THE CUL-DE-SAC OF
SOFTWOOD LUMBER
Michael Hart and Bill Dymond
The Bush administration's decision to ignore a ruling on softwood lumber from a
NAFTA Extraordinary Challenge Committee “was both egregious and offensive,” write
Michael Hart and Bill Dymond, members of the Canadian team that negotiated the
Free Trade Agreement in 1987. That being said, while the venting of the Canadian
spleen may have been therapeutic, “a sense of proportion” is needed to find a way out
of this political dead-end. A sense of history wouldn't hurt, either, in understanding the
origins of a dispute that has dragged on for decades. It starts with Crown lands in
Canada, and whether low stumpage fees constitute a subsidy of the industry.
Le choix de l’administration Bush d’ignorer la décision sur le bois d’œuvre rendue
par le Comité de contestation extraordinaire de l’ALENA est à la fois « stupéfiant et
offensant », estiment Michael Hart et Bill Dymond, qui étaient de l’équipe
canadienne de négociation de l’Accord de libre-échange en 1987. Et si le Canada a
saisi l’occasion pour laisser libre cours à une exaspération sans doute thérapeutique,
il lui faudra tout de même un minimum de pondération pour sortir de cette impasse
politique. Une certaine vision historique ne nuirait pas non plus à la compréhension
d’un conflit qui remonte à plusieurs décennies, avec la désignation des terres de la
Couronne. Quant aux faibles droits de coupe, il faudra tôt ou tard établir s’ils
constituent une subvention à l’industrie.
T
he summer of 2005 witnessed yet another episode in
the long-running Canada-US softwood lumber soap
opera. The US decision in August to ignore a North
American Free Trade Agreement (NAFTA) panel finding led to a
predictable media feeding frenzy, fuelled by expressions of outrage by federal and provincial politicians, indignation by lumber barons, and surprise at the Canadian reaction by US
protagonists. Hyperbole has become a routine feature of this
continuing saga, as have contributions from Canada’s professional anti-Americans. More sober observers added their own
bleak assessments of the future of Canada-US relations and
warned that the NAFTA stood in danger of being sacrificed on
the altar of short-term American political expediency.
They may be right. The Bush administration’s decision
to ignore a ruling from an Extraordinary Challenge
Committee was both egregious and offensive. Nevertheless,
in addressing this issue, it would be helpful to maintain a
sense of proportion.
Softwood lumber has clearly reached an impasse, and
although it may have been therapeutic to vent our collective spleen, we now need to look at how best to resolve this
problem. There is too much at stake for the 320 million people who benefit from the fact that Canada and the United
States have succeeded in creating a prosperous, wellfunctioning, integrated bilateral economy.
As business economist Stephen Blank puts it: “we don’t
sell cars to each other; we build them together.” As such, we
cannot afford to let the two softwood lumber industries,
and their political supporters, hold the further evolution of
a mutually beneficial North American economy hostage to
their narrow, self-serving interests. This time, more than
softwood lumber is at stake. It is time for some fresh thinking and a more rational approach.
How did the two governments get into this mess, and
how do they get out? A useful start is to understand the
nature of the problem. First, Canada is blessed with abundant supplies of readily accessible softwood lumber, 70 percent or more of which is exported. It is used primarily in the
housing industry, and only the United States is as reliant on
wood-frame housing as Canada. Marketing efforts to promote wood-frame housing in Europe, Japan, and elsewhere
have met with, at best, limited success. Consequently, the
United States is the only serious market for Canada’s softwood lumber, and the US softwood lumber industry is capable of supplying only 50 to 60 percent of US demand.
Second, Canada and the United States have different ways
of managing their forestry resources. With the exception of
the Maritimes, the provinces own Canadian forests, and use
various ways to calculate stumpage, the fees paid by lumber
companies for the right to harvest the trees. These harvesting
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Michael Hart and Bill Dymond
matters from getting out of hand, the
WTO rules impose a bewildering array of
procedural and substantive hurdles and
require that the complaining industry
demonstrate that imports of the subsidized or dumped goods cause or threaten material injury. In addition, NAFTA’s
chapter 19 allows affected parties to
challenge agency decisions by providing
for binational panels to determine
whether domestic rules and procedures
were properly applied. In sum, trade
remedy laws are a matter of politics and
rules, not of economics.
