The softwood lumber dispute is actually a number of disputes which gone on over
for 20 years between the Canada and the U.S. Since 1982 Canada and U.S. have been
involved in five softwood lumber disputes, also known as Lumber I, II, III, IV and V.
The Softwood Lumber Agreement (SLA) avoided the fourth dispute in 1996. The
most recent dispute boiled over in May 2002 when the U.S. imposed duties of 27
percent on Canadian softwood lumber.1 Softwood lumber is one of Canada’s largest
exports to the United States, with 21.5 billion board feet of lumber shipped in 2005
alone. Those exports were worth $8.5 billion and they continue to comprise an
important element of the largest trading relationship in the world. Although Canada
and United States enjoy the benefits from world’s largest bilateral trading relationship,
but the softwood lumber dispute continuously a sore point on their relationship. It is
often very difficult to immediately tell who is right and who is wrong on this
economic dispute, because most of the time countries are trying to protect their
business interests. The magnitude of the Canadian softwood lumber trade interest in
the United States is substantial. The importance of the U.S. market to Canadian
softwood lumber producers is seen in the fact that in 2001 more than two-third of
Canadian production was exported to the United States. The fact that British
Columbia is the prime target of the dispute is because BC exports 72% of its
production to the United States, accounting for almost one-half of total Canadian sales
of lumber to the United States. (McKinney, 2004) One may wonder what have caused
a trading dispute to keep recurring in the past 20 years. The intractability of this
dispute is rooted in the difference in the ownership and management of natural
resources in the United States and Canada, which in turn are reflections of different
attitudes toward the role of the state in the two countries.
At the heart of the softwood lumber dispute is the fact that softwood lumber
industry’s organized and operates quite differently in Canada as compared to the
United States. The characteristic of the Canadian lumber industry that most clearly
sets in apart from that of the U.S. is the degree of public ownership of forest lands in
Canada. Approximately 94 percent forest lands in Canada are publicly owned, and
more than 90 percent of the lumber supply comes from publicly-owned (Crown) land.
(McKinney, 2004) In contrast, in the U.S. 58 percent forest land is privately owned
and 95 percent of timber harvest is done on private land.
The difference in ownership of forests translates to different forest policies. In
Canada, provincial governments set requirements mandating that certain amount of
timber be harvested and sometimes prohibit sawmill closures or reduction in
production capacity. Stumpage fees, the right to harvest timber on publicly-owned
land, are set in most instances by the provincial government. In the U.S. payments for
harvesting timber are generally negotiated by private parties, which are market driven.
Therefore, the U.S. suspects that Canadian producers who pay non-market-determined
stumpage fees (typically lower than the prices paid for timber by U.S. lumber
companies) to provincial owners of timber thereby gain a distinct economic advantage.
This is the main argument that the U.S. lumber companies used in the disputes. In
other words, the U.S. lumber producers are saying that the low stumpages fees that
1
CBC Indepth Softwood http://www.cbc.ca/news/background/softwood_lumber/ date retrieved: 6/30/06
1
the Canadian lumber producers pay are a form of subsidy that the provincial
governments have given to the companies. And this has given Canada lumber
producers an unfair advantage in that they could penetrate the U.S. market by
charging a lower price. Dispute over government subsidy is not uncommon in world
of trade. Boeing, U.S. commercial aircraft manufacturer accused European Union for
giving its rival Airbus $1.7 Billion in form of aid.2 Both disputes are concerned that
trade not driven by market forces will result one gaining an unfair competitive
advantage at the expense of the other. But in the case of softwood lumber, one must
examine why there is a difference in the ownership of forest land, and consequently
does the U.S. have valid arguments.
It is widely accepted that free competition and market-driven forces are the most
efficient allocation of resources within an economy. But due to the unique
characteristics of Canada, it can’t develop a market-driven softwood lumber economy
like the one in the U.S. Canada, unlike the U.S., simply doesn’t have the resources
and the market to develop a market economy. Canada has fifteen times as much forest
land as the U.S., and six times as much available growing. (Leamer, 2003) But the
population of Canada is only one-tenth of the U.S. Hence it would be more efficient
for Canada to organize its lumber economy in a non-market fashion, which is only
having few softwood lumber producers. Having many lumber producers would be
inefficient, and would end up producers merging with each other as a result. In other
words, pubic ownership (i.e. provincial government control) fits well with the case of
Canadian softwood lumber economy. In the U.S. where there are huge markets and
vast resources, free competition is most efficient. According to the United States
Forest, 779 establishments produced softwood lumber in the U.S. in 2001, whereas in
Canada, the industry is dominated by a few producers.
