The United States – Canada softwood lumber dispute
is one of the most significant and enduring trade disputes
in modern history. The dispute has had its biggest effect on British Columbia
, the major Canadian
exporter of softwood
lumber to the United States
The heart of the dispute is the claim that the Canadian lumber industry is unfairly subsidized by the federal and provincial governments. Specifically, most timber in Canada is owned by provincial governments. The price charged to harvest the timber (the "stumpage fee") is set administratively rather than through a competitive auction, as is often the practice in the United States. The United States claims that the provision of government timber at below market prices constitutes an unfair subsidy. Under U.S. trade remedy laws, foreign goods benefiting from subsidies can be subject to a countervailing duty tariff to offset the subsidy and bring the price of the product back up to market rates.
The Canadian government and lumber industry dispute the assertion that Canadian timber is subsidized on a variety of bases, including that the timber is provided to so many industries that it cannot be considered sufficiently specific to be a subsidy under U.S. law. Under U.S. trade remedy law, a subsidy to be countervailable must be specific to a particular industry. This requirement precludes imposition of countervailing duties on government programs, such as roads, that are meant to benefit a broad array of interests.
Since 1982, there have been four major iterations of the dispute.
In April 2006, The United States and Canada announced that they had reached a tentative settlement to end the current dispute. Under the preliminary terms, the United States would lift duties provided lumber prices continue to stay above a certain range. Below the specified range, a mixed export tax/quota regime would be implemented on imports of Canadian lumber. As a part of the deal, more than $5 billion in duty deposits collected would be returned.
- The first iteration of the softwood lumber dispute, commonly referred to as Lumber I, began in 1982 when the U.S. lumber industry petitioned the Department of Commerce (DoC) to impose a countervailing duty. Ultimately, the DoC found that Canada's stumpage system was not specific to any single industry and thus not countervailable. The U.S. lumber industry chose not to appeal this decision.
- Lumber II began in 1986 when the U.S. industry again petitioned the Department of Commerce. This time, the DoC did find Canadian forest programs to be countervailable and set a preliminary subsidy of 15%. Before the subsidy was imposed, the United States and Canada agreed to a Memorandum of Understanding that created a phased tariff.
- Lumber III started in 1991 when Canada informed the United States it was withdrawing from the Memorandum of Understanding. In response, the Department of Commerce self-initiated a countervailing duty investigation, and again the DoC imposed countervailing duties.
- This time, the Department of Commerce's determination was reviewed before a binational panel organized under the Canada–US Free Trade Agreement (the predecessor to North American Free Trade Agreement (NAFTA)). Normally, the DoC determination would be reviewed by the U.S. Court of International Trade. However, pursuant to the Canada–US Free Trade Agreement, Canada chose to have the determination reviewed before a binational panel, which ultimately consisted of three Canadians and two Americans. The panel found that the DoC's determination could not be supported by substantial evidence. The panel's decision was controversial for a variety of reasons. First, the panel voted on national lines. Second, the majority decision was based on the notion that U.S. law required the Department of Commerce to establish not only the existence of a subsidy, but also to find that the subsidy in fact benefitted the Canadian lumber industry. Many critics contended U.S. law could not be read to impose such a requirement (Congress subsequently amended the law to explicitly state there was no "effects test" under U.S. law). Also controversial was the claim made by the United States that two of the Canadian panelists had conflicts of interests. The U.S. challenged the panel's decisions and the panelists' alleged conflicts of interests before an extraordinary challenge committee. This committee again split on national lines with the U.S. member of the committee, Judge Malcomn Wilkey (retired) of the D.C. Circuit, writing a vociferous dissent. His dissent stated the panelists were conflicted and that its decision violated more rules of appellate review of agency decision-making than any opinion he had ever read. One of the Canadian judges on the Committee found that the panelists were remiss in their disclosure obligations, but that the alleged conflicts were not severe enough to warrant their recusal.
- In 1996, the United States and Canada reached a five-year trade agreement, The Softwood Lumber Agreement, officially ending Lumber III. Under its terms, Canadian lumber exports to the United States were limited to 14.7 billion board feet (34.7 million cubic metres) per year. However, when the agreement expired on April 2, 2001, the two countries were unable to reach consensus on a replacement agreement.
- Almost immediately after the Softwood Lumber Agreement's expiration in 2001, the U.S. lumber industry petitioned the Department of Commerce to impose countervailing duties. In addition, the U.S. industry for the first time brought an anti-dumping claim arguing Canadian lumber companies were also engaged in unfair price discrimination. On April 25, 2002, the United States Department of Commerce announced it had determined subsidy and anti-dumping rates, with a final subsidy rate of 18.79% and an average dumping rate of 8.43%, to give a combined CVD/AD rate of 27.22%. Specific companies were charged higher or lower dumping rates, including Abitibi-Consolidated (12.44%), Weyerhaeuser (12.39%), Tembec (10.21%), Slocan (7.71%), Canfor (5.96%) and West Fraser (2.18%).
- On August 13, 2003, a North American Free Trade Agreement (NAFTA) Chapter 19 panel ruled that the tariff is too high, although noting at the same time that the Canadian lumber industry is subsidized.
- On April 15, 2005, the Canadian Minister of Trade announced that the federal government would provide Canadian softwood lumber associations $20 million in compensation for their legal expenses stemming from the dispute with the United States.