Fourth, dispute settlement is a useful but limited instrument for resolv-
calculate the amount of subsidy. A related myth is that every time Canada has
taken a lumber issue to a WTO or NAFTA
panel, Canada’s position has been sustained. The truth is more ambiguous:
Canada’s position has prevailed on some
important points, while the US position
has been sustained on others.
A further myth is that the US action
is
an
affront to Canada’s sovereign right
dditionally, provincial ownership
to manage the forests as it sees fit withadds political considerations to
out fear or hindrance from foreign powthe mix used in determining stumpage
ers. This assertion would have meaning
rates. In the United States, on the
if the right to stumpage went together
other hand, and to a large extent in
with the right to export to the United
the Maritimes, the forests are for the
States. Canada has rights to export to
most part privately owned, and market
the United States under both
Softwood lumber has clearly reached an impasse, and
the WTO and the NAFTA,
although it may have been therapeutic to vent our collective but subject to their rules,
which include a US right to
spleen, we now need to look at how best to resolve this
apply antidumping and
problem. There is too much at stake for the 320 million
countervailing duties if the
people who benefit from the fact that Canada and the
necessary conditions can be
demonstrated. Related to
United States have succeeded in creating a prosperous,
this myth is the belief that
well-functioning, integrated bilateral economy.
the United States is a serial
ing trade disputes. It provides a
abuser of anti-dumping and counterforces generally determine the price of
valuable service in dispelling the fog of
vailing duty procedures. Perhaps, but
the timber. As a result, US buyers and
claims and counterclaims by establishthe nature of these regimes invites
sellers must make market-based judging the facts and determining the
abuse, a fact with which Canadian offiments and live with them. Finally,
scope of the applicable rules, but no
cials are as familiar as US officials.
some provinces retain controls on log
procedure can yield a definitive soluIt is also irrelevant to complain
exports, ensuring sawmill operations
tion when domestic interests are
that US lumber companies benefit
in Canada, but also potentially reducentrenched and enjoy substantial
from subsidies or may engage in sharp
ing the value of logs in Canada.
political support. Dispute settlement,
pricing practices. The trade remedy
Third, both Canadian and US law
either in the NAFTA or the WTO, may
laws exist to challenge foreign comequip private interests with powerful
look like a domestic court, but the parpetitors, not domestic practices. The
trade remedy tools — anti-dumping and
ties are sovereign states that cannot be
extent to which US lumber companies
countervailing duties — to fend off
compelled to act in ways counter to
are subsidized or engage in price disunwelcome foreign competition. Over
their perceived interests.
crimination has no bearing on this
time, the laws have evolved to narrow
case. US lumber companies are almost
the discretion available to governments
exclusively focused on the US market
in applying such duties. Although the
t is equally useful to dispel some of
and are not interested in selling on the
use of these tools is governed by NAFTA
the myths that have grown up
Canadian market, whereas many
and the World Trade Organization
around this dispute. One such myth is
Canadian companies exist largely to
(WTO), they are open to abuse. To put it
that the provinces do not subsidize
service the US market. Thus Canadian
in its simplest terms, determining dumptheir softwood lumber — the revenues
firms experience the lash of trade
ing and subsidization is not a neutral,
from stumpage fees exceed the costs of
remedies while US firms do not.
technical process but a highly abstruse
managing the forests — and thus the
Finally, the impact of the softblack art that operates at the margin of
United States has no right to apply
wood case on Canadian lives and comwhat is, and what is not, permissible
countervailing duties to it.
munities should not be exaggerated.
under the WTO rules. Once an industry
A WTO finding that Canadian
The main victims have been US conhas launched a complaint, the investistumpage practices can constitute a bensumers, who have paid as much as $3
gating officials are likely to find dumpefit within the meaning of the WTO rules
billion a year more for housing and
ing and/or subsidization; the only
effectively blew this particular myth
other lumber-based products.
mystery is its extent. In order to keep
away; the only remaining issue is how to
rights are often embedded in long-term
tenure arrangements between the
province and the industry, particularly
in British Columbia. Stumpage rates
may be adjusted to reflect the final price
realized on the lumber, allowing the
lumber companies and the province to
share the risk of market fluctuations.
