Lumber V: Avoiding Armageddon

The next round in the Canada – U.S. lumber wars may launch sooner than we think. In Question Period, Members of Parliament from British Columbia are pressing Trade Minister Chrystia Freeland to conclude a new softwood lumber agreement forthwith.

The Minister is taking time to get this deal done, but done properly, and in the national interest. Senator Pat Carney drove the first agreement when she was Trade Minister. David Emerson was the catalyst for the 2006 deal. There have been changes since the last agreement was negotiated. Quebec and Ontario have reformed their stumpage systems to achieve market based pricing in order to be rid of the perpetual trade dispute. At least one major producer (Resolute) is saying hell no, we won’t go.

Here is a glimpse of the complexities.

By mid-October, the U.S. Lumber Coalition (Coalition) will be able to file new anti-dumping and countervailing duty complaints against Canadian softwood lumber exports. Unless a replacement for the 2006 Softwood Lumber Agreement (SLA) can be negotiated in the next few months, Lumber V could be launched.

These perennial disputes feature extremely disruptive punitive U.S. duties. When Canadian exporters are threatened with the full force of U.S. trade remedy laws most Canadian stakeholders opt for the “least worst” option a government to government agreement to buy off the Coalition. Canada’s attachment to the rules-based international trading system will be abandoned in favour of managed trade agreements to buy peace – until next time.

SLA 4, or will it be 5, will not be possible unless the Coalition’s numbers are right for a launch. In addition, Canadian interests must agree on how they would prefer to be skewered this time. Ontario and Quebec are not on the same page as British Columbia.

How should exports be regulated under SLA 5? British Colombia prefers export taxes so that duties (based on alleged stumpage subsidies) go into its own coffers rather than the U.S. Treasury. Is this a silver lining? Would it help to explain Premier Christy Clark’s public demands for a quick negotiated solution?

Canada-U.S. lumber disputes are mainly about “stumpage” – the fee the provinces charge for harvesting standing timber on Crown lands. Coalition members claim Canadian stumpage charges are too low – read, lower than the U.S. where timber is owned by private operators. Compounding the Coalition’s complaints is a B.C. log export ban which prevents U.S. lumber mills from buying less expensive Canadian logs.

Ontario and Quebec have reformed their “stumpage” regimes.  Industry employment in Ontario has shrunk by 42% or 26,000 jobs since the 2006 SLA entered into force. Quebec has reduced availability and much higher fibre costs than B.C. While Ontario and Quebec could agree to a new SLA, they will likely insist that it transition to free trade with clear and workable “exit ramps” for their good behavior.

Lumber exporters in Atlantic Canada had a free pass under the 2006 SLA because stumpage rates were determined by private auctions. However, the recent U.S. Department of Commerce countervailing duty decision in Super-calendered Paper resulted in duties in the 20% range. Among the 14 countervailable programs found by the U.S. Department of Commerce was provision of stumpage by the Government of Nova Scotia at less than market value. This could draw Atlantic Provinces’ producers into the Coalition’s net.

Industry consensus on the need for another SLA has been elusive. Mr. Richard Garneau, CEO of Resolute Forest Products, the biggest Canadian producer east of the Rockies, is not as keen as Premier Clark is to negotiate.

Mr. Garneau is a very vocal critic of the 2006 SLA. His testimony at the April 12, 2016 meeting of the Standing Committee on International Trade runs roughshod over supporters of the SLA. Mr. Garneau claims the SLA worked well for B.C. but has been a disaster for Quebec and Ontario. He rejects claims of subsidization and wants nothing to do with another agreement.

These differences are not new. Canada tried to negotiate a second extension before the 2006 SLA expired. Extension on the same terms was not an option. The Coalition declined.

The Coalition was pleased to see the end of the 2006 SLA. It did not work well for them. Cross border lumber wars are always fiercely fought. Trade remedies (anti-dumping and countervailing duties) have provided quick and effective relief for the Coalition – and the worst possible nightmares for the Canadian lumber industry. The Coalition has little incentive to settle for an agreement less effective than successful AD/CVD litigation.

