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U.S. trade representative Ron Kirk

Gerald Herbert/AP

The U.S. trade representative has started an inquiry under the North American free-trade agreement to determine whether the Nova Scotia government has offered improper subsidies to a Cape Breton paper mill.

Ron Kirk, in a letter released Thursday by a Maine congressman, said reports about the province's $124-million financial aid package for the Port Hawkesbury Paper mill have raised "troubling questions" about potential injury to U.S. businesses.

Mr. Kirk also said he will be seeking information from the Canadian government, saying the United States plans to raise the matter at meetings this month at the World Trade Organization.

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"This administration has an unparalleled track record at pursuing the effective enforcement of our trade agreements to ensure that American businesses and working people can compete on a level playing field," Mr. Kirk told Rep. Mike Michaud.

"I can assure you that we will work speedily to obtain the facts of this matter."

Mr. Michaud issued a statement saying the Cape Breton deal, struck last month, could have a significant impact on U.S. paper mills and the small businesses they support.

"We need to get to the bottom of this deal to ensure that no current trade laws have been violated," said Mr. Michaud.

The federal government had little to say about the inquiry, issuing a one-line statement from Ottawa.

"As a strong supporter of a rules-based trading system, we are following this issue closely to ensure that the interests of Canadians continue to be defended," said Me'shel Gulliver Belanger, a spokeswoman for the Department of International Trade.

International Trade Minister Ed Fast declined a request for an interview.

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Nova Scotia Premier Darrell Dexter said the province obtained legal advice regarding a potential NAFTA challenge before the deal was struck.

"We also note that the United States has been engaged in mass subsidies to their mills for a considerable period of time," he said Thursday after a cabinet meeting.

Mr. Dexter also suggested the inquiry was motivated by politics, given that a U.S. election is only a month away.

"Naturally enough, people who are running for election will want to be seen to be taking positions to protect their businesses and their people," the NDP Premier said. "We understand that. We're in that business, too."

Andrew Younger, a Liberal member of the Nova Scotia legislature, said even though the NAFTA inquiry could drag on for some time, the mill could be in for a rough ride if the U.S. government decides to impose interim tariffs.

"That's probably the single biggest risk to this mill," he said in an interview.

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"If [President Barack] Obama decides that implementing interim tariffs on this mill will save him votes ... then you can bet that the interim tariffs will be implemented pretty quick."

Mr. Younger also suggested Nova Scotia is in a precarious position because U.S. lawmakers tend to become more protectionist in election years.

After almost a year of negotiations, Vancouver-based Pacific West Commercial Corp. agreed to buy the shuttered mill for $33-million last Friday. The mill resumed making paper Wednesday with 260 employees.

Under a deal struck last month, the Nova Scotia government is providing a $124.5-million aid package on top of the $36.8-million it has spent keeping the mill in a so-called hot idle state.

The deal also includes an amended discount power rate agreement with Nova Scotia Power Inc. The mill is the utility's largest customer.

However, the actual agreement has not been released, which has left critics wondering about some of the details.

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As well, the government has yet to say what it will charge Pacific West to cut trees on Crown land. These so-called stumpage fees have long attracted the ire of U.S. critics, who say they often amount to a subsidy because the fees are so low.

Earlier in the day, Nova Scotia's Natural Resources Minister, Charlie Parker, confirmed that the stumpage fees charged to Pacific West would be higher than the fees imposed on the mill's former owner, Ohio-based Newpage Corp.

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