A trade dispute between the USA and Canada
Suhail Abboushi (2010) (excerpts_
1.One largest Canadian exports to the USA.
2005: Canada’s provinces shipped 21.5 billion board feet
of lumber (value US$ 7.4 billion). 1840s. 1890s, 1930s,
1980, 2006: Dispute - debate started in the USA &
continued over imported Canadian wood.
2. Resolutions of limited durations had been introduced:
• Trade barriers continued to be imposed: US
countervailing duty (CVD) and anti-dumping duty
(ADD)/tariffs
• Amounted to about $ 100 million a month
US lumber producers argue:
• Stumpage fee is non-market based, decided by provincial
governments, and is below market prices.
• Even a small per unit cost differential advantage for Canadian
producers results in substantial cost advantage over US
producers.
• Timberland in the USA, is auctioned in a market-based system of
bidding. In Canada, auctioning is limited.
• Canada does not allow non-Canadian companies to acquire
Canadian logs harvested in Canadian public timberlands
• Result: Does not allow non-Canadian companies to export
Canadian logs.
• Canadian share of the US market for softwood has been rising and
currently accounts for 34 percent.
Arguments by Canada
• The stumpage fee is not a “price.”
• It is a “tax” imposed by the government on the
“tenure holder” in return for the right to
harvest government-owned natural resource,
timberland.
• Stumpage fees in Canada are adjusted regularly to
reflect changes in the market conditions
• The fees do not provide competitive advantage to
Canadian producers
• The stumpage system meets the test of “adequate
remuneration” set out in US countervailing laws.
Canadian provinces place restrictive regulations
on the lumber companies with regard to the use of
timberland and the sharing of infrastructure costs.
Canada ships 70 percent of its lumber production to
the USA.
Disruption of the US market can be catastrophic for Canada’s
softwood industry.
The Canadians are alarmed because suppliers from Scandinavia,
New Zealand, and Chile have been supplying the US market and
grabbing a growing share of the market.
US imports of non-Canadian softwood have quadrupled in the last
decade.
To remedy the decline in its market share in the USA, Canadian
companies embarked on cost-cutting strategies.
• introduced laser technology in their mills which increases
lumber production of logs by 15 percent.
• Production cycles of 24 hrs to cut their cost per unit.
Such measures have partially softened the impact of tariffs
on market prices (see, Aldrich, 2005).
US timberland owners
Timberland owners in the USA are benefiting from this
trade dispute: e.g.
• Plum Creek Timber company which owns 8 million
acres of timber land in two dozen states. The
company is in timber business and also in real estate
development of logged off lands.
Canadian companies pay:
• income tax
• stumpage fees
• do not own the lands they log.
Unlike Plum Creek and other US companies, Canadian
companies cannot harvest timber land and then build
housing projects or other real estate development
Such projects added $ 75 million to Plum Creek’s
bottom line in 2004 (see, Cushman, 2006).
The US timber industry is increasingly relying on Mexican labor
for thinning and replanting jobs.
Many of the jobs “protected” by trade restrictions are now jobs
filled by imported labor
It is estimated that for every lumber or sawmill job protected
in the USA, there are 22-25 American workers in industries that
depend on Canadian lumber.
Curtailing the supplies of Canadian lumber or raising their prices
hurts the thousands of US workers dependent on these imports.
Again and again, and in March 2006, NAFTA arbitration
panels ruled for Canada, against the USA, a total of 11
times:
• Declared the tariffs illegal
• Demanded the return of collected duties to Canadian
companies who paid them (Canada Appeals, 2006).
Latest agreement
• In April 2006, Prime Minister, Stephen Harper negotiated with
President George Bush an agreement to suspend this dispute
for seven years
• Both sides agreed to return to the previous regime of
“managed trade.”
• The USA will drop the tariffs, both CVDs and ADDs
• Return 4 billion of the US$ 5 billion already collected in tariffs
• US will keep $ 1 billion : half of that will be given to members
of the Coalition of Fair Lumber Imports who initiated litigations
against Canada.
• Canada agreed to cap its share of the US market at 34 %
• Canada to impose an export tax and limit its shipments
of lumber if prices in the USA were to fall below their current
levels.
See: Table III summary of export taxes in relation to domestic
price in the USA.
Critique:
Canada’s constitution and timberland ownership
Canada’s constitution confirms that:
forestland ownership belongs to the provinces
each province has its independent method of managing its
timberland.
all provinces have long-term land tenure arrangements giving
logging rights to logging firms.
companies pay stumpage fees for cutting the trees, hauling them
away, and planting replacements to sustain forestry in the forest
lands.
The US timber lobby does not recognize Canada’s constitutional
authority - brushes aside the Constitution issue and proposed a
remedy: sell Canada’s forest lands to private businesses or halt
imports of Canadian lumber!
In sum:
Canada’s public ownership of timberland is not a trade
issue.
Canada’s Constitution assigns exclusive authority to
provincial governments over natural resources like
timberland.
Stumpage fee is not lower than “market price”
British Colombia designated 20 percent of its forest land to be
managed in an open-auction free market system.
The province decided to use the prices set through this “free-market”
mechanism to determine the stumpage fee rates for the rest of
the province’s forests, so that the stumpage fees would not be lower
than the “market” price.
To this date, this “free-market” arrangement has not resulted in any
price or stumpage fee reductions.
The stumpage fee charged by the province under the traditional
system was not artificially lower than the “market” based price.
Complexity of fee calculations:
The precise stumpage fee calculations are complex and vary across
provinces.
Canadian timber companies are under numerous restrictions that
further complicate the calculation of stumpage fees, e.g.,
1. Canadian companies are not allowed to log “at will” – they are
restricted by “Annual Allowable Cut.”
2. Exporting raw logs is prohibited. Timber companies are required to
own and operate local saw mills.
3. Canadian companies are required to build and maintain roads and
highways to timberlands.
4. These companies are required to replant all logged out lands.
5. They may not use logged out lands for any
commercial development – the government continues to own those
lands.
Observers and analysts of this dispute situation agree that the impact
of this web of regulations and restrictions on a uniform pricing, or
stumpage fee, in Canada’s provinces is difficult to ascertain.
Profitability
The Global Lumber/Sawnwood Cost Benchmarking Report
(December of 2005 by International Wood Markets
Research and other organizations)
US West Coast sawmills with advanced technologies are
the most profitable in the world – about three times the
average rate of profitability world-wide.
British Columbia’s mills, which are equally advanced in
technology and capacity as the West Coast mills, were the
third most profitable, lagging behind the US mills, despite
the lower priced timber they have access to.
All sides to the dispute hope:
April 2006 agreement could bring a lasting solution to the
conflict and let market solutions prevail
Doubtful that this conflict would have a lasting resolution:
Reasons…
1. US disregard for agreements
2. Can. Land-ownership structure versus US strategy of
acquisition
3. A pattern of managed trade interim solutions.