An Epic Trade Battle

A History of the Canadian-USA Softwood Lumber Dispute

The Canadian – USA Softwood Lumber dispute is one of the longest and most enduring trade disputes between two nations. The modern-day version of the conflict started in the early 1980’s and its effects are still seen today. But even as early as the 1820’s, there were border disputes surrounding lumber trade between the countries. At the heart of the trade battle is the claim that the Canadian lumber industry is unfairly subsidized by federal and provincial governments as most timber in Canada is owned by the provincial governments. The World Trade Organization (WTO) defines a subsidy as financial support from a government which bestows a benefit upon an industry. The price charged to harvest the timber; called a stumpage fee, is set administratively, rather than through the competitive marketplace, the norm in the United States. Softwood lumber lots are primarily privately owned in the US and the logging rights and associated timber, are sold through competitive auction. The land owners, logging companies, and lumber mills form an effective political lobby. The US claims that the Canadian arrangement constitutes an unfair subsidy, and is subject to US trade remedy laws. That is where foreign trade, benefitting from subsidies, can be subject to countervailing duty (CVD) tariffs to offset the subsidy and bring the price of the commodity back to market rates. Of course, the Canadian government and lumber industry dispute the assertion, based on a number of factors, including that Canadian timber is provided to such a wide range of industries, and the lack of specificity makes it ineligible to be considered a subsidy under US law. In addition to the CVD, US lumber interests alleged that Canada was “dumping” lumber across the border, meaning that it exported products at a lower price than it charges in Canada. The anti-dumping (AD) duties has been a part of trade dispute since 1996. The dispute has essentially digressed into a mix of fundamental disagreements about the interpretation of law and ultimately the actions that the American government has taken in response since.

In actuality, there have been four different trade disputes, which are commonly referred to as Lumber I, Lumber II, Lumber III, and Lumber IV. The following provides an overview of each dispute.

Lumber I: 1982 - 1983

The first official Canada-US lumber dispute occurred in 1982, when the US lumber industry petitioned the US Department of Commerce (DOC) to impose a countervailing duty. The DOC investigated the stumpage programs of British Columbia, Alberta, Ontario, and Quebec. Upon completing its investigation in 1983, the Department of Commerce concluded that the provincial stumpage programs were not open to countervailing duties, because stumpage was generally available and not limited to a specific industry. Under US law, a good from another country is only considered subsidized if the program is available only to a specific industry. Provincial stumpage programs, however, were available to the entire timber sector, not just to the softwood lumber industry. However, the US International Trade Commission (USITC) made an initial determination that Canadian lumber imports did injure the US lumber industry. The negative ruling by the DOC was generally thought to be based more on technical grounds than the central subsidization issue. The US lumber industry group who brought the grievance decided not to appeal.

Lumber II: 1986 - 1987

Following the first softwood lumber dispute, two significant changes occurred. First, the US Department of Commerce began to apply US trade law more aggressively, especially in natural resource countervailing duty cases. Second, the Coalition for Fair Lumber Imports, the US lumber industry coalition and lobby group which favors high duties on Canadian softwood lumber, emerged as a well-funded and politically connected group in the US.

In 1986, this new Coalition for Fair Lumber Exports filed a new CVD petition to the US Department of Commerce and DOC initiated another investigation of Canadian stumpage programs. The USTTC once again arrived at the conclusion that Canada’s exports unfairly impacted American lumber producers and this time, the DOC did conclude that Canadian lumber programs did represent unfair subsidies and were thus, countervailing. As a result, the US government levied a preliminary 15% duty on Canadian softwood lumber imports. Before the US agencies issued final Lumber II countervailing duty determinations, the Canadian and US government negotiators agreed to a settlement known as the Memorandum of Understanding (MOU) that created a phased tariff. The five-year agreement meant that the US would drop its 15 per cent tariff and in its place, the Canadian government agreed to impose a 15 per cent export charge on lumber exports to the US. The MOU also allowed provinces and territories to reduce the export charge if they increased their administered timber prices or took other measures to offset subsidization.