Most Canadian stakeholders attach great importance and high priority to a negotiated settlement. Richard Garneau is not interested. Even those who want to settle will be concerned about the terms. Reported Coalition demands for a single option with hard caps or strict quotas on Canadian exports have not been well received. British Columbia wants greater flexibility.

Uncertainties about the U.S. election have increased the urgency of demands for a negotiated solution. The Western provinces want a managed trade agreement and they want it soon – before November.

The election is increasing the focus of U.S. trade law administration on prosecution and enforcement. U.S. trade remedy laws have been amended and enhanced to make them more effective.

The prospect of a Trump Presidency adds urgency to an expedited negotiation. Hillary Clinton, who is being pushed left on trade by Senator Bernie Sanders’ success, has promised to appoint a Prosecutor to defend U.S. trade interests.

No matter who the next President is, the incoming Administration will be tougher on enforcement. And it will be completely disorganized and unfocussed for months into 2017. The U.S. Lumber Coalition will have an unimpeded run down the field until the CVD rates and AD margins are announced, and maybe thereafter. The pressure to negotiate and compromise is on Canada. The Coalition benefits from delay.

President Obama and Prime Minister Trudeau have instructed their trade ministers to identify options or a framework for resolution by the time of President Obama’s visit to Ottawa.

At the end of Prime Minister Trudeau’s state visit, President Obama noted –“each side will want 100 percent, and we’ll find a way for each side to get 60 percent or so of what they need, and people will complain and grumble, but it will be fine.”

Mutually unsatisfactory agreements are generally the best solutions and work well between governments. In Softwood Lumber the private interests represented by the Coalition have leverage and must be satisfied. Compromise for reasons which might motivate governments is not in the Coalition’s DNA.

USTR Michael Froman and Canada’s Trade Minister Chrystia Freeland have a big challenge – like herding ornery cats or containing a herd of bullfrogs in a wheel barrow. There are divergent interests in Canada to accommodate and the leverage is on the Coalition’s side. Delay increases their leverage in settlement negotiations.

The Coalition has a clear right to file the complaints if the evidence supports their position. If the facts appear to be right. Coalition members have nothing to lose by launching investigations. Indeed, recent tightening of U.S. Anti-Dumping and Countervailing Duty laws was not and is not targeted only at Chinese steel. These tougher trade remedy laws will apply in Lumber V investigations.

The Coalition will be encouraged by the subsidy margins in super-calendered paper and by the methodology employed by the U.S. Department of Commerce in that investigation.

The Canadian Government was quick to challenge U.S. DOC methodology in super-calendered paper. The NAFTA and WTO challenges have begun. Canadian officials are confident they will prevail.

Trade Remedy investigations are very time consuming and expensive with extensive legal teams racking up thousands of dollars per hour -(US dollars)- in fees. Dispute settlement under NAFTA and the WTO is a slow, and also a very expensive and uncertain process. U.S. officials and stakeholders have been very critical of WTO decisions which often overturn DOC methodology. Indeed the U.S. is injecting ‘oversight’ into the Appellate Body selection process as Washington is blocking re-appointment of a “rogue” Korean member.

Canadian stakeholders have not been sitting on their hands waiting for negotiations to succeed or fail. They have been “lawyering up” as they hope for the best and prepare for the worst. There has been a long time since it was clear that SLA 2006 would expire and they appear to be using the time well.

Prime Minister Trudeau has raised concerns with President Obama. Minister Freeland has been doing her own coalition building meeting with the U.S. National Association of Home Builders and others supportive of Canadian lumber exports. Follow the Minister on Twitter @canadatrade May 2 and @cafreeland.

Some central Canadian producers are confident stumpage reforms have eliminated subsidies and that the soft loonie will minimize dumping margins. Resolute is gearing up for a fight. Others too must be prepared. Hoping the problem will go away is neither a sound nor a prudent business strategy.

The legal fees will be mind-boggling. It will be back to the good old pre-SLA days for the Washington Trade Bar. And this is part of the problem – litigation is more lucrative than settling.

