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Good afternoon, ladies and gentlemen. As an emissary from the so-called “other side,” I thought it might be useful to give you some background as to why this trade dispute has become a cause célèbre for the U.S. government — at least as we see it north of the border.
 
The 28% U.S. countervailing duty on lumber is probably the greatest threat to profitability Canada’s forest industry has ever faced. The final outcome will determine whether the Canadian forest products industry will be competitive on the world stage or a marginal producer, operating with intermittent profitability on a reduced scale.

A couple weeks ago, Vice President Cheney met with the Premier of British Columbia and his Minister of Forests. Although it’s been difficult for anyone to see the Vice President since 9/11, he had both the time and inclination to talk to worried Canadians about softwood lumber.

On at least one level, it isn’t hard to understand why. The last successful corner of the American economy, it seems, is housing. This sector could not prosper without softwood lumber from Canada.
 
For a number of reasons, more than a third of all softwood lumber consumed in the U.S. comes from Canada. We have more trees, for one thing. And our main softwood species—spruce, pine and fir—are heartier and make better structural and framing lumber than the southern yellow pine grown south of here for similar purposes. Canadians have also invested enormous sums to create efficient mills that maximize the use of wood fibre with little waste, thereby increasing output. So … abundant supply, high quality and affordable prices all contribute to the American economy by supporting robust housing starts. Americans need Canadian lumber, and more than $10 billion in softwood lumber enters the U.S. every year.

Some environmental groups insist that Canada produces so much lumber for the American market because we are not responsible in our forestry practices. This claim is worse than false: it reflects a very important aspect of what has made this centuries-old feud so intractable, an issue I’ll return to momentarily.

In the time that remains I’d like to put forth and explain three propositions:

1. The cash deposits for duties now being collected on imports of Canadian lumber are extraordinary, onerous, and a threat to the economy of the entire continent;

2. The imposition of duties on Canadian softwood lumber is on behalf of large landowners in the U.S., not the typical lumber producer; and

3. The dispute appears intractable because Americans and Canadians disagree about the role and nature of government, and Americans these days seem to presume that Canadians must become more American or pay a price, in this case more than 28% ad valorem on softwood lumber.

Protectionism Could Cripple the Economy

One should not confuse a level playing field in trade with protectionism. Kenneth Dam, on leave from the University of Chicago to serve as Undersecretary of the Treasury in the Bush Administration, recently wrote the following in his book, The Rules of the Global Game …

“The antidumping proceeding always has been and is increasingly a protectionist device.” He describes the law as “arbitrary rules [that] bias the procedure heavily toward a finding of dumping and [a] procedure [that] puts a heavy and expensive burden on the foreign party to prove its own foreign prices and costs.”   “The very invocation of the process,” he writes, “is an important restraint.”  In many instances, the law itself is the source of unfairness and illogic.   J. Michael Finger, writing in 1994, says, “[a]ntidumping, as practiced today, is a witches’ brew of the worst of policy-making: power politics, bad economics, and shameful public administration.” Dumping between bordering countries in a free trade arrangement makes neither logical nor legal sense.

If a company were selling a product at less than fair value across a border, the product would simply re-cross the border for resale. Moreover, the treatment accorded foreign producers in the United States under the antidumping laws violates the national treatment obligations arising under the North American Free Trade Agreement and the World Trade Organization.

The dumping allegations are creating more trade distortion, not less. It is tilting the playing field. The period of investigation (“POI”) for the current softwood lumber dispute coincides with the Softwood Lumber Agreement Between Canada And The United States (“SLA”), a period of deliberately distorting managed trade. Canadian producers of softwood lumber, on a quarterly basis over a five-year period, were limited by international agreement in the quantity of softwood lumber they could ship to the United States, regardless of demand. The application of trade laws designed for “normal” times is inherently inappropriate when the marketplace has been distorted by an artificial elimination of free trade.   Yet, to find dumping, the U.S. Department of Commerce relied on trading patterns during the SLA.

