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Commentary On softwood, Canada must avoid the negotiating table

Carl Grenier led the Free Trade Lumber Council from 1999 to 2006. He now teaches at the University of Laval, and l'École nationale d'administration publique.

If there is one thing newly elected Canadian politicians have in common, it's their unshakable faith that a better deal on trade with the United States is coming. This doctrine is supported by the long-standing Canadian practice of always fielding A-teams, whatever the issue, whenever we are summoned to Washington to make an irritant disappear. Once there, we are nearly always greeted by U.S. B-teams, as other, more exalted functionaries are kept busy with the pressing affairs of empire, rather than the $2-billion-a-day trading relationship with their northern neighbour.

Contrary to what U.S. President Donald Trump has been asserting, those "nice, polite" Canadians aren't getting their way because of weak U.S. negotiating teams. Even a U.S. B-team is ably back-stopped by Senators and their lobbyist friends who make short shrift of anything they don't agree with.

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This pattern was set a very long time ago, in fact even before the Canadian federation came into being 150 years ago.

Former prime minister Brian Mulroney was fully aware of this pattern when he sought to better integrate Canada into the giant U.S. economy. The primary objective Canada was pursuing when it negotiated the original U.S-Canada free-trade agreement was "more secure access" to the U.S. market, to quote from Mr. Mulroney's letter in September, 1985, to then-U.S. president Ronald Reagan. Getting rid of remaining customs tariffs was merely the second objective: 85 per cent of our exports were already going into the United States duty free, thanks to seven rounds of General Agreement on Tariffs and Trade (GATT) negotiations in the previous 40 years.

More secure access meant agreeing on a bilateral system of settling disputes: duty-free access flies out the window when countervailing duties or anti-dumping duties can be imposed unilaterally by your trading partner without recourse to independent arbitrators. At that time, the GATT dispute-settlement system was little more than a pious injunction for the parties to establish the facts of the case and negotiate a solution. To be sure, foreign exporters could address their grievances to the U.S. Court of International Trade in New York, but that venue was notorious for its bias against foreigners, very lengthy procedures and a disconcerting habit of reversing itself on similar issues.

This Canadian demand for independent arbitrators very nearly derailed the negotiations at the very end, but finally we did get such a system to deal speedily with allegations of subsidization and dumping: It is called Chapter 19 of the North American free-trade agreement.

Because of its heavy dependence on the U.S. market, Canada wanted established rules agreed to by the United States to settle trade disputes, rather than deal with them on an ad hoc, diplomatic basis (i.e. at the negotiating table where, invariably, might makes right). The facts underlying the Canadian logic have not changed, and will not change for the foreseeable future.

The various episodes of the softwood-lumber dispute are a perfect illustration of why we should stay away from the negotiating table and use NAFTA's Chapter 19 to adjudicate trade disputes. We have used Chapter 19 twice, once in the 1990s (Lumber III) and once in the 2000s (Lumber IV), and we were able to demonstrate conclusively that Canadian softwood lumber is not subsidized, not dumped and does not injure U.S. producers of lumber. Yet, we have done "deals" in 1986, 1996 and 2006, each one more restrictive and costly than its predecessor in terms of access to the U.S. market.

Lumber negotiations, when conducted in parallel with litigation, have always undermined Canada's position because they have created an incentive for the United States to stall the litigation while bleeding the Canadian industry of cash. Financial pressure is the weapon of choice to bring Canada to the negotiating table: in Lumber III, then-U.S. president Bill Clinton agreed to reimburse Canadian exporters in full with interest to the tune of $900-million (U.S.), but extracted a commitment to "consult," which led to the second memorandum of understanding (MOU) two years later. In Lumber IV, then-U.S. president George W. Bush refused to acknowledge the Canadian win, and the new government of Stephen Harper decided not to pursue litigation. He negotiated the third MOU, and this time Canada got the rawest deal of all time, leaving a cool $1-billion on the table, half of which went directly to the U.S. lumber coalition. The only reason we got $4.5-billion back was our win under Chapter 19.

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Now, Mr. Trump has decided that he wants to re-negotiate NAFTA, with the overall objective of making it work better for the United States. Politically, neither Canada nor Mexico can stay away from such a demand, which aims to update rules, not settle ongoing disputes, but they should not go to that table without a clear sense of their own purpose for doing so. In particular, U.S. demands for modifications that improve trade liberalization should be received favourably. Propositions going in the other direction should be resisted. Specifically, getting rid of Chapter 19 should be a deal breaker.

The U.S. is imposing tariffs averaging 20% on Canadian softwood exports
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