Softwood lumber producers, remanufacturers, construction,
building products companies, importers and shippers are waiting to
see whether the United States and Canada can work towards heading
off another softwood lumber trade dispute. The dispute revolves
around the expiration of the Canada-U.S. Softwood Lumber Agreement
(Agreement) on October 12, 2015, which began a one-year truce
during which the countries can try to agree to a new deal.
President Barack Obama and Prime Minister Justin Trudeau met
yesterday and agreed to intensively explore all options and report
back within one hundred days on the key features that would address
this issue.
The expired Agreement ended a lengthy trade dispute between the two
countries during which the U.S. collected approximately $5 billion
in anti-dumping and countervailing duties from Canadian producers.
If a new deal cannot be reached before October 12, 2016, the U.S.
Lumber Coalition (Coalition) is free to initiate another round of
costly litigation against Canadian producers.
The scope of products to be affected in any outcome is
far-reaching. Companies on either side of the border, who are
involved in softwood lumber, the building product sector, and
construction, including producers, importers, exporters,
distributors, retailers and consumers of softwood lumber products
and remanufactured products (including studs, flooring, trusses,
joists, decking, fencing, railing, lattice, siding, trim, molding,
pallets, packaging), engineered wood products, oriented strand
board, laminated veneer lumber, pressure treated lumber as well as
home lumber products contained in single family home packages,
should be monitoring developments now and taking those measures
necessary to promote and protect their interests in what will
either be renewed litigation or a negotiated settlement.
Since the Agreement expired, shipments of Canadian softwood lumber
products may have increased, which could have adverse impacts in
any new deal or litigation. Companies would be well-advised to
carefully consider their production, shipping and purchasing
strategies throughout the supply chain during this interim
period.
Dickinson Wright has considerable expertise in this area and is
available to assist companies in mitigating the effect on their
business of any new agreement or litigation.
The Core Issue: Subsidization
For more than four decades, Canadian softwood product exports to
the U.S. have been the subject of a trade war, with four other
major tussles between the countries since 1982. Canada is a major
exporter of softwood lumber products to the U.S., and timberlands
in all provinces except the Atlantic region are almost exclusively
owned by the provincial government as opposed to private
landowners, a stark contrast to the U.S., where the majority of
lumber comes from privately owned land. Canadian lumber companies
pay stumpage fees to provincial governments for the right to cut
timber on provincially owned land. Stumpage fees are not determined
exclusively by market forces. U.S. lumber producers maintain that
the provincial governments set stumpage fees that are too low, and
that imports of softwood lumber products from Canada are
"subsidized" and cause injury to U.S. producers.
Last Round of Litigation
The softwood lumber dispute focuses on the application of U.S.
trade remedies against Canadian softwood lumber imports.
International law permits the U.S. to take retaliatory action
against two trading practices considered to be unfair.
The first is dumping, which is selling goods to the U.S. for less
than the price in Canada; or for less that cost plus a reasonable
profit. If dumping is causing or threatening to cause material
injury to domestic producers, the U.S. may offset the dumping by
imposing an anti-dumping (AD) duty equal to the difference.
The second unfair practice is subsidization. If imports of
subsidized softwood lumber are causing or threatening injury to
domestic producers, the U.S. may impose a countervailing (CVD) duty
to offset the subsidy. In the U.S., dumping and subsidy
determinations are made by the Department of Commerce (DOC) and
material injury determinations by the International Trade
Commission (ITC).
During the last lumber trade dispute between 2001 and 2006, the DOC
slapped combined AD and CVD duties of up to 27.22 percent on
imports of softwood lumber products from Canada, resulting in
numerous appeals and re-determinations of the ITC's injury
decisions and DOC's determinations of dumping and subsidy to
the U.S. courts, NAFTA Panels and the WTO Appellate Body. Some
Canadian companies (British Columbia's Canfor Corp., Terminal
Forest Products Ltd. and Montreal-based Tembec Inc.) launched
claims against the U.S. government under Chapter 11 of NAFTA,
claiming that the government's actions violated its obligations
to ensure that investors such as themselves "are treated in
accordance with international law, are treated fairly and
equitably, and are treated no less favorably than their United
States competitors"—that is, the Coalition.
