History repeating itself
The importance of the softwood industry to Canada and the United States
The softwood lumber industry is an important sector of the Canadian economy, supporting hundreds of communities and thousands of jobs across the country. It also creates many positive spin-off effects in related industries and services.
Canada’s forest products sector is modern, efficient and environmentally sustainable, and has the potential to serve markets at home and around the world.
In the United States, the demand for lumber exceeds the domestic supply. As a result, the U.S. housing sector and other industries rely on Canada for stable, predictable access to quality products.
Canadian softwood lumber consists of spruce, pine and fir, and is used primarily for construction framing. Lumber companies are a key component of Canada’s forest industry and support predominantly rural and indigenous communities while generating $22 billion annually in GDP.
Most Canadian softwood lumber exports go to the United States. In 2015, according to the Government of Canada, U.S. producers could meet only 70 per cent of the United States’ softwood lumber needs, with Canada covering virtually all of the shortfall.
Canada’s softwood trade
- More than 600 mills produce softwood lumber in Canada.
- Canada exports softwood lumber to more than 140 countries.
- Since 2002, Canadian softwood exports to China have increased 25-fold to $1.6 billion, while exports to South Korea, Southeast Asia and the U.K. have increased more than 200 per cent, to over $700 million.
Canada’s softwood trade with the United States
- 90 per cent of U.S. homes are built with softwood. U.S. domestic supply, however, meets only 70 per cent of the country’s softwood lumber needs. Canada supplies virtually all the rest.
- The United States is the main destination for Canadian forest product exports, which were worth USD 18 billion in 2016.
- The U.S. National Association of Home Builders calculates that every additional USD 1,000 in home construction costs puts home ownership out of reach for more than 150,000 U.S. families.
- Since 2005, Canadian lumber companies have invested more than USD 5 billion in the U.S. forestry sector.
- U.S. residential construction employs 3.8 million Americans. New softwood duties could cause the loss of up to 8,000 U.S. jobs and millions of dollars in lost wages.
- Canada is the number-one customer for forest products exports from 27 U.S. states, accounting for revenues to those states of USD 7.2 billion in 2016
At the heart of the dispute
Chronology of the Softwood Lumber Dispute
Officially, the softwood lumber dispute began in 1982 when a group of U.S. softwood lumber producers petitioned for a countervailing duty. The case focused on the stumpage system in British Columbia, Alberta, Ontario and Quebec. The ITC made an initial determination that Canadian lumber imports injured the U.S. industry. The U.S. Department of Commerce made a negative CVD determination on technical grounds, which was that stumpage fees could not be countervailed because they were not limited to a specific industry.
Although no changes were made to the Canadian stumpage system, U.S. industry groups made a second claim in 1986. As a result, the U.S. Department of Commerce altered its calculations to include the standing timber’s “intrinsic value” in the costs to the Canadian Crown. Intrinsic value in this sense typically applies only to personal property, not public goods, which was the original decision of the ITC in 1982.
The Department of Commerce nevertheless concluded that the Canadian stumpage system bestowed a subsidy of 15 per cent. With the imposition of lumber tariffs imminent, Canada signed a memorandum of understanding with the United States. Under the agreement, Canada agreed to collect a levy of 15 per cent on all lumber exported to the U.S. market. While still maintaining the levies, Canada exercised its right to terminate the agreement late in 1991.
Following Canada’s termination of the MOU in 1991, the Department of Commerce began a new investigation and imposed a temporary security-bonding requirement on softwood imports from Canada. A panel under the GATT, however, concluded that this bond requirement contravened Canada’s GATT obligations. The Department of Commerce then determined that British Columbia, Ontario, Alberta and Quebec conferred countervailable subsidies on softwood lumber exports, and the ITC found resulting injury. As a result, countervailing duties of 6.51 per cent were imposed on lumber imports from all provinces except the Maritimes.
Canada appealed both the subsidy determination and the injury finding to panels of the Canada-U.S. FTA. In both cases, the panels repeatedly found in favour of Canada. Particularly significant was the decision that using the U.S. lumber benchmark to determine the value of foreign standing timber contravened U.S. law.
In response, the United States requested an Extraordinary Challenge Committee under the FTA. This committee also found in favour of Canada. It should be noted, however, that such decisions have often been majority decisions split along national lines.
With the United States delaying the refunding of past lumber tariffs, and under the threat of a fourth round of CVD investigation, Canada signed a five-year SLA in 1996. Upon signing, the United States refunded duties collected in Lumber III, and the U.S. Coalition for Fair Lumber Imports dropped its constitutional challenge of the NAFTA arbitration process. Under the new agreement, Canada imposed a fixed tax on softwood production above a specified volume. This agreement was particularly difficult for the B.C. coastal forest industry, resulting in layoffs and closures. The SLA expired in 2001, but the countries failed to negotiate a new agreement until 2006.
After the expiry of the 2006 SLA, both Canada and the United States committed to negotiating a new agreement, as highlighted in the joint statement by Prime Minister Trudeau and President Obama in June 2016.
With no new lumber agreement in place, the U.S. industry petitioned the Department of Commerce to again investigate Canadian subsidies and dumping. In its preliminary decision, released on April 24th, 2017, Commerce once more concluded that Canadian softwood lumber imports are unfairly subsidized. In response, it imposed preliminary duties ranging from three to 24 per cent. The investigation included five Canadian lumber companies that export to the United States and determined the following duties for each company:
- Canfor: 20.26 per cent
- Resolute: 12.82 per cent
- Tolko: 19.50 per cent
- West Fraser: 24.12 per cent
- J.D. Irving: 3.02 per cent
All other Canadian imports will be subject to duties of 19.88 per cent, with the single exception of J.D. Irving. This company, which is based in Atlantic Canada, harvests most of its timber from private forests and will consequently face a duty of 3.02 per cent.
The Department of Commerce’s preliminary CVD determination also included a finding of critical circumstances for all Canadian softwood exporters except the four largest. As a result, it assessed the lumber tariffs to be retroactive for 90 days.
