TVO: Why the U.S. has Canada’s lumber industry shaking like a leaf

It seems as if the softwood lumber dispute has been going on forever — so what’s at the heart of it, and why can’t someone sort it out?

 Logs being unloaded at Murray Brothers Lumber Company woodlot in Madawaska, Ontario. (Sean Kilpatrick/CP)

Logs being unloaded at Murray Brothers Lumber Company woodlot in Madawaska, Ontario. (Sean Kilpatrick/CP)

U.S. Commerce Secretary Wilbur Ross announced new duties on Canadian softwood lumber early this week — the latest in a long-simmering dispute between the two countries. But what’s at the core of the conflict? And why does this keep happening?

Why is the U.S. all tied up in knots?

The dispute centres on softwood lumber — wood from trees such as cedar, pine, and spruce, used mostly for housing and home renovations. At issue is where the trees are grown. In Canada, most forestry happens on federal or provincial land, while in the U.S. it’s mostly private.

American companies argue that Canadian provinces offer forestry companies lower stumpage rates (the fee a company pays to harvest trees) than owners of privately held land are able to. These lower costs mean Canadian companies can sell their lumber for lower prices, giving them an unfair advantage in the U.S. market.

But the U.S. needs imports from somewhere, because it can’t fulfill the needs of the market on its own. In fact, Canada supplies about a third of U.S. softwood lumber.

Why is this a problem now?

The most recent attempt to put this decades-old dispute to rest — the Softwood Lumber Agreement — expired in October 2015, which led to a one-year standstill period during which Canada and the U.S. tried to negotiate a new trade deal. But the negotiators couldn’t find common ground.

So the year ended, and American lumber companies filed complaints with the federal government. In January, the U.S. International Trade Commission ruled that softwood lumber products from Canada were causing “material injury” to American industry. This opened the door for the U.S. Department of Commerce to determine whether duties should be imposed on Canada.

On Monday, it did just that. The commerce department announced they would set countervailing duties of 3 to 24 per cent on Canadian lumber imports valued at more than US$5 billion. Countervailing duties are applied when one country subsidizes an industry in a way that threatens to harm another country. Five large Canadian firms are subject to specific duty rates (which explains the range). The rest of the industry will be subject to a 20 per cent duty. The commerce department will also enforce the duties retroactively.

And these tariffs are only the beginning. In June, the Department of Commerce will decide whether to impose anti-dumping duties on Canada as well. The duties will be levied if the U.S. determines prices for Canadian lumber there are lower than prices in Canada, and that lumber is being “dumped” on the U.S. market, harming the American industry.

The U.S. will finalize the tariff rate by the end of the year, and only then can Canada formally dispute it, through the WTO or through NAFTA.

What does this mean for Ontario?

Ontario is the third largest exporter of lumber to the U.S., after British Columbia and Quebec, accounting for 7.9 per cent of exports by sales volume — that’s about $500 million worth of wood. The industry supports 172,000 direct and indirect jobs in the province and generates $15.5 billion in revenue, according to a release from the Ontario government.

This lumber dispute could hurt producers in Ontario and Quebec more than those in B.C., because a higher proportion of producers in the central Canadian provinces are smaller, and have less cash on hand, some analysts say. So it will be more difficult for them to pay retroactive duties and stay afloat.

“The Ontario government fully supports our forestry sector and the critical role it plays in the success of the provincial economy,” said Jim Peterson, Ontario’s new softwood lumber representative in an emailed statement. “The U.S. Department of Commerce’s decision to impose unreasonable duties will put undue financial pressure on our Ontario lumber producers and remanufacturers.”

Why do I feel as if I’ve heard all this before?

Insiders call this Lumber V — that is, the fifth instalment of these disputes. The problem dates back to the 1980s. Last time, it took five years for Canada and the U.S. to resolve their differences with a bilateral agreement.

Why can’t we figure this out once and for all?

“Canada and the U.S. have two very different approaches to forestry management that mean that this issue will never go away,” says Mark Warner, a trade lawyer. Canada tends to win before WTO or a NAFTA dispute-settlement panels, but Warner says it is on “narrow, legalistic grounds.” He adds: “What ordinary people believe to be subsidization is what Canada is doing.”

As long as Canadian lumber is harvested on public land and producers have the advantage of lower stumpage fees, we’ll be fighting this fight, Warner says. “The issue won't go away unless we adopt a more market-based way of setting stumpage fees off crown land and end restrictions on export of raw logs.”

“To me, the mystery is in the inability for elite opinion in Canada to address the possibility that perhaps part of the problem lies on our side of the border.”