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The cul-de-sac of softwood lumber
softwood lumber case has repeatedly
American as apple pie. Under WTO
Despite nearly a quarter century of
brought this into question, with implirules, neither is illegal; rather, they
intense litigation, Canada continues to
cations that now go well beyond softgive rise to the right to impose offsetsupply a third or more of a growing US
wood lumber. The prime minister is
ting duties if imported dumped and
market, with exports now worth more
correct in characterizing the US posisubsidized goods can be shown to have
than $10 billion a year, or about 2.5
tions, as he did at the Economic Club of
caused or threaten to cause material
percent of Canadian exports. Canadian
New York in October 2005, as “noninjury to domestic producers.
firms have adjusted and become leaner
sense” and a “breach of faith.”
US officials also like to believe that
and meaner, the last thing their US
The US lumber industry likes to
the United States does not violate its
competitors wanted.
portray itself as a champion of markets
trade obligations. In general, the
There are problems in the forestry
and fair trade, but has always been
United States does take its trade obliindustry, but they have more to do with
quick to grasp at any measure that the
gations seriously, but not always.
the pulp and paper sector, lack of investUS government is prepared to entertain
History attests to a number of
ment in downstream activities, more
to manage the market or limit imports.
instances of a US administration finding
stringent environmental requirements,
Efforts to find a long-term soluAboriginal land-claim issues, and
have found officials freinfestations of mountain pine
Canada and the United States have tion
quently frustrated by the
beetles than with sales of lumber
different ways of managing their
unwillingness of the US industo the US market. The bilateral
try to entertain anything other
trade issue boils down to protectforestry resources. With the
than measures that penalize
ing profit margins for the major
exception of the Maritimes, the
their Canadian competitors or
suppliers on both sides of the
provinces own Canadian forests,
keep them out of the market.
border and fees for the myriad of
and use various ways to calculate
lawyers engaged on this issue.
he trials and tribulations of
stumpage, the fees paid by lumber
bilateral trade in softwood
mericans also freely discompanies for the right to harvest
lumber date back to well before
pense red herrings. US
the trees. These harvesting rights
Confederation. The modern
officials like to point out that
are often embedded in long-term
history of the dispute, however,
trade remedies are a normal
part of US commercial life, that
tenure arrangements between the goes back to 1982, when the US
Coalition for Fair Canadian
most trade is trouble free, and
province and the industry,
Lumber Imports filed its first
that we need to isolate this parparticularly in British Columbia.
complaint shortly following
ticular problem. Fair enough,
Stumpage rates may be adjusted to implementation of a muchbut isolating this problem does
not include turning a blind eye reflect the final price realized on the revised US countervailing duty
statute and the transfer of its
to abuses of the system and
lumber, allowing the lumber
administration from the Treawillfully ignoring panel decicompanies and the province to
sury Department to the Comsions that are politically inconvenient. Similarly, US officials share the risk of market fluctuations. merce Department. The newly
created International Trade
try to project an image of a
it politically inconvenient to confront the
Administration (ITA) found that
country whose firms are neither subsiCongress on difficult files, from the notoprovincial stumpage practices and a
dized nor engaged in dumping: the
rious DISC case in the 1970s to the Byrd
host of smaller programs constituted a
United States is the world’s preemiamendment of today. The answers to
“benefit,” but that this benefit was not
nent free and fair trader.
these problems may lie in negotiations,
specific to any industry and thus not a
The fact that US firms are less
but foreign countries should not have to
countervailable subsidy within the
dependent on foreign markets and
pay twice for their access to the US marmeaning of US law. “Lumber I” constithus less vulnerable to foreign trade
ket; trade harassment aided and abetted
tuted the first shot across the bow: a
remedy actions, however, hardly transby US law and a compliant administramiss but with much more to come.
lates into proof of fair trade. Dumping,
tion and Congress should not be the cost
Three years later, the Coalition
that is, selling in an export market at a
of doing business in the United States,
brought a new complaint — Lumber II
lower price than in the home market,
particularly when US officials are among
— successfully arguing that evolving
is a normal business practice that any
the most zealous in prosecuting their own
interpretation and a number of related
competitive firm is likely to engage in
grievances in foreign markets.
