Canadian Softwood Lumber Dispute Research Paper

Introduction

The Canadian softwood lumber dispute is one of the major trade disputes in the contemporary history. The softwood trade between the United States and Canada has lasted for more than twenty five years. There have been perpetual disputes over the trade of softwood. These disputes have significantly affected the countries involved, especially the exporters.

These disputes have affected the countries economically, politically, and socially. Despite of the long duration of these disputes, no long lasting or effective solution has been found to solve these problems. In fact, the dispute is the largest trade dispute over the recent past^[1].

The condition is worsening each and every day and it is expected to last for more than ten years to come. However, demand for the Canadian lumber in the United States was higher earlier in 1962 and there were very minimal understandings between these two countries.^[2] The situation only worsened in 1982, the period when the fraction of the lumber imported from Canada to the United States increased.

In the United States, about 58% of the forest is privately owned.^[3] The states owned 8% while the rest part was owned by the municipality, county and tribal governments.^[4] On the other hand, 71% of the total forest land in Canada is owned by the provincial governments while 23 percent of the land under forests is owned by the federal government.^[5] Only 5 percent of the total forests in Canada are owned by private sector.

Discussion

Over the past, Canada and the United States have stayed in a good relationship both politically and economically. The two countries have enjoyed diplomatic relationships which have favored interactions between them. The two countries have also been rated the best in bilateral trade.^[6]

These two countries have also integrated their forestry activities that involve ownership of the forests as well as the forest products like lumber and wood. Over the past, Canada has been exporting softwood lumber to the United States. The United States imports soft wood lumber from Canada for various purposes. These range from construction of different structures among others. The two countries have also been integrated through investments in the forest products.

However, these relations have been characterized by high level of disputes. This has attracted the attention of many leaders in these two countries including senators, presidents and other elected officials. It has also attracted the attention of the corporate leaders from both Canada and U.S. Both sides have been involved in perpetual interactions in an attempt to find a solution to their problems.

In Canada, the forestry arrangements differ significantly from the forestry arrangements in the United States. In United States, most of the lumber is harvested from the private forests.

The main cause of the problem which has prevailed for over more than twenty years is about the stumpage fee which softwood producers’ pay.^[7] Lumber producers from the United States claimed that the stumpage fee applied was below the market price and therefore the product will automatically be lowly priced.

When the production costs are low, producers can supply their goods at lower prices in the market. This frustrated the United States’ producers since the Canadian lumber prices were set below the equilibrium prices. Therefore, this situation led to endless disputes among the two countries. Such subsidies by the government seemed to disrupt the United States market.

Circumstances That Led To the Dispute

The main issues which has led to disputes in the softwood lumber disputes is whether the Canadian lumber industry is subsidized and whether this has affected the U.S. lumber industry negatively or whether it poses any danger to the U.S. lumber industry.^[8]

The U.S. government claims that the subsidization of the lumber industry in Canada by both the provincial and federal governments was threatening the domestic producers. For instance, the price of harvesting lumber was artificially fixed. Contrary to this, the price of harvesting lumber in U.S. was left to adjust freely in a competitive auction.^[9]

Such subsidy reduces the costs of lumber production in Canada. Therefore, the government timber will have lower prices than any other timber in the market. Thus, the government will manage to provide the lumber below the market prices. The U.S. government thought that this was not a fair subsidy as it led to unhealthy competition.

According to the U.S. foreign trade laws, any imported goods that enjoyed unfair subsidizes were subject to an extra tariff. The purpose of this tariff was to increase the prices of the imports back to the market prices in order to protect the domestic goods.

When the imported goods are available in the market below the market prices, this poses a big threat to domestic producers because their production expenses are relatively high. Therefore, the U.S. government uses this strategy to offset the impacts of the government subsidies on timber by bringing the prices of its products back to equilibrium.

Another main reason which led to the perpetual disputes in the trade between these two countries was the fact that there were two principal sources of lumber, that is Canada and United States and only one market in North America.^[10] This poses

a major problem because the consumer will not be able to consume all the goods supplied. In other words, the supply exceeds the demand. This leads to problems because each party wants to sell more than their partners.

