Lumber

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.

Tagged , ,