There is no claim, nor any finding, that there has been any dumping in the conventional or colloquial sense. Prices for Canadian products have always been higher in the United States than in Canada, so no one could say that Canadian products are “dumped” in the United States. And Canadian companies have been making a profit on their sales in the United States, and in their overall operations, so they have not been selling in the United States below cost.

The alleged dumping arose because, with restrictions on the quantity of Canadian goods that could be sold in the United States, supplies built up in Canada, driving down prices there. Through a Byzantine methodology, the Department of Commerce discards those lower prices in Canada from its calculations, which then produces results that Commerce calls “dumping.”  The supposed dumping then represents about one-third of the current total margin.

At this particular moment, it is difficult to sort out what is happening in the marketplace. Prices for softwood lumber are at levels dangerously low for the survival of producing companies, despite the high duties. Demand remains healthy. The low prices probably are helping fuel demand, along with low interest rates. And Canadian exports to the United States are down, more than ten percent from a year ago. So what is happening?

No one quite knows for sure, but at least one factor is certain. Because of the crippling duties on Canadian products, Sweden, Finland, Russia, Latvia, Austria, even Chile and New Zealand, are penetrating the U.S. market. It is at best ironic to see the United States’ best friend and most important trading partner discriminated against in favor of Russia and Latvia.

Lumber is heavy and very expensive to transport, yet it now appears cheaper in some instances to ship lumber from New Zealand than to buy it from next door. Eventually, as Canadian mills close and supply reduces, the United States will become truly dependent on the supply from distant shores for some not-insignificant percentage of its supply. At some point, the price from those distant shores will have to reflect the real transportation costs. That’s when the American consumer will discover that the price of a home has gone up substantially because framing lumber is much more expensive, and harder to get.

A 28% premium on framing lumber inevitably will lead to much higher home prices, even if the immediate aberrational market has kept prices down. Americans then will see an economic pressure on housing that could crack the entire American economy. Maybe that is why the Vice President is now interested.

Large Landowners are the Beneficiaries of This Trade Action

The 28 percent duties are a combination derived from allegations about subsidies and dumping. As I’ve described already, the dumping laws in the U.S. are generally used for protectionism and—in the North American market, particularly for commodities—can make no logical sense. Through simple arbitrage, any price advantage selling across the border would be wiped out by selling the commodity back across the same border. Consequently, as long as there is free trade there cannot be dumping. This condition explains why there has never before been a dumping case, and why no one seems to know what to do about it now.

The traditional, long-standing American complaint is that Canadian provinces, custodians of the forests and owners of the natural resources, sell standing timber to lumber companies below market values. The current dispute in litigation is how to determine market values. The U.S. is arguing that the applicable market values are in the U.S.; the World Trade Organization has already ruled that the applicable and appropriate market must be in Canada.

The dispute over values for standing timber means that the product subject to duties is lumber, for which only the input values are in question. I won’t tarry over the legal complexities arising from allegations focused on the input and not the downstream, exported product. But I must note this problem to lay the predicate: by seeking to raise the cost to Canadian lumber producers of their input timber, U.S. companies are raising the value—on their books and in fact—of their own standing timber. So, the real beneficiaries of the trade action are American private timberland owners, much more than lumber companies. Maybe that’s why Jimmy Carter last year weighed in on the side of the American producers, in the New York Times. He is, after all, a timberland owner.

The most strenuous force behind the U.S. industry push for punitive duties on Canadian softwood lumber is International Paper. International Paper is also the largest timberland owner and producer in North America, with 10.4 million acres. International Paper’s operating profit in 2000-2001, in its Paper Wood Products Division, was more than $1.2 billion— more than three times the operating profit of Canada’s eight largest lumber producers combined.

Other active members of the U.S. lumber industry in these trade cases are Plumb Creek Timber, which owns 7.8 million acres of timberland; Potlatch, with 1.5 million acres; Temple Inland with 2.2 million acres, and the closely-held Sierra Pacific, with another 1.5 million. It is more than mere coincidence that the leading forces against Canada are, above all, timberland owners. By demanding higher prices on Canadian timber—not lumber—they are increasing the value of their landholdings.

