FUTURE OF THE U.S.CANADA SOFTWOOD LUMBER DISPUTE
CINTRAFOR FOREST PRODUCTS MARKET CONFERENCE SEPT. 24, 2001
Broader Significance of Dispute
• Setting initial conditions for global organizations
– Useful but sensitive to initial conditions – Not easily reformed – Once world-wide rules set up, no competing paradigms
• Constructive international conflict
TIMBER SYSTEM
• PROVINCIAL/FEDERAL OWNERSHIP OF 95% OF LAND • LONG-TERM TENURES TO MILL OWNERS • LOW PRICES TO ENCOURAGE PRODUCTION AND EMPLOYMENT
System is Obsolete
“The Crown tenure system, designed to attract capital to liquidate a stock of old-growth timber and establish an efficient timber-processing industry, is ill-equipped to meet today’s challenges.”
-- David Haley & Martin K. Luckert, “Tenures as Economic Instruments,” in The Wealth of Forests 147 (1998)
Timber System Overview
• Virtually no sales in open, public auctions • Administered prices • Prices below levels of commercial landowners (accounting for, e.g, silviculture and road building obligations) • Mandates to produce locally
PROVINCIAL SYSTEMS
• Quebec.
– “Based on” private prices, with adjustments for supposedly higher costs of production on Crown land.
• Ontario.
– All mills of same type pay same price for all timber, “based on” value of end products.
• Alberta.
– All mills pay same price for most timber, “based on” value of lumber.
British Columbia system
• Comparative Value Pricing (Large Majority)
– Starts with arbitrary target number – Price for each stand based on relative value of each stand – Goal is to have total prices equal target revenue (they don’t)
• “Market Value” Pricing System
– In Interior, starts with SBFEP auction prices, adjusts for higher costs borne by major licensees – On Coast, starts with Vancouver log market prices, then adjusts.
Mandates
• Log export and local processing requirements • Minimum harvest requirements • Mill closure/capacity reduction restrictions • Appurtenancy clauses
First Marathon report
“BC’s stumpage rates are not high by global standards. In fact, BC’s stumpage rates are low versus almost all jurisdictions except eastern Canada.”
-- Reid Carter, “Death of an Industry . . . ? British Columbia’s Wood Products Industry,” April 6, 1998 (prior to roll-back of BC stumpage rates)
Provincial Subsidy Rates
[(U.S. price - Canadian price - adjustments)(total harvest)/(value of lumber shipments to U.S.)] • Quebec -- 15% (vs. Maine) • Ontario -- 20% (vs. Michigan & Minnesota) • Manitoba -- 14% (vs. Minnesota) • Saskatchewan -- 39% (vs. Montana) • Alberta -- 65% (vs. Montana ) • British Columbia -- 15% (vs. Washington)
More Evidence
• Consistent refusal to create true market sales • Extreme, disproportionate political power of Canadian forest products industry (6:1 ratio vs. U.S. industry)
History of Dispute 1
• 1982 (“Lumber I”) -- US found no subsidy based on technical interpretation of US law on “specificity”, later revised • 1986 (“Lumber II”) -- US found large subsidy; Canada settled before final determination. • 1992 (“Lumber III”) -- US found large subsidy. Canada appealed.
History of Dispute 2
• 1993. Canada’s case goes to FTA panel, which splits 3-2 along national lines • 1994. Canadian majority on appeal refuses to do anything about undisclosed conflicts of interest of original panelists. • US judge says decision violates more principles of review than any he has seen. • 1996 -- SLA concluded
History of Lumber IV
• March 31, 2001 -- SLA expires • April 2, 2001 -- Petitions filed
– Excludes Maritimes – Support from Canadian environmental and Native groups
• May 24, 2001 -- US International Trade Commission preliminary finding of threat of injury
US Commerce Department Preliminary CVD Determination
• • • • August 17, 2001. 19.3% country-wide rate (except Maritimes) Bonds required for four months Bonding requirement retroactive 90 days due to “critical circumstances”
Antidumping Petition
• Dumping
– Sales below cost of production and some U.S. sales below home market price (adjusted for freight, e.g.)
• Rationale for law
– Canadian policies force production during periods of low prices, exporting mill closures and unemployment to United States regardless of efficiency
Petitions and the U.S. Consumer
• Some U.S. consumers benefit from Canadian subsidies • Countervailing duties designed only to restore price to market level • Lumber mills get only 2.5% of price of new home • In case of lumber, duties would have net benefit to U.S. economy (consumers, producers, and taxpayers)
--Joseph Kalt, “Political Economy of Protectionism,” in Trade Policy Issues and Empirical Analysis 355 (1988).
Lumber IV: Future Events
• December 28, 2001: USDOC final CVD and AD determinations • March, 2002: USITC final injury determination • NAFTA appeals -- conclude in 2003 or 2004? • WTO challenges -- already begun
Settlement?
• Prices and quantities must be set in a manner consistent with normal, profitmaximizing commercial landowners • How Canada reaches a market system is up to Canada
Requirements for settlement
• Pricing
– All or substantial majority through genuine competitive bidding – Any residual quantities must be sold based on market prices – Alternative log sales?
• Tenure Reform • Mandates • Enforcement