in Vancouver, the agreement may be better than a countervail but "this is not over." Second, the Canadian industry will have to start doing things differently. Already BC is talking about moving more of its wood into value-added production and shipping less lower-grade lumber to be remanufactured into higher grades in the US. More of that remanufacturing will be done in BC, but whether this new strategy can be effective is moot.

BC's labour costs are higher than in the US and remanufacturing may not be competitive. The Canadian unions aren't inclined to negotiate lower wages. Quebec, the second largest exporter to the US, is going to be looking for overseas m a rkets, particularly in Asia and the Middle East. Louis Boudrault, communications director of the Quebec Lumber Manufacturers Association, says its Wood Industry Promotion Bureau, headquartered in Bristol, England, is working on a new strategy and expects to have a new frame-work in place in the next 10 to 15 weeks.

Whether Quebec can high-grade its shipments to the US depends on the quality of its lumber, considered to be inferior to BC's. "We are making a study in some of the states to verify the perceptions about the quality of our wood," says Boudrault. Trade officials from Eggleton Down don't believe the American producers will be able to replace the reduced supplies from Canada. Whole tracts of public land in the Northwest have been taken out of production for environmental reasons and output in the South is levelling off. Supply pressures are expected to push up prices, which of course would be to the benefit of corpo-rate treasuries in Canada. But consumer costs will go up in Canada as well, since prices are set in the US market. Administering the quota will be an enormous headache for Ottawa.

To make sure nobody gains at anybody else's expense, exports will be monitored company by company. No one on the Canadian side believes this agreement is the final solution. The American claim of government subsidies through stumpage in Canada seems pretty thin when the Americans harvest much of their wood from their own lands, granted to them on the cheap by Washington years ago. There 's a body of opinion in Canada that this is simply a bottom-line deal to fatten US profit margins. If that proves true, then trust between the two sides on trade will be as ephemeral as a summer breeze, which is why some think the deal won't last five years.

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