It is therefore also more than mere coincidence that their position in negotiations is that Canadian provinces ought to rewrite their forest laws to raise substantially the costs of standing timber in Canada.

During the proceedings before the International Trade Commission last spring, we learned that the U.S. companies had not reported their financial situation in the manner requested by the Commission. They all showed themselves in deficit, losing money, but they were recording their costs of standing timber at so-called “market prices.”  The Commission obliged them to report their actual costs—and when the conversion was made, almost the entire U.S. lumber industry turned out to be in the black. Only the smaller companies that typically have to buy their timber from the bigger companies were in the red. These data were an important reason why the Commission was unable to find that the U.S. industry was suffering any injury from Canadian imports.

The timberland owning lumber producers in the United States have tried to hide huge profits from timberlands. However, as long as they can raise these input costs for their Canadian competitors, they can increase their profits and the value of their holdings. Meanwhile, U.S. lumber producers who have to buy their timber often are buying from the big landowners, who are their lumber-producing competitors. They pay a premium that makes them less competitive.

In the U.S. south, wood costs for those having to buy their timber (because they do not own it) have risen 635 percent since 1970 (258 percent in the Pacific Northwest). Companies such as International Paper are the profiteers. Log costs have risen 633 percent in the south, while lumber prices have risen 253 percent. Consequently, southern timberland owners have raised their prices 6.3 times over the 1970 prices (2.6 times in the Pacific Northwest). Southern lumber producers purchasing timber are seeing profits squeezed by rising timber costs; timberland owners making lumber are seeing their profits soar. In general, owning timber is much more profitable than manufacturing lumber, and that disparity grows with duties on Canadian lumber.

The Case About Lumber is a Case About Canada and the United States

Much of the privately owned timberland in the United States was never bought by private interests. The Homestead Act delivered vast tracts of public lands into private hands—and reflected the basic American belief in private property.

Canadians, on the other hand, believe that the state, or “Crown,” should own and maintain responsibility for land. These values trace to feudal times in England, passed on to Canada, when the king protected peasants on his own lands, and peasants counted on the king’s protection.

The U.S., with no history of feudalism and a revolution against England, never accepted a king or the state as a protector, and always preferred land to be owned by private parties.

Americans insist that Canadian provinces should privatize their forests or, in the alternative, should sell them off on a continuing auction basis. All the American proposals revolve around short-term propositions. Further, American private timber owners do what they please with their lands. They can regenerate the forest—or not. They can clear cut—or not. It’s up to them. Canadians, by contrast, operate under very strict government controls. They must restore the forest, and harvesting practices must meet rigorous standards for sustainability.

Speaking abstractly, when American companies exploit publicly owned forests, they expect the government to act the way they’d like private parties to act. They expect the government to build forest roads, fight forest fires, protect trees against insects and disease. By contrast, the Canadian Crown expects private companies operating on public lands, to meet all these expenses themselves. When a wilderness road is built in Canada, the government receives ownership, but the company pays for the road and has responsibility for its maintenance in perpetuity.
 
Despite considerable propaganda, the environmental record resulting from these different systems is much better in Canada. Every provincial government enforces policies for sustainable yield, and all operations are monitored. Canada’s forests are, indeed, expanding.

In the American south, clear cutting is exceeding reforestation by 25 percent. American lumber companies are denuding the U.S. Yet, they insist upon limiting Canadian supply so they can cut down more trees south of the border.

The United States arrived at a calculation of some 19 percent in duties based on the alleged subsidy related to the price of standing timber by very selective consideration. It compares the price a Canadian company may pay for a tree in the far north to what International Paper might pay for a tree in Alabama or Georgia. The Canadian tree on average will be much further from market and mill and will be much smaller. Because of the expense to harvest the tree, borne entirely by the company, and the inherent value of the tree in large part because of its size, the Canadian tree itself is of less value than the tree in Georgia. However, the United States doesn’t see it this way and has practically ordered Canada to change.

