March 2006: Clearing the Air on a Major Trade Dispute

Nine seldom heard facts about our softwood lumber exports
March 1, 2006

The prolonged dispute over the tariffs illicitly imposed on Canada’s softwood lumber exports by the United States has been distorted by a failure to examine the facts. Here are nine facts that are rarely, if ever, mentioned by politicians or the media.

Fact No. 1

During the 37 years that Canada traded with the U.S. under the multilateral General Agreement on Trade and Tariffs (GATT), the U.S. never levied a single countervailing duty or an anti-dumping duty or any other non-tariff measure on its imports of Canadian lumber. Seven rounds of GATT negotiations cut U.S. tariffs on 90% of our lumber exports to zero, and to 5% or less on most of the remainder.

In 1984, before the Conservatives won the federal election and Brian Mulroney became Prime Minister, access to the U.S. for our lumber was about as good as it could get, considering we were (and still are) competing with a politically powerful U.S. lumber industry.

Fact No. 2

During the 37 GATT years of multilateral trading, the U.S. lumber industry only once (in 1982) lobbied for a countervailing duty on our lumber. The U.S. government refused to impose one, since it would certainly have been declared illegal under the GATT.

Fact No. 3

From the time Mulroney began pursuing a bilateral trade deal with the U.S. in 1985 until today, Canadian lumber exports to the U.S.—except for a few short intervals—have been hit with countervailing duties and/or dumping duties, or by Canadian export taxes and quotas imposed by Canada bowing to U.S. pressure. Such duties and taxes have ranged from 15% to 27%.

These punitive trade sanctions have occurred since the GATT was replaced by the FTA, and then NAFTA, as the principal set of terms governing Canada-U.S. trade. The difference is that the GATT (now subsumed under the World Trade Organization) is international trade law covering all member nations, while NAFTA law is essentially U.S. law made by Americans. Changes to WTO rules require mutual agreement by the contracting parties, but NAFTA rules can be changed unilaterally by the U.S. This makes it very difficult, if not impossible, for Canada to avoid the imposition of arbitrary U.S. duties or to have them removed—even if we win NAFTA panel decisions.

NAFTA panel disputes also take much longer to resolve than do disputes taken to the WTO, and are much more costly since WTO cases are processed by salaried government bureaucrats while NAFTA cases entail the hiring of expensive American lawyers. (Canada has already spent over $200 million on legal fees in the ongoing lumber dispute.)

Fact No. 4

Canada has never won a bilateral dispute settlement case involving lumber. Yes, we’ve obtained favourable NAFTA panel rulings, but they are meaningless unless the U.S. heeds and acts on them. Real victory would mean the removal of U.S. duties and in-lieu Canadian export taxes. This has not happened in 20 years of bilateral trade under the FTA and NAFTA.

Fact No. 5

Prospects are remote for Canada winning any trade dispute with the U.S. in which an American industry wields so much political clout that it can sway protectionist Senators and Congress members.

Another major handicap for Canada under NAFTA is that its dispute settlement panels can only rule on whether U.S. trade officials are correctly interpreting and applying U.S. laws. If a panel does come to such a decision, the U.S. can then amend its NAFTA laws to conform to its new trade tactics—and can do so without Canada’s agreement. In fact, this has happened three times already, at great cost to Canada: in 1986, 1995, and 2000.

Fact No. 6

The WTO provides Canada with three ways in which we could have the U.S. duties on our lumber exports removed and recover the more than $5 billion illegally collected from those duties. Before listing these three options, it should be noted that they involve trade retaliations against the U.S. that would be authorized by the WTO. But such retaliatory steps could only be taken under NAFTA if the U.S. concurs with them. Under NAFTA Article 103.2, which overrides all other agreements, Canada requires U.S. consent before it can exercise WTO rights against the U.S.

All three WTO measures begin with a WTO decision in Canada’s favour. If the Dispute Settlement Board (DSB) rules that the U.S. duties are illegal, the U.S. would be directed to return the illegally collected duty money, and Canada could seek authority to retaliate. In the second option, if the decision is simply that the U.S. countervailing duties are illegal, Canada again could seek approval to retaliate. The third option is to obtain a ruling that Canadian lumber exports do not in fact injure U.S. producers, in which case approval of retaliatory actions could also be sought. (A WTO panel recently ruled that our exports are harming U.S. producers, but Canada has properly appealed that decision, since two previous WTO panels had ruled that all U.S. countervailing duties on Canadian lumber were clearly illegal and gave Ottawa the green light to submit a retaliation list.)

Fact No. 7

NAFTA Article 106 overrides provincial rights when they conflict with NAFTA.

Fact No. 8

The U.S. lumber industry has a more long-range objective than simply maintaining protection against Canadian exports. The American companies seek nothing less than to own and control Canadian forests. The imposition of duties gives them a powerful means of pressuring the provinces to sell them Canadian timberland. The choice for the provinces is sell the forests to the Americans or continue paying punitive duties on lumber exports.

Fact No. 9

Under NAFTA, levying a retaliatory tax on exports of oil and gas to the U.S. would be illegal—unless an identical tax were imposed on Canadian sales. Under the WTO, on the other hand, Canada has the right--once given the WTO green light--to levy a tax on any exported product, including oil and gas, at any level and for any length of time.

Canada could, of course, try to justify breaking NAFTA rules on the grounds that the U.S. broke them first, but such a move would risk returning to pre-war dog-eat-dog trade policies. Or it could eventually lead to a one-sided renegotiation of NATTA in which Canada gives up even more concessions to the U.S. on energy, water, and other areas.

* * *

How many times—and how much longer--do we pay the U.S. for access to its lumber market? This question is all the more critical since we have such an effective and cost-free alternative: cancel NAFTA and return to trading with the U.S. under multilateral law.

(Mel Clark served for many years as a senior Canadian trade negotiator. Now retired, he is writing a book about Canadian trade policies, looking at past experience, present practices, and future prospects.)