Therefore, the U.S. shouldn’t use the difference in forest ownership as an
argument in the dispute, because it can’t simply impose its values and ideas onto other
countries. Each country is unique in its own way as it is organized differently
economically and politically. In the case of Canadian lumber industry, it would be
unfair for Canadians to employ market-driven devices as it is not economically
feasible as it would be with the U.S.
So long as forest owned by the provinces in Canada, elements of the U.S. lumber
will find ways to assert that competition from Canada is unfair. Yet it is highly
unlikely that Canadian forests will privatize, because the public opinion on this issue
is very strong. As Reed has stated, “it is easy to make academic cases for selling
public forests, but the likelihood that this will be supported by public opinion is
remote. Public forestland is regarded by most Canadians as part of their patrimony,
their heritage, and something they would give up with great reluctance.”(Reed, 2001)
Reed is essentially saying it makes academic sense that trading such a abundant
resource will bring trading economic benefits to both countries, however, Canadians
have a deep attachment with their natural resources. They believe no one owns the
resources except the public, and the resources shouldn’t be used as to satisfy business
2
Economic Brief: Airbus vs.Boeing
http://www.pinr.com/report.php?ac=view_report&report_id=310&language_id=1 date retrieved 6/30/06
2
interests. Many evidences support this statement that Canadian cares about its natural
resources. Every year Canada harvests less than one-half of one percent of its
commercial forest land and each year grows twice as much wood as it removes
through logging operations. (DFAIT, 2002) Almost one half of Canada's forests will
never be harvested. In addition, since wealth of Canada depends partly its richness in
natural resources, Canadian governments have good environmental protection policies
such as reforestation; It is a fact that softwood lumber is not only an important natural
resource, but also important to Canadian’s heritage and culture.
In supporting Canadian public opinion about the natural resources, a similar
argument is made on another Canadian natural resource, water. Canada is one of
world’s water-rich nations, Canada's supply of fresh water vary from 5.6 per cent to
nine per cent to 20 per cent of the world's supply. Some entrepreneurs see water
commodity believed that Canadians should be able to make some profit from this
abundantly available resource. However, most Canadians strongly oppose the sale of
Canadian water. The chair of Council of Canadians endorses the fact that “Water is an
essential need, a public trust, not a commodity. It belongs to everyone and to no one."3
Both of the issues demonstrate the point the Canadian people have a strong
attitude and opinions towards their natural resources. This provides answers why
Canadian forest lands are not privatized. In addition, environmental groups would
strongly resist any suggestion that forest be privatized, and the unsettled but extensive
claims of First Nations on forest lands would complicate any attempted in this
direction.
Canadian provincial government used its forest management practices to defend
its position on the stumpage practices. Canadian province pointed out the
“multi-functionality” of their forestry management system. That is, a number of
different goals are pursed through forest policies. Companies are awarded long-term
tenure arrangement, sometimes for as long as 25 years, and in return are expected to
provide a number of services. These include such things such as road construction and
maintenance, fire extinction and prevention, insect and disease protection,
reforestation, and other mandatory silvicultural practices such surveying and site
preparation. (McKinney, 2004) Since softwood lumber producers in the U.S.
generally does not incur such costs, Canadians argue that provinces are justified in
charging stumpage fees lower than who paid by the U.S. producers, because Canadian
lumber producers absorb costs that either the federal or provincial government would
otherwise have to incur. Also, Canadian lumber producers have sometimes been given
favorable stumpage fees if they if they agreed to locate or continue production in
relatively less developed regions or in communities where closure of production
facilities would cause high unemployment and disrupt the local economy.
It appears that Canadian and the U.S. have institutional differences in their forest
management system. Canadian forest management adopt an win-win approach where
business gains by getting long-term tenure contact, and the provincial governments
are less burdened with the costs maintaining the forest. When provincial governments
design a particular policy, it often considers particular situations or needs in mind. In
3
CBC News Indepth: Water http://www.cbc.ca/news/background/water/ 6/29/06
3
this case governmental believed that when the lumber producers provide forest
maintenance services, provincial government saves its resources. Furthermore, it is
the most efficient approach in that the lumber producers are adept in providing such
services.
