Lumbering On: The State of the Canada-U.S. Trade Relationship

Notes

• An earlier version of this article was presented at a conference held at the Woodrow Wilson International Center for Scholars in Washington, D.C., in December 2006. I am grateful for the helpful comments on this paper offered by my discussant, Grant Aldonas, Scholl Chair in International Business, Center for Strategic and International Studies, Washington, D.C., and other participants. Responsibility for the analysis presented here remains mine.
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• C. L. Higham and David N. Biette, eds., American Review of Canadian Studies [hereafter ARCS](Summer 2005).
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• The DOC also determined in October of the same year that Canadian companies are “dumping” softwood lumber on the U.S. market.
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• Canadian and US. trade officials had first reached a negotiated agreement in principle on Apr. 27, 2006. They successfully concluded negotiations on July 1, and the Canadian government announced on Aug. 26, 2006, that it had received support from a clear majority of Canadian softwood lumber companies in all regions for the negotiated agreement, in addition to the three largest softwood-producing provinces of British Columbia, Quebec, and Ontario.
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• The chapter is entitled “Review and Dispute Settlement in Antidumping and Countervailing Duty Matters” (Chapter 19 of NAETA).
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• On Oct. 7, 1982, the Coalition for Fair Lumber Imports (CFLI) launched its first petition against Canadian softwood lumber imports under U.S. Countervailing duty law. The DOC concluded on May 31, 1983, that stumpage did not confer a countervailable subsidy (Lumber I). On May 19, 1986, the CFU again petitioned for countervailing duties. After the DOC found that Canadian stumpage systems conferred a subsidy to lumber producers averaging approximately 15 percent, Canada and the United States concluded a Memorandum of Understanding (MOU) on Dec. 30, 1986, to resolve the dispute. Pursuant to the MOU, Canada agreed to collect a 15 percent export charge on exports of lumber from Canada. Canada exercised its contractual right to terminate the MOU on Sept. 3, 1991 (Lumber 11). On Oct. 31, 1991, the DOC self-initiated a new countervailing investigation while imposing a temporary bonding requirement on imports of Canadian softwood lumber. Successful legal challenges under Chapter 19 of the ETA followed the DOC affirmative determination on subsidization. On Aug. 16, 1994, the DOC published a notice in the Federal Register revoking the countervailing duty and, by the end of the year, it announced the refund of all duties collected (Lumber III). On May 29, 1996, Canada and the United States finalized a quota-based agreement on softwood lumber covering the five-year period to Mar. 31, 2001. For further details, see Department of Foreign Affairs and International Canada, 'Canada-U.S. Softwood Lumber Trade Relations (1982–2006),” http://www.international.gc.ca/eicb/softwood/chrono-en.asp; page consulted on Dec. 4, 2006.
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• The allegation was that Canada's provincial and territorial governments had subsidized forest companies by setting the stumpage fees too low. Instead of paying the market price for logging rights, Canadian companies pay what is known as a stumpage fee for logs harvested on Crown land. This purportedly gives Canada's softwood lumber exporters an unfair price advantage over softwood suppliers in the United States, who must sell their lumber at market price.
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• Canada also had challenges before the U.S. Court of International Trade.
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• During the months of February and March 2002, Canada and the United States first engaged in discussions to resolve the softwood lumber dispute. On Jan. 6, 2003, the DOC released a paper entitled “Proposed Analytical Framework: Softwood Lumber from Canada,” as the basis for discussions with Canada. On May 23 of the same year, Canada released a counterproposal. On July 23, 2003, the parties recommenced negotiations. Canada released a proposal for discussion on Nov. 14, 2003, and the United States responded the following month with a proposal to the provinces and industry as the basis for a settlement of the dispute. The parties met again in Washington, D.C., on July 18–20, 2005.
