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The zombie softwood lumber dispute is never dead – it’s only sleeping

May 20, 2016

By: The Globe and Mail

Two-thirds of the way through the 100-day countdown set in March by Prime Minister Justin Trudeau and President Barack Obama to agree on the parameters of a new bilateral softwood lumber deal, time is fast running out to reach an agreement before U.S. election fever overwhelms the negotiations.

The Canadian lumber industry is still hoping that talks at the bureaucratic level will have advanced far enough that Mr. Obama and Mr. Trudeau can iron out what differences remain when they meet at the North American Leaders’ Summit in late June. But that might just be wishful thinking when it comes to to the zombie of Canada-U.S. trade disputes.

The Keystone XL pipeline may have knocked softwood lumber from its perch as the biggest irritant in Canada-U.S. relations in recent years, but no other bilateral dispute has come back from the dead to haunt the bilateral relationship as many times as the $6-billion cross-border trade in two-by-fours. Economic historians can trace the bickering back more than century, with only temporary reprieves.

The last one ended in October 2015 with the expiry of a 2006 deal that instituted “managed trade” between the two countries that are supposedly the world’s biggest champions of free trade, current presidential candidates nothwithstanding.

Under the 2006 deal, B.C. producers, which account for half of Canada’s lumber exports to the United States, agreed to pay a hefty export tax on their shipments south, while operators in Quebec and Ontario begrudgingly accepted a lower export tax combined with a quota.

Lumber producers in B.C. and Central Canada have never seen eye to eye on how to respond to U.S. industry charges that Canadian producers are unfairly subsidized. But never have regional divisions been as acute as they are now. A 2013 market-based reform of stumpage fees has prompted Quebec producers to insist on nothing less than free trade, while B.C. producers are willing to buy trade peace by accepting an export tax again.

For B.C.-based Interfor chief executive officer Duncan Davies, who also co-chairs the B.C. Lumber Trade Council, the 2006 agreement “provided certainty of access to the U.S. market during one of the worst economic downturns we’ve seen since the Depression.”

As Mr. Davies sees it, the Americans aren’t interested in free trade in lumber. “The choice we face is between managed trade and litigation,” he told a House of Commons committee this month.

Montreal-based Resolute Forest Products CEO Richard Garneau sees a very different forest among the trees. He calls the 2006 agreement “incredibly destructive for Central Canada,” contributing to a one-third drop in employment in Quebec’s forest industry and 40 per cent slide in Ontario.

B.C. producers, meanwhile, have invested heavily in U.S. sawmills, allowing them to hedge production. Interfor alone has become the fifth-largest U.S. producer, with U.S. mills accounting for two-thirds of the company’s lumber output. B.C. lumber exports to China have also grown more than tenfold in the past decade, providing a vast new market for West Coast forest companies that is “logistically out of reach” for Central Canadian producers, Mr. Garneau contends.

What’s more, the B.C. government treasury has come to rely more than any other province on export taxes on lumber (the levies are collected by Ottawa, but redistributed proportionally among the provinces), helping explain why Premier Christy Clark is pushing hard for a quick softwood deal similar to the 2006 accord.

That, Mr. Garneau counters, would be unacceptable. Quebec’s 2013 introduction of an auction-based stumpage system similar to that used by the U.S. Forest Service, and a 2005 NAFTA panel decision in Ontario’s favour, have undermined U.S. industry claims of unfair subsidization. He is pressing Ottawa to reject the B.C. position: “The willingness to give up free trade to escape litigation is like offering your lunch to the schoolyard bully before he takes it.”

Reconciling the opposing regional views within Canada is not the only challenge International Trade Minister Chrystia Freeland faces. Her Obama administration counterpart, U.S. Trade Representative Michael Froman, is reportedly insisting on a hard quota that would limit Canada’s share of the U.S. lumber market to 25 per cent. In 2015, Canadian lumber accounted for around 29 per cent of U.S. consumption, down from about 33 per cent in 2005. Western and Central Canadian producers are united in rejecting quotas.

“We are seeking an agreement with all regions and partners in mind,” offered Alex Lawrence, a spokesman for Ms. Freeland. “Our objective is to ensure stable access to the U.S. market for Canadian softwood lumber.”

Ms. Freeland and Mr. Froman talked softwood when they met at this week’s Asia-Pacific Economic Cooperation gathering in Peru, setting the agenda for further negotiations among their bureaucrats next week in Ottawa.

But it will likely take the big guns to slay this zombie – if only temporarily.

By: The Globe and Mail

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