Politics·Analysis

'Riskier than doing nothing': Softwood lumber package may hurt Canada's case with U.S.

When the federal government sets out to bolster a sector that's already under fire for getting too much of a boost, it has to tread carefully. Last week's softwood lumber action plan likely signals there won't be a settlement anytime soon.

Helping industry may be legally defensible but lowers the odds of a quick deal and complicates NAFTA talks

Natural Resources Minister Jim Carr announced a package of programs last Thursday to help the 300,000 Canadians directly or indirectly employed in the forest industry. U.S. countervailing duties on Canadian softwood lumber were announced in April, with additional anti-dumping duties expected later this month. (Adrian Wyld/The Canadian Press)

When the federal government sets out to bolster a sector already under fire for getting too much of a boost, it has to tread carefully.

Last week, Natural Resources Minister Jim Carr tried to explain how his softwood lumber action plan was an "appropriate response" to U.S. countervailing duties.

Right on cue, the U.S. lobby driving the new levies called it a "new government subsidy" that "further tilts the trade scale."

The upshot? Don't expect a softwood lumber deal anytime soon. The renegotiation of the North American Free Trade Agreement (NAFTA) may get harder too.

Coming forward with an assistance package is "riskier than doing nothing," said Meredith Lilly, a former trade adviser to Stephen Harper who's now at Carleton University.

But after both Quebec and Ontario called for federal help, ministers were compelled to do something. "They're kind of in a difficult position," she said.

Carr said last week the package would "stand the test of scrutiny." 

Lilly doesn't think it's a subsidy that's vulnerable to trade litigation. The loans and loan guarantees, for example, are "on commercial terms."

But legal arguments may be trumped by the optics of a nearly $1 billion bailout. From the political perspective, "there's no reason the U.S. wouldn't attempt to fold this in to part of their arguments," she said.

Minister of Natural Resources Jim Carr discusses the loan package and the state of the Canada-U.S. softwood lumber dispute 6:33

On the other hand, "when developing a package that is safe from a legal perspective, what you might be announcing in the end might be a bit more sizzle than steak," she said.

That makes it hard to satisfy the expectations of the companies and workers you're trying to keep afloat until new markets can be found

'Ransom money'

Former lumber council executive and trade diplomat Carl Grenier wanted the federal government to step up quickly.

In the last softwood lumber dispute, Paul Martin's Liberal government came to the table in 2005 with too little, too late, he said. The industry was already on its knees and desperate to get a deal.

An earlier package this time tells the U.S. "if you want to play the same game again, we will support the industry, and so you won't get to bring us back to the table quickly [and] do a quick and dirty deal," he said.

It's also a sign the federal government isn't terribly confident of a quick resolution to the dispute, whatever optimism ministers may cling to in public. If things were about to be fixed, they wouldn't need an action plan.

A long dispute lets the U.S. collect more duties. In the 2006 settlement, $500 million of the levies on Canadian exports ended up in the pockets of U.S. lumber producers.

"The appetite for this ransom money is still there with the [U.S. lumber] coalition," he said. "Basically the U.S. has learned to game the system."

In addition to loans and loan guarantees for struggling lumber producers, the federal government's plan includes programs for workers who lose their jobs. (Darren Calabrese/Canadian Press)

Softwood lumber as a commodity doesn't currently fall under the NAFTA agreement, but disputes over softwood lumber duties can be appealed to a NAFTA tribunal.

Grenier warns against trying to fold softwood lumber into the upcoming renegotiation.

"We'll lose every time," he said. There's no pleasing the U.S. lobby.

On top of that, Canada shouldn't agree to get into a discussion about the rules for settling disputes while one's underway, he said.

Eventually, Canada is expected to appeal the latest duties. If it wins under a NAFTA arbitration process, Canada gets its money back.

Canada won last time, too. But its decision to accept a settlement anyway undermined that victory.

Now the U.S. wants to renegotiate or even do away with NAFTA's Chapter 19 process. 

"This is something Canada should resist at all costs," Grenier said.

Canada could still appeal to the World Trade Organization, but winning the argument before a WTO panel doesn't return the duties paid.

'Timing seems off'

Canadian and American trade lawyer Mark Warner sees the package as an "inviting target" for Americans to challenge as an export subsidy.

Regardless of what the WTO may eventually rule, coming out with this package now "seems overly aggressive," he said, if Foreign Affairs Minister Chrystia Freeland wants to settle the softwood lumber file before diving into NAFTA.

"The timing seems off to me," he wrote to CBC News, saying Freeland seems "remarkably tone deaf" about how asymmetrical the trade relationship is between the two countries.‎

Foreign Affairs Minister Chrystia Freeland is in charge of trade negotiations with the Americans. While some want to resolve the softwood lumber dispute before NAFTA talks begin, it's looking less and less likely. (Adrian Wyld/Canadian Press)

Brett House, the deputy chief economist at Scotiabank, thinks the package is thoughtful and doesn't run afoul of the rules.

Helping displaced workers or finding new markets is outside the scope of litigation. As for government-backed loans, today's low interest rates mean any discount is likely too small to be material, he said.

The greatest value of the loans may be who's eligible: large producers named in the U.S. investigation may not need them, but more marginal companies might. 

"This potentially lowers the playing field a bit internally for smaller producers," House said. "The little guys are employing more people, almost more certainly, because they're not using technology that's as labour-saving as the big guys."

Turning eligibility into a trade complaint would be "perverse," he said. The U.S. caused the problems in the first place.

The way duties were levied — with some producers paying more than others — is the latest U.S. attempt to divide Canada's industry.

More anti-dumping duties are expected June 23.

"It's every man for himself," former lumber council executive Grenier said, with provinces each turning to their own advisors.

"U.S. authorities don't care a whit about the way the forests are managed," he said. "They only care about the possibility of kicking Canadian exporters of softwood lumber out of the market when prices are low."

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