court cases had created sufficiently
at one time or another, and subsidies
The United States asserts that it has
changed circumstances to warrant a
— from agricultural support payments
a high regard for the rule of law. The
new investigation. Changes in the
to cost-plus defence contracts — are as
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Michael Hart and Bill Dymond
political climate and in some of the
key personnel in the ITA presaged a
different outcome. When the ITA
found that stumpage and a litany of 26
other federal and provincial programs
added up to a margin of 15 percent,
and that these benefits were specific to
the softwood lumber industry, the federal and provincial governments knew
that they had a problem — a problem
that was compounded by the concurrent negotiations for the Canada-US
Free Trade Agreement. Furious consultations and discussions among the
governments and industry concluded
in a federal government decision to
negotiate an “undertaking,” a polite
term in the arcane trade remedy rules
for managed trade. Terms were agreed
to by the end of 1986 and, for the next
five years, Canada agreed to impose a
15 percent tax on Canadian lumber
exports to the United States, providing
time to reform stumpage and other
programs found countervailable.
In September 1991 the federal
government, following consultations
with the industry and the provinces,
neither of which had been happy with
the undertaking, terminated the agreement, to the surprise of the US government and the chagrin of the coalition.
Within weeks, the US Commerce
department initiated a new investigation — Lumber III — and found the
reforms implemented over the previous five years insufficient. Such findings were by now unsurprising; the fix
appeared to be in. Three years of litigation followed, during which Canada
made full use of the provisions of the
new chapter 19 as well as the disputesettlement provisions of the GATT to
clarify its subsidy rules. In 1993, a
chapter 19 panel found Commerce’s
decision to be unsupported by the evidence and remanded it back to
Commerce, which balked at this questioning of its competence. The issue
was finally decided in 1994 by a chap-
ter 19 Extraordinary Challenge
Committee, which upheld the original
panel’s findings, requiring Commerce
to vacate the decision and refund the
duties. It took a further two years of
foot dragging before Commerce finally
refunded the duties. Lumber III thus
ultimately vindicated Canada and was
touted as a shining example of the
value of the Free Trade Agreement.
B
y 1996, however, in the face of further political pressure from the
Coalition and an imminent new petition, the federal government agreed to
head off another round of costly investigation and litigation by negotiating a
new managed trade arrangement. The
new, five-year Softwood Lumber
Agreement (SLA) relied on export quotas, limiting exports from British
Columbia, Alberta, Ontario, and
Quebec to 14.7 billion board feet annually. Shipments beyond this level
would be subject to escalating fees.
CP Photo
Canadian workers sort lumber at a mill in Maple Ridge, BC. To date, the US has collected some $5 billion in duties on Canadian
softwood lumber, and gives no sign of remitting it to Canadian producers anytime soon, in spite of Canada winning successive
NAFTA panel rulings. For its part, the US has been successful before the WTO in alleging that Canadian stumpage fees on Crown
lands constitute a subsidy. The result is a political and legal stalemate, a dead end.
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OPTIONS POLITIQUES
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The cul-de-sac of softwood lumber
material injury. The first two panels,
the injury panel to order the ITC to
Canadian firms saw their share of the
while sustaining some of the findings
make a finding consistent with its rulUS market decline during this period,
made by Commerce, remanded other
ing, but indicated that its reasoning
but their profits increase. While US
aspects back to Commerce for reconhad been fully consistent with US law.
producers marginally increased their
sideration. By the beginning of
It is this ECC ruling that the US govshare of the market, third-country supOctober 2005, the subsidies panel was
ernment has decided is irrelevant. For
pliers did even better.
awaiting Commerce’s re-determinaits part, Canada is now pursuing in the
The SLA expired on March 31, 2001,
tion on its fifth remand, while the
US courts the dubious legal position
by which time industry, the provinces,
dumping panel was waiting for a remaintained by the Bush administraand the federal government were again
determination on its third remand. By
tion, a step that may in the end prove
prepared to see if they could weather a
its fifth remand, the subsidies panel
the most helpful in resolving this parnew round of investigation and litigahad whittled the margin to less than 1
ticular aspect of the case.
tion. They did not have to wait long. The
percent, that is, below the level
Coalition filed a new complaint on April
required to collect duties. The most
2 — Lumber IV — alleging both dumphe US rationale for ignoring the
interesting action, however, flowed
ing and subsidization, and were rewardECC ruling arises out of one of the
from the panel reviewing the ITC’s
ed in August by the imposition of
three cases filed by Canada at the WTO
threat-of-injury finding. It found the
preliminary duties; the final determinacomplaining about various aspects of the
finding to be unsubstantiated by the
tion in March 2002 established comfindings by Commerce and the ITC.
