Doug Smyth is a forest industry consultant and former research director with IWA-Canada.
In the runup to NAFTA negotiations starting on Aug. 16, Foreign Affairs Minister Chrystia Freeland has been pushing to close a softwood lumber deal in order to clear the decks. But with heavy U.S. penalties on Canadian lumber imports already in place, the B.C. and Canadian lumber industries are clearly sitting in a very weak bargaining position. For now, the U.S. side holds all the aces. But they are blackmail cards, based on extremely flawed subsidy calculations by the U.S. Department of Commerce.
This now marks the third time in a row since 1996 that the United States has attempted to use erroneously calculated duties to pressure Canada into accepting a punitive long-term trade agreement. However, caving in early to another blackmail lumber agreement in 2017 would be like snatching defeat from the jaws of victory.
Here is why.
On April 25, Commerce opened its fifth countervailing duty case against Canadian softwood lumber imports in 35 years. The department assessed three representative B.C. Interior companies with an average 9.4-per-cent penalty for allegedly "subsidized stumpage." When alleged B.C. log export restrictions and government grants were factored in, the total subsidy penalty for the rest of the Canadian industry rose to an average of 20 per cent.
Stumpage is the value of a tree while it is still standing on the stump, excluding harvesting and hauling costs to the sawmill. For more than three decades, the U.S. Coalition for Fair Lumber Imports has alleged that the Canadian lumber industry enjoys an unfair cost advantage, mainly because provincial governments are said to provide subsidized timber from public lands.
However, our current 100-page study proves that during the 2015 reference year, the average sawlog stumpage rate for B.C. Interior Western Spruce-Pine-Fir was $65 a cubic metre – 40-per-cent higher than the stumpage price of $47 for the same species in the eastern Washington region that the United States chose for comparison.
Net stumpage costs are calculated by subtracting harvesting and hauling costs from total delivered log costs. But higher harvesting and hauling costs in eastern Washington have resulted in sawmills bidding for timber at much lower stumpage prices than in the B.C. Interior. In its calculations, Commerce incorrectly substituted the total delivered log cost from the harvest site to the sawmill for the stumpage price. This extremely erroneous definition directly contradicts that of the Washington State Revenue Department, which specifically defines stumpage as the value of a tree standing on the stump immediately before harvest.
The Commerce Department's current approach therefore violates U.S. trade law. The sole goal of the current countervailing duty petition is to claim alleged stumpage subsidies provided by provincial governments – and that is all. A NAFTA free-trade panel would have no trouble seeing through this ruse.
However, given the continuous 42-per-cent plunge in southern pine sawtimber stumpage prices from 2005 through the first quarter of 2017, private timberland owners in that region are demanding that an extremely tight quota be imposed on Canadian lumber imports to support much higher timber prices in the South. But under international trade law, the U.S. government cannot unilaterally do so. They can only try to prove their subsidy case in front of a binational trade panel.
But based on the correct stumpage numbers for the B.C. Interior and the eastern Washington region, Commerce clearly does not have a valid case.
Commerce also committed a second serious error of omission. It is amazing that the Department carried out its 2017 stumpage subsidy calculations without ever mentioning the U.S. South. During 2015, the B.C. Interior industry paid $38 a cubic metre more for sawtimber than southern pine sawmillers did – $66 versus $28, or 135 per cent more. Given that big advantage, it is no wonder that the southern pine region holds by far the largest U.S. domestic market share of all North American lumber-producing regions: 36 per cent, compared with 20 per cent for the U.S. West and just 15 per cent for B.C. during 2015.
The South has accomplished this by enjoying much lower stumpage and labour costs than sawmills in the U.S. West and the B.C. Interior. Given this enormous economic advantage, the southern pine region shouldn't need any more U.S. government help. The South's real problem is a huge sawtimber oversupply, which was created by its own timber owners. They have been by far the most vocal of the U.S. Coalition complainants about Canadian imports.
In the continuing lumber negotiations, the Canadian side should expect to look for common ground with the U.S. industry in order to negotiate a bilateral lumber agreement that both sides can live with. But a fair, long-lasting deal can only be reached when the calculations behind the discussions are accurate and honest. Neither side will get everything it wants, which is clearly the current goal of the U.S. Coalition.