The US and Canada have been trading on softwood lumber for years now but disputes on the exports have marred the two countries for over 20 years now. The US has been aggravated by stumpage fees which they claim are subsidies to local companies. This essay will discuss the history of this trade and why America buys lumber from Canada. I will also examine the dispute of this trade and the effect of this in their respective economies.
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History of the Trade
Wood has been a great Canadian trade for much of the 19th century. Canada is one of the largest producers and exporters of softwood lumber and accounts for 16 percent of forest exports by Canada. In 1986, the US decided that Canada was subsidizing local lumber production through low stumpage fees and on discussion with the Canadian government a Memorandum of understanding was established that called a 15 ad percent valorem tariff on Canadian softwood.
The Memorandum of understanding was later terminated by Canada in 1991and claimed that the stumpage fees were not a subsidy. This lead to the US placing a tax of 6.1 for softwood imported from Canada. Canada appealed under the FTA which sided with it, US appeal was not successful. In 1996, the two governments signed a softwood lumber agreement, which required Canada to collect export tax after 14.7 million feet have been reached and which lasted until 2001.
The US (department of Commence) DOC again imposed sanctions in 200 when the agreement expired and started the fourth investigation whether Canada was involved in the lumber practices. This lead to another tax of 19.31 imposed on Canadian softwood. A further “anti-dumping duty” of 12.57 percent was imposed. Canada appealed to these duties to WTO which later ruled to Canada’s favor in 2003.
The rules were unbinding and therefore the American government has no obligation to change the policies and although the US has the opportunity to appeal but in the meanwhile the case is being handled by NAFTA which is likely to issue a binding rule (Moffat M. 2010). The latest news on the dispute this year according to Canada.com, the US is accusing Canada of breaching the 2006 softwood deal and therefore the US has decided to take Canada to court (Moffat, 2010).
Why America buys Softwood from Canada
Three factors can be associated with the preference that exists among the Americans for the Canadian softwood: cost, vicinity and reliability. In a world where cost reduction is a major factor in carrying out business it becomes preferable for Americans to prefer softwood from Canada.
Canadian softwood is cheap than the American softwood thus it becomes preferred as a means of reducing construction expenses. The cheap softwood from Canada is usually as a result of the system of ownership. It is claimed that the Canada softwood is much subsidised than the American softwood making softwood from Canada cheaper than that in America (Makarenko, 2008).
Another factor considered is that Canada has a large reserve of softwood which will ensure that there is a continuous supply to sustain business. Apart from having large reserve of softwood, it is worth noting that Canada is in close vicinity to the US. This will ensure that the soft wood can be easily shipped to the US to serve its needs. The close vicinity also helps to reduce the transportation costs associated with the softwood thus the costs associated with the softwood is not too much (Makarenko, 2008).
Problem for this Trade
Since 1982, there have been trade disputes between the US and Canada over softwood lumber trade. The US importing companies logged complaints against Canada on subsidized stumpage rates. Over that period, the trade has been forced to respond to several intrusions. This dispute has been the longest running trade dispute disagreement between the two countries. Unfortunately despite the money, energy and time that have been devoted to solve the issue, only intermediary solutions have been found (Driver, 2008)
Basis of the Dispute
Majority of the lumber harvested in the US is from privately owned land while in Canada most of harvested lumber is from Crown land (land owned by the federal government or provincial government). The basis of the argument has been on the way the government of the two countries set the price they charge corporations to harvest the softwood lumber.
In Canada, stumpage fees set by the government based on transportation fees and labor tend to be lower than the prices coming out of US auctions. According to the US, the low prices are a subsidy to Canadian producers and therefore they decided to retaliate (Moffat, 2010).
Effect of the Trade in the two Economies
Canada exports bulky of its lumber products to the US. In 2001, 82 percent of the total $11.6 billion exports went to the US. This means that the lumbering survival depends largely on the US market. NAFTA is handling the latest dispute between the two countries, and most experts believe that they will rule in favor of Canada.
The US has expressed some desire that the Canadian government should institute some form of taxation to make the softwood business competitive. However it is unfortunate that the Canadian government has shown little desire to change it way of managing the soft wood business (Moffat, 2010).
The agreement as reached in 2006 requires that the US government makes a compensation of up to 80 percent collected previously from imports. Depending on the price reduction, producers will be required to pay between 5-15 percent export taxes. This agreement is meant to last for the next 7 years after the 2006 agreement (CBC, 2006).
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The lumbering industry as a result has been hit severally by the disputes. For example in 2001, the US administration hit the Canadian lumber with billions of dollars in disputes. The trade war between the two countries has resulted to downsizing in Canadian jobs. There were reported many cases of job losses (CBC, 2006).
Though U.S. and Canada have engaged in trade for a long time of over 20 years, it has been a rough ride as the two countries have most had disputes over this period of time. The US claims that the stumpage fees are a subsidy by the Canadian government as they are too low.
The US wants Canada to follow the American system and auction of timber. Canada had a lukewarm response, the US responded by levying tariffs on Canadian timber exports. The Canada has proved to be cheap than the American softwood and this has been the main cause of disputes between the two trading partners.
CBC. (2006). Softwood lumber dispute. CBC CA. Web.
Driver, S. (2008). Assessing the softwood lumber trade dispute between Canada and the United States. Art and Science. Web.
Makarenko, J. (2008). The Canada-US Softwood Lumber Dispute. Maplelea web. Web.
Moffat, M. (2010). The softwood lumber dispute. Economics About. Web.