Trade splinter won't go away

U.S. and Canadian lumber industries set to renew trade skirmish after lapse of key agreement

By: Chris Gillis
Photo: Alberto Masnovo/Shutterstock
   The lapse of a decade-long agreement between the United States and Canada regulating the import of Canadian softwood lumber has retintroduced the unneeded specter of trade recriminations between the North American neighbors.
   The U.S. government is investigating Canadian softwood lumber products entering the United States for dumping and countervailable subsidy violations, a déjà vu scenario that had been all but eliminated since 2006 due to adherence to the Softwood Lumber Agreement (SLA), which regulated such exports.
   A coalition of U.S. businesses filed a petition Nov. 25, and the Commerce Department announced on Jan. 9 that it found enough evidence to begin an investigation.
   Dumping occurs when a foreign company sells a product in another country for less than it does in the producing country, while a countervailable subsidy is financial assistance from the producing country’s government, conferring the industry in the producing country an unfair advantage over the other country.
   The industry petition to the Commerce Department alleges that both countervailable subsidies and dumping are occurring with Canadian-milled softwood lumber, and that the alleged subsides and dumping are injuring the U.S. softwood lumber industry.
   However, this most recent petition differs from four previous investigations, which only scrutinized the historical product of a primary mill, which is raw dimensional structural lumber used in homebuilding. The petitioner is now seeking to include additional downstream industry products, such as pallets, fence pickets, trusses, flooring, bed frames, and door and window frames.
   The petitioner for this latest investigation is the Committee Overseeing Action for Lumber International Trade Investigations or Negotiations (COALITION), an ad-hoc association whose members include: the Washington, D.C.-based U.S. Lumber Coalition; Collum’s Lumber Products in South Carolina; Hankins in Mississippi; Weyerhaeuser Co. and Potlatch Corp. of Washington; Rex Lumber Co. in Florida; Sullivan Forestry Consultants in Georgia; Seneca Sawmill Co., Stimson Lumber Co., Swanson Group, Carpenters Industrial Council and Giustina Land and Timber Co. of Oregon; and Sierra Pacific Industries of California.

Prior to the 2006 SLA, battles between the two countries over softwood lumber raged, involving numerous countervailing and antidumping duty investigations, as well as many challenges in the World Trade Organization

   The investigation follows the expiration of the nine-year-old SLA on Oct. 12, 2015. The outgoing Obama administration and Congress failed to either extend the existing agreement or enter a new one with Canada before the end of 2016.
   Prior to the 2006 SLA, battles between the two countries over softwood lumber raged, involving numerous countervailing and antidumping duty investigations, as well as many challenges in the World Trade Organization. The back-and-forth resulted in a form of stalemate, with neither side able to firmly claim victory. The U.S. government simply collected countervailing and antidumping duties on Canadian lumber imports. With the signing of the SLA in 2006, the United States ended its duty collections on Canadian softwood lumber, refunding 81 percent of the duties collected.
   The 2006 SLA’s original duration was five years, allowing for automatic five-year extensions that hinged on agreement by both countries. The first five-year extension began in 2011, but just prior its expiration in 2015, Canada rejected any further extension of the agreement.
    Meanwhile, a condition of the 2006 SLA provided that in the event the SLA was not renewed, a one-year moratorium would go into effect, disallowing the United States from taking punitive actions or implementing any investigations.
   “The United States sought to engage Canada on substantive negotiations for three years, but Canada refused to come to the table without a number of pre-conditions, thus hindering any options of progress,” the U.S. Lumber Coalition said around the time leading up the SLA’s expiration. “All the while, Canadian exporters disrupted the lumber market by significantly increasing their market share in the United States.”
   The Canadians said they refused to extend the SLA, because they believed the U.S. coalition sought to increase softwood lumber volume restrictions.
   According to the Commerce Department, imports of softwood lumber from Canada in 2015 were valued at $4.5 billion.
   The U.S. industry’s petition alleges that since the Oct. 12, 2015 expiration of the 2006 SLA Canadian exports of softwood lumber products have increased substantially.
   “I understand it has increased somewhat, but not substantially or to the degree that any retroactive actions—antidumping or countervailing duties collected—should or will be taken on those imports from October 2015 to October 2016, especially if the coalition’s numbers include the volume of materials that were not included in the 2006 SLA or any of the previous ADD/CVD cases,” said Michael Jones, president of Blaine, Wash.-based Jones & Jones Customs Brokers and Trade Consultants.
   “However, if Canadian exporters were to ‘surge’ the border with softwood lumber shipments between Nov. 25 [when the Coalition’s petition was filed] in anticipation of the antidumping and countervailing duties being collected at some near future date—understood to be February or March, respectively—in order to get the material through the border, the Department of Commerce could use a ‘critical circumstances’ provision, enabling them to collect those duties retroactively, possibly all the way back to Nov. 25, 2016,” he added.
   Jones, who has specialized in handling Canadian lumber imports for nearly 45 years, said the major difference in this petition is that the U.S. lumber industry or their petitioning agent is pressing the Commerce Department and International Trade Commission (ITC) to widen the scope of their investigation to include materials not within the normal production of primary mills, which could result in harmful economic effects on both sides of the border.
   “It was understood that the products of ‘downstream’ lumber product manufacturers were exempt, because they did not benefit in the same manner as primary mills did from the conferred [Canadian] government subsidies, i.e. alleged low stumpage rates,” he said. “Also, the petition’s claim of increased volumes since the expiration of the SLA, if including the volume of materials not included previously, would only serve to skew those numbers.”
   U.S. softwood lumber trade investigations have been ongoing since the early 1980s when the U.S. forest industry tightened its supply for conservation and environmental reasons. Canadian producers quickly filled the lumber shortfall, sparking U.S. industry allegations and a federal investigation in 1982 to determine whether Canadian softwood lumber is subsidized by the Canadian government.
   The U.S. government and industry argument has long centered on Canada’s provincial governments allegedly allowing Canadian mills cheap access to timber from crown-owned land, which they in turn make into lumber to sell in the United States at less than the price the U.S. mills can afford to make. Softwood lumber is vital to the home construction industry.

