April 29, 2006
Unless they are in the construction
industry, most Americans don't know that the main trade dispute between Canada
and the U. S. has been a 25-year old conflict over
softwood lumber. This is a conflict that has done
much damage to Canada-U. S. relations. Canada exports annually about $10 billion
worth of softwood lumber (mainly spruce, fir and easy-to-saw pine) to the U.S. home-construction and
renovation sectors, taking about a one-third share of the American lumber
market.
Under the Free Trade Agreement between Canada and the
U. S., signed in 1987 and implemented at the beginning of 1988, trade in
most goods between the two countries is tariff-free and quota-free. The North
American Free Trade Agreement (NAFTA)
that has brought
Mexico into the agreement, reinforced the largest free trade area in the world.
With most private investment also being liberalized in North America, some
large American companies, such as Weyerhaeuser Co. and International Paper Co.,
are directly involved in producing wood in Canada for export to American
buyers.
Presently, the demand for and prices of
construction-grade softwood lumber products have increased due to the boom in
construction and also due to the devastation brought on by severe hurricanes in
2005, as witnessed by Katrina in New Orleans and Wilma in Florida. There is
also an 18-20 year cycle in
real estate that seems to have peaked with the bubble in home prices in early
2005. All this is to say that softwood prices are currently very high and
contribute to raising the cost of building new houses.
Another factor that has contributed to raising the
price of softwood lumber in the United States has been the punitive tax
(countervailing and dumping duties), which has varied between an average of
29.1 and 10.8 percent, that the U. S. government has been levying on
Canadian softwood lumber for many years. Indeed, over the last quarter of
century, softwood has rarely been traded freely between Canada and the
U. S., because American producers and the U. S. government have
argued that Canadian producers harvest trees at below-market prices on
government-owned land.
Canada has taken the position that trees are more plentiful
in Canada than in the U. S., and that is the main reason why lumber is
cheaper in Canada than in the USA. Indeed, such is the foundation for
international trade based on the law of comparative advantage.
Canada has always considered that the U. S.
discriminatory border taxes were unwarranted and contrary to free trade, and asked
trade panels established under the North American Free Trade Agreement and the
World Trade Organization to declare them illegal. Indeed, in numerous rulings, the
NAFTA and WTO
panels have ruled many times in favor of Canada and declared the U. S.
duties on Canadian lumber imported into the U. S., illegal. While
recognizing that the Canadian lumber industry was somewhat subsidized (less
than one percent), the rulings established that this posed no material injury
to U. S. producers.
Nevertheless, prompted by the American forest products
industry lobby, the U. S. government has repeatedly refused to abide
completely by the rulings and has continued to impose duties on softwood lumber
imports from Canada, under the pretext that it had to protect American workers
and lumber companies from unfair trade, irrespective of its trade agreements.
As a consequence, many small Canadian softwood producers have been loosing
clients in the United States and the financial drain caused by the punitive
U. S. tax has pushed some of them toward bankruptcy.
This is the conflict that was tentatively settled last
Thursday April 27 (2006), with a compromise
agreement between Canada and the United States. It will take two or
three months to work out the details.
In summary, the so-called softwood compromise agreement
provides for duty-free Canadian exports of softwood lumber to the U. S.
under two conditions: it is free trade as long as Canada's share of the
U. S. lumber market remains below the recent historical average of 34
percent and as long as the North American market price for softwood lumber
remains above $355 US per thousand board feet. When and if these
thresholds are violated, Canada will have to levy export taxes on its lumber en
route to the U. S. and/or impose export quotas to limit voluntarily its
exports of softwood lumber, on a increasing sliding scale. For example, if
softwood lumber prices were to fall under $315, exporters from Canadian
provinces would be hit with a 5 to 15 percent tax and the total Canadian export
quota would be reduced to 30 percent of the U. S. lumber market. As we
see, the compromise is for "managed" trade for the next seven years,
possibly renewable for two more years, and not an agreement about
"free" trade.
In addition, the U. S. government will reimburse
Canadian exporters only 80 percent of the $5 billion it has (illegally) levied
in punitive duties since May 2002, with about $1 billion staying in the
U. S. — half going to the American Coalition for Fair Lumber
Imports, mainly to pay for their legal fees, and the rest being divided between
joint North American lumber marketing initiatives and "meritorious
initiatives" in the U. S., such as the rebuilding of the city of New
Orleans.
There you have it.
In the past, Canada and the USA signed similar deals,
notably in 1986 and 1996, but none was renewed at expiration. Is the present
agreement a fair compromise or is it a deal that has been obtained under
duress, after the Bush administration pushed Canadian producers against the
wall and the Harper government was hoodwinked and caved in to American demands?
Moreover, could a clearly politically driven trade deal undermine the entire
legal framework of NAFTA and the WTO? Indeed, is there not a dangerous message
being sent that WTO's and NAFTA's dispute resolution systems are worthless? In
the long run, this could have detrimental consequences for the entire
international trading system.
The principal short-term benefit derived from the agreement
is the removal of uncertainty hanging over both Canadian producers and American
builders. At least for seven years, production planning can be done without the
fear of legal and fiscal disturbances. Also, for financially strapped Canadian
producers, the reimbursement of some $ 4 billion of border taxes will be most
welcome, and this explains why many decided to accept the deal, with a feeling
of resignation, even if some consider it most unfair.
Indeed, the group most responsible for the dispute, the
American lobby of lumber producers, will be rewarded with a half billion dollar
subsidy, even though their complaints have be rejected by the NAFTA and WTO
rulings. Their lawyers are laughing all the way to the bank. It is a precedent
that other U. S. industries may be tempted to adopt in future trade
disputes.
American trade officials also have reason to rejoice. Given
the fact that the price of lumber is relatively high in the current building
cycle, they can reasonably assume that they have boxed in the Canadian
negotiators by committing them to impose export taxes as soon as the current
building boom in the U. S. subsides, or when Canadian producers take a
larger share of the U. S. market. Since the building-products market is
expected to weaken over the next few years, as construction declines, Canadian
exporters may be facing punitive taxes or export restrictions sooner than many
expect.
For these reasons, I believe the $355 price per
thousand board feet is too high a floor to establish softwood free trade
between the two countries. The choice of an average price over many years would
have been more logical and less detrimental to Canadian producers. Considering
also that the Canadian dollar is posed to appreciate vis-a-vis the US dollar in
the coming decade (after an expected short term correction because of the
current overvaluation), mainly under the influence of high energy prices and
high interest rates, the compromise agreement may look less and less attractive
to Canada in the coming years. There could then be a political backlash against
a trade deal that would be seen as a sell-out in Canada. —We shall watch
how all this unfolds.
Posted by Rodrigue Tremblay,
April 29, 2006, at 12:30 p.m.
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