Canada's protracted dispute with the United States over softwood lumber is estimated to have cost lumber producers billions of dollars and thousands of jobs.
The dispute has been simmering for years, but boiled over in May 2002 when the United States imposed duties of 27 per cent on Canadian softwood lumber, arguing that Canada unfairly subsidized producers of spruce, pine and fir lumber.
SOFTWOOD LUMBER GLOSSARY
Softwood lumber: Easy-to-saw wood such as pine and spruce used in building.
Board foot: A unit of volume for wood equal to 144 cubic inches, or one square foot of one-inch-thick board.
Countervailing duties: Applied on imports found to be unfairly subsidized.
Dumping: Selling goods in another country at less than what they cost to produce.
Stumpage: A fee charged by Canadian governments to logging companies for the right to harvest lumber from public land.
An agreement-in-principle to end the dispute was reached in December 2003. But it died two days later and the issue has been before North American Free Trade Agreement panels and the World Trade Organization several times. Rulings have usually gone Canada's way.
At issue
The dispute is centred on stumpage fees - set amounts charged to companies that harvest timber on public land. Many in the U.S. see Canadian stumpage fees as being too low, making them de facto subsidies. A U.S. coalition of lumber producers wants the provincial governments to follow the American system and auction off timber rights at market prices.
The U.S. responded by levying tariffs on incoming Canadian lumber in May 2002.
Overview of the dispute
The bickering between Canada and the United States over softwood lumber is like a case of sibling rivalry. It dates back hundreds of years. Even within Canada there are divisions. The B.C. Lumber Trade Council has argued a trade war with the Americans over softwood lumber would be costly and should be avoided by accommodating U.S. demands. The Free Trade Lumber Council, which includes lumber producers in Quebec and Ontario, wants to fight it out. What most Canadian foresters and governments do agree on is their goal: free trade in softwood lumber.
In August 2001, the Bush administration backed a U.S. forest industry bid to hit Canadian lumber with billions of dollars in duties. Two months later, the duty was increased further when the government imposed an anti-dumping duty on top of the original duty. Dumping is a term used to describe the sale of goods to another country at less than what they cost to produce.
The duties were applied separately following the expiration of the softwood lumber agreement between Canada and the U.S., which governed exports from April 1, 1996 to March 31, 2001. Under that agreement, the U.S. guaranteed market access to Canadian exporters for five years and permitted the import of 14.7 billion board feet per year of lumber without fees. The agreement applied to $10 billion worth of lumber produced in British Columbia, Alberta, Ontario and Quebec.
The agreement didn't apply across Canada. Since lumber harvested in the Maritimes comes mostly from private land, Maritime provinces weren't subject to the U.S rules. With no extra duties to deal with, Maritime producers saw business rise.
When the agreement was signed, Maritime provinces accounted for about five per cent of Canada's lumber production. In the five years following, production in Nova Scotia and New Brunswick soared 62 per cent to more than 1.2 billion board feet. That compares with 1.5 billion board feet produced in Ontario. In New Brunswick, 90 per cent of softwood lumber exports go to the United States.
The trade war has taken a toll on Canadian jobs. Thousands in the industry lost their jobs, including about 15,000 forestry workers who were laid off in British Columbia.
In 2001, then-U.S. trade ambassador Robert Zoellick vowed the trade war would continue until Canada imposed its own taxes on lumber exports. Canada has refused to do so.
On July 29, 2003, it seemed as if there might be a breakthrough in the dispute when officials on both sides announced a draft deal. As part of the draft, Canada had agreed to cap lumber exports to account for 30 per cent of the U.S. market, down from 34 per cent. If the quota was exceeded, Canada would have to pay a penalty. The plan was nixed two days later when U.S. producers said Canada needed to make more compromises.
A NAFTA decision on August 13, 2003 was considered a partial victory for the Canadian side. A panel ruled that, while the Canadian lumber industry is subsidized, the 18 per cent tariff imposed on softwood lumber by the United States is too high. While the ruling didn't throw out the duty imposed more than a year earlier, it ordered the U.S. Commerce Department to review its position.
The NAFTA report said the U.S. made a mistake in calculating its duties based on U.S. prices, and by not taking Canadian market conditions into consideration. It ordered Washington to recalculate them. NAFTA decisions are legally binding and must be put into effect within 60 days.
Two weeks later, a WTO panel concluded that the U.S. wrongly applied harsh duties on Canadian softwood exports. The panel also found that provincial stumpage programs provide a "financial benefit" to Canadian producers. But, the panel made it clear that the benefit is not enough to be a subsidy, and does not justify current U.S. duties.
On Aug. 10, 2005, an "extraordinary challenge panel" under NAFTA dismissed American claims that the earlier NAFTA decision in favour of Canada violated trade rules.
"We are extremely pleased that the ECC dismissed the claims of the United States," said International Trade Minister Jim Peterson.
"This is a binding decision that clearly eliminates the basis for U.S.-imposed duties on Canadian softwood lumber. We fully expect the United States to abide by this ruling, stop collecting duties and refund the duties collected over the past three years," he said.
Washington's initial response was that the ruling doesn't settle anything – and that it will take more negotiations before this dispute is wrapped up.
