Canada’s Softwood Lumber: Raw deal

The softwood lumber raw deal was dubbed “Amateur hour” by some of the industry representatives involved in the process.

Dietrich Rose/Corbis

The softwood lumber raw deal was dubbed “Amateur hour” by some of the industry representatives involved in the process.

On August 16, 1812, U.S. General William Hull surrendered Fort Detroit, without firing a shot, to a much smaller force of British, Canadian and First Nations troops. It still stands as one of the most humiliating defeats in U.S. military history, and Hull was court-martialled for cowardice.

It has taken the U.S. nearly 200 years, but they are close to getting even. A negotiated settlement in the softwood lumber war (which, ironically, has its roots in the aftermath of the War of 1812) could be finalized when Parliament reconvenes September 18.

So volatile is this file that at press time, the deal could still go either way. B.C., Ontario and Alberta provincial governments are unhappy with the final text, while Quebec sits on the fence. Forestry companies in all four provinces do not like it. Prime Minister Stephen Harper and International Trade Minister David Emerson have vowed to ram this deal through, and it looks like they will make good on that promise. Whether or not these two softwood generals meet the same fate as General Hull will be answered during the next federal election. Given the Conservative government’s minority position, that might happen sooner rather than later. But that the deal represents a humiliating defeat for Canada in this bitter trade war is self-evident – not just because of the terms of the deal itself, but because of the manner in which it was thrown together. “Amateur hour” was the term used by some of the industry representatives involved in the process. And while some of Canada’s largest forest products companies – Canfor Corp., Weyerhaeuser and Abitibi Consolidated – supported the deal as originally structured, many other mid-sized and small operators were outraged by it. For reasons known only to the people themselves, most industry executives (other than those who have supported the deal) initially took an oath of omertà refusing to criticize it in the open. Governments of the four major lumber-producing provinces – B.C., Ontario, Quebec and Alberta – initially signed onto the settlement. Only Quebec, at this point, is still fully on board; the other three are holdouts, at best. They want Harper and Emerson to re-open negotiations on the deal they signed July 1. Nothing doing, say the embattled pair. Why all the controversy? On an application by a U.S. lumber lobby group – the Coalition for Fair Lumber Imports – the U.S. Commerce Department and the U.S. International Trade Commission ruled in 2002 that Canadian lumber is subsidized, is being sold in the U.S. at below market prices (dumped), and threatens to injure U.S. producers. They slapped on combined duties of more than 27 per cent. Through a succession of appeals over four years to both the World Trade Organization and North American Free Trade Agreement dispute settlement panels, Canada succeeded in proving that Canadian lumber isn’t subsidized, it isn’t dumped and it doesn’t threaten injury to U.S. producers. Along the way, the U.S. has collected nearly $5 billion in what are now illegal duties. The 27-per-cent duty has been chipped away through some of these rulings, and currently stands at 10.8 per cent. But by U.S. law (and NAFTA Chapter 19 Dispute Settlement Panels do indeed have the force of U.S. law), the duties should have been eliminated more than a year ago, and all that money refunded to the lumber producers. The U.S., through a variety of ingenious (Canadians would say underhanded) legal maneuvers, has refused to comply. They very craftily used the WTO decisions, which are not legally binding and occasionally went against Canada, to trump the NAFTA rulings – all of which favoured Canada. Over the last 12 months, Canada and its lumber producers have been methodically taking the U.S. through its own court system to force compliance with NAFTA. A rabbit’s warren of legal cases has been slowly yielding the victories that would bring the U.S. into line, but that elusive final victory is still a few months away, and the U.S. ability to stretch out the litigation is nothing short of legendary. Enter the brand new Conservative government of Stephen Harper and his floor-crossing new trade minister David Emerson. (Emerson didn’t respond to requests for an interview for this article.) Expectations were high that these two, particularly Emerson, would hold the U.S. to account in a way that the previous Liberal administration just couldn’t do (despite its anti-American rhetoric). Then reality hit the forest industry on April 27, 2006, when the Harper government’s terms of surrender were presented: a two-page framework term sheet that had Canada agreeing to severe restrictions on its lumber exports for seven (possibly nine) years. They took the form of a sliding-scale export tax tied to the price of lumber (the lower the price, the higher the tax) or, if a province preferred, a combination of a lower tax rate plus quotas. And Canada has to abandon all the litigation cases, including the ones it has already won. For their part, the Americans would revoke the two duties, promise not to allow any more duty cases for the term of the agreement, and return 80 per cent of the money. That means the U.S. keeps $1 billion paid out by Canada’s lumber producers. Details would be worked out later. Russ Cameron, president of the B.C.