Canadian and U.S. trade officials will meet in Ottawa on Thursday in an attempt to resolve a brewing dispute that threatens to derail the seven-month-old softwood lumber agreement.

The meeting follows release Wednesday of a six-page letter of complaint from U.S. trade representative Susan Schwab.

The letter accuses Canadian lumber producers of exceeding their export quotas, and provincial and federal governments of unfairly subsidizing the beleaguered Canadian forestry industry.

"When this incompetent government signed the softwood deal last fall, it promised seven years of peace and we have got barely seven months," charged Liberal Deputy Leader Michael Ignatieff during question period.

"The deal is falling apart."

Prime Minister Stephen Harper said the request for consultations is an appropriate mechanism set out in the agreement to resolve disputes, hinting that "some American interests" may indeed want to rip up the deal because it is good for Canada.

Schwab's March 30 letter sets out a litany of complaints against Canada that she says contravene the lumber trade deal that went into effect last October.

The complaints say that Canadian exporters failed to adjust export quotas after actual U.S. consumption dropped more than five per cent from what was predicted, as provided in the agreement. The letter also lists a total of 15 federal, Ontario and Quebec programs valued at about $2 billion, "each of which may constitute a breach."

The so-called surge mechanism calls for penalties equal to 150 per cent of the border tax in any one month if an exporter exceeds its set quota or monthly allocation.

'More protectionism than we were expecting'

Ted Menzies, the parliamentary secretary for international trade, said the complaints are a result of the damage the American housing crisis has inflicted on the U.S. lumber industry, reducing demand, and depressing prices for lumber, plywood and other building materials.

"The softening of prices in the United States has created more protectionism than we were expecting," he said. "It is this softwood lumber agreement that provides us the opportunity to sit down and discuss what the Americans feel are their concerns."

Canada has denied the assistance programs contravene the agreement, and has said that the deal allows exports to exceed the quota for a short period of time.

The U.S. complaints, the extent of which only became public Wednesday with the release of the Schwab letter, is the first significant test of the controversial softwood deal. It was opposed by many in the forestry sector because it did not allow for unlimited free trade and because it recovered only $4 billion of the $5 billion in disputed duties the U.S. had collected from Canadian lumber exporters since May 2002.

John Allan, president of the B.C. Council of Forest Industries and the B.C. Lumber Trade Council, said he is confident Canada will be able to show that government assistance programs do not constitute illegal subsidies, and on the issue of exceeding the quotas, he said the U.S. has it all wrong.

He explained that Alberta and B.C. are not under a quota in the agreement, whereas it is too early to apply the quota provisions that apply to the rest of Canada. That's because the U.S. complaint refers to U.S. "consumption" in the third quarter, before the agreement went into effect in October.

"There is a time when the quota will apply, but it's too early now," he said.