Softwood Lumber – The Other Shoe Drops

  • National Newswatch

International Trade Minister Chrystia Freeland's office has confirmed that the U.S. Lumber Coalition will file petitions in the fifth round of anti-dumping/countervailing duty today (November 25). Lumber V is moving from threat to reality.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 nightmares for the Canadian lumber producers. The Coalition has little incentive to settle for a deal that it does not want with Governments it does not trust.Mutually unsatisfactory agreements are generally the best solutions and work well between governments. Canada understands this. Washington understands this. The Coalition does not care. In softwood lumber, the private interests represented by The Coalition have leverage which must be satisfied. Compromise for reasons which might motivate governments is not in the Coalition's DNA.The Coalition has a clear right to file complaints if the evidence supports its position. If the facts appear to support their position, the Coalition has 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.This filing was inevitable. Canada was not prepared to cap its exports at 22 percent of U.S. consumption. While managed lumber trade with the U.S. has become the norm, this was too much for Canada.While the negotiations are between Canada and the United States, the Coalition has a veto over the settlement. The Coalition wants nothing to do with an extension or restoration on the same or similar terms as the 2006 Softwood Lumber Agreement. The Coalition is not a trusting lot when it comes to Canada. British Colombia has refused to abandon its favoured export tax mechanism of controlling exports.The Coalition has made it clear that it would not accept an export tax based settlement. Some analysts suggest that the U.S. fared better under the 2006 deal than Canada. The 2006 agreement was done in part because the Coalition could avoid NAFTA and WTO dispute settlement, and partly because half a billion dollars in Danegeld. The new arbitration forum – the London Court of International Arbitration – didn't work in the Coalition's favour. There is no prospect that it can.Within the Coalition, the distrust of British Colombian governments is even deeper than its distrust of the Government of Canada. That is reality. Prime Minister Trudeau has admitted that the Coalition has a veto which could kill an unsatisfactory deal.With no hope of Canada buying into the Draconian trade restrictions, the Coalition has stepped up the pressure. This is not a case of no more Mr./Ms. Nice Guy. The Coalition has no need to feel loved. It has been sending clear and unequivocal messages for several years that it wanted nothing to do with a further extension of the 2006 Softwood Lumber Agreement.The filing is not about President-elect Trump. President Obama could not derail the Coalition's determined initiative. Nor could Minister Chrystia Freeland's repeated meetings with USTR Michael Froman move the game in Canada's favour.Canadian Ambassador to Washington, David McNaughton, is a formidable political operator who has made fixing the lumber war a top priority. He is supported by a very competent team of negotiators including veterans of several iterations of the lumber wars. They are well connected and tireless in their determination. The surprise election results do not make their task any easier.President-elect Trump has modified or appears to be modifying some of his more extreme campaign rhetoric on trade. But appearing to give Canada a pass on perceived unfair trade would be too big a flip flop for Mr Trump. The Coalition has a solid core of 25 Senators who would keep the Administration's feet to the fire. Among them are Senators Ron Wyden, Marco Rubio, and Diane Feinstein. These high powered Senators have many other friends in the Senate who owe them favours and support. There is little love or tolerance in Congress for subsidized import competition.Canada-U.S. lumber disputes are mainly about “stumpage” – the fee the provinces charge for harvesting standing timber on Crown lands. The Coalition claims Canadian stumpage charges are too low, which means they are lower than in the U.S., where the timber is harvested on lands owned by private companies. Compounding the Coalition's complaints is a B.C. prohibition on whole-log exports which prevents U.S. lumber mills from buying less expensive Canadian logs and milling them in their U.S. operations.Why have there been five rounds of litigation? Because the Department of Commerce rules and methodology determine that stumpage rates, in British Columbia in particular, are a subsidy. And because the Coalition, in pursuing its various initiatives, understands how to unleash the power of its supporters in Congress.Ontario and Quebec have reformed their stumpage regimes since the 2006 SLA entered into force. Industry employment in Ontario has shrunk by 42 per cent or 26,000 jobs, while Quebec has reduced availability and charges 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 behaviour.Achieving consensus within Canada on the need for another Softwood Lumber Agreement has been elusive. Other provinces have from time to time argued that government support for the B.C. industry distorts trade and competition in Canada.Mr. Richard Garneau, CEO of Resolute Forest Products, the biggest Canadian softwood lumber producer east of the Rockies, seems to prefer to fight.Mr Garneau is a very vocal critic of the 2006 deal. In testimony at the April 12 Commons Standing Committee on International Trade meeting, Garneau ran roughshod over supporters of the SLA. He said the 2006 deal worked well for B.C. but has been a disaster for Quebec and Ontario. He rejected claims of subsidization and wanted nothing to do with another agreement.We now have the fight. Resolute may do well if the U.S. Department of Commerce is prepared to investigate and assign Resolute an company-specific rate, rather than a national one which could be inflated by subsidies in B.C.To expect looser U.S. Administration of unfair trade laws in the U.S. at a time when the U.S. (as well as Canada and the E.U.) is determined to “modernize” their own trade remedies laws is likely a futile exercise.The Trump Administration may bob and weave around the future of NAFTA. However, it will need to show increased toughness on enforcement of unfair trade laws. On trade, the Administration will not be fully organized or focussed for several months into 2017. Expect the United States Trade Representative, if it is ex-Nucor CEO Don DiMicco, to be absorbed with the China and steel overcapacity.The U.S. Lumber Coalition will have an unimpeded run down the field until the countervailing duty rates and AD margins are announced, and perhaps thereafter. The pressure to negotiate and compromise is entirely on Canada. The Coalition benefits from delays.Canadian exporters will now need to comply with the burdensome demands for information from U.S. investigators. Soon NAFTA and WTO dispute settlement will once again be bogged down with the latest Canada –U.S. lumber war.No doubt there is some mutually unsatisfactory market share which astute negotiators can find. But as long as the Coalition is faced with demands for the 2006 model, which it does not like and does not trust, is there any incentive to move? If a hard cap quota is the only option, is there a deal to be found?The negotiations have been dragging on because British Columbia wanted to extend (re-initiate) the 2006 Agreement. The Coalition did not agree and had been sending clear messages about this for at least two years. Premier Clark wouldn't agree. The Coalition has raised the stakes. This would be an expensive bluff.Trade remedy investigations are very time consuming and expensive. The legal fees will be mind-boggling with extensive legal teams racking up thousands of dollars per hour – U.S. dollars – in fees. Dispute settlements under NAFTA and the WTO are a slow, expensive and uncertain process. Delay and uncertainty will benefit the Coalition, and Canadian exporters will be seeking government help to finance until the matter is settled.Lumber trade is very important to Canada and particularly to British Colombia. But there is a different mood in Washington. Trade agreements will be tested against benefits to the U.S. This is not a new or novel concept. The perception is that Mr. Trump won by trashing trade agreements and Secretary Clinton's opposition was not persuasive.Premier Clark has lost round one by refusing to move away from the 2006 SLA model. Now she hopes that proposed reconstruction and rebuilding infrastructure will protect Canadian lumber exports. I predicted recently that the infrastructure spending would involve a serious Buy American focus for steel, concrete and other inputs. Why not softwood lumber?Hope is not a sound business strategy.Peter Clark, president of Grey, Clark, Shih and Associates, is one of Canada's leading international trade strategists. His clients in Canada and around the world include governments, corporations and trade associations. He is a frequent media commentator and columnist.  Follow him on Twitter at @jpclark14