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The Canada-US Softwood Lumber Dispute

The Canada-US softwood lumber dispute has been one of the longest and most significant trade disputes between the two countries in modern history. Central to the dispute is not only competition between Canadian and US softwood lumber companies, but also conflict over basic forestry management styles. This article discusses the North American softwood lumber industry and explains the nature of the dispute, including its basic issues, its history and the signing of the 2006 Softwood Lumber Agreement.

The North American Softwood Lumber Industry

Structure and importance of the softwood lumber industry

Issues in the Canada-US Softwood Lumber Dispute

What exactly is the softwood lumber dispute about?

History of the Canada-US Softwood Lumber Dispute

Overview of the dispute between 1980 and 2001

2001-2006 Canada-US Softwood Lumber Dispute

Issues and litigation in the recent Canada-US softwood dispute

2006 Canada-US Softwood Lumber Agreement

Highlights of the recent Canada-US softwood lumber deal

Sources and Links to More Information

List of article sources and links to more on this topic

*Note: This article was originally written by Rhonda Parkinson. It has since been altered and updated by Jay Makarenko.

The North American Softwood Lumber Industry

Structure and importance of the softwood lumber industry

What is Softwood Lumber?

It is important to remember that the Canada-US softwood lumber dispute does not involve the entire North American lumber industry, but simply one component; namely, the softwood lumber sector.

Softwood is a classification of wood based upon the tree’s method of reproduction. Softwood trees are gymnosperms, developing from seeds that produce no outer covering. A pine cone is an example of the type of seed produced by a gymnosperm. Hardwood trees, on the other hand, are angiosperms, growing from seeds that are fully enclosed. While softwood trees have needles or scale-like leaves, hardwood trees have broad, flat leaves. Softwood includes a number of trees such as cedar, Douglas fir, pine and spruce commonly found in North America.

Softwood forests are found in both Canada and the United States. In Canada, softwood forests make up two-thirds of forested land available for timber production, and can be found in most provinces and territories. The largest Canadian softwood forests are in British Columbia. In the United States, softwood forests are predominant in the Pacific Northwest and in the southern US.

Softwood Lumber Industry

Softwood lumber forms the bulk of wood used commercially in North America. It has a wide range of uses, the most important of which is for structural building components. Softwood is also used for furniture, millwork (mouldings, doors and windows), paper production and for various types of boards, such as MDF.

Canada is one of the largest softwood lumber producers and exporters in the world, with a large portion of the industry in British Columbia. Canadian export of softwood lumber to the US is a multi-billion dollar industry, employing thousands across the country. In 2005 alone, Canada exported 21.5 billion board feet of lumber to the US, totaling $8.5 billion in trade (Foreign Affairs and International Trade Canada, 2006).

Different Forest Management Styles

A key element of the softwood lumber dispute involves differences between Canada and the US concerning forest ownership and management styles. In the United States, the majority of forest land is privately owned; nearly 90 per cent of lumber production takes place within privately owned forests. Under this system, forested land is held in fee-simple ownership, whereby the owner (and his/her heirs) can manage, sell or transfer the property as s/he sees fit.

The situation is very different in Canada, where more than 90 per cent of the nation’s forests lie within lands owned by federal or provincial governments (also known as Crown land). The provinces own the majority of Crown land (78 per cent), while the federal government owns 22 percent. Overall, the provinces own 90 per cent of land classified as productive forest land, that is, land capable of producing more than a certain quantity of wood annually. The territories fall into a separate category, and will be discussed later.

This difference between Canada and the US, in terms of public and private ownership of forestry resources, has led to a significant divergence in the stewardship of their respective forestry industries. In the United States, companies compete for the right to harvest wood through an auction method on the open market.

In Canada, companies wishing to harvest wood from government-owned land do not compete with one another on the open market. Each company enters into a tenure agreement with the provincial government, whereby the company is granted a licence to harvest trees from a specified portion of Crown land. Tenures can be of short- or long-term duration. They may be area-based or volume-based tenures, granting the company either the right to manage the area or simply to obtain a specified volume of wood. The tenure holder then pays the provincial government a fee for the wood they harvest, commonly referred to as a “stumpage fee.”

A similar situation exists in the territories, where significant portions of federal Crown lands are located. In recent years, the federal government has handed responsibility for managing these lands to territorial governments, while retaining ownership. Accordingly, companies wishing to harvest wood enter into an agreement and pay stumpage fees to the territorial government, not the federal government.