evidence and thus unlawful. It twice
bined countervailing and antidumping
There is no room here to deal with the
remanded the decision back to the
duties of almost 28 percent. The US
details of these WTO cases. Suffice it to
ITC, ordering it to make a finding conInternational Trade Commission (ITC)
say that the most important is the deterfor its part found no evidence of present material To date, the US Commerce department has collected more
injury — a no-brainer con- than $5 billion in duties, money the coalition is eager to see
sidering the managed distributed among its members in keeping with the notorious
trade agreement that had
Byrd amendment. This provision introduced a new level of
been in place — but agreed
that there was threat of perversity to trade remedy cases, by endowing successful
injury, justifying the col- complaining parties and their attorneys with a monetary
lection of duties from that reward, money that in turn can be used to fund political
point forward.
T
T
activity to advance the interests of protectionist lobbies.
Despite a WTO ruling that the Byrd amendment is inconsistent
with US WTO obligations, it remains in force.
o date, the US
Commerce department has collected more
than $5 billion in duties, money the
coalition is eager to see distributed
among its members in keeping with the
notorious Byrd amendment. This provision introduced a new level of perversity to trade remedy cases, by endowing
successful complaining parties and
their attorneys with a monetary reward,
money that in turn can be used to fund
political activity to advance the interests of protectionist lobbies. Despite a
WTO ruling that the Byrd amendment
is inconsistent with US WTO obligations, it remains in force.
The federal government responded to Lumber IV with a blizzard of
legal challenges. Three separate panels
were constituted under NAFTA’s chapter 19 to review the findings of subsidization, dumping, and threat of
sistent with the evidence before it. The
ITC sent back the same decision,
prompting the panel in its third
remand, on August 31, 2004, to order
the ITC to make a no-injury finding.
T
he injury panel’s finding was challenged by the US government and
sent to an Extraordinary Challenge
Committee (ECC) of three retired
judges for review, on the grounds that
the original panel had manifestly
exceeded its authority and made an
order inconsistent with US law. For
good measure, the coalition, with the
US government’s support, also alleged
malfeasance on the part of one of the
US panelists. In a spirited report, the
ECC unanimously dismissed all allegations and upheld not only the right of
mination by a WTO panel that
stumpage can constitute a countervailable subsidy under the terms of the WTO
subsidies agreement, even if the US
authorities had not used proper methodologies to make their findings.
Of particular interest, however,
was a ruling by a WTO panel that the
ITC finding of threat of injury was
inconsistent with US obligations.
Consequently, the ITC made a redetermination on November 24, 2004
that it claims to be not inconsistent
with the WTO ruling and that replaces
the finding found wanting by the
NAFTA panel. It is on the basis of this
slender thread that the current
impasse rests. But as Canadian trade
lawyer Larry Herman argues, “the
WTO agreement and Chapter 19 of
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Michael Hart and Bill Dymond
forward as its advocates claim, nor as
pliance, driven largely by concerns
NAFTA deal with completely different
effective as they might hope.
about the Mexican legal system. The
matters...[US] conformity with its
Negotiations, on the other hand, while
terms of article 1905 are extremely
WTO obligations doesn’t mean it comdifficult and unappealing to those who
complex, including provision for conplies with NAFTA.” It will be interestsee an intransigent United States
sultation, the establishment of a speing to see if the US courts agree that
unwilling to live up to its current oblicial committee, more consultations
the administration’s position rests on
gations, at least offer the prospect of
and, ultimately, the right to suspend
political rather than legal reasoning.
putting this issue behind us once and
the application of chapter 19 to the
The US decision to flout the ECC
for all. Strengthening Canada’s hand in
other party or the suspension of “such
ruling took place in the context of
such negotiations with some imaginabenefits under this Agreement as may
deteriorating relations between the
tive initiatives may also prove helpful.
be appropriate under the circumUnited States and Canada. Over the
stances.” Such a decision, in turn,
past decade or more, growing differgives the other party the right to susences over foreign policy and other
n negotiating the original terms of
pend the application of chapter 19.
