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Lumber limbo: Either way, Canada will get the short end of the stick
DON WHITELEY
Special to Globe and Mail Update
March 4, 2008 at 12:03 AM EST
Now that the dust is settling on last week's attack on the North American free-trade agreement by Hillary Clinton and Barack Obama, Canadians can look forward to the fruits of the Harper government's own much more effective attack on NAFTA — the 2006 softwood lumber agreement.
Today, the London Court of International Arbitration is to release its decision on the first U.S. complaint that Canada is not living up to its side of the lumber agreement. It looks increasingly like this is a lose-lose scenario for Canada, and could mean a very quick end to the agreement.
Before the ink was dry on Prime Minister Stephen Harper's "peace in our time" 2006 settlement of the protracted lumber trade war, the Americans were already complaining that lumber producers were either not paying enough export tax (for those in Alberta and B.C. who chose to pay a tax) or were shipping too much lumber south (for those in Ontario and Quebec who chose to adhere to a quota, instead of a tax).
The two sides couldn't resolve the disagreement through consultations and, under the terms of the agreement, sent the dispute to the court in London. Its legally binding decision will be relayed to the two governments today.
If Ottawa loses this case, it will mean that Canadian forest products companies, already drowning in a sea of red ink, will either have to cough up more tax money (estimates go as high as $100-million) or, in the case of the quota provinces, stop shipping lumber south for a while.
The actual penalty, should Canada lose, won't be determined by the court until May. Optimists hope that in the event of a Canadian loss, the court might make a prospective ruling going forward, rather than a retroactive ruling going back a year or so. That's probably wishful thinking.
A Canadian loss would also mean that Washington will continue to push an additional complaint filed with the LCIA in January over bailout packages for Canadian mill towns, and likely file even more complaints. Ironically, one of the main reasons for signing the 2006 lumber deal put forward by Mr. Harper and International Trade Minister David Emerson was that it would put an end to years of fruitless litigation.
But far more dangerous would be a Canadian legal victory, adding to a string of NAFTA and World Trade Organization wins going back several years. That would infuriate the U.S. side and likely lead to Washington opting out of the lumber agreement. Coincidentally, the first opportunity to do that is just weeks away, exactly 18 months after the two countries signed the agreement.
U.S. Trade Representative Susan Schwab has made clear that the results of the London arbitration may well indicate how long the deal lasts. "We have very little experience with this kind of arbitration," she told The Canadian Press last August. "And so yes, the arbitration will be very significant in terms of telling us how successful the [agreement] will be."
That sounds like code for "If we lose, we're outta here." That's what Canada faces if it has the misfortune to win this arbitration.
Under the terms of the agreement, after 18 months, any party can terminate with six months notice. A standstill clause also says that U.S. lumber producers and/or the U.S. government may not file a new trade action for one year after the termination of the deal. Canadian officials believe this makes a U.S. pullout unlikely.
But it isn't that simple. Another clause in the agreement says that if one party believes the other has breached the agreement, it can seek immediate consultations, and 10 days later, it can terminate with only one month's notice and no standstill clause. Yet another termination clause gives Washington an "immediate and unconditional" right to terminate if Canada fails to apply the export measures.
In other words, there is more than enough in the agreement to allow the United States to terminate without any notice at all, and immediately instigate trade action against Canadian softwood lumber. If Ottawa objects, it can take Washington to court. In the meantime, an anti-dumping case could be filed against Canadian lumber and likely result in a large duty — far bigger than the 15-per-cent export tax now being collected — imposed within months.
How could they succeed with an anti-dumping case? The definition of dumping includes selling your products in another country's market at prices below the cost of production. Canadian forest products companies have been reporting losses in the hundreds of millions of dollars in the past few quarters, with more to come. It would be a slam dunk.
And what would Canada have to fall back on? The WTO and NAFTA's Chapter 19 dispute settlement system, which in the last lumber war took four years to give Canada victories that the United States then ignored, and that Canada, by signing the softwood lumber agreement, completely undermined.
