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BRIGHTON: The high price of government support

January 4, 2016

By: The Chronicle Herald

Government subsidies for the Cape Breton paper mill have embroiled the province in another trade dispute.

A previous dispute that came to a head in December led to hefty duties on U.S. imports of supercalendered paper from Canadian mills. In that case, complaints of unfair competition came from the other side of the border.

Now Resolute Forest Products Inc. in Montreal is taking action against Nova Scotia and Ottawa through the North American Free Trade Agreement.

On Wednesday, Resolute filed a notice of intent to seek arbitration through NAFTA in its quest for $70 million in damages. It is doing so “as a U.S. investor in Canada,” according to a note filed with the United States Securities and Exchange Commission.

Resolute trades on stock exchanges in New York and Toronto and operates mills on both sides of the border, including a mill in South Carolina operated by a U.S. subsidiary. According to the U.S. International Trade Commission, that mill in South Carolina also produces supercalendered paper.

The Quebec company intends to argue that provincial subsidies for the mill in Nova Scotia contributed to the decline of its Laurentide paper mill in Quebec, which was closed in 2014.

Resolute used to be the majority owner of the former Bowater Mersey newsprint mill in Brooklyn, Queens County. It sold the mill and related assets to the province in 2012, after making sure it could not be restarted by a competitor.

Resolute is initiating the action through NAFTA while simultaneously contesting the U.S. decision that its Canadian production of specialty paper is unfairly subsidized.

Earlier in December, the U.S. government set countervailing duties on supercalendered paper imported from Canadian mills, following complaints of unfair subsidies made by Madison Paper Industries Inc. in Maine and Verso Corp. in Memphis, Tenn.

The duties were set at 20.18 per cent for Port Hawkesbury Paper LP, which owns the Cape Breton mill; 17.87 per cent for Resolute; and 18.85 per cent for New Brunswick’s Irving Paper Ltd. and Catalyst Paper Corp. in British Columbia.

All these trade disputes are reactions to the 2012 decision by the NDP government in Nova Scotia to rescue a dying mill.

Port Hawkesbury Paper LP is part of the Stern Group of Vancouver, a private equity firm that acquired the Point Tupper mill from NewPage Port Hawkesbury Corp. in 2012. Through an affiliate, Pacific West Commercial Corp., Stern paid $33 million for the mill. The sale price was a fraction of the $1.1 billion in inherited tax losses that came with the mill, representing a potential benefit in excess of $300 million when applied against future income.

Stern’s assertive negotiations secured a $124.5-million aid package from the province to support the mill and its timber supply. That money, to be paid out over a decade and ostensibly recouped through taxes, was on top of the $36.8 million invested by the province to keep the mill on “hot idle” during the year-long sale process and to keep the forestry supply chain humming while the mill was idled.

In addition to direct government aid, the current owners benefit from a deep discount on the cost of electricity. This discount accounts for the principal part of the U.S. duty on imports from Port Hawkesbury Paper.

In this dog-eat-dog world of the pulp and paper industry, Resolute will have a hard job proving Nova Scotia’s subsidies contributed to the decline of one of its mills.

But the fact that Nova Scotia is facing protracted trade deliberations indicates government support for the mill was excessively zealous and generous to a fault.

By: The Chronicle Herald

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