Simplifying Softwood Spin

Over the past few weeks the US-Canada softwood dispute marched across the headlines, but once again the stories have offered little analysis or context. NDP leader Jack Layton promised that if elected he would retaliate against the US by restricting energy exports. Rusty Wood, head of the despised US Coalition for Fair Lumber Imports, visited Vancouver for “discussions.” And politicians and logging industry lobbyists across Canada claimed another softwood trade panel victory.

This was not the first time Canada had claimed victory, so it raises the question: if Canada keeps winning at the dispute panels, why does the softwood dispute continue?

Canadians are justifiably confused by the endless series of decisions from trade bodies such as the WTO, NAFTA, and the US International Trade Commission. There have been 7 WTO cases and 3 NAFTA cases related to softwood. Some of them are preliminary, some are called “final”; some are binding, some are not; virtually all are subject to appeal–and none of them seem to to move BC closer toward a resolution.

Are Canada’s so-called victories real? What do they mean? And how will the protracted softwood dispute ever end?

The U.S. also claims it won these trade panel decisions, though you’d never know this from Canadian media coverage.

How can both sides win? I’ll try to answer these questions, but first some context.

Politicians and industry pundits who blindly wrap themselves in the mantra of “free trade” when discussing softwood do Canadians a disservice. Lost in the ongoing rhetoric are decades of history in which our timber giants have consolidated their stranglehold over our public forests, successfully stifling competition and consistently persuading federal and provincial governments to take money out of citizens’ pockets by pricing trees below market value. The fact that these timber giants now scream for free trade is hypocritical at best.

Despite claims to the contrary, historically Canada has not fared well with trade panels on softwood. Prior to the current dispute there have been five international trade panels concerning softwood lumber, and Canada has lost four.

Like most international trade disputes, softwood involves complex issues. Recent decisions can only be understood in the context of the arguments on specific issues.

The Canadian Position:
Canadian governments argue they do not subsidize logging companies. They contend that low log prices are a function of a different system imposing differing responsibilities. They claim the issue in the dispute is US protectionism and the inability of the US industry to compete with Canadian efficiency. They claim the softwood dispute is all about market share, and they accuse the inefficient US industry calling for protectionist tariffs any time Canadian imports exceed 33% of the US market.

The U.S. Position:
The US claims that Canada subsidizes logging on public lands. These subsidies are found in ridiculously low stumpage rates and a complex hodgepodge of financial assistance programs. US manufacturers argue that 60% of their costs come from the cost of wood, while in BC tenure holders spend only 20% of their operational costs on stumpage, and often pay as little as 25 cents for logs the size of telephone polls.

The Reality:
Both countries are partially right, but neither tells the full story. It’s certainly true that US logging interests are trying to use the tariffs to protect their market share. This motive doesn’t invalidate their claims.

The US coalition’s complaint points out real problems in the management of Canadian forests. Canada, particularly BC, does provide perverse subsidies to logging companies that promote unsustainable harvesting, impede transition to innovative businesses that would produce more jobs and wealth per log, and undercut their competitors.

The US claim that Canadian log prices are too low is true. Independent studies show that BC logging companies paid between 40% and 60% of the prices US companies paid for equivalent logs in Oregon and Washington.

And calling the US industry inefficient is a matter of perspective. BC produces fewer jobs per volume of logs cut than any jurisdiction in the world, but is that a good thing?

Is Canadian efficiency in producing pulp and commodity logs with fewer jobs and lower return to the public purse something that Canadians should be proud of and defend internationally? Remember, the primary goal of allowing access to public resources is not to promote corporate profit, but to optimize wealth for the public. And wealth is not just money. Real wealth includes clean air, clean water, functional ecosystems, and thriving local economies. All indicators illustrate that our current system is a dismal failure on these counts.

Trade Panel decisions:
So with both sides claiming victory , who is really winning at the WTO and NAFTA?

A closer look reveals trade panels have dealt serious blows to both sides in the softwood dispute. Lets look at the various issues in the dispute individually.

US claim no. 1: Canada Subsidizes its Logging Industry
Every recent trade panel has agreed with the US claim that Canada subsidizes its logging industry. And in Canada, a growing coalition of Canadian environmental, First Nations, Labour, community and business groups also supports this view.

Canada has attempted to avoid trade sanctions from trade panels by arguing semantics. Instead of disproving that subsidies exist, Canada uses a technicality to claim in essence that international subsidy rules don’t apply to Canadian timber. That technicality is the meaning of the word “good.” Trade rules govern the price for goods. Canada’s lawyers argue that public logs acquired for stumpage fees are not a “good.”

With statements so dubious it’s surprising their noses aren’t 3 feet long, these representatives claim that stumpage is “a levy on harvesting rights akin to a tax.” In real words, Canada is saying that logging tenures grant companies ownership of the trees and that stumpage is just a tax on that ownership interest. This is an attempt to win on a technicality, because taxes are not covered by the applicable international subsidy agreements, while stumpage–defined as the “price paid for Crown timber”–clearly would be.

Again Canadians must question who their government is working for. Why is our government misrepresenting stumpage and implying that logging tenure holders own trees that in fact belong to the public. Canada’s attempt to duck the main issue by misrepresenting the definition of stumpage has been soundly and repeatedly rejected by international panels and, in different contexts, by Canadian courts.

