New year, old trade wars: lumber, dairy disputes set for arbitration

Two of the thorniest trade disputes between Canada and the U.S. on softwood lumber and dairy are ready for a comeback in2021under the new NAFTA.

On Dec. 9, the U.S. requested formal consultations under the agreement's state-to-state dispute settlement rules(Chapter 31).Washington ischallenginghow Canadaregulates14 categories of dairy imports, such as cream, butter and cheese.

Outgoing United States Trade Representative Robert Lighthizer warnedlast Junethat the U.S. was unhappy, before the revised agreement had even come into force.

The big concessions President Donald Trump bragged about wringingout of Canada haven't amounted to much for American farmers.

Twodays after the U.S. kicked off its dairy complaint, Canada escalated its softwood lumber dispute by requestinga panel under the Chapter 10 rulesto review countervailing duties the U.S. had revisedin late November.

"Canada firmly believes that any duties imposed on Canadian exports of softwood lumber to the United States are unwarranted and unfair," International Trade Minister MaryNg said on Dec.11, adding that the duties harm the economic recovery on both sides of the border.

Canada alreadyhad waitedmonthsfor a panelto be struck under the originalNAFTA's Chapter 19.

Last summer, Canada won a World Trade Organization case on softwood lumber. But the U.S. appealed and because the Americanscontinueto block appointments to the WTO's appellate body, thatcase is effectively stalled.

Ng said Canada is considering all its legal options, which could include another WTO case on lumber. But it's not clear that would bringany remedyin the short term, beyond the prospect ofanother moral victory.

"The [lumber] action by Canada... really was a signal," said Inu Manak, a research fellow at the Washington-based Cato Institute. "It's a tit-for-tat thing to sort of say, 'Hey, look, we need to get some movement somewhere here You're accusing us of not following the rules, but you're certainly not allowing us to benefit from the ruling at the WTO as well.'"

Hoping 'saner heads will prevail'

Susan Yurkovich, the presidentof the Vancouver-based Council of Forest Industries and the B.C. Lumber Trade Council, disagrees with the suggestionthat Canada's latest request for arbitration isa response to the dairy challenge.

"We never get out of it on lumber," she said, listing off the multiple battles she's been fighting for years in an effort todisprove the U.S. industry's claims that Canadian lumber is unfairly subsidized and establish thatthe duties payable should be zero.

"This is a growth industry and a total revenue stream for trade lawyers," she said, citing the fact that U.S.lawallowsits industry to challenge Canada on the same issues again and again. "As soon as we reach resolution, we seem to find our way back here."

But Canadafights on, hoping "that saner heads will eventually prevail," Yurkovich said and it can do thatbecause the former NAFTA Chapter 19 dispute settlement process was preserved in the new NAFTA's Chapter 10.

Demand for Canadian 2x4s remains strong in the U.S., with the pandemic driving up demand for both home renovations and single-family housing constructionasmorepeopleworkfromhome.

The latest duties just pile on top of strong prices. "We are always curious why [U.S.] consumers are not more annoyed that this has been allowed to go on for so many decades," Yurkovich said.

The U.S. industry lacks the supply to meet thisdemand. The duties on Canadian lumber, Yurkovich said, simply make it easier for other offshore suppliers to gain marketshare.

As dysfunctional as this file has been for decades, Yurkovichsaid she hopes for a return to "normalcy"when anew U.S. administration takes over.

"Even though the [U.S. Commerce Department] was very biased at least you would get a panel struck in a relatively orderly fashion," she said. After Donald Trump became president, "all that went out the window."

Dairy import permitsofferedas compensation

U.S. farmers have many beefs with Canada'ssupply management system, any one of which could trigger future arbitration. But in its first official noticeunder the revised NAFTA, the U.S. trade representative's office argues that the way Canada controls itsdairy imports isn't fair and equitable.

The American industry became highly suspicious when the Canadian government awarded most of itsduty-free import permits not to wholesalers or retailers, but to Canadian dairy processors as compensation.