U.S. softwood lumber trade investigations have been ongoing since the early 1980s when the U.S. forest industry tightened its supply for conservation and environmental reasons

   To settle the ongoing battle between U.S. and Canadian lumber interests, the countries in 2006 established the first Softwood Lumber Agreement. Instead of duties being collected by the United States as happened prior to 2006, the five-year agreement imposed an export surcharge and/or surcharge plus quota on imports of softwood lumber manufactured and exported into the United States from a number of Canadian provinces alleged to have been conferred subsidies and selling in the United States at prices lower than in Canada.
   So-called “Option A” provinces—British Columbia and Alberta—opted for the surcharge-only rates involving either 5 percent, 10 percent or 15 percent export surcharges depending on quarterly pricing thresholds. The “Option B” provinces—Ontario, Quebec, Manitoba and Saskatchewan—opted for volume restrictions involving either 2.5 percent, 3 percent, and 5 percent surcharges specific to the degree of excess in the allowed volumes.
   The Canadian government collected the applicable surcharges on Option A province shipments of less than the agreed to threshold pricing and/or the applicable surcharges specific to Option B province over-quota shipments. The United States, meanwhile, agreed not to pursue any countervailing or antidumping actions during the agreement.
   There were, however, instances where the United States charged, which was sustained by the London Court of Arbitration, that Option B province export volumes of a certain period were in excess to warrant an increased percentage (10 percent) over and above the agreed to 2.5 percent, 3 percent or 5 percent, until the difference had been made up and the volumes were restricted to the agreed upon levels.
   In June 2016, Canadian Prime Minister Trudeau and President Obama said they would negotiate a new softwood lumber agreement, but the clock ran out on the Obama administration. Meanwhile, the new Trump administration has been more focused on reforming the North American Free Trade Agreement between the United States, Canada and Mexico.
   In the interim, Canadian softwood lumber product manufacturers and importers anxiously await the possibility of higher duties placed on their products as a result of the latest countervailing and antidumping duty investigations.
   If the ITC determines that there is a reasonable indication that softwood lumber imports from Canada harm the petitioning U.S. industry, then these investigations will continue and Commerce will schedule its preliminary countervailing duty determination in February and its preliminary antidumping determination in May. However, if the ITC’s preliminary determinations are negative, the investigations will end.
   Much remains up in the air.