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trade dispute

The United States is expected to seek billions of dollars in penalties Tuesday when it files its case to back a claim that British Columbia is subsidizing wood damaged by the mountain pine beetle.

The U.S. Trade Representative is slated to present a brief to the London Court of International Arbitration seven months after it alleged that British Columbia was breaking the 2006 softwood lumber agreement by selling the province's timber at artificially low prices.

In January, it filed a complaint after consultations last fall failed to result in a resolution.

The United States accused the provincial government of "dramatically" increasing the amount of beetle-damaged timber it was selling at the cut-rate price of 25 cents a cubic metre.

The price hike has given B.C. mills an unfair advantage in softwood sales, said the complaint.

John Allan, president of the B.C. Lumber Trade Council, which represents the province's lumber producers, said the requested penalty should be disclosed.

"We'll see the guts of their argument tomorrow," he said in an interview from Vancouver. "We think we've got an excellent defence but it is a challenge and I do expect the U.S. to be looking for a reasonably high number in terms of damages."

A U.S. trade publication last week suggested the Americans could seek up to US$4 billion.

It said U.S. and Canadian officials met last month to discuss a two-year extension to the 2006 softwood lumber agreement that is set to expire in October 2013.

The extra time would allow the United States to collect the added duties on B.C. lumber exports.

The final award, should Canada lose, could be substantially lower. The Americans won a $60 million penalty earlier in the year despite seeking $2 billion.

Mr. Allan said he's confident that Canada will prevail this time, in part because the market system to sell beetle-infected wood is grandfathered in the 2006 softwood lumber agreement.

The province also had to act to draw value from the dried up wood and the timber pricing system governing harvesting is market based, he added.

Mr. Allan said the U.S. challenge is the most serious under the softwood lumber agreement to date.

"This one is more fundamental. It's an attack on forest policy and timber pricing, so that's why it's really critical."

Canada will have until November to respond. An oral hearing is scheduled for Feb. 27 in Washington, D.C.

A final ruling by the three-member panel of European lawyers is expected by fall.

Canada has said it believes the U.S. case was based on "unfounded allegations."

British Columbia also denied the province was cheating, saying U.S. producers should have known there would be an effort to clear dead, beetle-infested timber.

The U.S. acknowledges some timber has been damaged by the pine beetle, but said the amount classified by B.C. as "grade 4," or cut-rate, can't be justified.

The United States has won its two previous complaints before the London Court involving wood shipments from Ontario and Quebec. A 10 per cent additional duty on exports was lifted the end of June.

One of those claim had also been filed against Western producers, but that claim was unsuccessful.

However, aside from a two-month period last year — when the export tax slipped to zero and 10 per cent — wood from B.C. and Alberta has been taxed at the 15 per cent maximum every month since October 2006.

Increased lumber shipments to China and other parts of Asia has helped to mitigate weak demand from the United States because of low housing starts.

China has overtaken the U.S. as the largest buyer of B.C. lumber.

But Mr. Allan said he doesn't foresee China replacing U.S. as Canada's best customer because much of the product shipped to Asia is low quality wood used for concrete forming, not housing construction.