Canadian subsidies are the main reason why the Canadian softwood lumber producers and American softwood lumber producers are butting heads. Canadian lumber industries are able to sell their products at such a low price because of the negligence from the provincial and federal governments.
The argument made by the American producers is that the fees that a logging company in Canada must pay the government, to harvest trees on public property, were depleted in comparison to what the Americans had to pay. These low subsidies put Canadian lumber producers at an advantage for they were able to sell their lumber at a substantially lower rate than the American lumber producers could.
This led to the dumping violation made by the Canadians. The Americans believe that Canada was dumping their lumber products into their market at a below-cost price. The American’s then pushed their government into imposing taxes on imported Canadian lumber. This resulted in an ongoing softwood lumber dispute that became famous today. The NAFTA and WTO councils got involved to promote peaceful confrontations, mediate conflict and give the appropriate advice in order to administer the dispute. But there have been instances where the Canadians/Americans have challenged some of the WTO of NAFTA decisions.
There were four main phases of this dispute that potentially began in the 1980s. There was the first attempt by the US lumber industry to impose a countervailing duty, in 1982.
They petitioned the U.S. Department of Commerce (DoC); however, it was determined in 1983 that the Canadian industry was not countervailable, because the Canadian stumpage system, the source of the suggested subsidy, was not specific to any one industry. The next phase, Lumber II, started in 1986 when again, the U.S. lumber industry levied a countervailing duty on Canadian lumber.
This time, the U.S. DoC determined that there were grounds for a duty, deciding that the Canadian forest programs were indeed countervailable and imposed a 15% duty in a preliminary determination, and the end result was a 15% export tax on lumber exports to the U.S., in a Memorandum of Understanding.
Canada’s withdrawal from the Memorandum in 1991 sparked the beginning of Lumber III. In response, the DoC initiated an investigation on the Canadian lumber system, and once again imposed a duty fee, in 1992. This determination was reviewed by a bi-national panel, under the Canada-US Free Trade Agreement, a predecessor to NAFTA.
Under this review, it was asserted that the DoC determination to impose a duty lacked substantial evidence. In 1994, the duty was once again removed. The final act in Lumber III was the 1996 Softwood Lumber Agreement. This agreement limited the sales of Canadian lumber in the U.S. to 17.6 billion board feet, as part of a 5-year deal.
During the Softwood Lumber Agreement, however, U.S. Customs on more than one occasion changed the classification of a number of products that were not covered by the agreement in order to fall under the boundaries of the Softwood Lumber Agreement, thereby breaching the agreement. When the agreement term finished, a replacement agreement could not be settled.
Almost immediately after the termination of the Softwood Lumber Agreement, the U.S. DoC again imposed duties on Canadian lumber. This time, however, in addition to a countervailing duty, an anti-dumping petition against Canada also ensued. A preliminary duty of 18% was established.
One year later, however, a 2003 NAFTA investigation ruled that this duty was over-stated, and ordered a review by the American side. A short two weeks later, a WTO panel determined there were no sufficient grounds for the U.S. to impose any form of duty because while there was “financial aid” given to the Canadian lumber industries, it did not fall under the category of subsidies.
The American side declared this point invalid, however in November 2005, the U.S. stated they would comply with the NAFTA ruling, and later reduced the duty to 10.8%. Yet again, this time NAFTA ruled that Canadian lumber industries were not subsidized, and up to this point roughly $5.2 billion were collected in the form of countervailing duties.
Finally, on April 26, 2006, a framework had been set for an agreement to end the dispute. This framework included an 80% return on the $5.2 billion collected in duties to Canada, a 34% of the U.S. softwood lumber market limit on Canadian products, and an export tax on Canadian lumber should the price fall below $355/thousand board feet.
The softwood deal was signed on July 1, 2006. The agreement was a 7 year deal with a possible 2-year extension. At first, Canadian provinces were skeptical and refused to give their support, but in the end B.C., Ontario and Quebec agreed to the terms, after some clauses were established to ensure the security of the agreement, using regulations that did not allow the U.S. to back out of the agreement.
It is difficult to infer who was treated unfairly, as essentially the U.S. was at a disadvantage from the start, however it was through legal methods and actions done by Canada. In response to this, the American lumber industry often imposed inflated rates for duties and used different calculation methods to come up with these rates.
NAFTA and the WTO intervened when necessary to resolve disputes, thus keeping both sides treated fairly and equally. Canada was acting within the law to maximize profits in the U.S. market, and the Americans had little choice but to react in seemingly unfair ways.