The US-Canada Softwood Lumber Trade Dispute

An Introduction to the Softwood Lumber Trade Dispute

Man holding two large, boxing gloves apart
Man holding two large, boxing gloves apart. Getty Images/Gary Waters/Ikon Images

The dispute known as the softwood lumber dispute is one of the longest and largest trade disputes between the United States and Canada. The dispute is actually the result of a number of disagreements about Canadian lumber production and import between the two nations. The dispute began in the early 1980s and continues to be a topic of discussion today.

At the heart of the softwood lumber dispute is United States' claim that the Canadian government is unfairly subsidizing Canadian lumber production.

To better understand the importance of the trade dispute, let's discuss the justification behind the claim and its implications.

 

The Softwood Lumber Dispute: Private vs. Public Ownership

In the United States, the majority of the softwood lumber harvested is from privately-owned land. That is not the case in Canada, where most of the lumber harvested comes from Crown land, or land owned by the federal or provincial government. This difference is the primary driver of the trade dispute as where the lumber is harvested - privately or publicly-owned land - affects the price of the lumber.

 

The Softwood Lumber Dispute: Prices, Subsidies, and Duties

In Canada, the price for corporations to harvest timber from their land, otherwise known as the stumpage fee, is set administratively as opposed to through competitive markets. So in Canada, stumpage fees are essentially set by the government. In the United States, on the other hand, logging rights are sold through competitive auction.

This difference is significant as Canadian stumpage fees, which are based on a number of factors such as labor and transportation costs, tend to be significantly lower than the prices that come out of the U.S. auctions. As a result, the American government claims that these low prices constitute a subsidy to Canadian producers, which would make Canadian lumber subject to U.S. trade remedy laws.

These laws essentially make foreign goods that benefit from subsidies (in this case the good in question is Canadian lumber) subject to what are known as countervailing duties or anti-subsidy duties that are meant to bring the price of the good back up to market prices.

This assertion is where to trade dispute escalates. For years, the Canadian government has challenged not only the United State's subsidy claim, but the claim that Canadian lumber is therefore subject to countervailing duty tariffs. Canada asserts that, among other factors, because Canadian lumber is supplied to such a wide variety of industries, their pricing structure does not constitute a government subsidy under American law.

From there, the softwood lumber trade dispute has devolved into a mix of fundamental disagreements about the interpretation of law and ultimately the actions that the American government has taken in response since.

Next we'll look at the history of American policies in the softwood lumber dispute and a timeline detailing the dispute's significant events.

Be sure to continue to page 2 of The Softwood Lumber Trade Dispute

An article like this one cannot do full justice to the complete history of the softwood lumber dispute, which began as far back as the 1980s. A good summary of the history of the dispute is given by the American Consumers for Affordable Homes lobby group, which is against softwood lumber tariffs.

While we will not give a comprehensive history of the softwood lumber dispute, we will provide a timeline highlighting the most important events over the years.

  • 1982 marked the beginning of the softwood lumber dispute when the United States lumber industry petitioned the U.S. Department of Commerce (DOC) to impose a countervailing duty on Canadian timber. The DOC ultimately ruled that Canada's stumpage system did not constitute a subsidy under U.S. law and no duty was imposed.

  • Then in 1986, another group within the American lumber industry re-petitioned the . This time, the DOC determined that Canada was subsidizing lumber production through low stumpage fees. Rather than engaging in a lengthy dispute, the American and Canadian governments agreed to a "Memorandum of Understanding" that called for a 15% ad valorem tariff on Canadian softwood lumber.

  • After a few years of the new tariff, Canada terminated this Memorandum of Understanding on October 4, 1991 as they felt their new policies no longer constituted a subsidy to the Canadian softwood lumber industry. The DOC disagreed, placing a 6.51% ad valorem tax on imported Canadian softwood lumber. Canada appealed under the U.S.-Canada Free Trade Agreement dispute settlement panel. The panel sided with Canada. The DOC then determined that Canadian softwood lumber was no longer being subsidized. The Americans would appeal the FTA decision but would ultimately be unsuccessful.

  • On May 29, 1996 the Canadian and American government signed the "U.S.-Canada Softwood Lumber Agreement" which would last from April 1996 to March 2001. The agreement required Canada to collect an export tax once lumber exports exceeded a threshold of 14.7 million board feet. Although the Canadians insisted that their softwood lumber was not being subsidized, they felt this export tax was worthwhile for the certainty it brought the industry.

  • As soon as this agreement expired on April 1, 2003, the U.S. Department of Commerce imposed another investigation of Canadian softwood lumber practices. It would be the fourth such investigation launched by the DOC in 20 years.

     

  • After the DOC investigation ended in August 2001 the DOC imposed a duty of 19.31 percent on Canadian softwood lumber imports. The Bush Administration would later impose an additional duty of 12.57 percent that it called an "anti-dumping duty." The Canadian government appealed these duties to the World Trade Organization (WTO), which ruled in Canada's favor on May 27, 2003. However this ruling was non-binding so the American government was not forced to change any policies.
  • The American government ultimately appealed this WTO ruling, and in 2004, the WTO Appellate Body issue their final ruling, which was largely in favor of Canada. Between 2004 and 2006, the United States continued to submit revised estimates for what they considered justifiable duties to the North American Free Trade Agreement (NAFTA) panel with no success.The U.S. government continued to challenge each subsequent NAFTA decision.
  • In 2006, NAFTA ruled again in Canada's favor, finding the subsidy to the Canadian lumber industry to be de minimus, or less than 1%, which under U.S. law would not be subject to countervailing duties. After that decision, a tentative agreement between the U.S. and Canada known as the 2006 Softwood Lumber Agreement (SLA) was reached, in which the U.S. would return to Canada over $5 billion in duties collected, no new tariffs were to be imposed, and litigation was to end. Though there was much opposition to the deal in Canada, it eventually passed.

  • Since the passing of the SLA, the United States and Canada have been involved in a series of arbitrations in an attempt to resolve lingering concerns of the dispute and the implementation of the SLA.The Softwood Labor Agreement is set to expire in October of 2015, and there remains great uncertainty surrounding whether the U.S. and Canada will renew the agreement.

 

Where Does America and Canada Go From Here?

The American government wants the Canadian government to agree to a tax on Canadian softwood lumber until the Canadians institute a system of competitive bidding as the Americans have. The Canadian government has shown lukewarm interest in changing how it and the provincial governments sell logging rights to producers. It instead has proposed a system similar to the agreement in 1996 where most softwood would enter the United States tariff-free, but imports over a certain level would be taxed at progressively higher rates.

Although both sides are talking, it does not look like the softwood lumber dispute will ever be permanently resolved.

The sequel to this article, The Economic Effect of Tariffs , explains why tariffs on softwood lumber hurts the American economy as well as the Canada's. You can continue to that story by clicking on the story name.

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Moffatt, Mike. "The US-Canada Softwood Lumber Trade Dispute." ThoughtCo, Oct. 22, 2015, thoughtco.com/softwood-lumber-dispute-introduction-1145890. Moffatt, Mike. (2015, October 22). The US-Canada Softwood Lumber Trade Dispute. Retrieved from https://www.thoughtco.com/softwood-lumber-dispute-introduction-1145890 Moffatt, Mike. "The US-Canada Softwood Lumber Trade Dispute." ThoughtCo. https://www.thoughtco.com/softwood-lumber-dispute-introduction-1145890 (accessed November 25, 2017).