The softwood market in the United States has been very unstable. For instance, the share of the Canadian companies was 15% in 1965 which almost doubled in 1985.^[11] This raised a concern because Canada shared the same market with the United States. Since the level of demand was almost stagnant, this increased in the market share was likely going to create problems of competition for the customers. This is another circumstance which has contributed to formation of the disputes in the lumber trade between these two countries.

Another reason for the disputes in Canada-United States trade was the Canadian taxes and subsidies. United States and Canadian governments had very different tax and subsidies systems. Subsidies are not common in the United States. However, the country emphasizes on the infrastructure and electrical distribution.

At Canada, the government subsidizes the production of the softwood which has led to low prices for its products. The mode of transporting the logs is cost effective since they are allowed to float on the down the river to destination.^[12] This further helped in retaining the prices of the already subsidized production of Canadian lumber.

Since 1982, these disputes can be categorized into four phases. These include;

Lumber I

In the late 1970s, the prices of federal timber in the U.S. increased dramatically. However, the crises followed in early 1980s when the value of timber fell at the same rate.^[13] This situation led severe crisis as the people buying the timber were forced to pay exaggerated prices which did not reflect the value of the timber as they were obliged to conform to their contracts’ regulations.

One of the main factors which contributed to the crisis was the federal procedures applied in the sale of the timber. The crisis was also caused by the macroeconomic policies. Meanwhile, United States implemented a restrictive monetary policy in reaction to inflationary pressure in the economy.^[14]

As the crisis persisted, the buyer of the federal timber who was mostly small firms decided to seek for way through which to overcome the problem. These buyers were represented by the Northwest Independent Forest Manufacturers Association (NIFM) which was located in Washington and Tacoma.^[15]

As these buyer continued to pay very high prices for then low valued federal timber, they combined and formed a group called Western Resource Alliance. Through this group, these buyers demanded for bailouts of their contracts. The group succeeded since these buyers were able to receive bailout. In other words, they were saved from paying the inflated prices of the timber.

This crisis forced the NIFM to send a request to the government to restrict the softwood imports from Canada. On 1980, the leader of NIFM association was advised by one official from the department of the commerce on what he was supposed to do in order successfully restrict the Canadian imports.^[16]

It was explained to him on how the Canadian exports could be restricted through antidumping duties or countervailing duties. Kuehne, who was the leader of the NIFM contacted other officials on restriction of Canada’s exports and they later decided to form an association. This association was composed of small and medium saw millers. Later, meetings were held and it led to the formation of a coalition known as the U.S. Coalition for Fair Canadian Lumber Imports where Paul Ehinger served as the chairman.^[17]

The members of NIFM held frequent meetings where they discussed the best ways to handle the Canadian lumber problem. In the late 1980s, NIFM released a report which indicated that the government subsidies to the Canadian lumber producers allowed them to under price the U.S. producers, the fact which threatened the employment opportunities in the U.S. Pacific Northwest.

Lumber II

During this period, there were several bills which were introduced in the U.S. Congress which were directed at coming up with a formal action to suppress the impacts of the subsidized Canadian lumber in the united states market.^[18] DZ 396 In this period, the Canadians were opposing the restrictions imposed on the product through the National Association of Home Builders. Later, another opposition group in Canada was formed. However, this group was not successful as it did not follow the formal procedures.

When negotiations started on September 1985, Regan who was the president declared that he wished to have a fast track negotiating authority and a having a legislation which allowed president to participate in negotiations. President Regan suggested that the president be involved in the negations after which the agreed procedures would be passed to the Congress so that they can be approved.^[19] This created a lot of optimism of finding a solution to the prevailing problems.

In 1991, the United States government was notified by the Canadian government on its intention to leave the MOU since it met its rules and that it was going to continue being committed. Following this decision, senators requested the president to propel the Canadian government to take the necessary actions to offset the subsidies provided by the government.