-based Independent Lumber Remanufacturers Association, summed up this attempt at a negotiated settlement in a letter to the Union of B.C. Municipalities. He was seeking their help in destroying this deal before it could be finalized: [pagebreak] “What we have is a 10-per-cent duty that the U.S. is having trouble maintaining, where we can ship as much as we want, where we will get all our money back in six to 24 months, where we can preserve NAFTA Chapter 19, where we can set legal precedents, and where we can discourage future cases. Why would we want to trade that for a 10-per-cent or higher tax, and a quota, where we give up $1 billion, have no chance to get back what we pay for the next seven years, lose Chapter 19, lose all the legal precedents, and virtually guarantee a future case? Why would we want to snatch defeat from the jaws of victory?” Cameron has told anyone who will listen (he’s one of the very few in the industry who is prepared to talk openly about this deal) that if the framework goes through as currently written, it will all but destroy the value-added sector of the industry in B.C. These producers have been paying duties on the full value of their value-added products for the last few years, and will probably pay the export tax on the full value too. Why? Because even though there is a provision in the deal for remanufacturers to pay tax on the “first mill” price of the lumber they use (before they add their value to the product), the Americans have inserted a set of conditions that will disqualify the majority of remanufacturers. And even if they can qualify for that first mill price, they still have to pay tax on it. Their direct competitors in the U.S. can get the wood from B.C. without paying any tax at all. “The government thinks we will be fine if it blunts a couple of the nails in our bed of nails,” Cameron said. “In spite of being told many times that simply making us uncompetitive on a ‘first mill’ basis instead of an ‘ad valorem’ basis will not make us competitive, they again offer to tax us at ‘first mill’ and the U.S. attempts to make even that small concession worthless in the framework text.” It’s useful to look at how that original two-page term paper came to be signed on April 27 by Ottawa and Washington, seemingly with the support of provincial governments and even some industry players. It is not a pretty picture. In what has since become a trademark style, Ottawa speeded the development of the original two-page term sheet on such a tight schedule that neither the provincial governments nor the various industry players had time to properly analyze the effects. At the same time, provincial ministers were given the impression that if a deal could be initialled before 5 p.m. on April 27, the U.S. would not file an appeal (an extraordinary challenge) to the last NAFTA Panel decision – a decision that had given Canada another win and would have eliminated the countervailing duty (not the anti-dumping duty). After much back and forth (with various industry representatives still trying to get their hands on the document so they, too, could provide an analysis), Ottawa and Washington announced that they had reached an agreement. It was done so quickly that when the press conference was held in Washington, they still didn’t have a final text available. The next day, provincial and industry representatives discovered that the final text signed by Ottawa and Washington was not the same as the text they’d seen the day before. And there were some nasty surprises. Bruce Shaw of Terminal Forest Products – one of the companies now extremely unhappy with the agreement – outlined one of the discrepancies: “The final version on Friday had significant changes, one of which was about the money. The original from the embassy had an 80-20 split – it was the lesser of 20 per cent or $1 billion would go to the U.S. The final version was $1 billion, period.” What it means is that Canada leaves $1 billion in the U.S. regardless of what the 80-20 split would dictate. John Allan, head of the B.C. Lumber Trade Council, has said he believes the amount of money actually deposited (at the time the framework was initialed) was $4.6 billion – not $5 billion. In the rush to get the deal signed, the Americans pulled a fast one. If the deposits are indeed less than $5 billion as Allan suggests, the shortfall of nearly $100 million all comes out of Canada’s share. (It gets worse. The $1 billion donation to the U.S. was supposed to be split, with $500 million going to members of the Coalition for Fair Lumber Imports, $250 million to a joint U.S.-Canada lumber marketing initiative and $250 million for “meritorious” causes such as Katrina reconstruction. Now the Americans are saying that only $50 million will go to the marketing initiative while $450 million will go into the pork barrel… sorry, meritorious initiatives.) Shaw is quite blunt about this aspect of the agreement: “Paying money to the coalition is a non-starter,” he said. “If they want 20 per cent of Terminal’s money, we’ll pay to charities and good causes – but we want to control those levers.” The other last-minute change – not in the original document – was the U.S. wording on what are called anti-circumvention measures. This was the language that Premier Gordon Campbell said must change before he’d sign the deal. It requires provinces to submit forest policy changes (such as B.C.’s new market-based stumpage system) to the U.S. for approval. The Canadians were frantically trying to meet that April 27 deadline for the framework on the understanding that the U.S. would let that last NAFTA Panel Canadian victory stand and not file the ECC appeal. The