Lumber deal still a good one despite new arbitration loss, Ottawa says

The Harper government insists a 2006 agreement that limits lumber exports is still good for Canada, despite a second consecutive arbitration loss to the United States.

An international tribunal sided with the U.S. on Friday, ruling that Canada must impose nearly $60-million in special export taxes on lumber from Quebec and Ontario to offset illegal subsidies it is giving sawmills.

Federal Trade Minister Peter Van Loan said the outcome could have been much worse. The United States was seeking nearly $2-billion in penalties, but the court ruled that only some of the targeted programs are illegal.

Mr. Van Loan insisted the 2006 agreement, which limits Canadian exports when lumber prices are low, has brought welcome "stability and predictability" during a deep industry slump.

"Canada remains committed to the softwood lumber agreement, which provided for a fair and independent ruling on these claims," he said. "Before 2006, disputes resulted in unilateral action that unduly and unjustifiably punished the Canadian forestry industry."

U.S. Trade Representative Ron Kirk applauded the decision, saying the result is "important for U.S. workers, firms and our softwood lumber industry."

The London-based Court of International Arbitration agreed that a series of grants, tax credits and loans the two provinces offered to lumber producers were an attempt to "circumvent" a 2006 cross-border trade deal, Mr. Kirk said.

The decision follows another arbitration win by the United States in 2009 involving the calculation of export quotas from Quebec, Ontario, Manitoba and Saskatchewan. Exporters have so far paid $68.26-million (Canadian) in export taxes as a result of that case.

But Canada's lumber industry is facing an even bigger threat following the filing of a third U.S. case earlier this week. The United States alleges that British Columbia has been systematically selling timber at rock-bottom prices in the province's Interior, hurting U.S. producers. The bill in that case could reach nearly $500-million if the United States wins.

Canada denies the latest allegations, blaming the cheap timber sales on cutting of trees damaged by a mountain pine beetle infestation.

The 2006 bilateral agreement, which ended years of litigation, limits exports of Canadian softwood lumber by imposing quotas when lumber prices fall below preset thresholds. The U.S. industry has long complained of Canadian efforts to skirt the deal.

Arbitration cases are the natural outcome of such a complex trade agreement, said trade lawyer John Boscariol of McCarthy Tétrault LLP in Toronto. But he acknowledged Canada can't be "happy" with two straight losses and the prospect of defending a third case.

"This is the cost of the deal we reached with the United States," Mr. Boscariol said. "Parties will push the envelope on both sides of the deal."