Canada’s argument no. 1: How a Subsidy is Measured
Canada’s second argument is that, even if it subsidizes timber, the US can’t measure the subsidy by comparing Canadian and US log prices. This argument was successful at first, since trade laws prefer to use price comparisons within the same jurisdiction rather than across borders. So in the early rounds of recent trade panels, Canada exploited the United States’ growing reputation as a trade bully, and the WTO accepted Canadian arguments and rejected the use of US prices as benchmarks to determine Canadian subsidies.

The problem is that there is no real open, competitive market for logs in BC or most of the rest of Canada, so there is no way to compare prices within the same jurisdiction. Canada is therefore arguing, in essence, “if we set up a system that limits competition for logs so much that there is no free market for timber, then we can’t be caught for providing subsidies.” We predicted that ultimately this argument would fail. And fail it did, as subsequent WTO and NAFTA panels accepted US arguments and upheld the cross-border method for determining subsidies.

In response to this problem, the BC government is setting up an auction system for a portion of the wood cut in the province. This system is supposed to determine the true market value for wood, which can then be compared to stumpage rates. As I have written in previous bulletins, due to the inadequate amount of wood that will be put through this system, and continued near monopoly control by a few manufacturers, the new auction system in BC is seriously flawed.

Canada’s argument no. 2: Calculation Errors
Canada has a second back-up argument. Our representatives have argued that even if timber is a good that we subsidize, and even if cross-border comparisons are acceptable, the US methodology for making the comparison violates trade rules. On this argument, the Canadians have continued to be largely successful. The WTO and NAFTA panels have both instructed the U.S. to recalculate the dumping and countervailing duty tariffs using updated methodologies. The problem for Canada is that even if they continue to win on this point , the tariffs remain in place, although the exact amounts may go up or down.

US claim number two: Canada Dumps Wood in the US Below Cost
In addition to arguing that Canada subsidies its logging industry, the US argues that Canadian companies are dumping softwood into the US market at less than the cost of production. Recently, both the WTO and NAFTA rejected Canadian challenges to US anti-dumping tariffs, although they provided new direction for how the US should quantify the anti-dumping tariff

In reviewing the anti-dumping tariffs, in June the US Department of Commerce (DOC) released a preliminary determination that lowered the tariff from 8.43% to 3.98%. However, this determination has no legal effect. While the change appears to be a victory for Canada, in its final determinations the DOC often corrects calculation errors that can change the numbers dramatically. The US softwood coalition has indicated publicly that they view this preliminary DOC determination to be riddled with errors that they will challenge.

Ironically, many Canadian producers increased production and exports despite the anti-dumping tariffs, driving commodity prices down and reinforcing the US claim that Canadian logging companies are dumping wood into the US market.

Canadian Subsidies Injure US Loggers
Recently the WTO and NAFTA panels both dealt big blows to the US position by ruling that the US method for determining whether the US industry is “injured” by Canadian exports was inconsistent with international rules. This is the most significant ruling Canada received from the trade panels. The issue has been remanded to the U.S. with instructions on how to calculate injury.

If ultimately the United States cannot conform with the NAFTA panel instructions, then the tariffs would be struck down and the money collected so far will be returned to Canadian producers. However, this would at best only produce a short reprieve, since the US coalition would inevitably refile countervailing duty and anti-dumping claims for a subsequent period of time and the battle would begin all over again, just as we’ve seen happen over the past quarter century.

Who Gets the Collected Tariffs?
As of spring 2004, the United States has collected about $2 Billion in tariffs from Canadian exporters. Despite consistent international rulings that the wood is subsidized, Canadian softwood producers, particularly in BC, believe they are entitled to regain these collected tariffs. Under a new US law called the Byrd amendment, this money is to be redistributed to US companies injured by subsidized foreign competition. This law infuriates Canadian competitors and many in the international community.

Who gets the money has also been a sticking point in the on-again, off-again negotiations between the two countries.

Negotiating a Softwood Deal
Despite all the posturing and rhetoric, most knowledgeable people believe the softwood dispute is unlikely to be resolved by trade panels; they believe the solution is to negotiate a new softwood agreement. The trade panels are important, however. They will influence the negotiating position of the parties in the ultimate agreement.

A new softwood negotiation is unlikely to produce much until after the November US elections. There simply is no incentive for the Bush Administration to risk alienating some states or companies by trying to push for a negotiated agreement.

After November, the question will be whether a new agreement will address the Canadian and provincial policies that produce subsidies–a permanent solution to the dispute–or will merely implement another quota to limit imports?

In BC a growing number of groups is pushing for policy reforms, but the writing on the wall is too faint to discern which approach will result.

What’s next?

The Federal election may hamstring BC’s strategy. The ever present Quebec dynamic may create additional domestic challenges that make a BC-first approach an uphill battle politically. BC has shown a willingness to go it alone on negotiations, but a governing Liberal minority hoping to increase support in Quebec, will be reluctant to allow BC to proceed over Quebec’s objection. And Quebec has been a hardliner on negotiations, promoting continued litigation.

despite the denials, US claims of subsidy are buttressed by the continuing profits being reaped by BC companies despite the tariffs. What other industry,can survive 27% tariffs are still produce large profits without subsidies?

Given Canada’s lack of historical success in ending the dispute, and the obstacles facing Canadian legal arguments, why do Canadian politicians take so much pride in the canard that Canada always wins on softwood?

As on many issues, it seems Canadian politicians and timber barons are so addicted to the current system that it is easier to play ostrich and deny subsidies than to roll up their sleeves and begin the hard work of creating a modern, sustainable and wealth-producing forest industry.

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