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Angry about U.S. duties on Canadian lumber? Blame B.C.

Stacks of lumber are shown at NMV Lumber in Merritt, B.C., Tuesday, May 2, 2017.

Jonathan Hayward/THE CANADIAN PRESS

Buried in the 124 pages of the U.S. trade case against Canadian lumber is a surprising revelation about how the Trump administration tallied its duties.

The prevailing narrative is that the U.S. hit Canada with duties of up to 24 per cent because the provinces are selling their timber too cheaply to lumber companies – thus, a subsidy, so the Americans say.

That's only part of the story. A significant chunk of the penalty is due to log export restrictions that exist only in British Columbia.

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The bizarre, and arguably unfair, result is that lumber producers across the country are being punished for the forest policies of one province.

Absent of B.C.'s export controls, Canada's lumber industry would be facing something closer to a nuisance tax today, rather than a punishing throttle on its exports. And it could wind up costing lumber companies hundreds of millions of dollars per year, and valuable market share in the United States.

The U.S. Commerce department investigated five companies – three in B.C., one in Quebec and another in New Brunswick. It calculated the alleged subsidies each receives and then applied unique rates. Outside of B.C., the duties are relatively low – about 3 per cent for St. John-based J.D. Irving Ltd. and 13 per cent for Montreal-based Resolute Forest Products Inc. Inside B.C., the rates are much higher – 24 per cent for West Fraser Timber Co. Ltd., 20 per cent for Canfor Corp. and 19.5 per cent for Tolko Industries Ltd.

Every other lumber exporter in Canada is now paying a weighted average of those five rates, or 20 per cent. As much as a third of the nationwide duty reflects the effect of federal and provincial restrictions on B.C. log exports.

Those restrictions, in place since the 1880s, are an aberration in Canada's generally open economy. Indeed, logging is a rare example where governments dictate to private interests what they can export, for reasons other than national security.

Federal and B.C. officials should have seen this coming. Economists in Canada have warned for years that the policy lessens competition for logs, increases the supply of timber available to mills in B.C. and suppresses prices by up to 50 per cent. And that lowers the cost of finished lumber, such as two-by-fours, destined for the U.S. market.

The Commerce department agreed. It calculated that a quarter to a third of the total duties imposed on the three targeted B.C. companies is directly attributable to log export rules, which are applied by both Ottawa and B.C.

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The United States isn't alone in raising objections. Japan, China and South Korea have also complained about Canadian log-export restraints. Japan and China almost certainly will raise the issue in free-trade talks with Ottawa.

It's still unclear whether the United States will be able to make its case stick. Canadian lumber has been targeted four previous times since the 1980s, successfully fighting off the duties each time through litigation.

But the notion that Canada is entirely blameless is misleading. Eric Miller, a fellow at the Woodrow Wilson International Center for Scholars in Washington, argued in a recent report that log-export restrictions are a blatant subsidy that is illegal under both the North American free-trade agreement and World Trade Organization rules.

"The peculiar structure of the regime guarantees B.C. wood processors access to cut-rate inputs at the expense of domestic timber harvesters, [creating] an array of distortionary effects up and down the supply chain," according to Mr. Miller, a consultant and former Industry Canada official.

Log-export restrictions aren't unique to Canada. The United States, for example, has an export-licensing regime for trees cut on federal and state lands. What's unusual about Canada's regime is that it also covers trees on private land in B.C.

In Canada, roughly 90 per cent of timber available for cutting is on Crown land. But there are vast privately held forests, as well – in Atlantic Canada and throughout British Columbia. Only in B.C. are there limits on exports.

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And now lumber companies across the country are paying dearly for alleged subsidies, whose benefits they don't enjoy.

BC Liberal Leader Christy Clark rails against U.S. President Donald Trump for unfairly targeting the province's lumber industry.

Frustrated companies in the rest of the country could just as easily point fingers at her and the federal government.

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