As long as Canadians believe that the Crown is the steward of the public patrimony and Americans think all property should be private … as long as the U.S. government pays for roads and forest activities for which Canadian companies pay in Canada … and as long as the United States insists that Canadians must manage their natural resources the American way, there will be lumber wars. In some form or another. There is no end in sight.

There is one more special wrinkle this time around, the Byrd Amendment. According to the Byrd Amendment, U.S. companies that publicly bear witness in support of a trade petition are entitled to receive the duties paid. Here is privatization in the extreme:  the U.S. Treasury used to collect and keep tariffs paid at the border, but now even those monies go into private hands. So virtually any company with the potential for such a windfall will sign up, especially when a few big companies will foot the bill to get duties imposed.

A panel of the World Trade Organization has declared that the Byrd Amendment does not conform with U.S. international obligations, but the United States has not yet agreed to get rid of it. Byrd money has been a major motivator for U.S. companies pursuing this case against Canada.
 
Where We Are Now

There are now seven judicial appeals underway arising from the decisions taken by the Department of Commerce and the International Trade Commission. Canada has challenged the final agency determinations for antidumping and for countervailing duties, and for injury, before both NAFTA panels (to judge whether the United States conformed in those decisions to its own laws), and before panels of the World Trade Organization (to determine whether in each instance the United States lived up to its international obligations). In addition, Canada has challenged the preliminary determination of the Department of Commerce in the countervailing duty case.

This latter case is the first to reach a decision. The WTO panel found almost entirely in Canada’s favor. The United States has denounced the decision:  that it was premature, referring only to a preliminary, not a final determination; that in fact the results were mixed with some judgments for the United States (the U.S. prevailed on one issue that is not important for Canada’s case); that the panel was simply wrong in applying the law. The U.S. will appeal.

In all the other cases the United States has done everything it possibly can, inside and outside the rules, to stall and delay. The United States is desperate to avoid litigated outcomes.

The United States is hoping for a negotiation. Canada encouraged a free trade agreement with the United States to routinize and depoliticize the resolution of trade disputes. But, with the United States ten times greater in almost every respect than Canada (population; GNP; exports), it is difficult for Canada to protect its interests through negotiation and conversation. Canada needs judicial neutrality. Through stalling and delaying, the United States hopes to force Canada to negotiate a bad deal. The United States, on the record of these cases, would much prefer to avoid its day in court.

The Softwood Lumber Dispute as Symbol and Symptom

Recently the same two U.S. agencies, the Department of Commerce and the International Trade Commission, initiated antidumping and countervailing duty investigations against Canadian wheat. More recently still, the International Trade Commission initiated an investigation into wood products, such as roof trusses, I-joists, and I-beams, not currently within the orders on softwood lumber. These actions all involve areas where there is public ownership in Canada and private ownership in the United States. As with softwood lumber, the American perception of a solution is to make Canadians be more American.
 
You may all be familiar with the popular nostrums: largest trading relationship in the history of the world; longest undefended border; greatest cooperation. Canada, with only 30 million people but a vast land mass and the blessings of natural resources, exports a great deal of its products, which themselves often are derived from the wealth of the land, in order to succeed economically. Eighty-six percent of those exports go to the United States. Canada depends on the U.S. market, and knows it. The United States depends on Canadian products, but Americans generally do not know it. So, to every disagreement there is a common and easy solution: be more like us.
 
As long as Canada is determined to remain a sovereign state, it will be in trade disputes with the United States. It can resort to the days before the Free Trade Agreement and try to make deals, or it can use the institutions of NAFTA and the WTO.

The United States, by squeezing the use of the institutions, is trying to restore pre-NAFTA, pre-WTO days, and the United States has found many sympathetic Americans and frightened Canadians. But the challenges facing these institutions and respect for them are the stuff of another speech at another time. One day perhaps we will have time to talk about them. Meanwhile, I am happy to take your questions on the topics I have tried to cover today.
 
 

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