The Memorandum meant that Canadian softwood companies would have to submit to a 15 per cent charge when exporting their products to the US. However, it did have several advantages for Canada. By making it an export charge collected by Canada, the money was kept within the country, as opposed to going to US coffers in the form of a countervailing duty. Moreover, it gave Canadian companies some measure of predictability, as Canada itself controlled the level of the charge, as opposed to it being controlled by US authorities. It is also important to note that under the MOU, the Canadian government did not admit that stumpage fees represented a form of government subsidies. Instead, it simply volunteered to impose the 15% export charge on softwood lumber exports rather than entering into a protracted trade battle in court. This would be important for future iterations of the softwood trade dispute.

Lumber III: 1991 - 1996

The Memorandum increasingly became viewed by some provinces, in particular British Columbia, as an infringement of provincial sovereignty. Pressure grew within Canada to eliminate the Memorandum, and the federal government unsuccessfully attempted to negotiate its termination with the US government. In 1991, Canada unilaterally withdrew from the agreement and ended the practice of imposing a 15 % tariff on softwood exports to the US. The US immediately imposed a cash deposit requirement on Canadian lumber imports in the amount of the MOU export tax and the DOC self-initiated a new CVD investigation. In 1992, the DOC imposed a 6.51 per cent countervailing duty on Canadian softwood lumber (although, the precise duty varied from province/territory to province/territory, depending on its particular stumpage programs). The USITC also made a final ruling that subsidized imports injured the US lumber industry. Canadian parties again appealed both the final CVD and the injury determination, this time to a binational panel organized by the Canada-US Free Trade Agreement (CUSFTA), the predecessor to the North American Free Trade Agreement (NAFTA). Prior to the signing of CUSFTA, the DOC decision would have been reviewed by the US Court of International Trade, but Canada now had the option to have it reviewed by this binational panel. The panel of 3 Canadians and 2 Americans found that the DOC determination could not be supported by substantial evidence, which was a controversial decision because the vote was along national lines. This led to a number of legal battles between Canada and the United States under the Canada-US Free Trade Agreement. As a result of these battles, the US Department of Commerce eventually revoked its countervailing duty order in 1994. That same year, Canada and the United States agreed to implement a consultative process on softwood lumber trade in order to eliminate any further trade disputes.

Softwood Lumber Agreement 1996 - 2001

This consultative process resulted in the tariff-rate quota system known as the Softwood Lumber Agreement (SLA). Under the agreement, Canada was permitted to export 14.7 billion board feet annually to the United States free of any export charges or duties. Exports above this threshold would then be open to escalating charges collected by the Canadian government. If prices for a given quarter were above a certain level, additional tax-free quota volumes were made available. The US, in turn, agreed not to initiate a trade case for the duration of the agreement. It is important to note that these restrictions applied only to the softwood exports of Alberta, British Columbia, Ontario, and Quebec. Considerable enforcement problems arose over the duration of the SLA, as Canadian exporters experimented with various minor modifications to softwood lumber in an attempt to reclassify lumber products to evade SLA quotas. These efforts were eventually rejected by the courts but not before significant evasion had occurred. The 1996 Softwood Lumber Agreement managed to bring some level peace in Canadian-US trade relations in softwood lumber. In 2001, however, the agreement expired, leaving both countries without a framework for managing softwood lumber trade. This led to another softwood lumber dispute between Canada and the US, commonly referred to as Lumber IV.

Lumber IV: 2001 - 2006

Three days after the expiration of the 1996 SLA, the US Coalition for Fair Lumber Imports, once again, petitioned the DOC to impose countervailing duties. In addition, the US industry for the first time brought an anti-dumping claim, arguing Canadian lumber companies were engaging in unfair price discrimination by pricing lumber into the US at a price below the cost of production or, at least below the price for which it would sell in Canada. The Americans allege that dumping had allowed Canada’s softwood lumber exporters to claim a higher portion of the American market. In April 2002, the US DOC reached a final determination that countervailing and anti-dumping duties be set at 18.79% and 8.43%, respectively. The total amount charged on imported Canadian softwood lumber was set at 27.22%. Canada responded to the duties by launching several trade challenges with the World Trade Organization (WTO) and under NAFTA. Within the year, over 15,000 Canadian lumber workers (primarily in British Columbia) had been laid-off as a result of the duties imposed by the US.

