Lumber dispute tests free trade

The US lumber industry filed last week to have duties imposed on Canadian softwood.

As 34 nations in North and South America gear up for a summit on hemisphere-wide free trade this month, this continent's two largest trading partners are verging on a full-blown trade war.

Canada and the United States are trading accusations in the latest phase of a century-long dispute over softwood lumber, considered one of their most important trade commodities. Canada exports vast supplies of its wood to the US, doing about US $11 billion in trade annually. The US has long accused Canada of subsidizing its industry - a claim it has never been able to prove.

The dispute reignited last week after a five-year agreement expired on March 31. The Softwood Lumber Agreement (SLA) capped Canada's duty-free exports at 14.7 billion board feet, and in return, the US agreed not to launch any trade offensives against Canada.

Last Monday, the US timber industry resumed its battle, petitioning the US Commerce Department to impose countervailing duties as high as 76 percent, or nearly $5 billion a year. The lobby represents mill operators, landowners, and wood-product manufacturers. Canada accuses the US of engaging in protectionism.

The whole dispute has a particular irony in light of the upcoming Summit of the Americas, where nations from Canada to Chile will be hammering out the Free Trade Agreement of the Americas. Free trade is one of the top priorities in US President George W. Bush's foreign policy.

The irony is not lost on Kelly Rommel, an unemployed timber forklift operator from British Columbia. "How can they keep talking about free trade, then deny it to the softwood lumber industry?" says Mr. Rommel, who has two children. "If we're going to have free trade, then let's have it."

At the heart of the dispute is a history of mistrust about the two countries' fundamentally different ways of managing softwood forests of pine, spruce, and fir.

In Canada, almost all of the woodlands - about 94 percent - are owned primarily by provincial governments. In the US, 95 percent of forests are privately owned and timber is sold by auction. When Canadian timber is harvested, companies pay "stumpage fees" calculated by governments, which factor in such costs as replenishing woods and building roads.

But the US lumber industry says these government-set stumpage fees are so low they are tantamount to a subsidy, since Canadian softwood sells for about a quarter of US market prices.

Canadian lumber producers say they merely have a competitive advantage: their softwood is more plentiful, it's made cheaper by the country's weak dollar, and therefore it's more economical for US consumers. But Canadians are hurting, too, they say.

In recent years, jobs have been lost, profits have been slim, and mills have closed. With the expiration of the softwood agreement, there was speculation that Canadian lumber would flood into the US. But so far, producers are hesitating for fear of massive retroactive duties. They're also still threatening to close mills because of uncertainty over the trade dispute.

Experts say this dispute is likely to be drawn out for at least a couple years, and it could go in a number of directions. A costly and lengthy analysis could be undertaken of both sides' objections, using special envoys from each country. This mechanism helped solved earlier disputes over salmon fishing and acid rain.

Canadians are unlikely to seek a NAFTA hearing, since this option has prolonged the battle and hiked costs on previous occasions. Instead, they could take the case directly to the World Trade Organization for an impartial ruling, but this option could still take two years.

In Ottawa, there has been talk of a carrot-and-stick approach, by promising the US increased access to Canadian energy - something the American government dearly wants.

Or, another compromise solution like the SLA may be negotiated, although Canadian industry and government seem to be hardening their resolve to pursue truly free trade. This may be the right time, too.

Canada has accumulated some influential American allies, including a coalition of homebuilders and consumers, Home Depot - the largest lumber retailer in North America - and several large forestry companies with Canadian subsidiaries.

Recently, US Federal Reserve Chairman Alan Greenspan joined the fray, criticizing the American lumber lobby's demand for duties. "These forms of protection have often been imposed under the label of promoting 'fair trade,' but often times they are just simple guises for inhibiting competition."

In the midst of all the political maneuvering, experts like Ben Cashore at the Forest Policy Center of Auburn University in Alabama point out that the objections raised by American lumber producers have been examined three times by trade bodies in recent years, and the allegations of substantial unfairness have never been proven.

So how does America's industry make Canadians nervous enough to offer concessions? Analysts say it's because Canada needs access to a market that's 10 times its own size. Government is cognizant of jobs being lost if the lumber industry is jeopardized. And neither government nor industry can afford the time or money to do battle with a trade partner which has deeper pockets and substantial clout.

Avoiding confrontation

On the diplomatic front, there are signs that the Canadian government is nervous about a more confrontational, isolationist tone from the Bush administration. Recently, Prime Minister Jean Chretien told fellow legislators, "They're becoming more inward-looking, protectionist."

But John Kirton, a political scientist at the University of Toronto, says Mr. Bush could still find the political will to permit true free trade in softwood if he realizes US consumers and workers in lumber-related industries far outnumber the lumber lobby.

"If he takes a few minutes to understand ... why he was elected and who elected him, then he should find the rationale to let true free trade prevail," he says.

Mr. Kirton also expects Bush will "quickly realize the incongruity of asking fellow summit members to join in full free trade, while at the same time his country's largest trading partner is being hammered by egregious, protectionist sentiments in the US."

(c) Copyright 2001. The Christian Science Monitor