- Another NAFTA Chapter 19 panel reviewed the determination made by the International Trade Commission that the U.S. lumber industry was under a threat of injury because of Canadian imports. Since the U.S. acceded to the World Trade Organization, it is necessary for the U.S. government to establish that a domestic industry is suffering injury or faces a threat of injury before countervailing duties can be imposed. U.S. law had required an injury determination for antidumping duties even before its accession to the WTO. The NAFTA Chapter 19 panel found the International Trade Commission's determination invalid. In addition, the panel took the controversial decision of refusing to allow the International Trade Commission to reopen the administrative record and in fact ordered the International Trade Commission to issue a negative determination after it reached another affirmative determination based on the existing record. Unlike the Lumber III panel, however, this panel's decision was unanimous. However, the U.S. government challenged its decision before an extraordinary challenge committee.
- In the meantime, because of an adverse WTO decision, the international trade commission reopened the administrative record pursuant to a special provision in U.S. law, the so-called Section 129 provision, and issued a new affirmative threat of injury determination in December 2004. This new determination allowed the countervailing and antidumping duty tariffs to remain in place.
- On August 10, 2005, the NAFTA extraordinary challenge committee unanimously held against the United States finding that NAFTA panel's decision were not sufficiently invalid to require vacatur or remand under the standards of NAFTA.
- On August 15 2005, the U.S. said it would not abide by the NAFTA decision because the Section 129 determination superseded the decision being reviewed by the NAFTA panel. This announcement prompted former Finance Minister Ralph Goodale to say that Peterson is considering Canada's options, which could include litigation or trade sanctions.
- On August 30 2005, the World Trade Organization which had previously ruled against the United States International Trade Commission finding of "threat of injury", upheld the U.S. International Trade Commission's new Section 129 "threat of injury" ruling. A NAFTA panel has not reviewed this decision. The legality of the use of the revised December 2004 International Trade Commission decision to continue to impose duties on Softwood Lumber Imports from Canada is before the U.S. Court of International Trade.
- On August 26, 2005, Canadian federal cabinet ministers remained defiant and unwavered in response to remarks by U.S. Ambassador David Wilkins comments to stop the "emotional tirades" in the softwood lumber dispute. Canadian International Trade Minister Jim Peterson said Washington should not confuse emotion with commitment and determination by Canadians to ensure the NAFTA is respected. Prime Minister Paul Martin used strong rhetoric that the dispute was undermining NAFTA and hinted that Canada can explore trade alternatives such as China. "Friends live up to their agreements", Martin said in calling on the United States to respect a ruling under the North American Free Trade Agreement on Canadian exports of softwood lumber.
- In September 2005, a U.S. lumber industry associated filed suit in the D.C. Court of Appeals challenging the constitutionality of the NAFTA Chapter 19 dispute settlement system.
- On October 18, 2005, Bill Clinton stated his general agreement with Paul Martin's position, stating that if he were the prime minister, he would do little differently. However, he did state that the Canadian government ought to return to negotiations.
- On October 24, 2005, U.S. Secretary of State Condoleezza Rice visited Ottawa on her first visit to Canada. Canadian Prime Minister Paul Martin talked with her about duties, but no response has been registered.
- On November 24, 2005, The U.S.Commerce Department announced it would comply with a separate NAFTA panel's order to cut a 16 percent duty on Canadian softwood lumber imports for now. Even though the Bush Administration still strongly disagrees with the repeated NAFTA rulings in Canada's favor, it says it will comply.
- In December 2005, the U.S. Commerce Department announced recalculated countervailing and anti-dumping duties on softwood. The new duties would be set at a total of 10.8 per cent.
- In March 2006, a NAFTA panel ruled in Canada's favor, finding that the subsidy to the Canadian lumber industry was de minimis, i.e., a subsidy of less than one percent. Under U.S. trade remedy law, countervailing duty tariffs are not imposed for de minimis subsidies.
- A tentative deal was reached in July, in which Canada got $4 billion of the $5.3 billion it lost because of the penalties with no additional tariffs to be imposed. Initially, there was a large opposition by several lumber companies from several provinces. However, during the following weeks the support, due to the possibility of no better scenarios, had increased and the Harper government was confident that there would be enough support for the deal so it would not be jeopardized. The government did not specify how many companies endorsed the deal nor did they implement a minimum for the deal to be salvaged.
- In August, Canadian Prime Minister Stephen Harper brought the new deal to Parliament for discussion and a possible confidence vote in which if the House of Commons would vote in majority against, it would have automatically forced a general election and annulled the deal. The Conservatives were in favor of the deal, while the New Democratic Party and the Liberal Party were against leaving the Bloc Québécois as the deciding party to support and for the survival of the deal.
- On September 7, 2006, Bloc Québécois Leader Gilles Duceppe endorsed the softwood lumber deal between the Canadian and American governments, effectively neutralizing any chance of an election coming out of a non-confidence vote. The next day, the Liberals confirmed they would vote against, although some MPs voted for the deal.
- On September 12, 2006, Canadian International Trade Minister David Emerson along with U.S counterpart Susan Schwab officially signed the deal in Ottawa. Despite being described by supporters of the deal as the best deal possible, Elliott Feldman an international and economic law specialist from the firm Baker & Hostetler in Washington, D.C. and a former director of the Canadian–American Business Council criticized the deal as "one-sided" and a "bad deal for Canada".
- On September 19, 2006, the deal passed its first reading in the Canadian House of Commons with a 172–116 majority.
- On September 27, 2006, the Canadian Press reported that Canada did not meet an October 1 deadline imposed by itself to implement the agreement. Withdrawal of some of the 30 issues regarding the deal was the main reason for the delay on complying to the deal.