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Lumber I to IV: History of the Canada-U.S. Softwood Lumber Dispute

September 19, 2005

Canada and the United States have a long history of trade in lumber dating back well into the 1800s. That trade has not always run smoothly. For example, lumber interests were the principal U.S. motivation in the Maine–New Brunswick border dispute of the 1820s. The current softwood lumber dispute, nearing 25 years in duration, is the longest running and arguably the most important lumber trade issue between the two countries.

Subsidies, Dumping, and the WTO and NAFTA

The World Trade Organization (WTO) defines a subsidy as financial support from a government which confers a benefit upon an industry, a targeted group or a company. Such a benefit may arise, for example, if the government does not receive adequate remuneration for the provision of a good or service. In the case of the softwood lumber dispute, standing timber on Crown land is the good provided, and stumpage fees are the remuneration required by government. Under WTO rules, where an illegal subsidy is found to cause injury, the injured country may apply a countervailing duty (CVD) to offset the subsidy.

Dumping occurs when a company exports its product at a lower price than it charges domestically. The WTO does not judge whether or not dumping is a fair practice, but rather judges the actions of governments in response to dumping. These actions often include anti-dumping duties (ADs). In the United States, the Department of Commerce (Commerce) investigates allegations of subsidies and dumping, while the U.S. International Trade Commission (ITC) undertakes the determination of injury to U.S. industry.

Review panels under the North American Free Trade Agreement (NAFTA) assess whether or not a government has acted within the limits of its own legislation. NAFTA panels are not charged with determining whether or not a country’s domestic legislation is consistent with rules of international trade, but they can require a government to review a determination made under its own laws. The WTO cannot require a country to change a decision regarding subsidy or dumping, but it can authorize the exporting countries to apply retaliatory measures.

The Subsidy Issue

The U.S. softwood lumber industry, represented principally by the Coalition for Fair Lumber Imports (CFLI), has argued repeatedly that stumpage fees in Canada are so low as to confer a subsidy on Canadian industries, thereby injuring the U.S. industry in the U.S. market. Canada has argued that the sum of all the fees and levies charged to Canadian harvesters (directly or in kind) must be considered. Furthermore, Canada has claimed that Canadian stumpage fees reflect the greater supply of timber, relatively limited infrastructure, shorter harvesting seasons and other particularities of the Canadian situation. This being said, some environmental groups such as the Wildlands League and the World Resources Institute, as well as the recent independent Coulombe Commission in Quebec, also argue that Canadian stumpage fees are subsidized. The U.S. building supplies industry and homebuilders industry, on the other hand, lobby against penalties on Canadian lumber imports to the United States.

Canada is in the midst of refuting a fourth round of U.S. subsidy allegations and CVD action. Details on this fourth round, up to mid-2004, are found in The Canada-U.S. Softwood Lumber Dispute (TIPS-98E). Developments since that time are presented in the relevant section of the chronology below. The results in the first three rounds, all of which favoured Canada, are perhaps the most telling counter-arguments to the U.S. claims of subsidized stumpage fees in Canada.

Chronology of the Dispute

   Lumber I (1982-1983)

Late in 1982, U.S. sawmillers requested that Commerce investigate stumpage systems in British Columbia, Alberta, Ontario and Quebec. The next year, Commerce rendered a decision that stumpage fees could not be countervailed because they were not limited to a specific industry.

   Lumber II (1986-1991)

Despite no changes in the Canadian stumpage system, a second claim by U.S. industry groups in 1986 led Commerce to review and alter its calculations so as to include “intrinsic value” of the standing timber as part of the costs to the Crown in Canada. Intrinsic value in this sense is typically applicable only to personal property (not public goods), and this was the original decision of the ITC in 1982. Commerce then concluded that the Canadian stumpage system bestowed a subsidy of 15%. With the imposition of duties imminent, Canada signed a Memorandum of Understanding (MOU) with the United States, under which Canada agreed to collect a levy of 15% on all lumber exported from the country. While still maintaining the levies, Canada exercised its right to terminate the MOU late in 1991.

   Lumber III and the Softwood Lumber Agreement (1992-1994 and 1996-2001)

Following the termination of the MOU, Commerce initiated, of its own accord, a new CVD investigation and imposed a temporary security bonding requirement on softwood imports. A panel under the General Agreement on Tariffs and Trade (GATT – since superseded by the WTO) concluded that this bond requirement was a contravention of GATT obligations. Commerce determined that British Columbia, Ontario, Alberta, and Quebec conferred countervailable subsidies on softwood lumber exports, and the ITC found resulting injury. CVDs of 6.51% were imposed on lumber imports from all provinces except the Maritimes.

Canada appealed both the determination of subsidy and the finding of injury to panels of the Canada-U.S. Free Trade Agreement (FTA). In both cases, the panels found in favour of Canada repeatedly. Particularly significant was the decision that use of the U.S. lumber benchmark to determine the value of standing timber in a foreign setting was in contravention of U.S. law. The United States requested an Extraordinary Challenge Committee (ECC) under the FTA. This committee also found in favour of Canada. It should be noted, though, that the various NAFTA decisions have often been majority decisions split along national lines.

With the United States delaying the refunding of the past duties and the threat of a fourth round of CVD investigation pending, Canada signed a second five-year MOU, the Softwood Lumber Agreement (SLA), in 1996. With the signing of the SLA, the United States refunded duties collected in Lumber III and the CFLI dropped its constitutional challenge of the NAFTA arbitration process. Under the SLA, Canada imposed a fixed tax on softwood production above a specified volume. This agreement was particularly difficult for the B.C. coastal forest industry, resulting in layoffs and closures. The SLA expired in 2001.