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• In fact, the agreement could be abrogated before the end of the seven-year period. At any time after the agreement has been in effect for 18 months, any party may terminate the agreement by providing six months' notice. However, the agreement requires a 12-month standstill on trade remedy actions should either party terminate the agreement. This is in addition to the 12-month standstill on U.S. trade remedy action upon expiry of the agreement. For a more complete overview of the agreement, see Department of Foreign Affairs and International Trade Canada, “The Canada-U.S. Softwood Lumber Agreement,” http://www.international.gc.ca/eicb/softwood/SLA-backgrounder-en.asp; page consulted Dec. 5, 2006
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• Some of the initiatives are joint while others are U.S. meritorious initiatives selected by the U.S. government in consultation with Canadian officials. Both parties agreed that this distribution of collected duties does not represent a precedent.
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• Border measures do not apply to softwood lumber that is produced in the Atlantic provinces from logs harvested in the Atlantic provinces or the state of Maine, to logs harvested and produced in Nunavut or the Yukon and Northwest Territories, or to logs from 32 companies found by U.S. authorities not to benefit from alleged subsidies.
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• To preserve Canada's share of the U.S. market and to address increases in the third-country share of the U.S. market, the Government of Canada will retroactively refund export charges (up to 5 percent) if the third-country share of the U.S. market increases by 20 percent, the Canadian market share decreases, and the U.S. “domestic producers” market share increases.
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• Regional shares are determined by each region's average exports to the United States for the period 2001–2005. If shipments from a province exceed 110 percent of its base allocation, then the export charge on shipments from that province during that month will be increased by 50 percent. For instance, if there were a 10 percent export charge Canada-wide during that month, then the export charge for the province that exceeded its base allocation would be increased to 15 percent. In 2005, British Columbia accounted for more than 57 percent of Canada's lumber exports to the United States, followed by Quebec (16 percent), Ontario (9 percent), the Maritimes (8 percent), Alberta (7 percent), Saskatchewan (1 percent), and Manitoba (1 percent).
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• At a recent conference that took place in Columbus, Ohio, I asked by a show of hands how many American international relations experts knew about the Canada-U.S. softwood lumber dispute; I estimated that about 40 percent of them had heard of it. When I asked how many of them could discuss its content for 15 minutes, no one answered positively. On the other hand, the dispute made the front page of several newspapers in Canada, and it seems to me that over the years every Canadian citizen has become a softwood lumber expert
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• On Sept. 13, 2005, the CFLI initiated a challenge to the constitutionality of NAFTA's Chapter 19, under the mechanisms contained in Chapter 20 of NAFTA. Chapter 20 creates a method of handling disputes between member countries arising out of the agreement itself. The CFLI claimed that the dispute settlement mechanism “allows Bi-national panels of individuals to make binding decisions about application of U.S. law to U.S. unfair trade findings contrary to due process and constitutional requirements.” DFAIT, “Canada-U.S. Softwood Lumber Trade Relations (1982–2006),” http://www.international.gc.ca/trade/eicb/softwood/chrono-en.asp, p. 3; page consulted on Dec. 10, 2006.
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• This Latin locution is Canada's motto, which means “from sea to sea.”
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• Under the Constitution Act of 1867, provincial governments have jurisdiction over all aspects of forest management within their respective territories. However, trade issues fall under the responsibility of the federal government. Because each provincial government uses its own forest management style, they are key players at the negotiation table.
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• See Doug Struck, “Rapid Warming Spreads Havoc in Canada's Forest,” Washington Post (Mar. 1, 2006), p. AI, http://www.washingtonpost.com/wp-dyn/content/article/2006/02/28/AR2006022801772.html; page consulted on Dec. 10, 2006.
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• CTV.ca, “PM Strikes Deal with U.S. to End Lumber Dispute,” Apr. 27, 2006, http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20060426/softwood_folo_060427/20060427?hub=To pStories; page consulted on Dec. 10, 2006.
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• Steve Hunt, “Harper Rolls the Dice on Softwood Lumber Agreements with George Bush,” Steelworks, District 3-Western Canada, July 24, 2006, http://www.usw.ca/program/content/3537.php; page consulted on Dec. 10, 2006.
