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Workers build a home at a housing development in March in Petaluma, Calif. The Canadian government is hoping that at least three of the five people on a NAFTA softwood panel will side with Canada and take steps to end punitive U.S. duties.

Justin Sullivan/Getty Images

The U.S. Department of Commerce has ignored trade rulings on softwood lumber that favour Canadian producers, and a NAFTA panel should order duties that were introduced last year to be reversed and the money refunded, Canada says.

Two months ago, Canada served notice that it would use one of the most controversial elements of the North American free-trade agreement – Chapter 19, which sets up trade panels to settle disputes – in its battle against U.S. lumber duties.

This week, a law firm representing the Canadian government hired a courier to drop off a letter marked "via hand delivery" to Paul Morris, secretary of the U.S. section of the NAFTA Secretariat.

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Canada is counting on a binational NAFTA panel expected to be formed within months to overturn the Commerce Department's determination in 2017 that provincial governments subsidize Canadian lumber producers, which the United States says dump softwood into the United States at below market value.

In its 18-page letter sent late on Thursday, the Trudeau government said the binational panel should order the Commerce Department to reverse course: "Remand this matter to the Department for disposition consistent with the Panel's determination, including by revoking any anti-dumping duty order on certain softwood lumber products from Canada that might have resulted from the final determination, and by ordering the immediate release and refund of all security and estimated duty deposits imposed as a result of the Department's investigation and determination."

The Canadian government is hoping that at least three of the five people on the softwood panel will side with Canada and take steps to end the punitive U.S. duties, which average 20.23 per cent for most Canadian lumber producers.

During talks to renegotiate NAFTA, the Trump administration has said it wants binational panels scrapped, while Canada vows to stand up for Chapter 19's dispute-resolution mechanism.

The Canadian government also recently outlined its concerns about countervailing duties levied in retaliation for what the Americans deem to be provincial subsidies, according to a separate document Canada sent to the U.S. section of the NAFTA Secretariat.

The latest cross-border clash over softwood is the fifth round in the battle, known in the forestry industry as Lumber V – borrowing from the Roman numeral style for the National Football League's Super Bowl game.

A softwood agreement that was reached in 2006 after a dispute known as Lumber IV expired in October, 2015.

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This week's letter from Canada asserts that the Commerce Department relied "on the discredited findings from Lumber IV," and that punitive duties are "unsupported by substantial evidence on the record and otherwise not in accordance with law."

In November, 2017, the Canadian government decided to challenge U.S. lumber tariffs not only through NAFTA, but also at the World Trade Organization.

Last month, the U.S. International Trade Commission ruled that Canada's shipments of softwood lumber south of the border are injuring the U.S. forestry sector. That ruling followed a familiar pattern of ITC decisions that favour the United States, lawyers for Canada say.

NAFTA and WTO panels have repeatedly sided with Canadian lumber producers, according to this week's letter from the Trudeau government.

The ITC, however, said recently it believes that Canadian softwood has stolen market share from U.S. producers. ITC chairwoman Rhonda Schmidtlein and three other commissioners unanimously voted in favour of the U.S. lumber industry on Dec. 7, 2017.

In its reasons, the ITC's 227-page report says Canada's share of U.S. lumber consumption rose from 28.4 per cent in 2014 to 31.8 per cent in 2016, the ITC said.

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"Subject imports experienced significant gains in market share directly at the expense of the domestic industry," the report said. "We find that the volume of subject imports and the increase in that volume are significant both in absolute terms and relative to consumption in the United States."

While U.S. lumber producers buy their timber mostly from private owners of forests, the Commerce Department ruled in 2017 that stumpage fees Canadian firms pay to provincial governments to cut trees on Crown land are too low and amount to subsidies. Last year, preliminary countervailing duties started in April and preliminary anti-dumping duties began in June.

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