Canadian provincial governments have a long-standing policy of subsidising their lumber mills, to the detriment of the US lumber industry, US landowners and the environment. Recently, a coalition of Canadian lumber companies, some lumber consumers, and others have aimed to change the longstanding US policy of combating those subsidies. Under the veil of protecting consumers, this group aims to terminate the current US-Canada agreement, which contains the damage from Canada’s forestry regime, and ensure that no action is taken to offset the subsidies. With the US (SLA) due to expire in March 2001, a spirited debate on Canadian lumber subsidies and the measures taken to counter them is likely in the coming months.
Although it has garnered limited attention in the United States, this dispute is nearly two decades old. In 1986, to counter subsidies, the United States imposed a 15 per cent duty on Canadian softwood lumber imports. Subsequently, the US and Canadian governments reached a series of agreements designed to offset these subsidies. The most recent of these is the 1996 SLA.
At the heart of this dispute are different means of charging for the use of forest resources. In the United States, timberlands are held by private landowners and state and federal governments. The right to cut timber from public and private land is sold at auction or through other competitive means. Though there are some restrictions on log exports from public lands in the Pacific Northwest, the United States is the world’s leading exporter of logs and unprocessed timber.
In Canada, the vast bulk of timberlands are owned by Canadian provincial and federal governments. The prices for the right to cut timber from this land - known as stumpage fees - are set administratively. These Canadian stumpage rates are set very low - only one-third to one-fourth of the market value of the rights - in order to subsidise the Canadian lumber industry. To further boost production, Canadian companies are obligated by their government licenses to cut trees even when prices are low. The Canadian industry also benefits from a ban on virtually all log exports, which concentrates the impact of the stumpage subsidy in Canada and keeps log prices artificially low.
Despite the claims of the Canadian industry, the Canadian stumpage subsidies and export ban are clearly actionable subsidies under US law and international trade agreements. The US Commerce Department has twice determined that these subsidies are illegal under US law and the Congress has concurred. In 1991, a GATT/WTO panel ruled in favour of the United States after Canada challenged the US case to offset the subsidies.
The dispute has also been heavily litigated under the 1989 US-Canada Free Trade Agreement (FTA) - now subsumed under the North American Free Trade Agreement (NAFTA). Unfortunately, the bi-national nature of the FTA and the charged nature of the issue in Canada resulted in many problems of bias and conflict of interest regarding the Canadian jurists on these panels. In the final panel decision in this dispute, two Canadian judges outvoted the American judge on the panel. The American judge - distinguished retired D.C. Circuit Chief Judge Malcolm Wilkey - characterised the decision this way: "[The decision] may violate more principles of appellate review of agency action than any opinion by a reviewing body which I have ever read."
In 1996, to avoid further litigation, Canada proposed and the United States agreed to the SLA. The SLA is a modest restraint on Canadian softwood lumber. The first 14.7 billion board-feet of lumber entering the United States from British Columbia, Alberta, Ontario, and Quebec and all lumber originating in Canada’s Maritime provinces - where most timber is private - are imported without duty. Imports above that level from the subsidising provinces are subject to a duty to partly offset the subsidies.
Despite criticism from Canadian lumber companies and their allies, the SLA has been a success. With the SLA in place, the US softwood lumber industry has been able to increase production 18.4 per cent, with attendant increases in market share and employment.
Just as importantly, the SLA has worked to restrain (marginally) Canadian overlogging of virgin, old-growth forest, which causes incalculable damage without the oversight of environmental protections like those applied in the United States. Approximately 90 per cent of the lumber cut in Canada comes from virgin old-growth forests. What is worse, Canada lacks many of the critical environmental protection laws that are the backbone of environmental protection in the United States, and many of the laws Canada does have are not consistently enforced. For this reason, environmentalists in the United States and Canada strongly support the SLA.
Critics also argue that raising the price of Canadian lumber by offsetting subsidies harms consumer interests. Using a convoluted economic model, critics claim that the SLA has a significant impact on new home prices, but they ignore the basics. In reality, the impact upon the average US consumer is minimal, since more than 95 per cent of lumber imports enter the United States duty free and more than 98 per cent of US consumption is not subject to any fees under the SLA. Further, lumber accounts for a very small share of the cost of a home, a smaller share now than prior to the SLA. This year, the price of lumber has declined sharply in the United States in response to record levels of imports and other market factors.
On a more basic level, it is important to understand that the subsidies have now led to exactly the opposite problem - Canadian timber is artificially priced too low, creating excessive lumber production in Canada, unemployment in the US industry, harming the environment, and generally distorting the market. A countervailing duty or other means to offset subsidies merely moves the price toward the appropriate level - the price consumers would pay under free-market conditions.
For two decades, the United States has sought to establish true free trade in lumber between the United States and Canada - this means trade unhindered by duties and subsidies. This should remain the goal of US policy. Unfortunately, Canada still seems unwilling to eliminate its subsidies, which benefit a few Canadian companies at the expense of US producers, while doing enormous damage to the irreplaceable resource of virgin old-growth Canadian forests. Nor are these practices in the long-term interest of US consumers. Thus, the United States should continue to impose duties or other trade restrictions in order to prevent the Canadian subsidies from harming the US lumber industry and the environment, as well as to keep pressure on Canada for meaningful reform of its timber subsidies. If the US government keeps pressure on Canada to reform its lumber subsides, it is possible to advance the interests of both US workers and the environment. The US industry, consumers and the environment can win if Canada’s lumber subsidies are reduced or eliminated.
This article is the executive summary of a paper Dr Mastel presented to the Global Economic Policy Project, New America Foundation, Washington DC, on October 24. The full paper can be downloaded from the New America site (PDF 149K).