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• This program—as well as similar aid packages by federal authorities and provincial governments in Ontario and Western Canada—is already drawing attention south of the Canadian border. The U.S. trade representative, Susan Schwab, has already accused Canada of not respecting certain aspects of the agreement. Not only is she questioning the legitimacy of aid programs for Canada's forest industry, but she also claims, in a letter sent to Canada's trade minister, David Emerson, that Canadian softwood lumber exporters did not respect the export quotas negotiated in the December 2006 agreement.
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• Cited in James Mcllroy, “Lessons Learned from the Softwood Lumber Saga,” Policy Options, November 2005, p. 39.
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• There is much less dissatisfaction regarding the dispute settlement process at the WTO. More than likely, the main explanation is that many Canadians perceive that the resolution of the softwood conflict at NAFTA is based on U.S. law and that U.S. judges are bound to pursue U.S. interests. This misperception is deeply ingrained within the Canadian public, which is why, in this article, I concentrate on an empirical analysis of NAFTA's dispute resolution mechanism.
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• Drew Fagan, “Beyond NAFTA: Towards Deeper Economic Integration,” in Canada Among Nations 2003: Coping with the American Colossus, ed. David Carment, Fen Osler Hampson, and Norman Hillmer (Don Mills, ON: Oxford University Press, 2003), p. 37.
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• James McIlroy, “Lessons Learned from the Softwood Lumber Saga,” Policy Options, November 2005, p. 32.
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• John Conybeare, Trade Wars: The Theory and Practice of International Commercial Rivalry (New York: Columbia University Press, 1987). For a formal extension of Conybeare's theory, see Scott Gates and Brian Humes, Games, Information and Politics: Applying Game Theoretic Models to Political Science (Ann Arbor: University of Michigan Press, 1997).
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• All statistics on the overall trade relationship between Canada and the United States come from Industry Canada, “Trade Data Online,” http://strategis.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php#tag; page consulted on Dec. 5, 2006.
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• Canadian Embassy, Washington, “The Canada-U.S. Trade and Investment Partnership,” http://geo.international.gc,ca/can-am/washington/trade_and_investment/trade_partnership-en.asp?lang_update=1; page consulted on Dec. 5, 2006.
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• The Trade Act of 1974, under Sections 301–302, “expanded discretionary authority to retaliate against unjustifiable and unreasonable foreign barriers.” The Trade Agreement Act of 1979 expanded the Trade Act of 1974 and gave to the president the authority to enforce trade agreements. It also allowed for detailed procedures for investigation (including deadlines for action), and the use of available settlement procedures. Later, the Trade and Tariff Act of 1984 authorized retaliation in the service sector. Finally, the Omnibus Trade and Competitiveness Act of 1988 created Super 301 and shifted the authority to retaliate from the president's desk to his trade representative (USTR). However, the process is still dependent on some presidential directives. It also made retaliation against “unjustifiable” practices mandatory. See Thomas O. Bayard and Kimberly Ann Elliot, Reciprocity and Trade Relations in U.S. Trade Policy (Washington, D.C.: Institute for International Economics, 1994), p. 24.
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• Erick Duchesne, International Bilateral Trade and investment Negotiations: Theory, Formal Model and Empirical Evidences, Ph.D. thesis, Michigan State University, 1997.
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• In addition, a number of countries, including Canada, challenged the provisions of Sections 301–310 of the United States Trade Act at the WTO in the late 1990s, but a panel rejected the claim. See WTO, United Stales Sections 301–310 of the Trade Act: Report of the Panel, Dec. 22, 1999, http://www.sice.oas.org/DISPUTE/wto/tractOle.asp; page consulted on Mar. 7, 2007. Despite the rejection of the claim, the United States did not resort to Section 301 after 1997.
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• Seven cases were eliminated because they had been initiated by Canadian firms against their own government.
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• This measure of success is different from remands by dispute resolution bodies. If a political resolution leads to the abandonment or the diminution of countervailing and antidumping duties, it becomes a successful case.