Each province or territory is responsible for setting the terms of tenure agreements. All tenure agreements require the tenure holder to follow responsible conservation and forest management practices. This is particularly true of longer-term tenures, where the company is granted a licence to manage the designated forest area.

Each province or territory is also responsible for the method of determining stumpage fees. Often, governments factor in non-market-based criteria when setting stumpage fees, such as provincial revenue goals or the job-creation potential of the contract. Stumpage rates may also reflect the cost, to the forest company holder, of following responsible forest management policies. The goal is to encourage forest companies to be “good stewards” of the forest. Consequently, stumpage fees are often lower than the market price.

Issues in the Canada-US Softwood Lumber Dispute

What exactly is the softwood lumber dispute about?

The softwood lumber dispute comprises many different issues. The following provides a brief overview of a few key elements.

Provincial/Territorial Stumpage Fees

Canada’s system of stumpage fees, whereby forest companies pay a fee to a provincial or territorial government for the right to harvest and/or process wood on a specific piece of land, is a major source of contention. The US contends that Canada’s provincial and territorial governments are subsidizing forestry companies by setting the stumpage fees too low. This gives Canada’s softwood lumber exporters an unfair pricing advantage over American softwood suppliers, who must sell their lumber at a price that reflects the real economic cost of harvesting the wood.

International trade laws stipulate that if Canada is subsidizing the softwood lumber industry, the United States has the right to even out the situation by applying a “countervailing duty” to imports of Canadian softwood lumber. International trade panels have ruled, however, that Canada’s system of stumpage fees does not meet the legal definition of a subsidy.

Allegations of Canadian Dumping

A more recent issue in the softwood lumber dispute involves American claims that Canadian forest companies are “dumping” lumber — pricing softwood lumber in the US market at a price below the cost of production or, at least below the price for which it would sell in Canada. The Americans allege that “dumping” has allowed Canada’s softwood lumber exporters to claim a higher portion of the American softwood lumber market than would otherwise be the case. In this regard, the US has won several decisions under the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) on this issue, although both concluded that the mechanism used by the United States to determine the percentage of duties to be applied was flawed.

Canada’s Multi-Jurisdictional Forestry Management System

Attempts to resolve the ongoing softwood lumber dispute between Canada and the United States are complicated by the number of players involved. Instead of dealing with one government (Canada), US trade negotiators must enter into talks with, and understand the forestry management systems of, several provincial governments.

The process is further complicated by the frequent lack of consensus among the provinces over how softwood lumber negotiations should proceed; a concession that one province is willing to make in order to reach an agreement may be unacceptable to another. Furthermore, the provinces may also disagree with the federal strategy. Prior to reaching the most recent agreement in 2006, for example, the federal government took a very adversarial position towards the United States, at least publicly. By contrast, several provinces, such as British Columbia, made it clear they were more interested in reaching a compromise with the US than in starting a trade war.

History of the Canada-US Softwood Lumber Dispute

Overview of the dispute between 1980 and 2001

The softwood lumber dispute between Canada and the United States has been an ongoing disagreement which began in the early 1980s. In actuality, there have been four different trade disputes, which are commonly referred to as Lumber I, Lumber II, Lumber III and Lumber IV. The following provides an overview of each dispute.

Lumber I: 1982-1983

The first Canada-US lumber dispute occurred in 1982, when the US Department of Commerce investigated the stumpage programs of British Columbia, Alberta, Ontario and Quebec. Upon completing its investigation in 1983, the Department of Commerce concluded that the provincial stumpage programs were not open to countervailing duties, because stumpage was generally available and not limited to a specific industry. Under US law, a good from another country is only considered subsidized if the program is available only to a specific industry. Provincial stumpage programs, however, were available to the entire timber sector, not just to the softwood lumber industry.

Lumber II: 1986-1987

Following the first softwood lumber dispute, two significant changes occurred. First, the US Department of Commerce began to apply US trade law more aggressively, especially in natural resource countervailing duty cases. Second, the Coalition for Fair Lumber Imports, the US lumber industry coalition and lobby group which favours high duties on Canadian softwood lumber, emerged as a well-funded and politically connected group in the US.

In 1986, the US Department of Commerce initiated another investigation of Canadian stumpage programs, this time concluding that they represented unfair subsidies. As a result, the US government levied a 15 per cent tariff on Canadian softwood lumber imports.

