SOFTWOOD LUMBER TRADE UPDATE

Former Special Trade Ambassador Peter Scher made it exceptionally clear in a September 24 1999 letter to Canadian Minister for International Trade Pierre Pettigrew that the Canadian government needed to influence provincial governments successfully toward reforming stumpage policies and timber practices, or accept the trade remedy consequences.

Expiry of the United States-Canada Softwood Lumber Agreement of 1996 occurred on March 31, 2001 with no agreement on an extension or further quota arrangement.

Ever the optimist, Bob Rae has actually been saying that Canada can take on the US lumber industry, and win. A lot of stock - too much in our view - is attached to the fact that three countervail cases in twenty years have gone largely in Canada's favour.

Nonetheless, the Canadian softwood lumber industry has taken a beating in all three previous lumber countervail cases, spending millions of dollars in legal and lobbying fees to fight US claims of provincial and federal subsidisation.

As former Canadian trade official Gerry Shannon reminded us in a March 10, 2000 article in the National Post, "We folded our hand in previous rounds on softwood lumber largely because the prospect of fighting trade cases against the U.S. was considered too costly and fraught with risk, given the U.S. system's arbitrary and capricious nature." This is the single most important reason that, faced with renewed countervail threats in 1995, Canadian interests signed on to the 1996 Softwood Lumber Agreement.

During the January 30 Finance Committee hearing on Robert Zoellick's nomination for USTR, Senator Snowe of Maine described the bilateral lumber trade as, "…a serious and persistent problem…" The Senator implored Mr. Zoellick to "address this flawed arrangement" and make this issue "your immediate and top priority." She expressed the hope that "we can get a permanent agreement…everything else has been a band aid approach…"

In reply, Mr. Zoellick noted that in his discussions on the lumber issue, "there seems to be frustration at every corner." He noted ominously that his discussions had indicated that an extension of the Softwood Lumber Agreement was not likely to elicit much domestic support. A lot of people, he said, are "unhappy with that too." As a result, he suggested it would be necessary to try to come up with something different. While acknowledging that US trade remedy tools have a place in aggressively addressing trade problems, he did say that, like in the business community, "the name of the game is opening up markets," and "the goal …is to reach something that works for both sides…"

Since being appointed as USTR, Mr. Zoellick has signaled clearly that the US government will not stand in the way of double track CVD and AD investigations to be launched by the US lumber industry. There are some indications that the US industry will be seeking the imposition of duties on Canadian lumber imports on the order of 40% of value.

Zoellick has indicated that he warned Canadian Trade Minister Pierre Pettigrew during their meeting in February of how politically charged the issue is in the United States. He urged Pettigrew to consider any other steps that Canada might take as the agreement ended so as not to make the problem worse. He reportedly suggested that an acceptable approach would be for Canada to apply voluntarily an export tax to softwood lumber sold in the United States.

Pettigrew rejected Zoellick's suggestion, preferring to avoid any commitments for as long as possible.

Pettigrew's position is understandable: not only are there deep divisions among the provinces regarding the appropriate posture vis-à-vis the US, there are aboriginal, environmental, and labour interests at play as well. Within the Canadian central government there are disagreements over the core strategy, and growing paralysis associated with inter-ministerial bureaucratic rivalries.

For his part, Pettigrew tried with little success to get US support for the concept of putting the issue before special envoys who would be tasked with finding a solution. This too failed to inspire Mr. Zoellick.

Canadian options are limited largely because of their inability to forge a functional consensus. They would do well to keep in mind Franklin's famous observation: "We must indeed all hang together, or, most assuredly, we shall all hang separately." Longer-term options include pursuing the dispute through a NAFTA binational panel or a WTO dispute panel.

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