   Lumber IV and the Byrd Amendment (2001 to present)

The fourth round of the softwood lumber dispute is by far the most complicated (see TIPS-98E), due largely to the elaborate petitions filed by the CFLI in 2001 to initiate it. In its petitions, the U.S. industry identified federal and provincial stumpage and export controls, five federal programs, and 22 provincial programs as sources of subsidies. The CFLI also petitioned for an investigation of dumping by specific Canadian companies.

In 2001, the ITC determined that Canadian softwood posed a threat of injury to the U.S. industry. The next year, Commerce published a final determination of subsidy and of dumping; it set CVDs totalling 27.22% and ADs ranging from 2% to 16% for specific companies, with an AD of 8.43% for all others. Canada and individual Canadian companies applied to NAFTA and the WTO for review of various parts of Commerce’s and the ITC’s determinations. Meanwhile, both Canada and the United States prepared position papers toward a negotiated solution to the dispute (see TIPS-98E).

In 2004, Commerce conducted its first annual review of the CVDs and ADs and, in its preliminary finding, lowered all of them significantly; among other decisions, it set a total CVD of only 9.24%, and an AD of 3.98% for “all others” (again, see TIPS-98E). However, when the final review was published in December, the traditional U.S. benchmark had been applied to the B.C. coastal lumber industry, resulting in an increase of the total CVD to more than 17%. Following this announcement, a Canada U.S. industry negotiating meeting scheduled for January 2005 in Chicago was cancelled by the Canadians.

Lumber IV is being further complicated by U.S. efforts to apply what is known as the Byrd Amendment (officially entitled the U.S. Continued Dumping and Subsidy Offset Act of 2000) to lumber imports. This legislation instructs Commerce to distribute the CVDs collected on a particular good to the U.S. companies or groups that filed the complaint. The WTO has clearly ruled that this process violates international trade law and has indicated that Canada and other U.S. trading partners such as the European Union and Japan may impose retaliatory subsidies in response.

Rulings by NAFTA panels and the WTO during Lumber IV have been inconclusive, in that they have generally supported the U.S. claims of subsidy and dumping but have repeatedly required recalculation (lowering) of Commerce’s CVDs and ADs. In the fall of 2004, a NAFTA panel ruled that the 2001-2002 ITC determination of injury was flawed. Recently, an Extraordinary Challenge Committee, requested by the United States, ruled that the fall 2004 panel decision was not in violation of NAFTA rules nor were any of the panellists in a conflict of interest situation as claimed by the Americans. Canadian politicians and lumber interests declared ultimate victory and insisted on immediate compliance with the previous decisions, including an end to CVDs and repayment of duties previously collected. The American response was a simple refusal to comply, bringing threats of trade retaliation from the Canadian government as well as the suspension of negotiations. Perhaps more alarmingly, the U.S. response threatens the legitimacy and survival of NAFTA itself.

The American position was further bolstered in late August by an interim WTO decision stating that the United States was within its rights to impose duties on Canadian lumber, based on the ITC’s 2004 re evaluation of injury in response to the NAFTA ruling. This decision does not take into consideration previous WTO rulings that the amount of duty imposed and the method of calculating it were both flawed. The office of the U.S. Trade Representative claims that the WTO and NAFTA decisions cancel each other and that a negotiated settlement is the only solution. While it stands to reason that countries have the right to impose duties when there is injury, whether or not the duty is appropriate is another question altogether. Furthermore, NAFTA includes a clause stating that it trumps the WTO in cases of conflicting decisions.

Beyond Lumber IV

The rulings of August 2005 have spurred a dramatic increase in rhetoric from Canadian and U.S. diplomats and politicians. Canada is considering retaliatory duties and expects to receive WTO approval for such a move in 2006. Canada is also pursuing legal action through the U.S. Court of International Trade in order to obtain refunds for duties already paid.

For its part, the U.S. industry will likely again threaten to challenge the constitutionality of NAFTA in the U.S. courts. The CFLI has made it clear that it will not be satisfied until the Canadian industry moves toward a fully market-driven system. Canada has made changes to its pricing system that move it in that direction, but a 100% market-based system is not feasible given the publicly owned status of Canadian forests. The Executive Branch of the U.S. government has shown a desire to resolve the ongoing dispute on several occasions, and is also interested in repealing the Byrd Amendment. However, the pressures exerted by the CFLI and others on the U.S. Congress and powerful committees, which in turn can influence the White House, have more than once scuttled negotiations and agreements when the parties have been close to resolution. The CFLI has gone as far as to state publicly that it would respond to defeats at NAFTA and the WTO by simply pressuring the U.S. Congress to change U.S. law to be still more punitive of lumber imports.

According to one Canadian industry group, fewer and fewer Canadian enterprises are interested in a negotiated solution. They are calling for continued and increased action through legal channels, including both NAFTA panels and the U.S. courts. Canada had been pursuing a two-track approach of negotiation and litigation on the softwood issue. Now, Canada appears to be changing its approach, as highlighted in a press release of 15 April 2005 from the Minister of International Trade. It refers to a three-pronged approach: negotiation, litigation, and retaliation.

Prepared by
Michel Charron, Analyst
Parliamentary Information and Research Service

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