Soft Wood, Hard Dispute

The State Department transcript of the October 25 Ottawa press conference records laughter after both the question and Secretary Rice’s response. But nobody in Canada is laughing now.

It’s called the softwood dispute. Frank McKenna, the Canadian ambassador to the United States, said recently that Canadians “are talking about it in all the cafés all over Canada.”

Our northern neighbor produces more softwood lumber than any other country, and the United States consumes more than any other country. When all that Canadian wood crosses the 49th parallel, the United States slaps a tariff on it. Canadians cry foul, as did Prime Minister Paul Martin, who complained during the secretary of State’s visit that “Friends live up to their agreements.”

Rice’s position in Ottawa was as blunt as diplomacy between friendly countries allows. “We’re going to have disputes,” she said. The Canadian press concluded that she had “straight-armed” Canada on the issue.

Just so. Compelling reasons exist for Rice’s softwood straight-arm. And only some of them have to do with softwood.

Spruce, cedar, pine, Douglas-fir, and other easy-to-saw coniferous trees are called softwood, which is used for paper, fiberboard, framing, siding, fencing, and other applications. Softwoods are–how to put it?–softer than the hardwoods, which include cherry, walnut, and oak. Furniture and flooring are typically made of hardwoods.

Canada brims with softwood. British Columbia alone has enough forests to cover America’s 14 smallest states. In 2004, Canada exported 20,950 million board feet of softwood to the United States, which accounted for $7.5 billion in trade. A third of softwood consumed in the United States is produced in Canada. The industry employs 290,000 Canadians, and is central to the economies of 300 Canadian towns. When softwood takes a hit, Canada takes a hit.

In the United States timber rights are typically auctioned to the highest bidder. In Canada, 94 percent of the forest is owned by the government, and stumpage fees–the charge to harvest lumber–are set by government decree. American producers allege that the Canadian government sets stumpage fees at an artificially low level–one-third to one-fourth the actual value–to keep Canadian lumber workers and sawmills busy. United States producers claim this is a $4.4 billion (in Canadian dollars) annual subsidy of the industry.

FROM 1996 to 2001 an agreement between the two countries allowed Canadians to export 14.7 billion board feet to the United States every year–tariff-free. When that agreement expired in March 2001, the United States levied tariffs on incoming Canadian lumber, and then two months later imposed an additional anti-dumping duty, charging that the Canadian lumber was being sold south of the border for less than it cost to produce.

The tariffs’ effect was dramatic: the CBC reported that “Thousands in the industry lost their jobs, including about 15,000 forestry workers who were laid off in British Columbia.”

Attempts to settle the trade dispute have fizzled. In July 2003, American and Canadian negotiators announced that a tentative deal had been reached where Canada would limit lumber exports to a level equivalent to 30 percent of American consumption, down from 34 percent. Imports that exceeded the 30 percent figure would face a duty. But on July 31, 2003, when the Canadians refused more concessions, U.S. producers cancelled the deal.

The Americans insist now that tariffs will be lifted only when Canada opens its lumber markets to competitive bidding and removes its restrictions on log (as opposed to cut lumber) exports.

Why does Canada refuse to let the market work in its softwood industry? Herbert Gruel, professor emeritus of economics at Simon Fraser University, and a senior Fellow at the Fraser Institute, puts it bluntly: “[T]he existing system was created to help the development of the province’s vast timber resources. The industry got used to the benefits the system provided and removing them would impose substantial hardships. Many sawmill workers would have to accept lower wages or even lose their jobs. Much investment would have to be written off.” In other words, artificially-low stumpage fees are a make-work system benefiting Canadian loggers and sawmill operators.

At American expense. A United States industry group, the Coalition for Fair Lumber Imports, claims these Canadian subsidies have almost ruined the United States softwood industry. “Despite a strong home building market, U.S. lumber prices are touching new lows, bankruptcies and mill shutdowns are high and climbing higher, while Canada’s share of the U.S. market approaches 35 percent, a near record high.”

The U.S. Department of Commerce has now collected $3.5 billion in tariffs on Canadian softwood. The money sits in the U.S. Treasury. Canada wants the money back–hence the question to Secretary Rice–and the tariffs to end.

CANADA HAS FILED a dizzying array of legal challenges to the tariffs. Complaints have gone before a North American Free Trade Agreement dispute resolution panel, the World Trade Organization, the United States International Trade Commission, and the United States Court of International Trade.

Most of the decisions have gone against the United States. In an interim ruling, a WTO panel in May 2003 determined that the United States had failed to prove that stumpage fees were a subsidy. In August 2003, a NAFTA panel ruled that although the lumber industry received aid from the Canadian government, the import duties were contrary to United States law. The U.S. Department of Commerce has countered with a battery of diplomats and lawyers, appealing here and there, winning some partial decisions, losing others, and arguing about the methodology to determine benchmark log prices, among other arcana.

IT’S CALLED the stall, and Canadians know it. Two senior Canadian advisors on the issue are quitting the negotiations after only seven months. Paul Tellier, former chief executive of Bombardier Inc. and Canadian National Railway Company, said in a November 1, 2005 interview, “I’m about to stop doing [the negotiations], because it’s getting nowhere.” Gordon Ritchie, a negotiator for Canada on the free trade agreement with the United States, said, “The Americans basically blew up the negotiations and have not shown any interest in resuming it.”

Why can’t this trade dispute between two neighbors with the longest undefended border in the world be resolved quickly and fairly? We are, after all, two great democracies, and the problem is but pine boards.

The answer is that it’s not about wood from Canada, of course. It’s about Canada.

Canadian conservative leader Stephen Harper knows it: he said the softwood standoff is due to the sour relationship between the Liberal party and Washington.

Indeed, last April Secretary Rice’s first scheduled trip to Ottawa was cancelled when Canada decided not to join the U.S. missile defense plan, deciding to accept American protection, but declining to pay for it. And then there’s Canada’s lack of support in the war against Islamist terrorists. And Prime Minister Martin’s penchant for bashing the United States in order to divert attention from his Liberal party’s scandals. The most recent demagoguery came during Martin’s October 24 dinner with Rice where the prime minister blamed America for rising Canadian crime rates. Martin said weapons were being smuggled into his country from the States. (The National Post was quick to point out that no evidence exists that gun smuggling has gotten worse.)

No, the softwood dispute won’t be settled soon. Condoleezza Rice had been secretary of State for nine months before she finally journeyed to Ottawa. Canada was the 40th country she had visited since taking office, even though Ottawa is a 90-minute hop from her office in Washington, D.C. To most Americans, 40th seems about right.

James Thayer’s twelfth novel, The Gold Swan, has been published by Simon & Schuster.