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Business Commentary Any softwood lumber deal needs to address root cause of rift: a low loonie

Doug Smyth is a forest industry consultant and former research director with IWA-Canada.

Prime Minister Justin Trudeau and U.S. President Barack Obama said last week in Washington that they are committed to fixing the continuing "irritant" of the U.S.-Canada softwood lumber dispute. "This issue … will get resolved in some fashion," Mr. Obama said at a joint news conference in the White House Rose Garden.

Let's hope so, because there is no doubt that the 2006-15 U.S.-Canada softwood lumber agreements were a costly disaster for the four major provinces covered: British Columbia, Alberta, Ontario and Quebec. From October, 2006, to October, 2015, they paid out $1.9-billion (Canadian) in export charges.

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However, the damage didn't stop there. The U.S. government had already hit Canadian lumber imports with average duties of 27 per cent from 2002 to 2006. The total cost to the four provinces came to $5.3-billion (U.S.) in duties. Of that amount, 81 per cent was eventually refunded to the Canadian companies. But the net total cost of the duties after deducting the refund was $2.4-billion (Canadian).

Altogether, the total cost of the export charges on top of the loss of the unrefunded duties came to an enormous $4.3-billion. British Columbia and Alberta accounted for a combined $3.7-billion of that, 86 per cent of the four-province total.

The blame for this lies squarely with the abysmal failure of the binational panel system provision in the 1989 U.S.-Canada free-trade agreement. It was included at Canada's insistence in order to provide Canadian imports with fair appeals of U.S. subsidy decisions. Because this provision was "a deal breaker" for Canada, the U.S. negotiators gave in. However, it's obvious that the U.S. federal government has been unwilling or unable to keep that commitment as far as Canadian softwood lumber has been concerned.

It's clear from Canada's acceptance of the two extremely punitive softwood-lumber agreements from 2006 to 2015 that the Chapter 19 binational panel appeal system does not work for the B.C. and Canadian lumber industries. Because the U.S. side still had access to a long drawn-out system of legal appeals, it was able to stall indefinitely the refunding of the $5.3-billion in duties that had been wrongly overcharged. As a result, it's obvious that Canadian companies were blackmailed into accepting the punitive 2006 agreement.

In the end, the binational panel ruled that there was no significant subsidy to Canadian lumber imports. And in two decisions, the U.S. Court of International Trade upheld that finding. Zero duties is a long way down from more than four years at 27 per cent.

Given the fact that in two consecutive lumber cases the binational panel appeals system provision was successfully nullified by the U.S. coalition, some other solution must be found to ensure fair treatment of the Canadian lumber industry. It is now extremely important to switch the focus of the dispute resolution system back to the original cause of the trade wars: the low value of the Canadian dollar. It was the primary issue for the first U.S. coalition during the early 1980s, and it has become an even greater concern during 2015 and early 2016, when the loonie sank to a new low since 2002 of just $0.70 per U.S. dollar.

Since a foreign-country currency advantage is not countervailable under U.S. trade law, it is up to the parties on their own to try to negotiate a solution to that underlying problem that both can live with. That, of course, means making a sincere effort to find the common ground, rather than engaging in a "knock-down-drag-out" legal fight that only one party can win.

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Such a currency-related export charge system could provide an additional benefit. The fatal flaw of both the 1996-2001 and the 2006-15 lumber agreements was that they both permitted the U.S. industry to flood the market with excess lumber while Canadian imports were severely restrained. But there was absolutely no deterrent to the U.S. industry to prevent it from doing so, while drastically reduced B.C. lumber imports were blamed for causing prices to weaken. If, during a period of weak demand, U.S. lumber prices are generally falling because of the U.S. industry flooding the market, then there must be a safeguard provision that allows the percentage penalty on Canadian imports to be reduced.

In 2016, Canada could face the unpalatable choice between accepting a fate similar to what happened from 2002 to 2006, or capitulating to another seriously flawed agreement. While a currency-related export charge system would not be perfect, it certainly would beat the obviously failed alternatives that have prevailed since 1991. Canada should not rush into another deal that repeats the same mistakes.

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