Lawrence L. Herman of Herman & Associates is a former Canadian diplomat who practises international trade law. He is also a senior fellow of the C.D. Howe Institute in Toronto.
It haunts us still. Softwood lumber is back, the defining Canada-U.S. trade dispute of the ages.
The preliminary duties announced Tuesday are designed to affect billions of dollars of Canadian exports. Even ahead of final duties to be announced in June, these will decimate Canadian exports and affect the livelihood of many thousands of Canadians.
Over the coming months, softwood lumber will dominate the front pages of our newspapers (though relegated to the back pages in U.S. media).
As if there wasn't already enough tension in the bilateral relationship, softwood lumber adds even more stress, with President Donald Trump's demand for NAFTA renegotiations (which he describes as the most "disastrous" trade agreement ever signed by the U.S.) and his recent slamming of Canada's dairy regulations under the system of supply management.
This is the fifth trade dispute launched by American industry since the 1980s ("Softwood V"). To understand the options for Canada, we need to deconstruct the dispute a bit.
To begin with, all such trade cases – whether by the U.S. Commerce Department or Canada's own Border Services Agency – are not actually instigated by governments. Dumping and subsidy complaints are launched by the private sector. If a petition (or as we call it in Canada, a complaint) is filed by a domestic industry and is properly documented, the responsible government agency then investigates.
That is what we have here, a situation where U.S. lumber producers, not the U.S. government, started all this. We would have had the same issues and almost certainly the same preliminary duties under Hillary Clinton.
What makes this case different is that these preliminary duties fit squarely into Mr. Trump's misguided and offensive narrative about Canada being an unfair trading partner, whether it's regarding softwood lumber, dairy products or energy.
Even if there was the political will for Washington to intercede and try to broker a settlement (which there isn't here), because these kinds of trade disputes are driven by the private sector, it becomes politically and legally tricky for governments to intervene.
Trade remedies, as the name indicates, are allowed under the WTO agreement and the North American free-trade agreement and are designed by law to assist the domestic industry, ultimately through a process of adjudication.
The unfortunate timing of Softwood V means that it muddies the waters for the impending NAFTA renegotiations. Clearly the better approach for Canada would be to pursue possible settlement outside of the NAFTA talks, but we'll have to wait to see how that unfolds.
In the meantime, the U.S. investigation and adjudication process will continue. One of Canada's advantages, if there is one, is that the U.S. must follow internationally agreed-upon rules. There is every opportunity for Canada and for Canadian industry to challenge U.S. rulings along the way, whether before WTO or NAFTA panels or in the U.S. courts.
The problem is that those challenges are long and complicated, and the Canadian industry's legal costs have to be borne by the companies themselves. In the meantime, duties on Canadian exports are in effect, and Canada's market in the U.S. progressively erodes.
And that is exactly what the U.S. industry wants. This is a commercial battle, and trade remedies are the American producer's strategic instrument of choice.
Assuming Canada ships something like $6-billion worth of lumber to the U.S. annually, a mere 1 per cent market gain by U.S. producers is worth $60-million. But as the case proceeds and Canadian exporters are tied up in endless Commerce Department audits, with duties being subject to cash deposits, U.S. producers are sure to regain more than 1 per cent of their market. That gives U.S. producers every incentive to keep the case going, win or lose.
Moreover, there are no adverse WTO or NAFTA panel rulings in Canada's favour that can assist in providing negotiating leverage. Because each of these cases start from a blank slate, rulings in Canada's favour in the previous cases have no influence on what the Commerce Department or the U.S. International Trade Commission do in this instance. This leaves little incentive for the U..S industry to come to the table.
For now, the options for Canada are to continue to aggressively fight the case with every legal weapon available, as B.C. Liberal Leader Christy Clark said this week. At some point, assuming Canada wins some of these challenges, there may be enough leverage to get a renewed softwood agreement.
In the long term, given the stark realities south of the border, market diversification is the best – and maybe the only – long-term solution for Canada.
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