In 1992, ITA provided a\n interim duty of about 15 percent as well as the countervailing duty of 6.51 percent.^[20] Meanwhile, United States-Canada Free Trade Agreement (FTA) was already in force. This agreement replaced the court procedures used in both United States and Canada.

Lumber III

This phase started from 1991. In 1996, United States and Canada came up with an agreement known as Softwood Lumber Agreement (SLA) which was aimed at settling the dispute.^[21]

This agreement was designed to limit the amount of timber exported from Canada to the United States. The United States government implemented this agreement by imposition of restrictions on the Canadian softwood imports to the United States. These included the quota system and the export duty on the lumber exported from Canada to the United States.^[22]

The quota system was implemented through restricting the maximum length of the timber which can be exported in a specific period. On the other hand, export duty is the charge that was levied on the exported lumber. These policies were targeting to increase the prices of the lumber exported to the United States. Since the government was providing subsidies on timber production in Canada, export duties increased the prices of the Canadian lumber in the United States market.

This eliminated unhealthy competition which was threatening the existence of the United States producers in the market. Following these measures, United States was forced to drop the actions which were taken by the American Lumber industry in the courts.^[23]

However, this agreement (SLA) expired on 2001. Therefore, lumber producers from Canada were free to export lumber in the United States without limits. This revived the disputes which had been suppressed by the agreement during this period. On realizing this, the Coalition for Fair Lumber Imports abruptly reacted to this by filing a countervailing duty petition.^[24]

According to Carmody, the Canadian lumber exports were posing both material and domestic industry.^[25] This revived the initial antagonism which existed before the formation of the Softwood Lumber Agreement; Canada on one side and the United States producers on the other.

The two sides started giving their differing views pertaining to the prevailing situation. Canada used the WTO Agreement in their defense arguing that the DOC’s results were violating this agreement. On the other side, the United States producers, through their association were busy trying to come up with restrictions to limit Canadian exports into the United States market.

In an attempt to suppress these problems, an antidumping determination through the DOC was issued.^[26] This was issued against the biggest Canadian softwood producers. This was implemented to prevent these producers from exporting timber at very low prices in the United States market.

Antidumping levies were aimed at discouraging the Canadian producers from exporting rubber at throw away prices. The results of the investigation carried known by ITC indicated that the Canadian lumber imports was not responsible for the prevailing material injury.^[27]

However, the results indicated that these imports posed a threat to the material, injury. As a result, high rates of countervailing and antidumping duties were imposed on the lumber imported from Canada to the United States. These restrictions had a big impact on the Canadian producers. Many of them closed as they were unable to operate under these regulations. There combined rates of both duties summed to 27.79%.

This was too high compared to other market conditions. However, these restrictions favored the United States producers. This is because they could easily dominate the market when there are fewer imports to compete with their product. The small industries in Canada were the most affected by these regulations. However, the bigger companies overcame the situation by diversifying their markets to other places like China.

Lumber IV

This phase came after the expiring of the Softwood Lumber Agreement in 2001. This incited the U.S. producers to come up with a restriction in order to limit the total amount of lumber entering into the United States market. This phase involves the determination of the authorities from the United States in funding out more about the rulings made by the WTO and the U.S. courts concerning the dispute prevailing between Canada and the United States.

The United States government was compelled to impose countervailing duties in order as well as the antidumping prices.^[28] Again, these restrictions were aimed at increasing the prices of the imports in the United States in order to protect the domestic producers.

Resolution

As already seen, the two trading partners were determined to solve the disputes which rose between them. However, it is difficult to solve the situation because both sides have opposing needs. The Canadian Lumber dispute momentarily stopped in 2006 following an Implementation of the U.S.-Canada Softwood Lumber Agreement.^[29]This agreement was very significant as it stopped the disputes which had adversely had negative effects to Canada around that time.

In this agreement, the two countries agreed on managed trade of the softwood in the following for not less than seven years. Under the same agreement, the Canadian Lumber exports were to be taxed increasing scale as the prices of the fell.^[30] However; policy was not feasible with the trade agreements which had been signed earlier. Therefore, for this agreement to be effective, all the previous agreements were to be dropped. A lot of time was wasted in solved the problem. The disputes continued to increase.