The history of this litigation has been rather complex, largely due to contradictory rulings by separate panels. Additionally, rulings against the US have often been based on technical issues, or the need for more information, as opposed to a clear victory in Canada’s favor for the right to export softwood lumber to the US duty free. Due to the complexity of the issues, both countries often hail rulings as victories. I will spare you the gory litigious details that only a third-year law student could appreciate, but five years’ worth of extorted trade squabbling during Lumber IV only served to benefit Washington lawyers and lobbyists at the expense of American retailers, builders, and home buyers. By the time a final ruling came down in Canada’s favor in 2006, the total duties collected by the US had reached $5.2 billion. Canada took the position that the US must return the billions of dollars in duties it had falsely charged on imports of Canadian softwood lumber but the US used the escrowed duties to force Canada to return to the bargaining table before it would discuss any repayment of duties. In April 2006, the Canadian and US governments announced that they had reached a framework agreement for settling the softwood lumber dispute. In July 2006, representatives from both countries formally signed the legal text of the agreement, and it was passed into law by December 2006.

Softwood Lumber Agreement - 2006

Under the 2006 softwood lumber agreement, the United States agreed to remove its countervailing and anti-dumping duty orders on Canadian softwood lumber. Furthermore, the US agreed to return more than $4.5 of the $5.2 billion in duties it had collected since 2002. The US also agreed not to initiate any new investigations against Canadian softwood lumber during the period of the agreement.

In exchange, Canada agreed to a cap on its softwood exports to the US at 34% of the US market. Furthermore, Canada agreed to impose an export charge on Canadian softwood lumber exports when the price of lumber was at or below US$355 per thousand board feet. These charges were collected by the federal government, and then transferred back to the provinces. Both Canada and the United States further agreed to terminate all litigation before the entering into the agreement (such as pursuing cases through NAFTA and the WTO). The 2006 Agreement also provided a broad framework for dispute settlement. Disputes relating to the agreement were to be resolved through a final and binding dispute-settlement process. The process was to be neutral, transparent, and expeditious. The length of the agreement was set at seven years, beginning in 2006, with an option to extend it for an additional two years, which the parties did. While neither side was entirely happy with the settlement, it left producers in Canada and the US reasonably content while generally ensuring an absence of “free trade” in lumber for a decade. One possible reason for the lack of turmoil during this period is that the US economic recession left the housing market staggering. The upper levels of the export charge rarely clicked in and for the most part, US and Canadian lumber companies were just trying to stay afloat.

Where do we go from here…Lumber V?

Now, in 2017, on the heels of a recovering and seemingly robust housing market, here we go again – the trade battle continues. In fact, it may be taking on some new dimensions with the new Trump administration’s trade positions. The 2006 agreement expired in October, 2015. After a mandatory “cooling-off” period, the US Lumber Coalition for Fair Lumber Imports filed claims in November, 2016 to the Department of Commerce of unfair trade practices against Canadian lumber producers. The DOC has initiated a CVD and AD investigation. In early January, 2017, the US International Trade Commission voted unanimously in a preliminary ruling that Canadian lumber imports have caused injury to the US industry, essentially paving the way for the DOC to continue its investigation. They are now expected to file a preliminary determinations on April 24th for the CVD and sometime in May for the AD investigation. Cash deposits on lumber shipments from Canada to the US begin to apply when DOC publishes its determination. Final determinations are due in late summer or early fall. Then, depending on those decisions, filing of appeals will start. Of course, the filing of duty petitions does not preclude the two nations from continuing to seek a negotiated settlement to the trade dispute, but the overall climate would seemingly have to improve for that to take place.

So there you have it, the convoluted history of the Canadian-US Softwood Lumber Trade dispute to date. Take two Tylenol and maybe a nap and sip of bourbon are in order. It is a frustrating and lengthy read, to be sure, but it has been exasperating at times to live through 35 years of the two governments bickering over this precious natural commodity, so vital to the economic stability and vitality of both countries, especially if you are a builder or a lumber retailer. It provides an especially egregious example of how the United States – self-proclaimed champion of free trade – has allowed a small group of protectionist-minded US lumber producers, to use the US Department of Commerce to manipulate the rule of law and manufacture the leverage needed to extort money from Canadian lumber mills at great expense to American lumber dealers, builders, and home buyers. Lumber trade between the United States and Canada certainly does not resemble any markings of the open, free trade agreement that the two countries have in place.