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• The dispute settlement process is a purely legal process. Panel members are bound to be neutral and oblivious to political pressure. As the softwood lumber dispute demonstrates, though, for such highly visible cases, political involvement and expending political capital may be necessary to find a solution. However, most political maneuvers take place before a trade conflict becomes a “formal” dispute settlement case. Indeed, a multivariate analysis of successful challenges suggests that political factors are less significant than economic factors. Data and results are available from the author, who with Marie-Hélène Cantin presented the findings at the annual meeting of the Peace Science Society (International) in Columbus, Ohio, in November 2006. In a future study, we will account for the influence of pressure groups, such as the FTLI, on key political leaders.
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• William Watson, 'When Good Politics Makes Bad Policy: Self-Righteousness Sells but Doesn't Solve Softwood Lumber Case,” Policy Options, November 2005, pp. 28–31.
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• The Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) is the official name for the Byrd Amendment. Sponsored by Senator Robert Byrd, Democrat from West Virginia, this piece of U.S. legislation changed the disbursement of import duties collected from antidumping and countervailing measures. Prior to this Act of Congress, such funds were incorporated into the U.S. budget. The new disposition specifies that the funds now be distributed to the U.S. companies that file pricing complaints. The European Commission and seven other countries, including Canada, filed a formal protest with the WTO, which ruled the Byrd Amendment illegal in 2002. After growing pressure from multiple fronts, including from the U.S. executive, the Senate repealed the amendment in December 2005. The House of Representatives followed suit in January 2006, and President Bush made the repeal official with his signature on Feb. 8, 2006. The Act's provision will stay in place until Oct. 1, 2007.
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• This includes 12 NAFTA Chapter 11 cases on investment, 29 NAFTA Chapter 19 cases, and 13 cases before the WTO Dispute Settlement Body. What is most striking about these statistics is the absence of NAFTA Chapter 20 cases; this would indicate that the legitimacy of NAFTA is well established.
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• Those issues are the relationship between trade and investment, between trade and competition, and among trade facilitation and transparency in government procurement. The objective was to bring these issues to the formal bargaining table. This task quickly became too ambitious.
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• WTO, “Text of the ‘July Package’ – The General Council's Post-Cancun Decision,” Aug. 1, 2004, http://www.wto.org/english/tratop_e/dda_e/draft_text_gc_dg_31july04_e.htm; page consulted on Feb. 25, 2007.
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• WTO, “Doha Work Programme: Ministerial Declaration,” Dec. 18, 2005, http://www.wto.org/english/thewto_e/minist_e/min05_e/final_text_e.htm; page consulted on Feb. 25, 2007.
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• WTO, “DG Lamy: Time Out Needed to Review Options and Positions,” July 24, 2006, http://www.wto.org/english/news_e/news06_e/tnc_dg_stat_24july06_e.htm; page consulted on Feb. 25, 2007.
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• The CAP is a complex form of subsidization (accounting for more than 40 percent of the European Union budget) and import tariffs that guarantee a minimum price to producers and a direct payment of a subsidy for crops planted. Reforms of the system are currently underway. Increasingly, the vast majority of subsidies will be paid independently from the volume of production.
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• The Farm Bill is a vast program of subsidies to benefit U.S. agricultural producers. These subsidies amounted to $46.5 billion, or the equivalent of 18 percent of total U.S. farm income, in 2004, according to a Cato Institute study. See Daniel Griswold, Stephen Slivinski, and Christopher Preble, “Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers,” Cato Institute, Center for Trade Policy Studies Trade Policy Analysis 30, Sept. 14, 2005, http://www.freetrade.org/pubs/pas/tpa-030es.html; page consulted on Feb. 25, 2007. The U.S. Department of Agriculture sent a proposal to Congress on Jan. 31, 2007, which would reduce farm subsidies by $18 billion over the next five years.
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• Michael Hart and Bill Dymond, “Waiting for Conservative Trade Policy,” Policy Options, October 2006, p. 65.
