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A truck drives past LNG Canada signage in Kitimat, B.C. on June 5, 2015.Ben Nelms/The Globe and Mail

Ottawa is refereeing a complicated trade dispute that pits Canada's steel fabricators against an international consortium seeking to build a liquefied natural gas terminal in British Columbia.

While the Canadian government is objecting to U.S. protectionist measures, LNG Canada is urging the federal Finance Department to look domestically at the unintended consequences of anti-dumping duties of up to 45.8 per cent Canada has levied that would affect imports of large LNG components from China.

The massive steel modules with sophisticated equipment are needed for a proposed terminal in Kitimat in northwestern British Columbia, according to LNG Canada, a consortium led by Royal Dutch Shell PLC, with partners from China, South Korea and Japan.

LNG Canada has asked the Finance Department to exempt the B.C. project from the anti-dumping tariffs on imports of fabricated industrial steel components (FISC). The Shell-led group wants supplies from China, saying it cannot afford to wait years to see whether Canadian fabricators can create a domestic industry in the Vancouver region for constructing large LNG modules.

The Finance Department must decide whether to accept the steel sector's argument that it is capable of building complex modules on the West Coast, or side with LNG Canada's view that for a future LNG facility to be globally competitive, the specialty components must be made in China.

The Canadian Institute of Steel Construction (CISC) says the sector requires protection from unfair foreign competition, lobbying Ottawa to maintain the duties. The Canada Border Services Agency said the FISC tariffs were primarily targeted at punishing China and South Korea for selling smaller energy modules for less than fair value in Alberta's oil sands.

CISC president Ed Whalen said thousands of domestic jobs could be created to supply B.C.'s fledgling LNG industry.

"Canada should have the ability to fairly compete," he said in an interview. "The concern that we have with LNG Canada's request for the remission on duties is that if Ottawa grants the exemption, where do you stop? If it goes too far, then you won't have steel fabrication left in Canada. At the end of the day, all that our industry wants is fairness and the opportunity to bid."

At stake is LNG Canada's proposal to build an export terminal in Kitimat, a community that struggled economically last year. The project's cost estimate of $40-billion includes the planned liquefaction terminal, related pipelines and other infrastructure.

No LNG project is yet under construction in Canada.

Industry observers believe the Canadian tariffs could inflate the Kitimat project's costs by at least $1-billion, depending on how the duties are applied to specific imports from China. The steel portion typically accounts for about half of the weight of a typical module, and 20 per cent of the value.

Experts in industrial real estate say there isn't room in the Vancouver area to accommodate a sprawling fabrication yard that would require at least 300 acres. But Mr. Whalen said innovative thinking would lead to Canadian firms finding a way to construct LNG modules in the Vancouver region, playing down concerns about a scarcity of large tracts of industrial land. "Just imagine all the construction apprentices and all the spinoffs," he said.

Susannah Pierce, LNG Canada's director of external relations, said the Shell-led group has carefully studied its options for ordering modules from Canada, but no such expertise exists to make it viable to assemble the Kitimat terminal from Canadian steel fabrication.

"While the aspiration is laudable, Canada doesn't have the capacity to build large, complex modules," Ms. Pierce said. "We're trying to make the project competitive for a final investment decision, and every single cent counts. This is specific to LNG, and not about opening the floodgates to every other industry ordering FISC."

The Canadian International Trade Tribunal said in June that it had to deny LNG Canada's request to have anti-dumping and countervailing duties waived because there were no final engineering designs for the proposal to use imported Chinese modules.

Ms. Pierce said the economic benefits of importing from China would create thousands of jobs in Canada to assemble the modules, and on a natural gas pipeline that TransCanada Corp. would build from northeastern B.C. to Kitimat.

The BC LNG Alliance, whose members include LNG Canada, is recommending that Ottawa grant an exemption for major modules. "Complex LNG modules weighing more than 160 tonnes cannot be sourced or transported in Canada," the alliance said in a letter sent last month to Natural Resources Canada and distributed to the Finance Department.

The Canada Border Services Agency ruled last year that South Korea and Spain have dumped FISC in Canada at below market value, while China is subsidizing and dumping its industrial steel goods.

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