In addition Canadian provincial governments took a broad outlook on how
forest management should be conducted in that it took unemployment and whole
economy into consideration. The Canadian governments are generally more
concerned about the people’s welfare than the U.S. government. This is also well
shown in Canada’s health care system and other social services. Thus, here lies
another fundamental difference between Canada and the U.S. From this case, it can be
interpreted that the Canadian government is putting its people’s interests ahead of its
business interest. On the contrary, the U.S. often seen as a capitalist country trying to
exploit as many business opportunities as possible. Thus from the Canadian
perspective the provincial government is perfectly justified for a charging a lower
stumpage fee, because number of benefits that Canadian lumber company gives to the
community in return of the contract (i.e. creating jobs in rural community to help with
employment).
Softwood lumber trade dispute throughout went through a series of
development in the last 20 years. A careful analysis of each of the disputes will reveal
the arguments used by each side, and determine whether each is valid and justifiable
arguments.
The history of the softwood lumber dispute begins by the U.S. lumber producers
filing a countervailing duty petition in October 1982. The producers alleged that the
“stumpage fees” charged by the federal or provincial owner of forest to Canadian
companies for land tenure and the right to harvest timber did not reflect the true
market value of the timber and, therefore, amounted to government subsidy. In this
first lumber case, the USITC (United States International Trade Commission) made a
preliminary finding that domestic industry was being materially injured. However,
two years later the ITA (International Trade Commission) concluded that the
stumpage programs “… were not provided to a specific enterprise or industry or
group of enterprises or industries…” (USITC, 2002) That is, Canadian governmental
entities did not in any way limit the types of industries that could benefit from
stumpage fees. In addition, ITA also rejected cross-border price comparisons of
softwood lumber as evidence of subsidization, nothing many factors such as species
composition, tree size and density of timber, and timber accessibility could be
responsible.4 Thus, it ruled in favor of the Canadian government in that the softwood
lumber is not countervailable.
It appears from the first lumber dispute that as early as 1982, the non-market
driven stumpage fees is the central argument used by the U.S. lumber producers.
We’ve presented the idea above that stumpage fee is an invalid argument in the sense
different countries have different practices and needs. Also it is wrong to impose the
values onto other countries where the situation is quite different. In addition the ITA
made specific findings that concluded that the use of stumpage fee is not a form of
4
Mickinney 2004
4
subsidization. ITA has also taken into account some of the external factors, such as the
physical characteristics of the lumber into account to support its findings. There are
other reasons why ITA ruled in favor of the Canadian government. In 1982 the
influence of U.S. lumber producers in the U.S. government is not as strong as it is
today. In other words, the U.S. lumber producers did not have effective lobbying
effort at that time. The U.S. also relied on the Canadian lumber in its economy, since
the U.S. has not been self-sufficient in lumber production for a century. The softwood
lumber is an important ingredient in building houses, and the booming U.S. housing
market required such material.
Shortly the first dispute, another dispute followed in 1986 (Lumber II). The U.S.
producers, under the banner of Coalition for Fair Lumber Imports, again filed a
countervailing duty petition alleging government subsidization of Canadian producers.
Using altered interpretation of when a subsidy is a specific to a given industry, and
under intense political pressure from softwood lumber interests, the ITA issued a
preliminary ruling that Canadian producers were being subsidized by stumpage
practices in four provinces. This conclusion was based on the questionable premises
that logging, lumber, and pulp and paper industries should be considered a single
industry because of vertical integration and that stumpage rates primarily benefited
this industry as opposed to other wood users such as furniture manufacturers.
(McKinney, 2004) The ITA estimated that fifteen percent countervailing duty was
justified. The USITC issued a preliminary determination that the domestic industry
was being materially injured by Canadian imports.
Under these circumstances, rather have the countervailing duty imposed the
Canadian government entered into a Memorandum (MOU) with the United States
government agreeing to impose a fifteen percent export tax on softwood lumber as an
alternative. In that way Canada could at least collect the tax revenue and also would
retain some influence over when the trade restriction could be lifted.
The Lumber II dispute was a result increasingly political pressure that the U.S.
lumber producers placed on the U.S. government. The U.S lumber producers really
didn’t like the result of the first dispute, and demanded that U.S. government to
protect U.S. softwood lumber interests. Consequently even the circumstances haven’t
changed since Lumber I, the U.S. changed its interpretation of the evidences in order
to favor the U.S. lumber producers. The MOU even though was source of revenue for
the Canadian government, but it was gained at the expense of Canadian lumber
producers. Because provinces now have to increase stumpage fees in order to avoid
export tax and less is produced. Through this arrangement the United States softwood
lumber gained protection at the expense of U.S. consumers, but Canada gained
sufficiently from agreement to keep degraded relations with the United States from
jeopardizing free trade negotiations. (McKinney, 2004).