The Americans argue that undercuts theincentive forCanadian competitorsto import the fullvolumes that were conceded in the tradetalks.

The market access Canada lost amounts toonly a small fraction of what American farmers produce annually. But on principle, any chance to chip away at Canada's protectionsmay feel worthwhileto the USTR and the American dairy sector. And if Canada loses, other trading partners will take notice.

After dairy market concessions were made in tradedeals with the European Union (the CETA) and Pacific Rim partners (the CPTPP), Canada'sindustry began lobbyingto acquirethe import permitsso that it couldcontrol which importscompete with itsown products andprofit from thosesales as compensation forlost market share.

The European Unionseemed to see this coming. Underthe CETA, itnegotiated language thatholds the Canadian government accountableiffull volumes of European cheese imports don't materialize. Adesignated share of theimport permits mustbe set aside for "new entrants."

But nothing in the text of the new NAFTAprevented Canada from assigningimport permits to its domesticprocessors. So in the race to implement the new North American deal byJuly 1, it allocated the vastmajority of the permits to its domestic industry.

Imports below negotiated volumes

Permit holders mustuse or return theirallocations by certain dates, or risk penalties. But duringthe pandemic, underutilization penalties have beenwaived.

Sohow many duty-free dairy imports actually arrive? Theimport statisticshave fuelledU.S. skepticism.

Fill rates (the percentage of what's allowed under the agreement) are relatively high for European cheeses, but lower for industrial cheeses (like those onfrozen pizzas) and nowhere near the full volumes formost CPTPP categories.

Canadianindustry officials suggest therearemarket forces at work: Canada's ingredient cheeses are cost-competitiveand importing perishable dairy products from New Zealand or Australia isn't practical. By contrast, fine cheese importsare profitable:higher margins offerincentives for permit holders to import all they can.

When the U.S. filedits complaint on Dec. 9, the fill rate for NAFTA cheesessatat about 60 per cent of what was allocated for 2020. (It's higher now.) Nearly half of thoseimportswere shipments ofmozzarella that may have originated in U.S. facilities of Canadianprocessors

Chapter 31 consultations are closed-door, diplomatic processes meant to mediateand avoid arbitration. They usually start within a few weeks of a complaint, although the holiday season andthe transfer of power to a new U.S. administration may delay these talks.

"This is an issue that will be addressed government to government," said Mathieu Frigon, the president and CEO of the Dairy Processors Association of Canada."Minister Ng has stated that she is confident that Canada is meeting its obligations under the [CanadaU.S.Mexico Agreement]. DPAC agrees the [tariff rate quota] allocations by the federal government are consistent with the terms of the agreement."

In a year-end interview with CBC News, Canada's ambassador in Washington, Kirsten Hillman, reinforced this line.

"We are firmly of the view that we are in compliance,that our implementation reflects the negotiated outcome," she said. "We're quite confident in that."

New administration, different tone?

President-elect Joe Biden's nominee for agriculture secretary, Tom Vilsack, will be reprising the role heplayedin Barack Obama's cabinet. In the interim, he's been the president and CEO of the U.S. Dairy Export Council.

Needless to say, he knows this disputewell.

"Canada should get ready for quite a difficult discussion," Manak said. "The next administration is certainly not going to let this slide."

So a very happy new year, then, to the lawyers who will bill by the hour as they debate the precise interpretation of each country'sobligations under the new NAFTA.

But whenBiden's USTR pick, Katherine Tai, takes over, she maytakea new approach and bring a change in tone.

Manak describes Tai as a very technical and strategic thinkerwho hasa "very different generational perspective" unlike her predecessor Lighthizer, her perspectives on free and fair trade were not formed in the pre-NAFTA thinking of the 70s and 80s.

Does this translate into a different attitude on Canadian files?

Tai's priority, Manak said, will be China. And she's already signalling more cooperation with allies a shift away fromthe Trump administration's 'America first' approach.

If that happens, maybe these Canadiandisputes willget easier.

"You can't be involved in really contentious litigation and ask for help in something else," Manak said.