Later that year, the governments of Canada and the United States signed a five-year Memorandum of Understanding (MOU), under which the US would drop its 15 per cent tariff. In its place, the Canadian government agreed to impose a 15 per cent export charge on lumber exports to the US. The MOU also allowed provinces and territories to replace the export charge through other policy changes, such as increased stumpage fees.

The Memorandum meant that Canadian softwood companies would have to submit to a 15 per cent charge when exporting their products to the US. However, it did have several advantages for Canada. By making it an export charge collected by Canada, the money was kept within the country, as opposed to going to US coffers in the form of a countervailing duty. Moreover, it gave Canadian companies some measure of predictability, as Canada itself controlled the level of the charge, as opposed to it being controlled by US authorities.

It is important to note that under the Memorandum the Canadian government did not admit that stumpage fees represented a form of government subsidies. Instead, it simply volunteered to impose the 15 per cent export charge on softwood lumber exports.

Lumber III: 1991-1996

The Memorandum increasingly became viewed by some provinces, in particular British Columbia, as an infringement of provincial sovereignty. Pressure grew within Canada to eliminate the Memorandum, and the federal government unsuccessfully attempted to negotiate its termination with the US government. In 1991, Canada unilaterally withdrew from the agreement and ended the practice of imposing a 15 per cent charge on softwood exports to the US.

This initiated another investigation of provincial/territorial stumpage fees by the US Department of Commerce. In 1992, the Department imposed a 6.51 per cent countervailing duty on Canadian softwood lumber (although, the precise duty varied from province/territory to province/territory, depending on its particular stumpage programs).

This led to a number of legal battles between Canada and the United States under the Canada-US Free Trade Agreement. As a result of these battles, the US Department of Commerce eventually revoked its countervailing duty order in 1994. That same year, Canada and the United States agreed to implement a consultative process on softwood lumber trade in order to eliminate any further trade disputes.

This consultative process resulted in the 1996 Softwood Lumber Agreement. Under the agreement, Canada was permitted to export 14.7 billion board feet annually to the United States free of any export charges or duties. Exports above this threshold would then be open to escalating charges. The US, in turn, agreed not to initiate a trade case for the duration of the agreement. It is important to note that these restrictions applied only to the softwood exports of Alberta, British Columbia, Ontario and Quebec.

For more information on the 1996 Softwood Lumber Agreement:

2001-2006 Canada-US Softwood Lumber Dispute

Issues and litigation in the recent Canada-US softwood dispute

The 1996 Softwood Lumber Agreement managed to bring some level peace in Canadian-US trade relations in softwood lumber. In 2001, however, the agreement expired, leaving both countries without a framework for managing softwood lumber trade. This led to another softwood lumber dispute between Canada and the US, commonly referred to as Lumber IV.

US Actions Against Canadian Softwood Lumber

Immediately following the expiration of the 1996 Agreement, the US Coalition for Fair Lumber Imports filed a countervailing duty and anti-dumping petition against the Canadian softwood lumber industry. This represented the first time allegations of dumping had been made against Canadian companies.

In 2001, the (US) International Trade Commission made a preliminary ruling that subsidies to Canada’s softwood lumber industry posed a threat of injury to the United States softwood lumber market. In August 2001, the US Department of Commerce imposed a countervailing duty of 19.31 per cent on Canadian softwood lumber imports.

In October 2001, the US Department of Commerce determined that Canadian companies were “dumping” softwood lumber (selling it in the US market at a price below market value) and that an additional “anti-dumping” duty of 12.57 per cent should be applied to US imports of Canadian softwood lumber.

In April 2002, the Department of Commerce reached a final determination that the countervailing and anti-dumping duties should be lowered to 18.79 per cent and 8.43 per cent, respectively. The total amount of duties charged on imported Canadian softwood lumber was set at 27.22 per cent.

Litigation of the Softwood Trade Dispute

Canada responded to the duties by launching several trade challenges. At both the World Trade Organization (WTO), and under the North American Free Trade Agreement (NAFTA), Canada requested separate panels to examine all three determinations made by the US Department of Commerce: 1) Canadian softwood lumber exports are unfairly subsidized; 2) the subsidies pose a threat of injury to the US market; and 3) Canadian lumber firms are “dumping” softwood lumber onto the US market.

The history of this litigation has been rather complex, largely due to contradictory rulings by separate panels. Additionally, rulings against the US have often been based on technical issues, or the need for more information, as opposed to a clear victory in Canada’s favour for the right to export softwood lumber to the US duty free. Due to the complexity of the issues, both countries often hail rulings as victories.

