Canada, U.S. poised to resume hostilities over softwood lumber

Don't panic: Even though the deadline has passed, there's still hope of a resolution to Canada's dispute with the U.S. on softwood lumber. Both sides are still negotiating in Washington, and there won't be any punitive measures kicking in right away.

But the stage is set for Canada and the U.S. to gird for another costly, drawn-out trade battle.

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"I think it's quite clear if we can take them at their word that the U.S. industry is gearing up to get the process started," said analyst NaomiChristensen of the think-tank Canada West Foundation.

The last softwood lumber deal expired Oct. 12, 2015. The subsequent one-year litigation standstill period ended at midnight. Now the American lumber industry could file a petition with the U.S. Department of Commerce as early as Thursday morning.

In a statement Wednesday, the U.S. Lumber Coalitionthanked the Americangovernment for trying to reach a deal butsaidit now had "no choice" but to act in order to manage the "harmful effects of Canada's subsidized lumber trade."

"The U.S. lumber industry's overarching goal is to restore an environment in which it can invest and grow to its natural size," the statement said, to"allow the domestic industry to better supply the American market and help restore the thousands of jobs lost to unfair trade."

Duties by next spring?

Prior to the lastdeal in 2006, the U.S. appliedboth countervailing and anti-dumping duties, adding about27 per cent to the cost ofCanadian imports.

Countervailing duties are levied when (Canadian)government subsidies are found to be injuringa domestic (U.S.) industry. That harm must be proven. Duties are meantto offset the subsidy.

Here lies the heart of the dispute: outside of the Maritimes, most Canadian softwood lumber comes fromprovincially managed Crown land. Most American forests are privately held, sothe market decides what trees are worth.

Changes to the way Crowntimberharvests are auctioned off,however, brought moremarket pricing into Canada'ssystem.

Anti-dumping duties are company-specific, based on a price in a foreign market being less than what the domestic market pays. There is no maximum duty it's meant to cover the gap.

If a petition is filed immediately, the U.S. Department of Commerce may initiate an investigation next month.

It could takebetween 65 and 130 days to issue a preliminary determination on countervailing duties, andeven longerfor the anti-dumping investigation.

So the earliest Canadian exportersfaceduties again is next spring nearthe end of the first quarter or early in the second quarter of 2017. But duties could be retroactive forup to 90 days.

A final determination onU.S. dutiescould come lateinthe year. The Commerce Department may startwith ahighdetermination,begin collecting duties, but then revise downward.

Cue the trade challenges

The Canadian government and industry are expected tofireback, challengingthe U.S. dutieson two fronts simultaneously: a binational NAFTA panel and theWorld Trade Organization (WTO.)

Canada has won trade disputes before and Canadian officials are confident they can do it again.

But here'sthe bad news: legalvictory could take four or five years, costing everyonebillions in duties and legal fees in the meantime.

However, strong legal challenges dofocus minds at the negotiating table.

"While our engagement has yet to produce a new agreement, our governments will continue negotiations though the standstill period has expired," said a joint statement Wednesday from Canada's International Trade MinisterChrystiaFreelandand United States Trade Representative MichaelFroman.

They're aiming for an agreementthat offers "the stability, consistency and flexibility necessary to achieve the confidence of both industries."

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How bad is it, then, that no agreement was reached before deadline?

"I think it depends on how long it were to drag on for," analyst Christensen says.

Right now, lumber exporters are doing quite well, benefiting froma low dollar and rising demand from the U.S. housing sector.

Once the U.S. election concludes, there may be a short window to make the most of the final, friendlyweeks of the Obama administration andbreak through.

On the other hand, negotiations with Washington are driven more by U.S. industry,which must give upits rightto trade action for any deal to hold.

Changed landscape, new demands

Both sides agreed in June that any potential dealwill define Canada's future accessto the U.S. market. But how much should that be?

The Americans are said to wantCanada's total market share capped at 22 per cent a level hard for Canada to stomach.

Current imports are worthabout 27 per cent, well down from before pine beetle infestations limited Canada's supply and the 2008-09 U.S. recession stalled construction and, with it, the demand for Canadian lumber.

A bigger problem may be the U.S.unwillingness to acknowledge Canada's varied industry. Individual companies and provincescould opt out of measures in the last deal.

"They see Canada as one block," Christensen said. "They're not keen on what was in the last agreement."

Canada'sindustry hasdiversified, slowly, over the past decade. About 10 per cent of exports now goto China.

Major Canadian forest companiesalso expandedinto the U.S., making themless vulnerable to trade actions.

But smaller lumber producers, particularly those landlocked (without accessto Asia), could be hit hard. Again.

That brings anothercost for the Canadian government: if mills close and ruraleconomies take a hit, demands for compensation might start.

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