The cheap Canadian dollar could prove very costly to one of the biggest beneficiaries of a weak currency.
Canada's forest products industry, and particularly lumber exporters, have it good right now.
U.S. demand for new houses is strong and gathering momentum. The 71-cent (U.S.) loonie makes everything cheaper for Canadian lumber producers compared with their U.S. rivals, most notably labour, energy and timber. Their revenues, meanwhile, are conveniently logged in U.S. dollars, swelling their profits. And, for the first time since 2006, the U.S. border is wide open to Canadian lumber. An agreement that limited U.S.-bound exports expired in October.
Canadian lumber producers, especially in Quebec, have been driving truckloads of extra two-by-fours through the open door. In the first full month after the deal's demise, Canada shipped 1.3 billion board-feet of lumber to the U.S., 33 per cent more than in November, 2014, according to figures compiled by Doug Smyth, a Vancouver industry consultant.
And 2016 is shaping up to be even better because of rising U.S. demand for new homes – the main market for Canadian lumber.
But it could be too much of a good thing.
The U.S. lumber industry is girding for a trade fight. The low Canadian dollar gives the industry all the incentive it needs to play hardball – as it has done every time the Canadian dollar has taken a dive in recent decades. The United States slapped steep duties on Canadian lumber in the mid-1980s, and again in the early 2000s, periods when the loonie was similarly in the 60-to-75-cent range.
"2016 promises to be a very difficult year for the softwood lumber industry," Mr. Smyth warned. "They'll be out for blood."
U.S. trade law specifically forbids taking action against currencies. Instead, the U.S. industry has typically targeted the fees provincial governments charge companies for cutting trees on Crown land – so-called stumpage – as a proxy for the currency. A low dollar worsens the competitive position of U.S. mills and exaggerates the divergence between timber costs in the two countries, providing the justification for allegations of unfair subsidies. In the U.S., most timber is cut on private land.
Most Canadian producers would have been happy to extend the managed trade deal that ended the last lumber fight. Stability and predictability are seen as better options than litigation.
But the U.S. industry didn't bite. The U.S. Lumber Coalition has dismissed the old deal as "outdated." They insist they also want a negotiated settlement, but apparently one that imposes a much larger penalty on Canadian lumber than the maximum 15-per-cent export tax applicable under the old deal.
Under the terms of the expired deal, the U.S. can't launch another trade case until October at the earliest, or just before the U.S. elections. Unless Canada agrees to voluntarily restrain trade, the U.S. Lumber Coalition has said it will have "no choice but to use our rights under U.S. laws to offset unfair advantages."
The weak dollar provides a disturbing backdrop to either a new agreement or another protracted trade fight. Canadian exports are surging, putting downward pressure on North American prices and, at least in theory, displacing U.S. production and workers.
The low dollar may also have helped trigger a similar trade dispute over glossy magazine paper. Last year, the U.S. government hit four Canadian companies with tariffs of up to 20 per cent on roughly $1-billion worth of Canadian exports of "supercalendered paper," alleging unfair subsidies.
This week, one of the U.S. companies that pressured Washington to impose the duties – Tennessee-based Verso Corp. – filed for protection from creditors. The company has complained in recent months about increased foreign imports and the strong U.S. dollar.
Canada exported roughly $20-billion worth of forest products to the U.S. last year, including $6-billion worth of softwood lumber.
The recovery for this vital industry should be a good-news story as the low dollar, open border and rising U.S. demand drive exports.
But Canada is facing an unfortunate confluence of circumstances. The U.S. elections will make a negotiated settlement trickier, if not impossible. And the weakened dollar exaggerates this country's cost advantages.
It's a painful reminder that a floating currency isn't much of a shock absorber when trade isn't free.