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Canada and the United States are digging in for a protracted fight over softwood lumber in what threatens to be the most bitter battle of the three-decade-old trade dispute.

U.S. President Donald Trump is tying softwood to his promised renegotiation of the North American free-trade agreement, colliding with Canada's efforts to deal with the two matters separately.

"People don't realize, Canada's been very rough on the United States. People always think of Canada as being wonderful – so do I, I love Canada – but they've outsmarted our politicians for many years," Mr. Trump said at the White House on Tuesday while signing an unrelated executive order. "We don't want to be taken advantage of by other countries. That's stopping, and that's stopping fast."

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Mr. Trump has unexpectedly put Canada in his crosshairs in the last week after spending the better part of two years sparing the country from his trade rhetoric.

The President has seized on two disputes – softwood and dairy protectionism – to get tough on trade.

The rising trade tensions prompted a phone call between Prime Minister Justin Trudeau and Mr. Trump on Tuesday, in which they discussed the softwood-lumber dispute, as well as the U.S. dairy industry's complaint about Canada's sheltered dairy market.

The Prime Minister's Office used tough language to describe how Mr. Trudeau handled it, saying in the call he "refuted the baseless allegations by the U.S. Department of Commerce and the decision to impose unfair duties."

Monday's decision to slap tariffs averaging nearly 20 per cent on Canadian softwood wasn't made by Mr. Trump. It was part of an independent trade-dispute process at the Department of Commerce. But his administration has expanded the importance of the fight by putting it on the table with NAFTA.

"How are [Canadians] blocking U.S. exports of milk to them? How are they dumping lumber down here? It just shows what a terrible arrangement NAFTA has been," Commerce Secretary Wilbur Ross told CNBC Tuesday. "NAFTA is a mess and NAFTA is also an obsolete deal."

During Tuesday's phone call between Mr. Trump and Mr. Trudeau, the PMO said "the two leaders agreed on the importance of reaching a negotiated agreement, recognizing the integrated nature of the industry between Canada and the United States."

On dairy, the PMO said Mr. Trudeau told Mr. Trump that "Canada would continue to defend its interests." The Prime Minister also pointed out the lopsided trade in dairy between Canada and the United States, where Canada imports more than $550-million in dairy products from the U.S. but exports around $110-million to the United States.

The Canadian government is preparing for a long battle. It's widely expected Ottawa will challenge the tariffs at the World Trade Organization – the referee on global trade – as well through a NAFTA dispute-settlement panel. But this could take years and the government said on Tuesday it won't be able to take such action until final duties are confirmed by the United States in November or December.

Natural Resources Minister Jim Carr sounded exasperated when asked whether the tough ride from the U.S. government was a surprise. "I would not use the word 'surprised' to characterize reactions to politics in the United States right now," he told reporters.

Mr. Trudeau also held a conference call with Canada's premiers Tuesday to update them on how Ottawa is addressing the burgeoning lumber war – a discussion that sources say broadened to discuss Mr. Trump's attack on Canada's sheltered dairy industry as well. The Trudeau government is mindful of the regional tensions underlying the softwood dispute – with different provinces seeking different solutions – and the call was an effort to try to keep premiers on the same page.

Raymond Chrétien, the former Canadian ambassador to the United States who is now Quebec's negotiator on the softwood file, noted that previous softwood disputes have usually taken four or five years to settle.

"If I learned one thing, it's that Americans are very tough in business and they never give you a break," Mr. Chrétien said. "But Mr. Trump is a deal maker. Mr. Ross is a deal maker. There may be a deal to be had in coming months. But nobody knows exactly when those negotiations will start."

The United States has long argued that Canadian lumber is unfairly subsidized by provincial governments. That's because most of the trees are on publicly owned land, allowing the provinces to decide how much to charge companies for cutting them down. In the United States, meanwhile, most timber is on private property, and companies pay market rates to harvest it.

Canada needs the U.S. market because 75 per cent of its $8-billion annual softwood exports go the United States to serve its housing and home-renovation needs.

The two countries have fought over the issue at trade tribunals and signed various deals temporarily resolving the dispute. The last such deal expired in 2015. Since then, the United States and Canada have tried unsuccessfully to negotiate a new one. In negotiations last year, the Americans made it clear they want a managed trade deal that limits softwood imports, so the Canadian share of U.S. lumber consumption is capped at about 22 per cent. That is much lower than Canada's 2015 market share of 30 per cent.

The U.S. lumber industry launched the complaint process that led to the tariffs. In June, the Commerce Department will announce preliminary anti-dumping duty rates for Canadian producers, which will hike the combined penalties paid likely into the 30-per-cent to 40-per-cent range for most Canadian lumber exporters. The final, combined sets of punitive U.S. duties – after Commerce has finished its investigation – won't be announced until late 2017 and will take effect in 2018.

Canadian officials sought to put distance between the recurring lumber dispute and the bigger threat of protectionist trade action by the Trump administration, emphasizing that this fight would be occurring regardless of who occupied the White House. Any resolution requires the U.S. lumber industry to withdraw its complaint.

"This is Lumber 5. It began a couple of centuries ago, but we believe that the relationship is so important and so consequential for both Canada and the United States that we will work through this as well," Mr. Carr said Tuesday.

But the Trump administration has already indicated Canada will not be able to separate the two issues easily. In a draft of NAFTA negotiating objectives circulated to Congress earlier this month, the White House said it would seek to gut Chapter 19, the NAFTA provision that allows for panels to settle trade disputes. The panels have ruled in Canada's favour on softwood in the past, and the United States accuses them of failing to correctly apply the law.

Matthew Gold, a senior trade negotiator in the Obama administration, said Chapter 19 is the only likely way that the NAFTA and softwood issues would intersect, as a bilateral deal on softwood would be too long to easily incorporate into NAFTA.

"If Trump can get rid of Chapter 19 – or if he can get softwood carved out from Chapter 19 – problem solved," Mr. Gold said. Still, he said, it wasn't clear that Chapter 19 is really a problem for the United States: Just because trade tribunals have ruled in Canada's favour in the past does not mean they will again.

Using the softwood dispute as leverage at the negotiating table, however, would be very difficult for Mr. Trump, as the tariffs are set by an independent process that he does not control. And the U.S. lumber industry, which brought the dispute, would have to sign off on any deal between the two countries.

"I think this dispute is really driven by a fairly small number of very influential lumber producers and timber barons in the United States who have basically captured key members of Congress," said David Emerson, B.C.'s special envoy on the softwood file.

And as the war rages, Canadian producers will likely press governments for compensation. But any assistance Ottawa provides could risk triggering further trade action. Mr. Carr said he will reconvene a federal-provincial task force to consider help for the industry but he made no promises.

The Quebec government announced it is prepared to spend up to $300-million to support the softwood lumber industry. That's the amount of impact the 20-per-cent tariff will have on 178 companies in the province, according to Dominique Anglade, the provincial minister of the economy. She said the aid will come as loans and loan guarantees.

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