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Canada’s strong lumber case could falter in a ‘Buy American, Hire American’ world

United States Trade Representative-nominee Robert Lighthizer testifies be the Senate Finance Committee during his confirmation hearing on Capitol Hill in Washington, Tuesday, March 14, 2017. Lighthizer, U.S. President Donald Trump's pick for trade secretary, is being urged to get tough with Canada.

Manuel Balce Ceneta/THE ASSOCIATED PRESS

These should be happy days for the U.S. lumber industry. Prices are up, mills are operating near full tilt and housing starts are on a tear.

Builders broke ground on new homes at an annual rate of nearly 1.3 million units in February – the second-highest monthly tally of the past decade. All that construction points to growing demand for lumber.

Surely, in this auspicious environment there should be plenty of spoils for everyone, including Canadian producers, who have roughly a third of the massive U.S. lumber market. The United States, after all, can't produce all the lumber it needs, and has historically depended heavily on imports from its northern neighbour.

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And yet, U.S. President Donald Trump's pick to be his administration's top trade negotiator said fixing the "very serious" lumber problem is at the top of his U.S.-Canada to-do list. Speaking at his Senate confirmation hearing last week, Robert Lighthizer talked about slapping a "quantitative restraint" on Canadian lumber – a hard quota limiting how much this country can ship to the United States.

Mr. Lighthizer should lighten up. The first question he might ask himself is: Where is the crisis?

Read more: Trump's 'America first' agenda raises the spectre of inflation

The historic U.S. grievance is that Canadian lumber companies pay "below market" rates for the trees they harvest on Crown land – ergo, a subsidy. In the United States, most lumber is cut on private land and sold at auction, establishing a clear market price. The different systems have been a source of near-constant friction, and litigation, going back to the 1980s.

The U.S. Lumber Coalition filed the latest in a string of trade complaints against Canada soon after Mr. Trump's election in November.

The Canadian industry is bracing to be hit with preliminary duties of 25 per cent or more as early as next month, pending a ruling by the U.S. Commerce Department.

The Americans have failed to make their subsidy allegations stick against Canada in four previous rounds of litigation. The U.S. industry must also show how these alleged subsidies are harming them – what's known in trade-law jargon as "injury." The worse the injury, the higher the duties.

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The U.S. International Trade Commission issued a preliminary injury finding in January. Upholding the finding could prove difficult in the current economic environment. U.S. lumber prices are up 25 per cent since last year, according to the Random Lengths framing lumber composite index. U.S. production of softwood lumber was up 3.4 per cent in 2016 and mills were operating at 86-per-cent capacity.

These healthy market conditions prevail in spite of the expiry in late 2015 of the Canada-U.S. softwood-lumber agreement, under which Canada imposed an export charge or similar restraints on Canadian lumber during periods of low prices.

But duties or taxes are not what the U.S. industry wants. It's seeking a permanent limit on lumber entering its market – not unlike the strict quotas Canada imposes on imported dairy and poultry products.

The problem is the United States can't legally impose new quotas under World Trade Organization rules. They can only apply retaliatory tariffs. To get a quantitative cap, the Americans need Canadian producers to agree. And they're using serial litigation to get Canada to buckle.

The dilemma for Canada is that fighting another trade case could take five or more years, and tens of millions in legal bills.

On the other hand, the mood for striking another managed trade agreement couldn't be worse in a "Buy American, Hire American" world. Playing nice with Canada doesn't fit with Mr. Trump's guiding narrative – a point the U.S. industry will eagerly exploit.

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British Columbia's recently appointed lumber trade envoy, David Emerson, expressed a clear preference for negotiation – a view shared by most Canadian officials.

"British Columbia, as much of the rest of Canada, is not anxious to take a long, costly damaging [litigation] process," the former lumber executive and former federal cabinet minister told reporters earlier this month. "We would like to see softwood resolved in a more reasonable, fact-based framework."

Canada has a strong legal case, and an equally powerful economic story to tell. The question is: Where will Canada get a fairer hearing – at the negotiating table, or in the courts and tribunals?

In a world of protectionism and parallel facts, door No. 2 may be the best of two bad options.

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