Under NAFTA, a July 2003 ruling supported US anti-dumping duties, but also ruled that the method used to calculate the duties was flawed. Similarly, in August 2003, a NAFTA panel ruled that the Canadian softwood lumber industry was indeed being subsidized, but, again, that the method the US used to determine the level of subsidy was flawed (resulting in excessively high duties).

Despite these findings, in August 2003, a subsequent NAFTA panel ruled that the US had not provided sufficient evidence to show that domestic softwood lumber producers were threatened with injury from Canadian softwood lumber imports. In 2004, following similar rulings by subsequent panels, the US requested an Extraordinary Challenge Committee under NAFTA to review the issue. In August 2005, the Committee affirmed the original decision. This was significant, as countervailing and anti-dumping duties can only be imposed if the dumped or subsidized imports are deemed to cause, or have the potential to cause, a threat of injury to the domestic industry.

In March 2006, a NAFTA panel ruled in Canada’s favour, finding that the Canadian stumpage program did not constitute a subsidy of softwood lumber exports. By this time, the total duties collected by the US had reached $5.2 billion (CBC, 2006).

The WTO panels customarily made rulings similar to those of the NAFTA panels. However, in August 2005, the WTO reversed itself on an earlier decision, concluding that Canadian softwood lumber imports did constitute a threat of injury to the US market.

Dispute over Repayment of Duties

The contradictory rulings of the NAFTA and WTO panels led to a further dispute over whether or not the United States was obligated to repay billions of dollars in softwood lumber duties it has collected. Canada took the position that the US must return billions of dollars in duties it has charged on imports of Canadian softwood lumber. The US took that position that Canada must return to the bargaining table before it would discuss any repayment of duties. Canada broke off scheduled talks on softwood lumber after the US announced it would ignore the decision of the 2005 NAFTA Extraordinary Challenge Committee and would continue to pursue its case at the WTO.

2006 Canada-US Softwood Lumber Agreement

Highlights of the recent Canada-US softwood lumber deal

In April 2006, the Canadian and US governments announced that they had reached a framework agreement for settling the softwood lumber dispute. In July 2006, representatives from both countries formally signed the legal text of the agreement, and it was passed into law by the federal Parliament in December 2006.

Highlights of the 2006 Softwood Lumber Agreement

Under the new softwood lumber agreement, the United States agreed to remove its countervailing and anti-dumping duty orders on Canadian softwood lumber. Furthermore, the US agreed to return more than $4.5 billion in duties it had collected since 2002. This represented a large portion of the total duties it had collected. The US also agreed not to initiate any new investigations against Canadian softwood lumber during the period of the agreement.

In exchange, Canada agreed to a cap on its softwood exports to the US at 34 per cent of the US market. Furthermore, Canada agreed to impose an export charge on Canadian softwood lumber exports when the price of lumber is at or below US$355 per thousand board feet. These charges are collected by the federal government, and then transferred back to the provinces.

Both Canada and the United States further agreed to terminate all litigation before the entry into force of the agreement (such as pursuing cases through NAFTA and the WTO). The 2006 Agreement also provided a broad framework for dispute settlement. Disputes relating to the agreement are to be resolved through a final and binding dispute-settlement process. The process is to be neutral, transparent and expeditious.

The new agreement only applies to the provinces of Alberta, British Columbia, Saskatchewan, Manitoba, Ontario and Quebec. The Atlantic Provinces and the territories are excluded from the agreement because their timber industries do not operate on a provincial/territorial stumpage fee system. As such, they may export softwood lumber to the US free of any restrictions or duties.

The length of the agreement is seven years, beginning in 2006, with an option to extend it for an additional two years. Although, under the initial agreement signed in July 2006, either country could unilaterally exit after three years.

Amendments to the Initial Softwood Lumber Agreement

While the initial Softwood Lumber Agreement was signed in July 2006, there remained some opposition in the Canadian softwood lumber industry, as well as from the government of British Columbia. Of particular issue was a provision that allowed either Canada or the United States to unilaterally terminate the agreement after only three years. The concern was that this would undermine the value of the agreement, and allow the US to reintroduce duties unilaterally as early as 2009.

In response, the federal government negotiated with the US to rework the deal, to make it harder for the US to exit the agreement. For example, under the amendments, if the agreement isn’t renewed, or if the US unilaterally decides to terminate the agreement, then it cannot re-impose duties until one year after the end of the deal. The US is also now required to provide Canada with six months’ notice before ending the agreement, up from three months in the initial deal.

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