NAFTA 2.0: How Canada, US can make a long-term lumber deal last
by Eric Miller
July 24, 2017
With the NAFTA talks set to begin in August, the United States and Canada are seeking to clear away obstacles to a successful re-negotiation. The most vexing challenge outstanding is the U.S.-Canada softwood lumber dispute.
The two countries have an ancient history in the timber realm. The “challenge” of Canadian lumber imports was first mentioned in the Continental Congress. The Aroostook War, which ended in 1842 and established the border between Maine and New Brunswick, turned on access to softwood lumber.
In modern times, there have been five rounds of softwood litigation dating back to 1982. Each time, the U.S. trade remedy system has found Canada guilty of subsidizing its timber industry and imposed penalties on Canadian lumber imports. While Canada has protested bitterly and sought recourse through international dispute settlement channels, it ultimately pays millions in duties before reaching a temporary political agreement.
In the current iteration, the U.S. imposed preliminary countervailing duties averaging 19.88 percent in April. Another 6.87 percent anti-dumping duties were added in June. Final determinations are expected in the fall.
Why does this pattern persist? Money. Lumber is a valuable business and a crucial employer in rural areas in both countries. It also is one of the few sectors where Canada and the U.S. have not fully integrated their supply chains, thereby competing with instead of complementing each other strengths.
Commerce Secretary Wilbur Ross has indicated that he wants to disrupt this cycle of disputes and end this matter once and for all. He knows that failure to resolve softwood risks complicating the NAFTA negotiations and turning it into the Keystone XL of the Trump-Trudeau era.
So how should Secretary Ross and his Canadian counterpart, Chrystia Freeland, get there?
First, the two countries need to become “deal minded.” This will require the parties to confront orthodoxies and objectively put the facts on the table.
For example, while it varies by region and policy instrument, significant evidence suggests that Canada is subsidizing its lumber sector.
Take, for example, British Columbia’s (B.C.) regime of log export restrictions (LERs).
By statute, a log may only be exported from B.C. if it is deemed to be “surplus,” meaning it must first be offered for sale to in-province buyers. Limiting the universe of buyers naturally depresses prices.
Unsurprisingly, domestic processors frequently use their power to block exports to extract even lower prices from harvesters.
The scope of this regime also is problematic. While a variety of U.S. states maintain LERs on public land, the B.C. regime is unique in covering logs harvested on both public and private lands.
By any measure, the processors (e.g., lumber mills) in B.C. seem to benefit from a system that subsidizes their inputs. It is little wonder that LERs are in the sight lines of the Commerce Department team calculating damages.
Yet, U.S. timber producers are hardly angels in the softwood fight. Many appear to have little interest in resolving the lumber dispute. Import duties keep Canadian wood out of the U.S. market and prices for domestic production high.
Many also remember that in the time-limited 2006 Softwood Lumber Agreement, U.S. Lumber Coalition members received a $500 million payout — a spectacular return on investment relative to legal fees paid.
So what would be the structure of a permanent lumber deal?
The core trade off would be Canadian policy reforms and a permanent quota into the U.S. market in exchange for a permanent exemption of Canadian softwood lumber from U.S. trade remedy actions.
The quota would need to be set at around Canada’s current market share level in the range of 30 percent.
There would need to be a bilateral certification mechanism of the “market-orientedness” of the Canadian reforms. The absence of such a mechanism meant that Quebec, which undertook politically hard reforms to its stumpage regime in 2013, got no new U.S. market access.
The deal also should immediately eliminate log export restrictions on private land. Their abolition would help to standardize forest policy on both sides of the border and give the Trump Administration an early tangible win.
Statesmanship is about doing hard things. If Secretary Ross and Minister Freeland have the courage to do a big deal ending the lumber dispute, they will greatly help their countries and underscore that NAFTA 2.0 will be even better than the original.