As detailed in a recent post on Jones Day’s Trans-Pacific Partnership (“TPP”) blog (“TPP: The Fine Print—A Look at the Mechanics of the Treaty“), a proper understanding of the TPP also requires an understanding of the various side letters negotiated among the parties in relation to TPP issues. As an essential part of agreeing to the TPP, a number of side letters were exchanged bilaterally between TPP countries as administrative agreements.

Each side letter was critical to the acceptance of the TPP by particular interested parties. In this article, we take a closer look at one such side letter: the side letter between Canada and Japan in relation to log export restrictions.

Canada, Japan, and Canadian Forest Products

Prior to signing the TPP, Canada and Japan had been discussing a bilateral agreement between the two countries. Thus, they negotiated various issues vigorously, including outstanding bilateral issues, within the context of the TPP negotiations. One of the major requests Canada made to Japan was the elimination of tariffs on forest products. The forest products trade between Canada and Japan involves many industries, from raw timber trade to lumber and wood products, such as plywood.

Japan agreed to eliminate tariffs on certain forest products with a safeguard clause in the Annex to the TPP agreement as follows:

Japan may apply a forest good safeguard measure on the originating forest goods from Canada, only when the aggregate volume of imports of those originating forest goods from Canada in any year exceeds the trigger level set out.

However, the side letter negotiated between Japan and Canada is also an important part of the agreement reached between the countries.

Each government will submit the TPP Agreement together with Annexes to its legislature for approval. While side letters do not constitute part of the TPP Agreement for purposes of approval, no country’s negotiators would have been prepared to reach agreement on the TPP without knowing which key side letters are or likely would be in place. These side letters are part of the international promises between the interested parties.

In Canada, provincial governments have jurisdiction to create laws and rules involving trade in certain goods, which supplement the federal level trade law. The forest industry is one of the major industries for Canada and, in particular, the biggest industry for British Colombia. Most of the timber is harvested from provincially owned land, but notably some timber is harvested from privately owned land, the majority of which is regulated by the federal government. Every log destined for export, regardless of its origin, is subject to a surplus test to qualify for an export permit. Under that test, each log must be “surplus” to the needs of local lumber mills before it may be exported (in order to support employment and sales in the milling industry in Canada).

The provincial governments pushed the federal government to apply a similar regulatory system to logs from privately owned land even though the province has no a jurisdiction over those logs. The federal government regulates the logs based on the “Notice to Exporters” with regard to export of logs from British Colombia—serial number 102, which was issued on April 1, 1998, and which creates a domestic price that is lower than the export price. This can assist Canadian domestic manufacturers in exporting their forestry products at an unfairly competitive price to the Japanese market. Japan has raised this issue repeatedly with the WTO seeking an appropriate remedy, but so far, Canada has not responded.

This internal Canadian policy was again raised in the context of the TPP market access negotiation, which resulted in the side letter on this point exchanged between Canada and Japan. The most important paragraph in the letter states:

In the context of liberalized trade for forest products, upon implementation of the TPP, notwithstanding the exception for the export of logs of all species from the application of Articles 3 (National Treatment) and Article 11 (Import and Export Restrictions) in Chapter 2 (National Treatment and Market Access for Goods) of the Agreement, the Government of Canada shall issue permits upon request for the export of logs destined for Japan following the procedures set out in the Export and Import Permits Act and its applicable notices and regulations and provincial and territorial laws and regulations.

The side letter further provides:

For greater certainty, Japan and Canada confirm that nothing in this letter shall have any other implications with respect to Canada’s existing practices and procedures relating to its existing measures concerning the export of logs of all species. In respect of the export of logs, Japan and Canada maintain their rights and obligations under the WTO Agreement, and any dispute regarding a matter relating to the export of logs shall be settled under the WTO.

According to Canadian news reports, this side letter caused confusion over Canadian restrictions on wood exports from British Colombia. While the governments of Canada and British Columbia have both said that the TPP would not undermine a rule that bars the export of logs from British Columbia unless they are surplus to the needs of local mills, the Japanese government says that the agreement in the side letter will increase the price of logs harvested in Canada. The implication is that Canadian mills will have to compete on a level playing field for British Columbian timber if Canada wants tariffs to be eliminated on Canadian wood products exported to Japan.

Japan is promoting the position that Canada is obligated to issue an export permit without discretion upon a request that follows the procedure, while the Canadian side insists that the government may maintain the status quo.

The debate over the meaning of the side letter will continue if TPP is implemented and may also have implications for the long-standing Canadian–U.S. dispute over softwood lumber.