But costs may also help to drive the solution. The relative peace of the SLA period has saved industry on both sides of the border. Neither side wants a bad deal. There will be a premium on certainty.

Delay could be painful for Canadian exporters as duty collections can rapidly grow to billions of dollars. And if the remedy duties are diluted (Resolute’s initial CVD rate in Super-calendered paper was about 2%) or eliminated, the Coalition will have gambled and lost.

Trade litigation is a means to an end – it is more than chain rattling. Canadian exporters want and need to limit disruption to trade. For the Coalition, an agreement can bring relief without the risk of remedies being overturned by dispute settlement under NAFTA or the WTO.

No experienced negotiator begins with the bottom line. There will be a lot of fencing and jousting on the way to common ground. There are complexities in Canada which may delay the process. Delay and uncertainty favour the Coalition – it seems likely that notwithstanding the best efforts of Canadian and U.S. governments, litigation will be launched before a settlement is reached.

An edited version appeared in my iPolitics column.

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Jindal Steel and Power secures no injury finding in Canadian Plate Inquiry

The CITT decision in Plate 8 has not been posted yet on the Canadian International Trade Tribunal’s website so here it is (Finding and Reasons). No injury decisions on major steel cases in Canada are rare. The last was cold-rolled in 2001. I recall it well as 9-11 occurred mid-hearing and one of my witnesses from Brazil was not at all interested in leaving his hotel.

The Tribunal’s reasoning is quite illuminating and WTO-sensitive. And given the economic downturn and the fact that the complainant Essar Algoma was in its second round of seeking creditor protection in less than 15 months, the Tribunal properly applied the WTO requirements that injury from non-dumping and non-subsidizing factors should not be attributed to imported goods.

Very refreshing as the U.S. tightens its system – an important concern for softwood lumber exporters – and announces inquiries into how to reinforce import regimes for steel and aluminum products.

Importers and exporters to Canada should understand that one case does not establish a trend. The CITT just completed its public hearings on small diameter land pipe and at least three more steel complaints are in the works. Win or lose (and file for judicial review), the process insulates the market for two years to 5 or more – usually with an excellent risk reward ratio.

Sun Sentinel Endorsement – None of the above

The Florida Sun Sentinel has refused to endorse any of the GOP candidates.

Their reasons seem sound. Marco Rubio should fare better in his home state but seems to be paying for trashing former Governor Jeb Bush, the Sentinel’s early choice.

The condemnations of Rubio – gets elected and doesn’t go to work – yesterday’s views on issues important to Floridians. Elected to the senate and started running for president. Reminds one of a Chatty Cathy doll.

Many Floridians would find Cruz scary, Cruz doesn’t understand military bombing technique. The evangelical card does not play well in Florida. John Kasich’s campaign is uninspiring. Too little too late.

The Donald attracted the usual complaints and condemnation but his appeal is not dead. Like Senator Bernie Sanders, he has tapped into anger and dissatisfaction driven by growing inequality. The elites ignore this at their peril.

I am in Canada so am missing the bombardment of negative attack ads in Florida. Beating up on Trump seems to solidify his support.

Will voters Trump has attracted stay with the process if he does not or cannot? Would Sanders Blue collar supporters migrate to Trump?

Michigan should set the tone for March 15.

Obama Notifies Congress of Intention to Sign TPP

President Obama has decided to play hardball with Congress on timing of the TPP Debate. Today he notified the Chairs of the Senate Finance Committee and House Ways and Means Committee of his intent starting the fast track clock ticking.

This is a risky tactic given that important legislators, including Senate Finance Committee Chair Orrin Hatch (R Utah), urged the President to allow Congress to review the text before notifying his intent to sign.

According to the Administration here is the road map for the TPP process going forward, the next steps before TPP is signed by President Obama, and before Congress then votes on the agreement.

*There will be 90 Days for Public and Congressional Review Prior to the President Signing the Agreement: While TPA requires the full text of the agreement to be publicly available for 60 days before the President signs the agreement, the text will be publicly available for  a full 90 days — before the President signs TPP.