issues have driven a wedge between the
chapter 19 as set out in the FTA,
Either suspension of chapter 19 or
two countries to the point that routine
Canada did not envisage the need for a
of other “benefits” is a lose-lose
matters no longer receive the
The US decision to flout the ECC
proposition for Canada. It
kind of constructive attention
they should in either capital.
ruling took place in the context of effectively indicates the beginThe Bush administration’s irrideteriorating relations between the ning of the unraveling of the
hardly a goal that
tation with Canada has reached
United States and Canada. Over the agreement,
meets the interests of anyone
the point of indifference to a
past decade or more, growing
other than hard-core Canadian
growing array of Canadian concerns, while Canadian politidifferences over foreign policy and economic nationalists and
American
protectionists.
cians find every occasion to
other issues have driven a wedge
Additionally,
as
former
express their differences with
between the two countries to the
Canadian ambassador to the
their US counterparts.
In these circumstances, US point that routine matters no longer US Allan Gotlieb points out,
“in a retaliatory war, the big is
disregard of the ECC decision
receive the kind of constructive
most likely to win.” chapter 19
should be seen as more than a
attention they should in either
has proven a valuable asset in
softwood lumber or Canada-US
capital. The Bush administration’s
reducing the capricious use of
problem. It has brought into
irritation with Canada has reached trade remedies to harass bilaterquestion the fundamental comal trade, including for softwood
mitment of the United States to
the point of indifference to a
lumber. It was less than Canada
the rule of law and to its treaty
growing array of Canadian
sought, but it is more
obligations. As Tom d’Aquino,
concerns, while Canadian politicians originally
than the Americans were
head of the Canadian Council
find every occasion to express their inclined to give. Canadians will
of Chief Executives, has pointed
not be well served by chapter
out: “At issue is whether
differences with their US
19’s suspension.
Canada can rely on the United
counterparts.
It is also not at all clear that
States to respect the rule of law
trade retaliation solves any problems.
and live up to its treaty obligations, or
retaliation provision. The chapter proRaising the price of imports of
whether the United States is prepared
vided for binational panels to review
Florida orange juice or California wine,
to sacrifice these principles in order to
decisions by national agencies in
for example, is not likely to persuade
satisfy narrowly based protectionist
dumping, subsidization, and injury
senators and congressmen from the
interests within its economy.”
determinations on the same basis as
southern and western lumber states to
There are few steps available to
domestic courts, and to remand issues
support a settlement in defiance of their
extricate the two governments out of
back to the original agencies for corindustries’ wishes, but it will hurt
the cul-de-sac in which they now find
rection. The idea that such national
Canadian
consumers.
Similarly,
themselves: one is to retaliate; another
agencies might balk at the terms of a
Canadian oil and gas is part of the
is to resume negotiations on a differremand or that political officials would
national energy grid; withdrawal of its
ent basis; and a third is to insert some
ignore the equivalent of a court order
supply cannot be targeted to particular
new factors into the equation.
was never contemplated. In negotiatstates. While some might hope that
Trade retaliation, which appears to
ing the terms of the NAFTA, however,
inducing long line-ups outside US gas
be the favoured option of a growing
a new article was added providing for a
stations or shorting gas-fired power stachorus of critics, is neither as straightway to address the issue of non-com-
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The cul-de-sac of softwood lumber
assured access. Canada’s contradictory
strategy has not worked.
The Canadian conviction that dispute settlement provides valuable leverage rests on the assumption that, if
negotiations fail, Canadian dispute settlement victories will force the United
States into compliance with Canada’s
interpretation of the trade rules.
Experience suggests that dispute
settlement practiced as an alternative
price comparisons to calculate the
extent of any benefits. Herein lies the
basis for an agreement on the subsidy
dimension: the negotiation of pricing
benchmarks to determine the existence
of subsidies within the meaning of the
WTO. More importantly, predictable
he answer lies in negotiations,
benchmarks
would
enable
the
provided they are pursued on a
provinces to set prices at levels that
basis that is likely to improve Canada’s
would not justify the application of
position. To date, the Canadian
countervailing duties.
approach to negotiations has suffered
The second is the
NAFTA
panel’s finding on
Experience suggests that dispute settlement practiced as an
injury,
specifically
that the
alternative to negotiation has not yielded practical results,
mere existence of trees and
particularly on the softwood lumber file. The problem is that
of production capacity in
dispute settlement has two possible outcomes — winning or
Canada does not constitute
a threat to the US industry.
