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Soft Wood, Hard Dispute

Canadian lumber subsidies aren't the real problem; Canada is.

11:00 PM, Nov 17, 2005 • By JAMES THAYER
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THE REPORTER called out, "Did you bring a check for $3.5 billion?"

Secretary of State Condoleezza Rice replied, "I don't travel with that kind of money."

The State Department transcript of the October 25 Ottawa press conference records laughter after both the question and Secretary Rice's response. But nobody in Canada is laughing now.

It's called the softwood dispute. Frank McKenna, the Canadian ambassador to the United States, said recently that Canadians "are talking about it in all the cafés all over Canada."

Our northern neighbor produces more softwood lumber than any other country, and the United States consumes more than any other country. When all that Canadian wood crosses the 49th parallel, the United States slaps a tariff on it. Canadians cry foul, as did Prime Minister Paul Martin, who complained during the secretary of State's visit that "Friends live up to their agreements."

Rice's position in Ottawa was as blunt as diplomacy between friendly countries allows. "We're going to have disputes," she said. The Canadian press concluded that she had "straight-armed" Canada on the issue.

Just so. Compelling reasons exist for Rice's softwood straight-arm. And only some of them have to do with softwood.

Spruce, cedar, pine, Douglas-fir, and other easy-to-saw coniferous trees are called softwood, which is used for paper, fiberboard, framing, siding, fencing, and other applications. Softwoods are--how to put it?--softer than the hardwoods, which include cherry, walnut, and oak. Furniture and flooring are typically made of hardwoods.

Canada brims with softwood. British Columbia alone has enough forests to cover America's 14 smallest states. In 2004, Canada exported 20,950 million board feet of softwood to the United States, which accounted for $7.5 billion in trade. A third of softwood consumed in the United States is produced in Canada. The industry employs 290,000 Canadians, and is central to the economies of 300 Canadian towns. When softwood takes a hit, Canada takes a hit.

In the United States timber rights are typically auctioned to the highest bidder. In Canada, 94 percent of the forest is owned by the government, and stumpage fees--the charge to harvest lumber--are set by government decree. American producers allege that the Canadian government sets stumpage fees at an artificially low level--one-third to one-fourth the actual value--to keep Canadian lumber workers and sawmills busy. United States producers claim this is a $4.4 billion (in Canadian dollars) annual subsidy of the industry.

FROM 1996 to 2001 an agreement between the two countries allowed Canadians to export 14.7 billion board feet to the United States every year--tariff-free. When that agreement expired in March 2001, the United States levied tariffs on incoming Canadian lumber, and then two months later imposed an additional anti-dumping duty, charging that the Canadian lumber was being sold south of the border for less than it cost to produce.

The tariffs' effect was dramatic: the CBC reported that "Thousands in the industry lost their jobs, including about 15,000 forestry workers who were laid off in British Columbia."

Attempts to settle the trade dispute have fizzled. In July 2003, American and Canadian negotiators announced that a tentative deal had been reached where Canada would limit lumber exports to a level equivalent to 30 percent of American consumption, down from 34 percent. Imports that exceeded the 30 percent figure would face a duty. But on July 31, 2003, when the Canadians refused more concessions, U.S. producers cancelled the deal.

The Americans insist now that tariffs will be lifted only when Canada opens its lumber markets to competitive bidding and removes its restrictions on log (as opposed to cut lumber) exports.

Why does Canada refuse to let the market work in its softwood industry? Herbert Gruel, professor emeritus of economics at Simon Fraser University, and a senior Fellow at the Fraser Institute, puts it bluntly: "[T]he existing system was created to help the development of the province's vast timber resources. The industry got used to the benefits the system provided and removing them would impose substantial hardships. Many sawmill workers would have to accept lower wages or even lose their jobs. Much investment would have to be written off." In other words, artificially-low stumpage fees are a make-work system benefiting Canadian loggers and sawmill operators.