Lumber III was a sequel of the previous two disputes. On September 8, 1991,
Canada advised the United States of its intention to terminate the MOU effective
October 4, 1991, citing the elimination of alleged subsidies and a decline in Canadian
market share in the United States. Canada pointed out the fact under the terms of the
MOU the U.S. had agreed to exempt more than 90 percent of Canada’s lumber
5
exports from the export tax and therefore argued that the MOU was no longer
necessary. In response United States Trade Representative (USTR) announced on the
day that the MOU was terminated that Department of Commerce (DOC) would
self-initiate a countervailing duty case against Canadian lumber practices. As a result,
ITA and USITC were again required to study Canadian governmental policies in
lumber industry to determine whether the lumbers have been subsidized. It was not
surprising that both ITA and USITC found Canadian softwood lumber is
countervailable with the same arguments they used in the previous two disputes.
By this time, however, The United-Canada Free Trade Agreement (FTA) was in
effect and Canada was able to have the rulings of the ITA and USITC evaluated by
binational dispute settlement panel under the FTA’s Chapter 19. Canada invoked the
panel review process of the General Agreement on Tariffs and Trade (GATT) on
November 1, 1991, to challenge the DOC and USTR initiations. On February 19,
1993, the GATT panel issued a final report finding sufficient evidence for the DOC to
initiate the investigation, but that the USTR’s imposition of the interim bonding
requirement was invalid.5
The importance of this third dispute is the FTA between Canada and the U.S. The
Canadian government was able to challenge U.S. government’s actions through a
third party. The binational panel established under the FTA for solving trading
disputes provided a more objective measure in solving problems. The panel criticized
the analysis used by USITC in reaching its decision, and ordered countervailing duties
to be removed, and those previously paid were returned to the Canadian exporters.
(Lindsey, 2000) The panel was more of arbitration than mediation in that its decisions
were binding.
While this was a definite setback for the softwood lumber lobby in the U.S., it
was by no means ready to give up the fight. Its next line of attack was to challenge the
constitutionality of the binational trade dispute panel process in the courts. In view of
potential and considering the costs continuing litigation, Canada entered into
negotiations for a compromise solution. The result of these negotiations was the
U.S.-Canada Softwood Lumber Agreement (SLA).According to terms of the SLA,
softwood exports from British Columbia, Alberta, Ontario and Quebec, provinces
accounted for about ninety-five percent of the softwood lumber exported by Canada
to the United States, could enter duty free up to 14.7 billion board feet per annum.
(Zhang, 2000) From the MOU in the 1980s to the SLA in the 1990s, one can see that
that history repeats itself. U.S.’s same arguments recycled themselves back and forth.
And by this time the U.S. have not built a valid argument. The solutions to disputes
that Canada and the U.S. created were not permanent, every time the issue came up
only a temporary solution is establish. At the expiration of the temporary solutions
another around of dispute came up. This was shown in the re-opening of the dispute in
2001. As soon as the SLA had expired, the Coalition for Fair Lumber of Fair Imports,
which comprises 269 firms representing two-thirds of United States production of
softwood lumber, filed countervailing duty petitions, this time adding anti-dumping
petitions as well.
5
Free Trade Lumber Council http://www.ftlc.org/index.cfm?Sectin=11&Detail=13 data retrieved 6/30/06
6
It is also very important to examine the economic issue within the context of the
softwood lumber dispute as it allows one see the effect of each measure When a
Canadian export tax levied in order to avoid a countervailing duty as in conflict
during 1986, Canadian producers loses because the export tax depress the price that
they would otherwise receive for their product, whereas consumers of softwood
lumber products in Canada gain from price reduction. The loss by producers is greater
than the gain by consumers. In the U.S., lumber producers and owners of timberlands
gain because the Canadian export tax raises the price of lumber (and the value of land
with timber on it) in the U.S. Consumer in the U.S. lose more than lumber producers
there gain as a result of price increase. (Wear and Lee, 1993). However the Canadian
government was able to through export taxes to capture scarcity rents that would gone
to the U.S. under countervailing duty.
