Canada has done the obvious thing by taking the softwood lumber fight to a NAFTA dispute settlement panel.
And why not? The Canadian government has gone this route twice before – in 1992 and 2001 – and won both times. Given that track record, last week's filing under Chapter 19 of the North American free-trade agreement is a no-brainer.
There is another, less obvious reason this is an astute move by the Trudeau government. Canada could have held off on a challenge as a sign of goodwill to the Trump administration. Instead, it has given itself a valuable bargaining chip in the ongoing renegotiation of NAFTA.
U.S. negotiators want Chapter 19 scrapped, arguing that it usurps the sovereignty of U.S. courts. Canada sees dispute settlement as an insurance policy against a U.S. anti-dumping and subsidy regime that is tilted in favour of the home team.
The softwood lumber case gives Ottawa some leverage – particularly because the odds are good that Canada would win. Assuming the United States does not abandon NAFTA, Canadian negotiators should take the position that if the United States want to talk about Chapter 19, it will first have to settle the softwood lumber dispute, permanently.
The United States cannot easily make this case disappear by walking away from NAFTA. Canada could pursue it through the World Trade Organization and the U.S. courts.
On the other hand, a U.S. pullout from NAFTA would almost certainly end Canada's Chapter 19 challenge, Toronto trade lawyer Lawrence Herman said.
"The U.S. will simply end whatever panel proceedings are under way. Period," he said. "In practical terms, it's game over."
That is unfortunate, because the U.S. case against Canada on softwood lumber is not strong. The United States initially sought a duty of nearly 27 per cent, but that has already been scaled back to 21 per cent. A NAFTA panel could reduce those duties further, perhaps to near zero.
The United States should want to put the lumber dispute to rest, for many reasons.
The Americans have long argued that the provinces, which control access to most of Canada's forests, unfairly subsidize lumber mills by charging too little to log on Crown land. This argument has never stood up to legal challenges. And Canada's forestry practices are far more market-oriented now than they were during the last go-around, in the early 2000s.
More importantly, the North American lumber market is already showing the consequences of protectionism.
Prices are up sharply since the United States launched its latest complaint against Canadian lumber imports. In the past 12 months, the price of lumber rose about 27 per cent to $436 (U.S.) per thousand board-feet, according to the Random Lengths composite index.
The purpose of the duties is to punish Canadian producers and level the playing field. But that is not what is happening.
For the most part, the duties are just being added to the final price. The result is that U.S. consumers – homeowners, builders and contractors – not Canadians, are paying the price.
Any good economist could have predicted this. Take a market with growing demand and tight supplies, and then throw in a severe price shock in the form of duties.
Americans use more lumber than they can produce domestically, much of it for home construction. Canada has traditionally filled the gap, supplying about 30 per cent of the U.S. market. Last year, the United States imported $7.5-billion (Canadian) worth of lumber from Canada.
The pace of U.S. housing starts has more than doubled, to about 1.3-million a year, since the depths of the recession in 2009. Rebuilding after Hurricane Harvey and Hurricane Irma has spurred additional demand.
Meanwhile, the supply of lumber is tight because of this year's forest fires and the continuing effect of a pine beetle infestation in Western Canada.
In short, there is plenty of evidence that the tariffs are inflicting a toll on the U.S. economy.
As long as NAFTA lives, Canada should use the tools at its disposal to get what it wants.