losing — and both have serious implications for the
Instead, there must be credimanagement of trade relations. It is evident that on both
ble evidence on the record
the Canadian and US sides, too little thought was devoted
of price suppression, increasto the consequences of either outcome.
ing exports, loss of employment, declining market shares, and
to negotiation has not yielded practical
similar factors to warrant a finding of
from two fatal flaws: mutually contraresults, particularly on the softwood
threat of injury. Here the solution lies in
dictory objectives and the belief that
lumber file. The problem is that dispute
an agreement that in any future cases,
negotiation is an alternative to dispute
settlement has two possible outcomes
the ITC be held to the strict standard set
settlement where Canada holds all the
— winning or losing — and both have
by this panel in determining injury.
cards. Hence the dead end. The way
serious implications for the manageout is to pursue more coherent and
ment of trade relations. It is evident
consistent objectives, to integrate disegotiating a lasting agreement
that on both the Canadian and US
pute settlement into the negotiations
will entail resolving a host of
sides, too little thought was devoted to
rather than treating them as alternatechnical difficulties. Simply adopting
the consequences of either outcome.
tives, and to inject some new elements
an auction system, for example, will
into the equation to provide the two
not of itself eliminate the threat of a
governments with sufficient political
new complaint, since auctions to
he way forward is to build a negoroom to justify a return to the table.
determine cutting rights in remote
tiated solution on the findings of
Throughout the long history of
areas will be of interest to only a few
dispute settlement panels. Of the many
this dispute, Canada has, on the one
bidders and thus be easily manipulated
panel findings in the WTO and the
hand, entered into managed trade
to yield questionable prices. Similarly,
NAFTA, two are critical. The first was
agreements and, on the other, consideliminating restrictions on log exports
the WTO finding in 2002 that
ered plans whereby US countervailing
will not necessarily lead to market
stumpage practices constitute a benefit
duties would be phased out as the
pricing for this resource. Much hard
to a specific industry against which a
Canadian provinces moved to marketwork will be required to devise a
countervailing duty may be applied.
based pricing for timber. These two
regime that can withstand scrutiny
The finding faulted the United States
approaches have proved at odds with
under a system that is geared to findfor using US domestic prices for calcueach other. The first presupposes the
ing subsidization and dumping.
lating the amount of the subsidy, but
continuation of Canadian stumpage
Nevertheless, we believe that offiruled that harvesting rights granted by
practices for the indefinite future and,
cials with a mandate from both governCanadian provincial governments in
as history demonstrates, will generate
ments to negotiate a long-term solution
respect of standing timber constituted
constant tension within the Canadian
based on establishing an open and
the provision of goods within the
industry and between the two councompetitive market for trade in softmeaning of the subsidies code, and thus
tries in administering any managed
wood lumber can devise such a system.
were a countervailable benefit. This
trade solution. The second would
With rare exceptions, previous softfinding was upheld by the Appellate
replace stumpage practices with USwood lumber negotiations have sought
Body, which additionally ruled that the
style market-based pricing in return for
to find short-term solutions while leavUnited States can rely on cross-border
tions in the Midwest will have the
desired effect on the lumber states,
export taxes on Canadian oil and gas
will set off intra-Canadian energy
squabbles not seen for 30 years.
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Michael Hart and Bill Dymond
ing it up to the provinces to implement
long-term reforms. The Maritime
provinces have found that solution, but
the other provinces have not. Perhaps
bilateral negotiations approached with
a broad enough mandate will be sufficient to lead to the necessary reforms.
The United States, for its part,
must be prepared to enter into negotiations that are capable of yielding a lasting solution. No Canadian government
can enter into negotiations that will
only yield the desired results after the
conclusion of a unilateral US investigative process. US officials must come to
the table with a mandate that will lead
to results that can be implemented in
law and condition the application of
the trade remedy laws in future softwood lumber disputes. We agree with
US Trade Representative Rob Portman,
that “it is time to negotiate a settlement to resolve this decades-long dispute once and for all.” It would be even
more helpful if Mr. Portman were to
initiate negotiations by ensuring that
Commerce lift the now illegal penalty
duties and refund the previously collected duties. In response, his
Canadian counterpart, Jim Peterson,
should offer to come to the table
acknowledging that subsidies are a
problem that need to be eliminated
and that Canada is prepared to negotiate a deal that will lead to a truly free
and open market for logs and lumber.
