Negotiations to keep the peace in the complex and long-running international trade dispute between the United States and Canada over U.S. imports of Canadian softwood lumber appear to have stalled. Parties on both sides of the border are preparing for another round of import relief actions, which could be filed as soon as the stay on the filing of cases by private parties expires on October 12, 2016. As demonstrated by years of past litigation over lumber imports between Canadian and U.S. parties, a resumption of hostilities would greatly complicate the business environment for Canadian and U.S. producers, their customers, and the U.S. housing industry.
The current stay is based on the terms of the 2006 Canada-U.S. Softwood Lumber Agreement, the latest in a series of agreements on Canadian softwood lumber imports going back to the 1980s. The 2006 Agreement, a negotiated settlement of import relief cases filed by the U.S. lumber industry, expired last fall. The U.S. and Canadian governments have been attempting to reach agreement on new terms, but the economic challenges confronting the lumber industry make it questionable whether a new agreement can be structured that will be acceptable to the key players.
Failure to reach an agreement would likely result in the U.S. lumber industry filing new trade complaints against Canadian producers. These complaints would presumably allege the receipt of numerous governmental subsidies and the dumping of Canadian lumber in the U.S. market. If proven, such allegations could result in the imposition of significant duties on Canadian lumber imports. Past investigations have resulted in duties as high as 30% and led to multiple NAFTA and World Trade Organization appeals by the parties. If new cases are filed, they would move quickly, because the U.S. International Trade Commission is required to issue its preliminary injury determination in antidumping and countervailing duty investigations within 45 days.
Entrenched Positions on Both Sides
The U.S. lumber industry has long complained that Canadian producers benefit from subsidies, particularly because Canadian timberlands are primarily owned by provincial governments. Among other things, U.S. producers have argued that stumpage fees (the prices charged to harvest timber) charged by Canadian governmental entities do not reflect the fair market value of the timber and disadvantage U.S. producers, who primarily purchase timber at market rates from private landowners.
President Barack Obama and Prime Minister Justin Trudeau issued a joint statement during President Obama&rsquo;s visit to Ottawa in July expressing a need to work together on resolving the lumber controversy, but both the U.S. and Canadian governments are under increasing pressure to protect their respective domestic interests in any negotiated resolution. Earlier this summer, twenty-five U.S. Senators signed a letter to U.S. Trade Representative Michael Froman emphasizing the need for any settlement to mitigate the impact of subsidized Canadian lumber on the U.S. market and "allow the U.S. industry to invest and grow to its natural size without being impaired by unfairly traded imports." The letter states that if the agreement does not meet these requirements, "it is critical that U.S. trade laws be fully enforced."
The Canadian position has also hardened. In a statement responding to the Senate letter, the Canadian Ambassador declared that any deal must accommodate the commercial needs of the Canadian lumber industry. Canadian officials have also been touting their successes in mounting legal challenges to past U.S. tariffs on softwood lumber, and Canadian lumber exporters have declared that a U.S. proposal to implement a quota-based system to limit exports to the U.S. would be "unacceptable." High level meetings between the two governments are ongoing, including a meeting between Mr. Froman and Canadian Trade Minister Chrystia Freeland on September 15, but the impending deadline makes a negotiated resolution increasingly unlikely.
As noted above, failure of the U.S. and Canadian governments to reach agreement is likely to result in the U.S. lumber industry initiating trade remedy cases against Canadian producers. In addition to their impact on the commercial lumber market, such filings would result in Canadian producers and U.S. importers being asked to respond on short notice to detailed requests for information on their operations from the U.S. International Trade Commission and the U.S. Department of Commerce. Accordingly, the mere initiation of trade remedy investigations would have an immediate impact on members of the industry.
Even if the U.S. and Canadian governments ultimately reach an agreement to forestall import relief investigations from proceeding, a new lumber agreement will present commercial challenges. Industries on both sides of the border would need to adjust to the changed business environment and the requirements of the new agreement.
In short, numerous interested parties will be affected by whatever transpires in the coming months. If new cases are initiated, U.S. companies that utilize Canadian lumber and their suppliers will face higher costs and potential supply disruptions. Alternatively, if an agreement is reached that forestalls investigative proceedings, new rules will govern the lumber trade, and U.S. timber producers will be affected by the conditions under which Canadian producers will be allowed to sell in the U.S. market. Because U.S. trade cases move so quickly, businesses that may be affected by changes in the lumber market should take steps now to decide how to defend their interests and plan for the possibility of market disruptions.