Over the last twenty years, the United States of America and the government of Canada has been engaged on various agreements in an attempt to solve their differences.^[31]

The two countries had agreed on the fact that the imports from Canada to the United States did not pose any injury or threat to the domestic industries.^[32]ASO 1197 This was realized by eliminating unhealthy competition from the imports. The two partners also agreed on the point that United States should not self-initiate an investigation under Title VII of 1930.^[33] The United States jaws also not supposed to take any action according to the sections 201-204 of the agricultural Act 1956.

In an attempt to solve their disputes, Canada and United States has signed two free trade agreements.^[34] These agreements involved having the United States being granted free access to its market. United States was the importing country and therefore restricted Canada who was mostly exporting in the United States. All these attempts were aimed at finding the resolution for the problems through the Free Trade Agreement. Under this agreement, the actions of both parties were expected to

Several cases have been filed concerning the trade between these two parties. The cases dealt with issues which were political and economic issues.

Conclusion

In conclusion, this discussion has clearly given the real picture of the Canadian softwood lumber dispute. The study has revealed that the root cause of the trade of lumber between Canada and the United States was the fact that the Canadian products underpriced the domestic products in United States.

The Canadian government gave subsidies in harvesting of timber. Consequently, the Canadian lumber was priced below the equilibrium levels (market price). Since the buyers are expected to act rationally, they will choose the cheapest products in the market. Therefore, more of the Canadian products will be bought compared with the domestic goods from the United States. This threatened the existence of the domestic producers at the expense of throw away prices.

Various associations and groups have been formed but none of these led to a lasting solution. Each agreement existed for a small duration of time after which it proved impotent. This has raised a concern about the future of the Canadian softwood lumber dispute. Unfortunately, these disputes are expected to continue for the next ten years.

Bibliography

Anderson, F. and Cairns, Robert D. Canadian Public Policy / Analyse de Politiques, Vol. 14, No. 2 (Jun., 1988), pp. 186-196

Anonymous, “Canada-United States: Softwood Lumber Agreement.” International Legal Materials, Vol. 35, No. 5 (SEPTEMBER 1996), pp. 1195-1205

Carmody, Chi. “Softwood Lumber Dispute (2001-2006).” The American Journal of International Law, Vol. 100, No. 3 (Jul., 2006), pp. 664-674

Doran, Charles F. “Trade Dispute Resolution ‘on Trial’: Softwood Lumber.” International Journal, Vol. 51, No. 4, Globalization (Autumn, 1996), pp. 710-733Published

Parfitt, Ben. After The Windfall: Plotting a New Course for BC Beyond
the Softwood Lumber Agreement. Vancouver: CCPA, 2008.
Percy, Michael and Yoder, Christian G. The softwood lumber dispute and Canada-U.S. trade in natural resources. Canada: IRPP, 1987.

Rajala, Richard A. “Technological Change, and the Transformation of the West.” Journal of Forest History, Vol. 33, No. 4 (Oct., 1989), pp. 168-179

Reynolds, Matthew B., and Nelson, James B. Canadian Imports and Trade
Issues. New York: Nova Science Publishers, 2008.

Zhang, Daowei and Laband, David. From Senators to the President. Solve the Lumber Problem or Else. Vol. 123, No. 3/4 (Jun., 2005), pp. 393-410

Zhang, Daowei. The softwood lumber war: politics, economics, and the long U.S.-Canada trade dispute. Washington DC. Earthscan, 2007.