Under the terms of the SLA during the conflict in 1991, Canadian lumber exports
beyond a certain level were subjected to graduated export tax. Empirical work has
indicated that this graduated export tax. Empirical work has indicated that this
graduated put some downward pressure on prices of softwood lumber, with
consequent benefits to Canadian consumers. Paradoxically, Canadian producers
gained on balance from the higher prices on product sold to the U.S. before tariff rate
quota took effect. (Zhang, 2000)
The reason that softwood lumber producers and owner of timberland in the U.S.
are keen to have either countervailing and anti-dumping duties or Canada export tax
imposed is not difficult to discern. Either of this measure improves the economic
positions of producers and landowners at the expense of U.S. consumers. Trade
barrier between the Canada and the U.S. is inefficient in that it sets out winners and
losers. For Canada the trade barriers would affect Canadian producers the most. For
those Canadian communities who rely extensively on the softwood lumber as a
commodity, trade barrier could result unemployment and economic hardship. And an
important task on Canadian government agenda is to balance the Canadian producer’s
interests with those of free trade, which is demonstrated by NAFTA. Thus resolving
the softwood lumber dispute remains a top Canadian trade priority. To this end, the
Canadian government has engaged in several legal challenges through the NAFTA
and the WTO to defend the interests of Canadian softwood lumber exporters. At the
same time, the Canadian government is also pursuing a settlement that would provide
a clear path to free trade.
In terms of understanding Canadian economic history, softwood lumber can also
be looked from the concept of Staple Thesis by Harold Innis. W.T. Easterbrook has
elaborated on Innis’s staples thesis as follows: the staple…may be viewed as tool of
analysis which enables study of total situations in terms of resources, technology and
markets and the institutions, economic, political, and social in which these are
imbedded. Like many other Canadian staples, such as fish, fur, wheat, softwood
lumber provides a good framework in understanding Canadian recent economic
history. First of all, softwood lumber, which is easy-to-saw wood such as pine and
spruce used in building, is abundantly available in Canada with its vast forests.
Secondly, technological innovations such as trucks and the flexibility of highway
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made transporting bulky softwood lumber cheap. Lastly, the staple softwood lumber
not only has a particular significance economically, but also politically. Softwood
lumber is an important element in Canada and U.S. trading relationship as the U.S.
provided a huge market for Canadian lumber. And the dispute heated up every time as
each country tries to protect its business interests. In ITC and USITC primary tasks to
find evidence that Canada is guilty of subsidizing its lumber. Under NAFTA,
settlement panel is created to solve such kinds of dispute. Therefore, one can see the
importance of a staple in shaping not only domestically institutions, but also
institutions whom Canadian trade with.
The softwood lumber issue involves more than a dispute over whether or not a
lumber is being traded fairly. As Golob has in insightfully stated:
The U.S. acts to defend its market-driven lumber interest from what is seen as
unfair unfair Canadian statist protectionism, while Canada claims that its state-led
rather than market-driven system is necessary to maintain the industry an calls on
its neighbor to adjudicate through settlement rather resorting unilateral
countervailing action. On the surface, this is a simple trade dispute, but
underneath it is a toe-to-toe battle between conceptions of the state and its role
the economy. (Golob, 2002)
The cause of the dispute is rooted in the differences in the management and
attitude towards its natural resource. Just because things are managed differently in
Canada doesn’t mean that they are unfair. Thus one finds U.S. arguments used in
dispute are invalid. This is also demonstrated by the fact that Canada received mostly
favorable rulings from both the WTO and NAFTA dispute settlement involved in the
softwood lumber. But why there are so many disputes revolving the same issue?
Policymakers in Canada and many in the industry seem to have concluded that the
Coalition for Fair Trade in Lumber is persistent enough, and has enough political
influence, to obtain protection one way or another for U.S. firms. Every time a
negotiated settlement of some sort appears inevitable. On April 26, 2006, came word
that Canada and the United States had reached a framework agreement that could
form the basis for an end to the dispute, the its latest dispute, Lumber V. Canada will
also collect an export tax on softwood lumber exported to the United States if the
price drops below $355 a thousand board feet. The following day, Prime Minister
Stephen Harper told the House of Commons that Canada and the United States had
agreed on a seven-year deal to end the dispute.6 This seems yet another temporary
solution to the unsolvable dispute, keep things cool for at least seven years. With no
permanent solution in place, dispute will come up again at the end of this agreement.
word count: 4245
6
CBC Softwood Lumber Dispute http://www.cbc.ca/news/background/softwood_lumber/ date retrived 7/1/06
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