Don Whiteley is a Vancouver-based business writer.
DON WHITELEY
Special to Globe and Mail Update
March 4, 2008 at 12:03 AM EST
Now that the dust is settling on last week's attack on the North American free-trade agreement by Hillary Clinton and Barack Obama, Canadians can look forward to the fruits of the Harper government's own much more effective attack on NAFTA — the 2006 softwood lumber agreement.
Today, the London Court of International Arbitration is to release its decision on the first U.S. complaint that Canada is not living up to its side of the lumber agreement. It looks increasingly like this is a lose-lose scenario for Canada, and could mean a very quick end to the agreement.
Before the ink was dry on Prime Minister Stephen Harper's "peace in our time" 2006 settlement of the protracted lumber trade war, the Americans were already complaining that lumber producers were either not paying enough export tax (for those in Alberta and B.C. who chose to pay a tax) or were shipping too much lumber south (for those in Ontario and Quebec who chose to adhere to a quota, instead of a tax).
The two sides couldn't resolve the disagreement through consultations and, under the terms of the agreement, sent the dispute to the court in London. Its legally binding decision will be relayed to the two governments today.
If Ottawa loses this case, it will mean that Canadian forest products companies, already drowning in a sea of red ink, will either have to cough up more tax money (estimates go as high as $100-million) or, in the case of the quota provinces, stop shipping lumber south for a while.
The actual penalty, should Canada lose, won't be determined by the court until May. Optimists hope that in the event of a Canadian loss, the court might make a prospective ruling going forward, rather than a retroactive ruling going back a year or so. That's probably wishful thinking.
A Canadian loss would also mean that Washington will continue to push an additional complaint filed with the LCIA in January over bailout packages for Canadian mill towns, and likely file even more complaints. Ironically, one of the main reasons for signing the 2006 lumber deal put forward by Mr. Harper and International Trade Minister David Emerson was that it would put an end to years of fruitless litigation.
But far more dangerous would be a Canadian legal victory, adding to a string of NAFTA and World Trade Organization wins going back several years. That would infuriate the U.S. side and likely lead to Washington opting out of the lumber agreement. Coincidentally, the first opportunity to do that is just weeks away, exactly 18 months after the two countries signed the agreement.
U.S. Trade Representative Susan Schwab has made clear that the results of the London arbitration may well indicate how long the deal lasts. "We have very little experience with this kind of arbitration," she told The Canadian Press last August. "And so yes, the arbitration will be very significant in terms of telling us how successful the [agreement] will be."
That sounds like code for "If we lose, we're outta here." That's what Canada faces if it has the misfortune to win this arbitration.
Under the terms of the agreement, after 18 months, any party can terminate with six months notice. A standstill clause also says that U.S. lumber producers and/or the U.S. government may not file a new trade action for one year after the termination of the deal. Canadian officials believe this makes a U.S. pullout unlikely.
But it isn't that simple. Another clause in the agreement says that if one party believes the other has breached the agreement, it can seek immediate consultations, and 10 days later, it can terminate with only one month's notice and no standstill clause. Yet another termination clause gives Washington an "immediate and unconditional" right to terminate if Canada fails to apply the export measures.
In other words, there is more than enough in the agreement to allow the United States to terminate without any notice at all, and immediately instigate trade action against Canadian softwood lumber. If Ottawa objects, it can take Washington to court. In the meantime, an anti-dumping case could be filed against Canadian lumber and likely result in a large duty — far bigger than the 15-per-cent export tax now being collected — imposed within months.
How could they succeed with an anti-dumping case? The definition of dumping includes selling your products in another country's market at prices below the cost of production. Canadian forest products companies have been reporting losses in the hundreds of millions of dollars in the past few quarters, with more to come. It would be a slam dunk.
And what would Canada have to fall back on? The WTO and NAFTA's Chapter 19 dispute settlement system, which in the last lumber war took four years to give Canada victories that the United States then ignored, and that Canada, by signing the softwood lumber agreement, completely undermined.
Don Whiteley is a Vancouver-based business writer.