US, Canada Weigh Next Steps in Softwood Lumber Trade Spat

11 May 2017

The preliminary determination reached by the US Department of Commerce last month to levy countervailing duties on Canadian softwood lumber imports has been met with reports of potential Canadian trade action targeting US industries in response.

This latest escalation in a protracted disagreement between the neighbours comes just as Canada, the US, and Mexico gear up to re-open talks on the decades-old North American Free Trade Agreement (NAFTA).

The Trump administration termed any move to counter the Commerce decision “inappropriate” on Saturday 6 May and maintained that it would not alter the US’ course.

US Secretary of Commerce Wilbur Ross previously defended the decision to impose duties, underlining that the outcome is grounded in facts.

"The Department of Commerce's recent preliminary decision to impose tariffs on Canadian softwood lumber was based on the facts presented, not on political considerations,” he said after the duties were announced. “If any Canadian or British Columbian official wishes to present additional information, we will consider it carefully and impartially.”

“[Canada has] a tremendous surplus with the United States,” President Donald Trump said at an agriculture roundtable not long after the decision, when asked whether there are concerns of a potential escalation in tensions with the US’ second largest trading partner. “When we’re the country with the deficits, we have no fear.”

Reports of a possible Canadian response

The preliminary countervailing duties on Canadian softwood lumber confirmed last month  responded to allegations raised by the US lumber industry that Canadian softwood is benefitting unfairly from low “stumpage fees,” and given that the timber is grown on public lands this has led to the claim that those fees are tantamount to unfair subsidies to the disadvantage of American workers. (See Bridges Weekly, 27 April 2017)

According to a Commerce Department factsheet, the countervailing duties imposed are intended to grant US mills with the means to “seek relief from the market distorting effects caused by injurious subsidisation of imports into the United States, establishing an opportunity to compete on a level playing field.” A decision in a separate probe on anti-dumping duties is slated to be reached in June.

A joint statement issued by Canadian Natural Resource Minister Jim Carr and Foreign Minister Chrystia Freeland expressed strong disagreement with the duties, pledging to “vigorously defend” the interests of Canadian softwood producers, including possibly through litigation.

“In ruling after ruling since 1983, international tribunals have disproved the unfounded subsidy and injury allegations from the US industry,” the statement reads. “We have prevailed in the past and we will do so again.”

When asked in a press briefing about the several rounds of trade disputes that have taken place under both the WTO (DS311) and the NAFTA dispute settlement mechanisms, Ross replied, “I had nothing to do with the prior cases. I'm confident that this case is a good case.”

The Canadian government statement also announced the re-opening of a domestic task force aimed at facilitating information exchange at the federal and provincial levels, as well as assessing possible impacts on and needs of affected workers. Canadian forestry industries account for upwards of 200,000 jobs in over 170 rural and indigenous communities nationwide.

Ottawa is gearing up to put pressure on US industries supporting a hard line on lumber. Canadian Prime Minister Justin Trudeau is reportedly considering a request to halt imports of US thermal coal into ports in British Columbia (BC). The province is Canada’s biggest softwood lumber producer, responsible for half of overall production, and the US is BC’s primary market.

In a letter addressed to BC Premier Christy Clark, who proposed the shipment ban last month in response to the timber duties, Trudeau said last week that “the Government of Canada is considering this request carefully and seriously,” according to reporting by Reuters.

In addition, the Canadian federal government is considering imposing duties on exports coming from the state of Oregon, including lumber products such as flooring, plywood, and woodchips, as well as wine. The role of US Senator Ron Wyden, who represents Oregon in Congress, in backing the duties on softwood lumber was cited by Reuters as behind this possible response, along with business assistance programmes which could be regarded as unfair subsidies.

Officials on both sides of the border have expressed an interest in finding a long-term fix. The statement issued by Carr and Freeland underscored that Canada is “committed to working with the US Administration to achieve a durable solution.”

Ross has also affirmed willingness on behalf of the US. "We continue to believe that a negotiated settlement is in the best interests of all parties and we are prepared to work toward that end," he said.

The Softwood Lumber Agreement (SLA), which entered into force in 2006, had previously provided stability and certainty in bilateral lumber trade until it expired in October 2015, halting US imposition of trade remedies in return for export measures applied to products below a certain market level. (See Bridges Weekly, 6 April 2017)

NAFTA renegotiations

Stakeholders and analysts have suggested that a potential agreement on lumber could be subsumed by efforts to upgrade NAFTA. The agreement to date includes provisions on trade in goods, technical barriers to trade, government procurement, investment, services, and intellectual property rights, though lumber does not currently fall under its purview.

“If NAFTA were functioning properly you wouldn’t be having these kinds of very prickly, very unfortunate developments back-to-back,” Ross said, referring to the recent escalation in tensions over lumber. “So in that sense it shows that NAFTA has not worked as well as it should.”

Renegotiating aspects of the tripartite free trade agreement in order to rectify trade deficits of US$63 billion with Mexico and US$11 billion with Canada last year has become a trade policy priority of the new US administration. Talks are expected to reopen this summer following the conclusion of a 90-day consultation period and pending Senate confirmation of US Trade Representative nominee Robert Lighthizer.

“What we have tried to do was to clear the air and get this dispute out of the way before the big NAFTA talks went on,” Ross said last month. “That was not possible to achieve, and that's why we went ahead and released the findings.”

In a February press conference with Trudeau, Trump had previously outlined his intent to “tweak” the relationship between the nations only slightly through NAFTA renegotiations. (See Bridges Weekly, 16 February 2017).

Recent comments by Ross have suggested scope for elements of the Trans-Pacific Partnership (TPP), the 12-nation trade pact in which Mexico, Canada, and the US were included, to be incorporated into a revamped NAFTA.

“There are some concessions that the NAFTA partners made in connection with the proposed TPP,” Ross told Bloomberg last week. “There is no reason to throw those away. We would view those as the starting point.” Trump withdrew from the TPP in January, imperilling its chances for ratification in its current form (see Bridges Weekly, 26 January 2017).

Former US Trade Representative Michael Froman recently told CBC that the US has "already… renegotiated NAFTA – it was called TPP.”

“Both Canada and Mexico agreed to a number of revisions that were not in NAFTA that helped make it a 21st-century agreement,” he added. Froman was the USTR in the Obama Administration from 2013-2017 and is now a fellow at the Council on Foreign Relations.

ICTSD reporting; “Canada hits back in lumber dispute, threatens action against U.S.,” REUTERS, 5 May 2017; “Ross Says TPP Could Form Starting Point for U.S. on Nafta Talks,” BLOOMBERG, 3 May 2017; “Mexico calls on Trump to reuse TPP deals to reanimate Nafta,” FINANCIAL TIMES, 30 April 2017; “US Commerce Secretary Wilbur Ross says Canadian threats after lumber tariff announcement ‘are inappropriate’,” THE INDEPENDENT, 7 May 2017; “Ahead of NAFTA talks, U.S. sets 20 percent duties on Canadian softwood lumber,” REUTERS, 24 April 2017; “Lumber Tariff Adds Wrinkle to Nafta Talks With Canada,” THE NEW YORK TIMES, 25 April 2017; “The TPP is a giant boost for B.C. and the forestry industry,” THE GLOBE AND MAIL, 22 December 2015; “U.S. won't opt out of NAFTA — for now, Trump says,” CBC NEWS, 26 April 2017; “Trudeau Mulls Coal Ban in Response to U.S. Lumber Tariffs,” BLOOMBERG, 6 May 2017; “Trump says he does not fear a trade war with Canada,” REUTERS, 25 April 2017.

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