Canada’s softwood lumber capitulation

I don’t generally like Gary Mason’s columns, but in this one he does a good job of showing how bad the softwood lumber deal is for BC:

… The agreement would allow the U.S. to keep about $1-billion of the $5-billion in penalties collected on Canadian softwood since 2002, and limit shipments to the United States if lumber prices begin to fall south of the border.The deal is intended to last for seven years with an option to renew for another two. However, according to the draft text, the U.S. insisted a clause be added that allowed either side to opt out of the agreement after 23 months has elapsed, with one month’s notice. The B.C. government and industry had requested the deal be for three years, with six months’ notice required for termination.

Set aside for a moment the fact that, contrary to the spirit of the North American free-trade agreement, Canada is agreeing to subject one aspect of the economy to certain tariffs and quotas, implicitly acknowledging we were somehow doing something wrong.

Let’s ignore for a minute that as part of the deal we are agreeing to give the Americans $1-billion of what court case after court case, trade tribunal after trade tribunal, ruled was illegally collected duties.

Forget for a second that the deal comes just as the industry in Canada was expected to start seeing the results of the more than $200-million it had spent on litigation — litigation that those companies now must agree to drop as part of the agreement.

And banish from your mind, if you can, the fact that under the deal, every move by Canadian forest companies related to the export of lumber will be subject to bureaucratic scrutiny, while U.S. companies will not face the same examination of their practices.

There are a number of additional problems with this agreement that still make it untenable. Because we’re talking softwood lumber, of course, these problems aren’t easy to explain or understand. Beyond that, the subject matter is as dry as tree bark.

But let’s examine one of the issues upsetting B.C. forest companies, especially in the Interior. They are upset that border tax and quotas will be assessed monthly and will be based on shipment, not sale. Additionally, they will not be able to carry their quotas over to the following month. This is a particular problem for a business as cyclical as the forest industry. Home-building, as we all know, has peaks and valleys.

But there is another problem. Forest companies in the Interior have been having a difficult time getting their product to market because of a shortage of rail cars.

Under this agreement, a B.C. company could theoretically sell its January quota but not be able to ship it to market, could sell its February quota and not be able to ship it to market and then, in March, sell its quota and finally clear up the backlog from the previous two months.

Because the quotas would be managed monthly, and be based on shipment, not sale, the company would be dinged a “surge penalty” of 22 per cent for going over quota in March — even though it sold the bulk of the product in January and February but was unable to get it to market. Who does the company pass that cost on to?

In other words, the core of this deal is not commercially viable for many B.C. companies.

Back in 2002, when the latest dispute was still new, I wrote in the CCPA’s BC Commentary:

The softwood lumber dispute hinges on domestic political pressures in the world’s most powerful nation. US producers are seeking to restrict access to the US market by Canadian producers. This has the effect of increasing prices for wood in the US, which directly contributes to the US industry’s bottom line. In addition, recent changes to US trade law now mean that the complaining US companies actually receive the duties, giving them an additional monetary incentive.

Since 1982, the US forestry industry has continuously lobbied Washington to levy duties on Canadian softwood exports. Their argument is that stumpage fees paid for timber harvested in BC and other provinces on Crown land are too low and thus constitute a subsidy to the Canadian industry. In recent years, the US has argued that bans on raw log exports are also a subsidy.

A series of battles were fought over the issue in the 1980s and 1990s, with Canada consistently appearing as the winner. However, US producers have not accepted no for an answer. Even when Canada wins a dispute, the US response has been to stall and change tactics, thereby continuing to harm the Canadian industry. These ongoing legal battles culminated in the 1996 Softwood Lumber Agreement, which set quotas on tariff-free Canadian access to the US market, in exchange for an end to the harassment.

The current dispute is essentially a rerun of this drama, with the US pushing Canada to make new concessions. Yet, the fact that this is happening demonstrates the failure of the original Canada-US Free Trade Agreement and the subsequent NAFTA. Canada was unable to get a clear exemption from US trade laws, or to get the US to agree to binding dispute settlement procedures. The best Canada was able to do was to negotiate a review process to oversee whether the other country was properly enforcing its own trade laws—hardly the teeth that Canada needs in situations like softwood lumber.

And so we are now back in a managed trade deal, one that is worse that the 1996 Softwood Lumber Agreement. Not to worry: Paul Martin launched a NAFTA-wide Security and Prosperity Partnership framework just over a year ago, and current PM Harper seems to like it just as much. Maybe this time we’ll finally get guaranteed market access . . . oh, forget it.