The Canada–United States Softwood Lumber Dispute is an ongoing trade dispute between the United States and Canada concerning the Canadian export of softwood lumber. The conflict arose in 1982, and is one of the largest and most enduring trade disputes between the two nations.
The heart of the dispute is whether the Canadian lumber industry is unfairly subsidized by federal and regional governments. Most timber in Canada is owned by regional governments, and the prices charged to harvest timber (stumpage fees) are set administratively, rather than through the competitive marketplace, the norm in the United States. In the United States, softwood lumber lots are primarily privately owned, with the owners holding auctions to determine who has the right to harvest timber. U.S. lumber producers argue that the Canadian arrangement constitutes an unfair subsidy, and is thus subject to U.S. trade remedy laws, where foreign trade benefiting from subsidies can be subject to a countervailing duty tariff, to offset the subsidy and bring the price of the commodity back up to market rates.
The Canadian government and lumber industry dispute this assertion, based on a number of factors, including that Canadian timber is provided to such a wide range of industries, and that lack of specificity makes it ineligible to be considered a subsidy under U.S. law. Under U.S. trade remedy law, a countervailable subsidy must be specific to a particular industry. This requirement precludes imposition of countervailing duties on government programs, such as roads, that are meant to benefit a broad array of interests. Since 1982, there have been four major iterations of the dispute.
Importance of lumber to Canada's economy The softwood lumber industry is vital to the Canadian economy and has employed thousands of people. The forest industry has contributed to direct jobs for about 232,700 individuals. Indirectly, 289,000 people have been hired to work in other sectors that depend on Canada's forests. They include engineering, transportation, and construction. Such benefit from this industry can be seen in the nation's GDP, which added $21.2 billion in 2014. That accounted for around 1.3% of real GDP. Canada has the biggest trade surplus in relation to forest products ($21.7 billion in 2015). As the largest market, the U.S. is heavily dependent on Canada's lumber. The needs of the US outweigh the domestic supply. Canada has also been expanding rapidly into the Asian market, with China being the second-largest importer. The U.S. accounted for 69% of Canada's softwood lumber exports in 2015. This is an increased share of Canadian softwood lumber exports, which reached its lowest level in 2011, accounting for only 54%. China in that same year accounted for 21%.
Softwood Lumber Agreement In April 2006, the United States and Canada announced that they had reached a tentative settlement to end the dispute. The settlement, known as the Softwood Lumber Agreement (SLA), went into full effect in October 2006. The conditions stated that the period for this agreement would last anywhere between seven and nine years. Both countries, in 2012, approved a two-year extension. Under the preliminary terms, the United States would lift countervailing and anti-dumping duties provided lumber prices continue to stay above a certain range. Below the specified range, a mixed export tax and quota regime would be implemented on imports of Canadian lumber. On Canada's part, the nation agreed to enforce regulations, such as in the form of taxes on lumber exports headed to the U.S. The provincial governments of Canada, specifically, were encouraged to make changes to their pricing systems. Such changes would allow for a non-subsidizing system. As a part of the deal, more than $5 billion in duty deposits collected would be returned. The SLA establishes a dispute settlement mechanism based around the London Court of International Arbitration (LCIA), a nongovernmental institution. Either country may initiate dispute settlement of matters arising under the SLA or implementation thereof. Hearings are to be open to the public, as are pleadings and other documents.John R. Crook, ed., American Journal of International Law, Contemporary Practice of the United States Relating to International Law: UNITED STATES AND CANADA ARBITRATE A SOFTWOOD LUMBER DISPUTE IN THE LONDON COURT OF INTERNATIONAL ARBITRATION, 102 Am. J. Int'l L. 192 (January 2008). The agreement states that hearings are to be held in either the United States or Canada (the venue is selected by the arbitration tribunal). The SLA also provides that decisions of an arbitration panel are binding on the two parties.
Lumber I The beginnings of the softwood lumber dispute, commonly referred to as Lumber I, were in 1982, when the U.S. lumber industry petitioned the U.S. Department of Commerce (DoC) to impose a countervailing duty. Ultimately, the DoC found that Canada's stumpage system was not specific to any single industry and thus not countervail-able. While the DoC made this claim, the United States International Trade Commission (USITC) believed that these Canadian imports did in fact hinder U.S. producers. The U.S. lumber industry chose not to appeal.
