The National Lumber and Building Materials Dealer Association issued the following update on the state of the Softwood Lumber Agreement between the U.S. and Canada:
Background: The Softwood Lumber Agreement (SLA) between the United States (U.S.) and Canada expired on October 12, 2015. There was a one-year cooling off period where neither country was allowed to engage in litigation on the issue. That cooling-off period expired on October 12, 2016. The U.S. Lumber Coalition, an alliance of softwood lumber producers in the United States, has expressed support for a new agreement but in a recent statement suggested it may have “no choice but to move to initiate trade cases against unfairly traded imports from Canada.”
At the center of the dispute is the claim that the Canadian lumber industry is unfairly subsidized by its federal and provincial governments, as most timber in Canada is owned by the provincial governments. The prices charged to harvest the timber (stumpage fee) are set administratively, as opposed to in the U.S. where prices are set mostly through the competitive marketplace. American lumber producers, as well as the U.S. government, claim this constitutes an unfair subsidy, and is thus subject to U.S. trade remedy laws, where foreign goods benefiting from subsidies can be subject to a countervailing duty tariff, to offset the subsidy and bring the price of the commodity back up to market rates.
The Canadian government and lumber industry dispute this assertion, based on a number of factors, including that Canadian timber is provided to such a wide range of industries, and that lack of specificity make it ineligible to be considered a subsidy under U.S. law. A countervailing subsidy must be specific to a particular industry under U.S. law. The U.S. has filed suit against the Canadian government on several occasions alleging that it illegally subsidizes softwood lumber imported to the U.S.; however, Canada has won all three times in the international court system regarding the dispute.
A very different economic environment exists now compared to when the most recent SLA was agreed to in 2006. China has become the second largest export market for Canadian lumber. The Canadian market share of softwood lumber in the U.S. has fallen from 34% in 2006 to 28% today. Allowable cuts in British Columbia are significantly lower now because of the mountain pine beetle infestations. The largest Canadian producers now own sawmills in the U.S., which leaves them squarely straddling this divide. And perhaps most importantly, the weak Canadian dollar and strong American dollar gives Canadian producers a price advantage.
U.S. – Canada Negotiations: On June 29, Canadian Prime Minister Justin Trudeau and President Obama released a joint statement on the expired softwood lumber agreement. The two men stated, “the United States and Canada are working together to find a path forward that reflects our shared goals and that results in durable and equitable solutions for softwood lumber producers from both countries.” In addition, the statement suggested that a new agreement should be designed to maintain Canadian exports at or below an agreed U.S. market share to be negotiated. In early October, Canadian Trade Minister Chrystia Freeland and U.S. Trade Representative Michael Froman pledged to continue working toward a new agreement.
On October 21, in a sign that prospects for an agreement may be deteriorating, 24 Senators sent a letter to President Obama accusing the Canadian government of being unwilling to put forth or consider proposals on a new SLA. On October 26, Freeland and David MacNaughton (Canada’s Ambassador to the U.S.) sent a letter to President Obama and the group of 24 Senators stating that Canada is eager to reach a new SLA with the U.S. In that letter, Canadian officials noted that it has met U.S. officials seven times, U.S. lumber lobbyists twice, and released four position papers, and a detailed proposal that meets conditions set out by Obama and Prime Minister Justin Trudeau.
There is growing pessimism that a new agreement will be reached soon. Canadian Trade Minister Chrystia Freeland recently said that Canada will fight U.S. softwood lumber tariffs in front of the World Trade Organization if a negotiated settlement cannot be reached. “We want a good deal, not just any deal. And if we can’t achieve a negotiated agreement, Canada’s prepared to fight,” said Freeland.
The U.S. government has been reported to want any new agreement to include an overall supply cap or quota placed on the amount of softwood lumber imported from Canada. Although there is speculation that the U.S. may have softened its stance, the Canadian government favors a continuation of the 2006 agreement but is willing to accept minor changes that would likely favor U.S. producers.
2006 Agreement: The most recent SLA took effect in 2006 and was extended for an additional two years before expiring in October 2015. Under terms of that agreement, the U.S. lifted countervailing and anti-dumping duties provided lumber prices continue to stay above a certain range. Below the specified range, a mixed export tax/quota regime existed for imports of Canadian softwood lumber. As a part of the deal, more than $5 billion in duty deposits collected were returned.
At present, Canadian softwood lumber imported into the U.S. is not subject to any export charges. Softwood lumber from Alberta and British Columbia was taxed under one system, and softwood lumber from Manitoba, Ontario, Quebec and Saskatchewan was taxed under a different structure. The level of tax was determined based on the price per thousand board feet.
In addition, below is the effective SLA export tax on Western Canadian shipments of softwood lumber to the U.S. while the 2006 SLA was in effect. Effective SLA Export Tax on Western Canadian Shipments to the U.S.(Percentages)
NLBMDA and SLA: NLBMDA government relations staff continues to monitor negotiations between the two countries and has met with congressional offices and the Canadian government about reaching a new SLA. Although consumers, retailers and builders do not have a formal role in the negotiations, NLBMDA has been raising awareness with Congress, Office of the U.S. Trade Representative (USTR) and other entities about the need to renew the agreement to ensure stable product supply and avoid the undesirable effects associated with a trade war.
While NLBMDA is on the side of a less restrictive agreement, no hard line has been drawn and NLBMDA will evaluate any proposed agreement before taking an official position, if any. NLBMDA has reiterated support for a new SLA, but has not taken a formal position regarding the level or scope of tariffs on Canadian softwood lumber imported into the U.S.
Conclusion: Officials from the U.S. and Canada continue to publicly express support for a new SLA. However, both countries privately concede that litigation is likely in the trade dispute. The last time a trade case was brought by the U.S. lumber industry against the Canadian Government, it took several years to resolve the dispute and there were increased duties placed on Canadian imports until a new agreement was reached. Should there be a new legal battle between the U.S. lumber industry and the Canadian Government, it will likely last several years before it is resolved. NLBMDA supports efforts to renew the expired SLA and avoid excessive restrictions on the availability of products demanded by customers.