By the time the Softwood Lumber Agreement was signed on September
12, 2006, approximately $5 billion in unliquidated AD and CVD
duties had been collected by DOC.
2006 Agreement
On September 12, 2006, the US and Canada signed the Agreement to
end the litigation. After two amendments, it expired on October 12,
2015, starting a one-year litigation moratorium. In other words,
new U.S. unfair trade cases may not be brought by the Coalition
against Canadian lumber before October 12, 2016.
The product coverage of the Agreement matched the product coverage
of the countervailing and antidumping duties (softwood lumber
products and a broad remanufactured wood products and home builder
kits). Indeed the scope of the Agreement expanded as Commerce
determined an increasingly number of softwood lumber products to be
covered by the Agreement.
Canada, through the Canada Revenue Agency, imposed, administered
and collected export measures on a broad range of softwood lumber
products from Canada. Exports from BC were subject to Option A,
which imposed higher taxes on softwood lumber product exports.
Mills in Quebec, Ontario, Manitoba, and Saskatchewan choose Option
B, which combined export taxes ranging from 5 to 15 percent and
quotas depending on the level of lumber prices. These measures
became more restrictive when the price of lumber fell, with no tax
and no quota where prices were above US$355 per mbf.
Lumber that was remanufactured by impending remanufactures was
taxed at the lower value of the production input, whereas
integrated remanufacturers were taxed at the price of the finished
products.
Lumber produced from logs harvested in the Maritime provinces, the
Yukon, the Northwest Territories or Nunavut is excluded from the
border measures, as is lumber produced by certain Canadian
companies, primarily along the Quebec/U.S. border, that were
excluded from the countervailing duty.
Disbursement of the $5 Billion
The Agreement spelt out in detail how the nearly $5 billion in
AD and CVD duties collected since 2002 would be allocated upon
termination of the litigation. Of those duties, $1 billion stayed
in the U.S., $450 million was set aside to a fund for
"meritorious initiatives," $500 million was distributed
to the Coalition members who brought the trade case, and the
remaining $50 million went a binational industry council. The
remaining deposits of approximately $4 billion were returned to
U.S. importers, who were generally affiliated with Canadian
mills.
Issues Going Forward
Canada and U.S. officials will face obstacles as they work on a
new softwood lumber agreement because of disagreements between
their respective lumber industries, as well as among Canada's
provinces, on the type of export measures that should be applied to
Canadian shipments. The U.S. lumber industry has signaled a
preference for a hard quota on Canadian exports, while the Canadian
government wants to ensure that any agreement includes more than
one type of export measure, leaving it up to provinces to choose
the option they prefer. As the largest lumber supplier to the
United States, British Columbia is shipping in large volumes, thus,
will generally oppose a quota system. Quebec is demanding that its
exports be excluded altogether under any new deal because it
believes that its timber pricing system is market-based.
Also, some Coalition members may favour litigation, considering
they received $500 million under the last Agreement. The changed
economics further complicate matters, as it is not certain that
Canada would prevail in any new litigation in a similar way that it
did in the last round.
For all of these reasons a prudent course of action for all
affected companies on both sides of the border is to monitor and
advocate where necessary to ensure that their interests are
protected and promoted in any new deal or ensuing litigation. Those
efforts include closely monitoring the developments over the next
year and interjecting where necessary; undertaking the necessary
efforts to make sure that the products that will be subject to any
new litigation or deal are not adverse to their interest;
advocating for particular export measures in any negotiated
settlement; advocating for product and company exclusions or
inclusions according to their interests; and understanding how any
new AD or CVD duties or export measures, whether in the form of
quotas or taxes, will be applied, paid and collected throughout the
supply chain
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.