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A new front is set to open in the softwood lumber war, with the U.S. accusing B.C. of under-pricing trees harvested for export.

The U.S. alleges that the surging volume of mountain-beetle-killed pine harvested on Crown land for cut-rate prices by lumber producers in B.C.'s interior violates the Softwood Lumber Agreement signed in 2006.

Representatives of the Canadian and U.S. governments have had one face-to-face meeting - little or no progress was made, sources said - and the U.S. can request formal arbitration as soon as Thursday.

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In a formal complaint made last month, Ron Kirk, the U.S. Trade Representative, alleged that the increase "does not appear to be justified" under the softwood agreement, "even when known factors affecting timber quality in B.C. (such as the mountain pine beetle) are taken fully into consideration."

Peter Van Loan, Canada's federal minister of international trade, said the allegations are "unfounded" because of "the unprecedented mountain pine beetle infestation." Mr. Van Loan, has called the U.S. position "flatly contradicted by trade and other economic data." The federal government would not disclose these data. B.C. also provided no data.

"What we've seen is a giveaway of B.C.'s resources to help the B.C. industry at the expense of U.S. industry and frankly the rest of the Canadian industry," said David Yocis, counsel to the U.S. industry lobby group Coalition for Fair Lumber Imports. "This is exactly what the agreement was designed to prevent."

If the U.S. complaint is successful, it could cost producers in the region - led by companies such as Canfor Corp. and West Fraser Timber - as much as $400-million, RBC Dominion Securities estimates.

The U.S. has already won a smaller fight under the softwood deal, which allows for dispute-settlement at the London Court of International Arbitration. The loss is costing producers of lumber in Ontario, Quebec, Saskatchewan and Manitoba $68-million in new export taxes.

The U.S. industry coalition believes B.C. is effectively subsidizing companies such as Canfor and West Fraser by charging too little for trees on Crown land, thus mitigating the impact of export taxes companies have been paying under the softwood lumber deal.

The Softwood Lumber Agreement was meant to end years of trade disputes over U.S. allegations that Canada, and especially B.C., subsidizes industry by under-pricing Crown timber. The deal is set to expire in 2013.

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With a specific aim at the B.C. Interior - the heart of Canada's forestry business - the latest scrap has left allegiances drawn on regional lines, rather than strictly between Canada and the U.S.

"I think the U.S. has a strong case," said Rick Doman, chief executive officer of Montreal-based Eacom Timber Corp., which this year paid $130-million to buy Domtar's old lumber mills in Quebec and Ontario.

Mr. Doman, a long-time B.C. resident, is an old rival of B.C. interior lumber producers and has complained for years about pricing of timber in the region. "The taxpayer's getting ripped off," said the son the deceased Herb Doman, who had built a large forestry company, which eventually failed, headquartered on Vancouver Island.

Beyond the agreed-upon fact that there is more beetle-savaged wood being cut down in B.C., the U.S. feels the timber is under-priced because there hasn't been a large drop in lumber. If the wood really was low grade, the U.S. industry coalition said, there would be a drop in the volume of lumber, too.

The interior industry notes that its market share in the U.S. has fallen since the softwood deal began and credits advanced computer scanning technology in mills to get more useable wood out of dead pine.

"We've invested millions in mill technology," said John Allan, a B.C. industry spokesperson. (Individual companies would not comment.) "I don't think we should be faulted for keeping up our productivity."

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RBC, in a report in late August, had warned shares of West Fraser and its competitors could face "considerable pressure" if the softwood fight intensified. However, investors don't appear worried right now, as stock of Canfor has fared well recently and West Fraser is at its highest point in five years, buoyed by rising lumber prices and strong company results.

Canadians, including Mr. Allan, have complained that the fight is politically motivated, rather than based on fact, pointing to actions by congressional leaders in border states such as Republican Senator Olympia Snowe of Maine, who had urged an official trade complaint be lodged. RBC said the dispute is obviously political but suggested that could bode badly for B.C.

"We expect that the U.S. will use the softwood lumber issue to serve a dual goal," said analyst Paul Quinn of RBC in his Aug. 27 report. "First, reduce Canadian lumber imports and second, send a signal to China that the U.S. will not be pushed around on trade. … Taking a position in support of American workers and against 'unfair' trade practices, whether it is right or not, is often good politics."

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