*Additional Resource for Analysis and Review: Once the President signs TPP, the International Trade Commission (ITC) will conduct a comprehensive analysis of the potential economic impact of TPP that will also be made available to the public.

*Submitting Legislative Text: In advance of Congressional consideration, the Administration will submit draft legislative text to Congress that would implement the agreement, if passed by both houses of Congress. The legislative clock for consideration will not begin until the Administration sends final legislative text to Capitol Hill.

*Congressional Consideration: After legislation is submitted, per the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, the House of Representatives and the Senate each have a certain number of legislative days to consider the legislation in the committees of jurisdiction and on the floors of each chamber.

*Presidential Notification: If both houses of Congress pass the TPP implementation bill, the President then is empowered to sign the implementing legislation into law. The President will notify Congress in writing 30 days in advance of the agreement taking effect with respect to each of the 11 other TPP countries, once the President determines that each meets its obligations under TPP.

The battle lines are being drawn. But those who wanted to see the text before committing will be able to review it.

President Obama has thrown down the gauntlet. It is a high stakes gamble.

Stay tuned for the fallout.

Canadians invited to comment on TPP

Canadians have been invited to comment on the agreement at:

Many will glaze over quickly reading the extensive legalese in the 6,000 page plus TPP text and side letters. Here is the consolidated text from the TPP Repository in New Zealand.

The US Administration has provided a user friendly text which annotates the terms of the agreement tries to simplify the benefits from an American perspective.

In the current mood in Washington, the Administration with neither admit nor highlight any costs – it is, after all, the total deal which matters.

Canada earlier provided Technical explanations from a Canadian perspective.

The Government is inviting lot of feedback – and while it may be difficult to cope, it certainly reflects an openness and inclusiveness which has been missing from the earlier process.

Nothing startling yet – wine lovers will be pleased and Canadian Whiskey is protected. And BC’s log export ban has not been lifted – but its future could be the subject of WTO litigation.

This is a massive deal about nearly everything.  I will be analyzing, so stay tuned.


Full text of the Trans-Pacific Partnership Released

Canada’s side letters are now available here…

The full US text is available here…

Understanding Canada`s Trade Agenda

There will be no lack of challenges for Prime Minister-designate Justin Trudeau and his newly elected team in shaping Canada’s trade agenda.

The Trans-Pacific Partnership (TPP) has the highest profile.  Though it requires urgent attention, there are other important issues in play.

The Liberal government will have willing and capable helpers in the trade bureaucracy.  Having their advice sought – and considered – is both refreshing and encouraging.  Not to mention the catalytic impact of losing their PMO watchers.

Read more at:

On TPP, it’s all about the devils we don’t know

For years, informed debate on the Trans-Pacific Partnership agreement has been hampered by secrecy, too little detail and too much hype.

The TPP text is undergoing detailed technical work on tariff schedules and legal scrubbing. The definitive text will have 15 side letters. There will be a co-ordinated release when it is ready. That won’t be for weeks.

In other words, Canadian voters won’t know a thing more about this deal when they go to the polls on Monday than they do right now.

Read more at:

Will the TPP survive Congress?

ATLANTA — The Trans-Pacific Partnership negotiations have led to an agreement. The talks were declared finished and a success by the 12 participating countries after a marathon five-day ministerial meeting in Atlanta.

The final package delivered by the TPP Ministers is very extensive. Amb. Michael Froman, the US Trade Representative, said it is more than just an agreement in principle, and what comes next — the translation and scrubbing — are not negotiations. It is technical work.

The final differences which dogged the ministers in recent weeks and through the final blitz this weekend were addressed with a mix of ingenuity, pragmatism and co-operation.

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Chile and Peru balk at TPP’s treatment of intellectual property

ATLANTA – Japan’s trade minister Akira Amari briefed Japanese press prior to lunch that agreement in principle has been reached the controversial Trans Pacific Partnership.

It would appear that the main reason the TPP remains only an agreement in principle is that Chile and Peru will not permit the intellectual property chapter to be closed. They will not support the U.S.-Australia compromise on biologics reported earlier today.

No further details at this time. We expect a press conference later this afternoon.

Stay tuned….

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