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A worker moves rolls of paper at the Catalyst Paper distribution centre in Surrey, B.C., on Thursday July 24, 2014.

DARRYL DYCK/The Globe and Mail

Stop the presses – U.S. paper mills are upset over what they see as subsidized Canadian newsprint being used by American newspaper publishers.

While the softwood-lumber dispute has strained Canada-U.S. trade relations, a separate fight is brewing over other products that Canadian forestry mills sell south of the border, notably uncoated groundwood paper, such as newsprint.

Groundwood from Canada is subsidized and being dumped at below market value, according to U.S. producer North Pacific Paper Co., also known as Norpac.

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Norpac complains that U.S. paper makers are being hurt by Canadian groundwood: Newsprint, book pages and other uncoated products used in commercial printing.

The U.S. Department of Commerce is expected to issue its preliminary ruling on imposing countervailing duties by Jan. 8 and anti-dumping duties by Jan. 16.

The groundwood battle comes as Canada takes an increasingly tough approach to renegotiation talks for the North American free-trade agreement. One of the key sticking points in NAFTA discussions is Canadian support for and U.S. opposition to Chapter 19, which sets up trade panels to settle disputes.

Norpac, the operator of a paper plant in Longview, Wash., complained about Canadian groundwood to the Commerce Department in August, and since then, it has asked Commerce officials to dig deeper into the industry in Canada.

On Nov. 15, for instance, Norpac said Montreal-based paper maker Kruger Inc. enjoys electricity subsidies through Hydro-Québec. Kruger has acknowledged its interruptible power arrangement with Hydro-Québec, said Norpac, which is owned by hedge fund One Rock Capital Partners LLC of New York.

Norpac said other subsidies in Canada include the Ontario government providing Resolute Forest Products Inc. with what amounts to breaks on electricity rates and also unfair financial assistance.

Canadian paper makers and U.S. newspaper publishers argue that the dispute isn't about trade. They point out that demand for newsprint has fallen sharply over the past decade, especially as readers shift to digital alternatives such as laptops, tablets and cellphones.

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The News Media Alliance, whose members represent more than 1,350 U.S. newspapers such as The New York Times and The Washington Post, has sought unsuccessfully to have the U.S. International Trade Commission dismiss Norpac's case. The commission issued a preliminary ruling in September that the U.S. groundwood industry is being injured by Canadian shipments, clearing the way for the Commerce Department to continue its investigation.

"But of course, print is declining during this digital transformation," the alliance warned the commission in September. "Because print subscriptions have declined by more than 30 per cent over the last 10 years, our industry is necessarily using less paper. This is simply a fact of life in the digital ecosystem. It has nothing at all to do with trade issues, but everything to do with the digital reality of publishing in 2017."

The groundwood case is following the softwood pattern, with the Commerce Department considering countervailing duties to penalize Canada for what Norpac calls subsidies for uncoated groundwood paper. Anti-dumping duties would be imposed on Canadian producers selling their groundwood below market value.

Kruger, Montreal-based Resolute and Catalyst Paper Corp. of Richmond, B.C., are the three mandatory respondents in the countervailing investigation. Resolute and Catalyst are the two mandatory respondents in the anti-dumping probe. Connecticut-based White Birch Paper Co., which has three Quebec paper mills, is the voluntary respondent in both the countervailing and anti-dumping cases.

In a filing to the Commerce Department, Norpac said there are five producers of uncoated groundwood paper in the United States: Norpac, Resolute, White Birch, Inland Empire Paper Co. of Washington State and Maine-based Twin Rivers Paper Co.

Norpac said the Commerce Department should disregard the views of Resolute and White Birch because "the companies' interests lie more in their Canadian production operations."

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But Resolute warns that if the U.S. imposes punitive tariffs on Canadian imports, it will worsen economic hardships for American publishers.

"Demand for newsprint has been in decline," Resolute spokesman Seth Kursman said in a statement. "It is the dominant business reality facing the paper industry. However, it is market erosion, not trade practices, causing today's competitive turmoil."

Norpac is targeting products such as newsprint, directory paper, book-grade paper and groundwood printing and writing paper. About 80 per cent of newsprint is sold directly to newspaper publishers, Norpac estimates.

Catalyst and the B.C. government have asked the Commerce Department to exclude other paper products from the U.S. countervailing and anti-dumping probes. "As written, the scope of the investigations covers other applications such as food, packaging and hygiene," the B.C. government said in its submission in support of Catalyst.

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