Both governments must be prepared
to lean on their most obdurate elements:
the coalition in the United States and the
provinces in Canada. This will not be
easy. US law provides the coalition with
extensive rights, including the right to
veto any “undertaking” that it believes is
not in its interests. In Canada, the
provinces hold most of the policy cards,
given their constitutional responsibility
for resource management. But just as the
“law” gives the coalition power, the
proper implementation of the NAFTA
gives the US administration power. Its
decision to ignore the ECC finding may
have been politically attractive, but it has
weakened its position as a principled
upholder of the rule of law. Canada
needs to help the Bush administration
26
OPTIONS POLITIQUES
NOVEMBRE 2005
Canadian Embassy, Washington
The US Capitol as seen from the Canadian embassy in Washington. Over the past
decade, write Michael Hart and Bill Dymond, a growing policy gap between the US and
Canada has driven a wedge between the two countries to the point that routine matters
no longer receive the attention they deserve in either capital.
see this as a political, rather than a legal,
decision, by giving it some new elements
to ponder. To some observers, this translates into retaliation. We disagree, but
agree with former Canadian ambassador
to the United States, Derek Burney, that
the federal government can strengthen
its position by neutralizing the continuing effect of the penalty duties being illegally collected. Canada must continue to
insist that any duties collected must be
refunded, but can reduce their impact by
paying the duties from now until the
United States brings its border regime
into conformity with NAFTA. This, in
turn, should also strengthen the federal
government’s ability to influence provincial policy development.
T
he tragedy of Hurricanes Katrina
and Rita, as well as the problem of
beetle-infested forests in British
Columbia, also offer both sides a facesaving alternative to leaning on nar-
The cul-de-sac of softwood lumber
rowly focused interests. The United
States needs lots of lumber to rebuild
the devastated Gulf region. US lumber
firms lack the capacity to meet this
need. Canada has a surplus of beetleinfested trees that need to be harvested
before they lose their value. If the
United States agrees to refund the illegally collected duties, British Columbia
and the industry could agree to harvest
this wood and make it available as a gift
to aid in the reconstruction effort. Such
a gesture could set the tone of neighbours working together to solve common problems.
To make progress, the federal government and the provinces will need
to work with industry to engage US
political and commercial interests. As
pointed out by Tom d’Aquino, “we
need to bring a broader, economywide perspective to bear on these matters,” by engaging senior US business
leaders. At the same time, we are wary
of allowing the softwood lumber issue
to become hostage to broader efforts to
address any shortcomings in the dis-
pute settlement process or deal with
other emerging cross-border issues.
While it is true that broader negotiations sometimes ease solutions on narrow, deeply controverted issues, we
believe there are also dangers in suggesting that the price of peace lies in
making concessions in other areas.
Failure to address this problem and
find a lasting solution will gradually add
to already troubled relations. The opponents of the Canada-US Free Trade
Agreement claimed that it would devastate Canadian industry and condemn
Canadians to the miserable fate reserved
for suppliers of natural resources to the
United States. Now the opponents of
the agreement and, regrettably, some of
its supporters proclaim that it is a failure
because it does not protect our natural
resource industries, specifically softwood lumber. This is irony with a
vengeance that shows that 140 years of
independence have done little to dampen the colonial mentality infecting our
public life. Allowing the softwood lumber file to fester will only add fuel to the
destructive aims of free trade’s opponents on both sides of the border.
If the charge of egregious, irresponsible and cavalier disregard of trade
agreement obligations may be fairly
laid at the US door, resorting to schoolyard language, uttering vague threats
about the NAFTA, and issuing ominous
warnings about retaliation do little to
make the cul-de-sac ever smaller. It’s
time to turn around and begin the
measured, careful steps that will take
Canada forward and allow us to put the
softwood lumber case behind us.
Michael Hart is the Simon Reisman
Professor of Trade Policy in the Norman
Paterson School of International Affairs
at Carleton University and a distinguished fellow of the Centre for Trade
Policy and Law. Bill Dymond is senior
executive fellow of the Centre for Trade
Policy and Law at Carleton University
and the University of Ottawa. Both are
former federal officials with extensive
experience in dealing with Canada-US
trade issues.
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