Canadian timber firms brace for U.S. softwood duties

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Hefty U.S. duties could be slapped on Canadian timber exports to the United States by early 2017 after a one-year standstill period expired on Wednesday in the long-running softwood lumber dispute between Canada and its biggest trading partner.

This week marked 12 months since a nine-year truce in the perpetual Canada-U.S. softwood conflict ended – with the federal government and the U.S. administration unable to clinch a successor pact despite months of negotiations.

This failure to agree probably means a costly and frustrating new season ahead for Canadian timber companies, which can expect to pay hundreds of millions of dollars to the U.S. government in order to keep shipping their product south of the Canadian-U.S. border.

The U.S. lumber lobby behind the dispute with Canada – it alleges provinces subsidize companies through below-market stumpage rates – now says it has "no choice" but to launch a trade challenge with the American government.

Under the U.S. system, preliminary duties can be levied on Canadian softwood imports into the United States six months after an unfair trading case is commenced with the Department of Commerce, and tariffs stay in place while American bureaucrats investigate the allegations. They can also be retroactively applied for up to 90 days.

Under the last dispute, which ended in 2006, the United States slapped an average 27-per-cent tariff on Canadian softwood and collected $5.3-billion (U.S.) over the length of the battle.

The dispute centres on how much Canadian softwood the U.S. Lumber Coalition is willing to allow into the United States.

Canadian officials privately say the price of the truce that the Americans are offering is too high.

The U.S. proposal for a deal to manage the softwood-lumber trade envisions a level of exports that is still far below what Canada would accept. The dispute covers about $6-billion in annual exports.

As recently as June, U.S. timber interests were demanding that Canada agree to limit softwood-lumber shipments such that the Canadian share of U.S. lumber consumption is capped at 25 per cent.

That is lower than Canada's 2015 market share of 30 per cent and well below the 33-per-cent level reached before the two countries signed their last managed trade deal in 2006.

Sources familiar with the negotiations say the Canadians favour a similar arrangement to the last softwood-lumber deal, in which an export tax kicked in once lumber prices fell below a certain level. But U.S. lumber interests would prefer a quota system that much more effectively limits Canadian imports instead of an export tax that well-heeled forestry companies could afford to absorb.

Meanwhile, the Canadian and U.S. governments announced that they will keep trying to negotiate a formal truce. Negotiations are expected to continue this week in Washington.

"While our engagement has yet to produce a new agreement, our governments will continue negotiations though the standstill period has expired," Canadian International Trade Minister Chrystia Freeland and U.S. Trade Representative Michael Froman said in a joint statement.

The government led by Justin Trudeau, elected last October, promised "real change" in relations with the United States after the Stephen Harper years, but the softwood-lumber fight demonstrates how bonhomie between a prime minister and president is not sufficient to resolve what is perhaps the most enduring business dispute between Canada and the United States.

If this dispute is not resolved, Canada will be forced to file complaints at the World Trade Organization and under the North American free-trade agreement and pursue four or five years of litigation, costing tens of millions each year, to try to force Washington to yield.

The U.S. Lumber Coalition would not say precisely when it would file formal trade complaints with the U.S. government – only that it would do so "at the most appropriate time." It is widely expected in Ottawa that the coalition will file within days.

Zoltan van Heyningen, executive director of the U.S. Lumber Coalition, said he is disappointed that the Canadian government has failed to offer more constructive proposals during the negotiations. "The United States has sought to engage Canada on substantive negotiations for a new agreement for three years," the coalition said in a separate statement.

The Americans say Canadian provinces unfairly subsidize exports by undercharging lumber producers for cutting on Crown land and, in the case of British Columbia, by restricting log exports. U.S. producers harvest trees on privately owned land, which costs more than the royalties Canadian producers pay to governments.

The temporary accord negotiated by former prime minister Stephen Harper bridged this disagreement by agreeing that duties would be imposed on U.S.-bound softwood lumber when prices fell below a certain level, and set a mechanism for managing disputes.