U.S. filed it anyway. One of the Canadian lumber association heads, who declined (as did most other forest executives) to speak for attribution, summed up the framework. “In typical meek mild Canadian fashion, we enter the negotiations and stake out our final position as our opening position,” he said. “The U.S. stakes out a position as far on the edge as they can get it – and we have to move from the middle to the edge. I don’t believe for a second we have a negotiating team with the political will to force the Americans to the middle. “We’ve sent them letter after letter with analysis from everyone across the country telling them not to go there – and they went there. Which tells you a little bit about what their mindset is.” Once the deal was done, the extent of the capitulation started to sink in, along with the realization that in working up a detailed final legal text, Canada was going to have to attempt to claw back at least some of what was surrendered in that first two-page framework. In developing their legal text version of that two-pager, the Americans were driving in the opposite direction – much, much harder. Carl Grenier, executive VP of the Free Trade Lumber Council (which remains opposed to the agreement) pointed out that whenever a “framework” deal is signed with the Americans, you will do very well if, in drawing up the legal text, you can hold on to what you gained in the original deal. His remarks were prophetic. The deal got worse, not better. Here’s a summary of what Canada surrendered in the initial two-page framework agreement: • Canada agrees to let the U.S. keep $1 billion in illegally collected lumber duties, with $500 million paid to members of the U.S. Coalition for Fair Lumber Imports, $50 million for a lumber marketing initiative and $450 million into a U.S. account for “meritorious” projects (selected by the U.S. government, of course) • Despite having been found not guilty of the subsidy and injury case, Canada agrees to a convoluted set of export taxes (which could be as high as 22.5 per cent) and quotas, putting severe restrictions on its lumber producers for seven years • Canada agrees to end all litigation against the U.S., effectively wiping the slate clean of all the NAFTA Panel victories over the last four years. NAFTA’s Chapter 19 dispute settlement mechanism is now toothless • Canada agrees not to use NAFTA at all for the seven-year term of the agreement for disagreements over lumber. Instead, a new dispute settlement process is created. There is no indication as to whether or not the U.S. will pay any more attention to unfavourable rulings from these panels than it did from the NAFTA Panels • Any hope that free trade in lumber will ever be attained is lost, as the U.S. agrees only to talk about changes in provincial forest management policies (e.g., B.C.’s new market-based stumpage system) as a ticket out of the taxes and quotas • Anti-circumvention language remains, with one exemption for B.C.’s new market-based stumpage system. Provincial governments lose their control over not just forest policy, but over a significant chunk of their entire economic policy. Heaven help a province that decides, for example, to reduce industrial electric power rates. The U.S. surrenders virtually nothing in the original framework: • It agrees to revoke the duties – but the duties are illegal and should be revoked anyway • It agrees to dismiss any petition for other lumber duties for the seven-year term of the agreement. But if the trade adjudication processes were fair and unbiased, those petitions would be rejected anyway • It agrees to refund 80 per cent of the duty deposits. But legally, it should refund 100 per cent of the deposits. [pagebreak] In the weeks after the initial signing, Canadian and U.S. negotiators attempted to create a “merged” legal text of this framework that both sides could agree on. Once again, Canada committed two strategic blunders that virtually assured that these talks would go nowhere – at least nowhere for Canada. First, Ottawa decided to allow the Americans to “suspend” that ECC appeal they filed on April 27 (but weren’t supposed to). This one defies rational explanation (other than a somewhat sinister suggestion that Ottawa’s real motive here was to smack its own industry). The last NAFTA Panel on the countervailing duty had ordered the U.S. Commerce Department to revoke the duty because it had not been able to properly calculate a level higher than one per cent. The U.S.’s only recourse to avoid complying with this order was to appeal through an ECC. NAFTA has a strict schedule for ECCs, and in this case it would require a decision no later than August 10 – a decision that no one, including the Americans, expected to go in the U.S.’s favour. The decision is not appealable, and without Canada agreeing to the suspension, the decision would likely be out by now. By agreeing to a U.S. request to suspend the ECC (and there is nothing in the NAFTA rule book that allows either party to do this) Canada effectively took away the biggest leverage item it had while conducting detailed negotiations on the text. The two Ontario industry associations – the Ontario Lumber Manufacturers’ Association and the Ontario Forest Industries Association – were so incensed with this decision that they have filed a lawsuit against both governments to get them to comply with NAFTA. Having removed the best leverage it had, Canada then compounded the blunder by stating publicly that it wanted a final text agreed by June 15 at the latest so it could get legislation through the house before it prorogued on June 23. To no one’s surprise (outside Ottawa, that is), the U.S. refused to budge on any of the contentious language in the legal text. Ottawa’s deadline passed, and by the middle of June the talks had been adjourned. According to industry sources, B.C. alone made 22 submissions on language over the few weeks that these talks were under way – and almost none were accepted by the Americans. Despite lack of movement by the Americans, Ottawa initialed a final text of the agreement on July 1 (Canada Day, ironically). Four major items put forward by B.C. for resolution were not addressed, but Emerson signed it anyway. The prime minister had a meeting scheduled with U.S. President George Bush in a few days, and that took precedence. Particularly galling, for all the provinces and industry, was an escape clause in that final text that lets either party (but particularly the U.S.) out of the agreement after two years, with a one-year “standstill” clause to prevent the Americans from immediately launching another trade case against Canada. Industry and the provinces thought the $1-billion donation was to buy seven years of peace, not two years. It is still unclear what will happen when Harper and Emerson try to push their softwood deal through parliament. All three opposition parties have been hammering away at it, but it is far from certain if they have the courage to bring the government down over it. Either way, Canada’s credibility in the global trading community has likely suffered as a result of this. Even if the deal falls apart, the U.S. will never take this country seriously again in trade negotiations and whoever has to pick up the pieces will have an impossible task. And if the deal does go through, NAFTA’s dispute settlement mechanism – once viewed with envy by the rest of the world – is finished. This is what happens when you rush a negotiation – especially with the highly skilled Americans. Canada signed the framework term paper in a panic and conceded negotiating points that in four years of previous negotiations it had consistently refused to consider. The federal government has now pinned its survival on getting this abysmal deal passed by parliament – a matter of confidence, says Harper. Will the opposition parties call his bluff? Or will political expediency govern their actions as well? An axe to grind In 1939, three Kalesnikoff brothers started a lumber business in the small Interior town of Thrums (near Castlegar). Today, Kalesnikoff Lumber Co. employs about 250 people and churns out 65 million board feet of lumber a year. Most of the wood is exported to the U.S. Ken Kalesnikoff, VP and GM, can’t fathom why Canada negotiated a deal with the Americans at this juncture. “I don’t understand why, after fighting this battle for so long and spending all this money, we would capitulate at this point,” he says. “But I would rather continue the way we’re running right now than have to capitulate. So I’m prepared to roll the dice and hope like hell we can manage through the problems.” There’s a sense of betrayal in Kalesnikoff’s words: “I feel like, right now, that we are not only negotiating with the Americans; we’re also negotiating with my own federal government. To me they’re all the same. We aren’t getting any support here; we don’t get anything from anyone. We’ve tried to contact people – we’re on the outside looking in.” Canada’s gone soft John and Ross Gorman began their working lives in the Okanagan growing fruit, but a heavy frost put them on the ropes. In the 1950s they started Gorman Brothers Lumber to make fruit boxes that would generate income while their orchards recovered. The fruit connection is long gone, and Gorman Brothers now runs a specialty products sawmill in Westbank, producing high-grade spruce and lodgepole-pine boards. CEO Ron Gorman isn’t happy with the scope of the lumber deal, but he’s too polite to rip it apart in the same way his colleagues have done. “What is the effective thing to do?” he asks, musing on how to get the seemingly intractable dispute settled, “If you chuck sand in their eyes, you don’t get it. If you stand back and are passive, you don’t get it. I would guess if the industry stood in the way of this they’d be viewed as greedy.” What most upsets Gorman is the strategy used to generate the deal in its present form. “The policy of the feds was driven by a timeline that’s self-imposed,” he says. There’s widespread concern about whether or not the three-page framework agreement they originally signed matches the 67-pager now under discussion. “The premier has to make it clear they [the U.S.] won’t dictate policy,” he says. Family Fury Wynndel Box and Lumber is a fourth- generation family-owned business just north of Creston, started in 1913 by Monrad Wigen. Today it employs 130 people manufacturing a wide range of specialty lumber products, with the U.S. as its main market. Michael Wigen is so angry with Canada’s approach to the lumber war he can hardly see straight. “This is a classic case of combining ‘Peace in our time’ with the Avro Arrow,” he says. “What the hell is wrong with Canada? Less than 20 days after Byrd is repealed we offer to give them $1 billion. Did any of our negotiators even bother to ask industry if we wanted to fork it over? The thinking here has to change. We are not guilty.” Wigen says he finally managed to get Federal Trade Minister David Emerson on the phone to explain why the settlement was being pushed forward. “Emerson told us we were ungrateful because of all the hard work he’s done on this file. But this is a fourth-generation family business that’s gonna get absolutely screwed by this rush to make a deal.”