Footnotes

1. Daowei Zhang.The softwood lumber war: politics, economics, and the long U.S.-Canada trade dispute. Washington DC. Earthscan, 2007. p.15.
2. Daowei
3. Daowei
4. Daowei
5. Daowei Zhang.The softwood lumber war: politics, economics, and the long U.S.-Canada trade dispute. Washington DC. Earthscan, 2007. p.81.
6. Chi Carmody, “Softwood Lumber Dispute (2001-2006).” The American Journal of International Law, Vol. 100, No. 3 (Jul., 2006), pp. 664-674
7. Chi Carmody, “Softwood Lumber Dispute (2001-2006).” The American Journal of International Law, Vol. 100, No. 3 (Jul., 2006), pp. 664-674
8. Daowei Zhang.The softwood lumber war: politics, economics, and the long U.S.-Canada trade dispute. Washington DC. Earthscan, 2007, p.73.
9. Ben Parfitt,. After The Windfall: Plotting a New Course for BC Beyond
   the Softwood Lumber Agreement. Vancouver: CCPA, 2008. p.65.
10. Charles F Doran,. “Trade Dispute Resolution ‘on Trial’: Softwood Lumber.” International Journal, Vol. 51, No. 4, Globalization (Autumn, 1996), pp. 710-733
11. Charles F Doran,. “Trade Dispute Resolution ‘on Trial’: Softwood Lumber.” International Journal, Vol. 51, No. 4, Globalization (Autumn, 1996), pp. 710-733
12. Richard A. Rajala, “Technological Change, and the Transformation of the West.” Journal of Forest History, Vol. 33, No. 4 (Oct., 1989), pp. 168-179
13. Daowei Zhang.The softwood lumber war: politics, economics, and the long U.S.- Canada trade dispute. Washington DC. Earthscan, 2007, p.84.
14. Michael Percy and Christian G Yoder, The softwood lumber dispute and Canada-U.S. trade in natural resources. Canada: IRPP, 1987, p.28.
15. Daowei
16. Daowei Zhang.The softwood lumber war: politics, economics, and the long U.S.- Canada trade dispute. Washington DC. Earthscan, 200, p.54.
17. Daowei
18. Daowei Zhang and David Laband.From Senators to the President. Solve the Lumber Problem or Else. Vol. 123, No. 3/4 (Jun., 2005), pp. 393-410
19. Daowei Zhang and David Laband.From Senators to the President. Solve the Lumber Problem or Else. Vol. 123, No. 3/4 (Jun., 2005), pp. 393-410
20. Daowei
21. Chi Carmody, “Softwood Lumber Dispute (2001-2006).” The American Journal of International Law, Vol. 100, No. 3 (Jul., 2006), pp. 664-674
22. Anderson, F. and Cairns, Robert D. Canadian Public Policy / Analyse de Politiques, Vol. 14, No. 2 (Jun., 1988), pp. 186-196
23. Chi
24. Chi Carmody, “Softwood Lumber Dispute (2001-2006).” The American Journal of International Law, Vol. 100, No. 3 (Jul., 2006), pp. 664-674
25. Chi
26. Chi
27. Chi Carmody, “Softwood Lumber Dispute (2001-2006).” The American Journal of International Law, Vol. 100, No. 3 (Jul., 2006), pp. 664-674
28. Richard A. Rajala, “Technological Change, and the Transformation of the West.” Journal of Forest History, Vol. 33, No. 4 (Oct., 1989), pp. 168-179
29. Daowei Zhang and David Laband.From Senators to the President. Solve the Lumber Problem or Else. Vol. 123, No. 3/4 (Jun., 2005), pp. 393-410
30. Reynolds, Matthew B., and Nelson, James B. Canadian Imports and Trade Issues. New York: Nova Science Publishers, 2008, p.85.
31. Reynolds, Matthew B., and Nelson, James B. Canadian Imports and Trade Issues. New York: Nova Science Publishers, 2008, p. 154.
32. Anonymous, “Canada-United States: Softwood Lumber Agreement.” International Legal Materials, Vol. 35, No. 5 (SEPTEMBER 1996), pp. 1195-1205
33. Anonymous
34. Charles F Doran,. “Trade Dispute Resolution ‘on Trial’: Softwood Lumber.” International Journal, Vol. 51, No. 4, Globalization (Autumn, 1996), pp. 710-733 Published. Demonstrate objectivity and fairness. This will reduce the chances of unwanted practices which could hurt the other party.