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• The negotiations were suspended by Thailand in 2006 due to Bangkok's political crisis. Negotiations with the United Arab Emirates are also on hold, although informal talks are still ongoing. Agreements with Columbia, Peru, Panama, and South Korea await congressional approval.
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• The Act gives the president Trade Promotion Authority (TPA), under which international trade agreements are subject to an up-or-down vote in Congress, with no amendments possible.
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• Jean-Philippe Gervais and Bruno Larue, “La crème est-elle en train de surir? Les relations canado-américaines dans le secteur agroalimentaire” Policy Options, November 2005, p. 41. French-speaking readers of ARCS should consult Gervais's and Larue's article for a more extensive discussion of the extent of bilateral irritants in the agricultural sector.
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• One specific issue came to the fore in January 2007 when Canada sent to the WTO Dispute Settlement Body a request for consultation regarding U.S. subsidies and other forms of domestic support for corn producers. According to the Canadian government, U.S. producers in this sector have gained an unfair trading advantage over the previous two years with a total of US $18 billion in subsidies. U.S. authorities have replied that the agricultural programs are legal; we should expect Canada to request the creation of a WTO panel within a few months to investigate the issue.
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• Agriculture and Agri-Food Canada, “Next Generation of Agriculture and Agri-Food Policy,” http://www.agr.gc.ca/pol/consult/index_e.php; page consulted on Feb. 25, 2007.
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• See Agriculture and Agri-Food Canada, “News Release: Ministers Focus on Building a Stronger Future for Agriculture in Canada,” Nov. 14, 2006, http://aceis.agr.ca/cb/index_e.php?sl=n&s2=2006&page=n61114; page consulted on Feb. 25, 2007.
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• For some convincing arguments regarding the need to phase out Canada's supply management programs, see Mike Gilford, “Canada's Dairy Industry: Can Supply Management Survive and Open Trade Environment?” Policy Options, November 2005; and Michael Hart, “Great Wine, Better Cheese: How Canada Can Escape the Trap of Agricultural Supply Management,” C.D. Howe Institute Backgrounder 90, April 2005.
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• Maureen Appel Molot, “The Trade-Security Nexus: The New Reality in Canada-U.S. Economic Integration, ARCS 33, no. 1 (Spring 2003): 27–62. For another study along the same lines, see Greg J. Anderson, “North American Economic Integration and the Challenges Wrought by 9/11,” Journal of Homeland Security and Emergency Management 3, no. 2 (2006).
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• Molot, “The Trade-Security Nexus,” pp. 27–28.
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• For details on the U.S. and Canadian security plans, see respectively http://www.dhs.gov/index.shtm and http://www.dfait-maeci.gc.ca/anti-terrorism/actionplan-en.asp. Both pages consulted on Feb. 27, 2007.
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• James E. McConnell and Alan D. MacPherson, “A Firm-Level Analysis of Cross-Border Trade, Logistics Management, and the Location of Production at a Time of Heightened Security,” paper presented at the Lineae Terrarum International Borders Conference, Ciudad Juarea, Mexico, Mar. 28, 2006, p. 5.
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• Paraphrasing from McConnell and MacPherson, ibid., p. 13. See also Nan D. MacPherson, James E. McConnell, Anneliese Vance, and Vida Vanchan, “The Impact of U.S. Government Anti-Terrorism Policies on Canada-United States Cross-Border Commerce,” The Professional Geographer 58. no. 3 (2006): 266–77.
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• Ibid, pp. 14–15. Ten percent of the executives indicated that they were very or somewhat likely to pursue such strategies. McConnell and MacPherson did not indicate if American CEOs responded differently than their Canadian counterparts.
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• A second phase of the investigation largely supports the initial survey. For the preliminary results of the summer 2006 survey, see Anneliese L. Vance, “Impressions of Strategic Responses by Canadian and U.S. Exporters to Increased Security Measures: A Firm-Level Analysis,” paper presented at the Economic Costs of Canada-United States Border Security Measures Roundtable, Université Laval, Québec City, Feb. 2, 2007.
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