Lumber II
The second phase, Lumber II, began in 1986, when a U.S. lumber industry group, the U.S. Coalition for Fair Lumber Imports, petitioned the Department of Commerce. The USITC once again arrived at the conclusion that Canada's exports unfairly impacted American producers. This time, the DoC did find Canadian forest programs to be countervailable and set a preliminary duty of 15%. Before the subsidy was imposed, the United States and Canada agreed to a Memorandum of Understanding that created a phased tariff. One of the terms of the MOU was that Canada levy an export tax on lumber traveling to the United States. Provinces that were affected had the chance to reduce this tax, if they performed any action meant to counterbalance their subsidies. British Columbia had the tax removed in 1987 while Quebec had it partly lifted in 1988.
Lumber III
Lumber III started in 1991 when Canada informed the United States it was withdrawing from the Memorandum of Understanding. In response, the Department of Commerce initiated a countervailing duty investigation, resulting in the DoC imposing countervailing duties. The Department of Commerce issued a final determination in May 1992, setting a countervailing duty rate of 6.51 percent.
This time, the Department of Commerce's determination was reviewed by a binational panel organized under the Canada–U.S. Free Trade Agreement (CUSFTA), the predecessor to the North American Free Trade Agreement. Prior to the signing of NAFTA, the DoC decision would have been reviewed by the United States Court of International Trade, but under CUSFTA, Canada had the option to have it reviewed by a binational panel, and they selected that option. The panel of three Canadians and two Americans found that the DoC's determination could not be supported by substantial evidence; which was a controversial decision, because the vote was along national lines, and the majority decision was based on the concept that U.S. law required the Department of Commerce to not only establish the existence of a subsidy, but also prove that the subsidy benefited the Canadian lumber industry. The U.S. Congress subsequently amended the law to explicitly state there was no "effects test". Additionally, the United States claimed that two of the Canadian panelists had conflicts of interests, and brought it before an extraordinary challenge committee. Again, this committee split along national lines.
In 1996, the United States and Canada reached a five-year trade agreement, The Softwood Lumber Agreement, officially ending Lumber III. Under its terms, Canadian lumber exports to the United States were limited to 14.7 billion board feet (34.7 million cubic meters) per year. However, when the agreement expired on March 31, 2001, the two countries were unable to reach consensus on a replacement agreement.
Lumber IV
On April 5, 2001, less than a week after the Softwood Lumber Agreements expired, the U.S. lumber industry petitioned the Department of Commerce to impose countervailing duties. In addition, the U.S. industry for the first time brought an anti-dumping claim, arguing Canadian lumber companies were also engaged in unfair price discrimination.
Effective on August 17, 2001, the U.S. DoC imposed a preliminary 19.31% countervailing duty on Canadian softwood lumber imports. Later that year, on November 1, the DoC imposed a preliminary anti-dumping duty on top of the countervailing duty. It averaged 12.6%, although varied by company. On December 15, the preliminary countervailing duty expired, although the anti-dumping duty remained.
On April 25, 2002, U.S. DoC announced it had determined subsidy and anti-dumping rates, of 18.79% and an 8.43% respectively, to give a combined rate of 27.22%, although specific companies were charged varying rates. By February 26, 2003, 15,000 workers had been laid off, primarily in British Columbia, as a result of the duties imposed by the United States.
On May 27, the World Trade Organization issued a non-binding ruling in Canada's favor with regard to U.S. anti-dumping duties. The decision was appealed to a legally binding NAFTA panel. On August 13, the panel ruled that while the Canadian lumber industry could be considered subsidized, the DoC had improperly calculated duties based on U.S. stumpage prices: there was no "world market price" for timber, as the DoC had asserted, and it was therefore improper for DoC to calculate duties based on U.S. timber prices rather than Canadian market conditions. It accordingly ordered DoC to reassess its method of calculating duties.
Two weeks later, a WTO panel similarly concluded that the U.S. had imposed improperly high duties on Canadian lumber. The panel agreed with the DoC's contention that provincial stumpage fees did provide a "financial benefit" to Canadian producers, but ruled that this benefit did not rise to the level that would constitute a subsidy, and could not justify the U.S. duties.
On January 19, 2004, the WTO Appellate Body issued a final ruling with respect to the countervailing duty determination largely in Canada's favor (WTO Dispute 257). On August 11 of that same year, the Appellate Body issued a final ruling with respect to U.S. anti-dumping duties (WTO Dispute 264). In the meantime, because of an adverse WTO decision, the USITC reopened the administrative record, pursuant to a special provision in U.S. law, and issued a new affirmative threat of injury determination in December 2004. This new determination allowed the countervailing and anti-dumping duty tariffs to remain in place.
Between June 7, 2004, and October 5, 2005, DoC submitted five revised estimates of justifiable duties to the NAFTA panel, each successively lower than the last, the last being 1.21%, but each time the NAFTA panel found errors with each one and ordered it to recalculate.