War of the woods: US-Canada lumber feud can impact NAFTA talks

One of the world’s longest-running trade disputes is the disagreement between the United States and Canada regarding softwood lumber.

Last Thursday marked another chapter in this saga, when the U.S. Department of Commerce announced its final determinations in the antidumping and countervailing duty investigations of imports of softwood lumber from Canada.

{mosads}This could result in total duties as high as almost 24 percent. However, we have been down this road before, so potential next steps and implications of this latest action are not difficult to predict.

This dispute stretches back — in one form or another — to at least the 1930s and currently involves over $5.5 billion in trade. At the heart of the dispute is the fact that most Canadian softwood lumber is manufactured from trees grown on government-owned land, whereas the majority of U.S. softwood lumber is manufactured from trees grown on privately owned land.

U.S. softwood lumber producers assert that the prices charged to their Canadian competitors for trees from government-owned land, known as “stumpage,” are too low and do not reflect market forces, so they constitute a subsidy. This is the fifth round of U.S. trade cases against Canadian softwood lumber; the first round started in 1982.

Commerce’s latest antidumping and countervailing duties will not become permanent until and unless the U.S. International Trade Commission (ITC) finds that imports of Canadian softwood lumber are materially injuring, or threaten to materially injure, the U.S. domestic softwood lumber industry.

The ITC is scheduled to make this determination around Dec. 18. If the ITC makes a negative determination, the investigations will be over and the duties will not stay in place. However, if the ITC makes an affirmative determination and the duties stay in place, that could set in motion a series of actions.

Litigation will certainly be the next step. Canadian producers and exporters of softwood lumber are sure to assert that commerce’s antidumping and countervailing duty determinations, as well as probably the ITC’s injury determination, violated U.S. law.

The Canadian government, and possibly some of the Canadian provinces, would also likely join in the challenges relating to the countervailing duty determination, because they were parties to that proceeding.

Normally, these types of appeals are made to the U.S. Court of International Trade (USCIT). The USCIT is a specialized federal court devoted to hearing cases regarding international trade laws. However, the Canadians will probably take advantage of Chapter 19 of the North American Free Trade Agreement (NAFTA).

This provision allows parties in antidumping and countervailing duty cases involving two of the three NAFTA countries to have such determinations reviewed by a panel of five trade experts, rather than the applicable domestic court.

Each Chapter 19 panel is composed of nationals from the two involved NAFTA countries, so in this case it would consist of Americans and Canadians.

It is important to note that Chapter 19 panels decide if an antidumping or countervailing duty determination is in accordance with the applicable national law, rather than with NAFTA obligations. Thus, Chapter 19 panels principally serve a judicial function, rather than a NAFTA dispute settlement function.

The Canadian government will also likely pursue another litigation track by bringing a case against the United States under the World Trade Organization (WTO) dispute settlement system. Here, the Canadian government would allege that the determinations by commerce and the ITC violate the U.S.’ obligations under the WTO Antidumping Agreement and Agreement on Subsidies and Countervailing Measures.

Unlike the NAFTA Chapter 19 cases, this would be a purely government-to-government dispute regarding the application of international trade agreement obligations, rather than a dispute involving private parties regarding the application of U.S. law.

Despite the Canadian government and companies going into litigation mode, settlement of the dispute is still possible. A settlement of the last round of U.S. trade cases against Canadian softwood lumber was reached in 2006, four years after antidumping and countervailing duties were first imposed and litigation on those determinations had begun.

Like the last agreement, a new settlement would likely restrict the volume of Canadian softwood lumber imports, either through quotas or export charges or a combination of the two. These restrictions could also be linked to the market price for softwood lumber, becoming less strict as prices increase and stricter if prices fall.

Under a settlement, the United States would revoke the antidumping and countervailing duty determinations, and the various forms of litigation against those determinations would also be terminated.

The settlement would need to address the disposition of estimated duties collected since the investigations began and likely provide a “peace clause” under which no new U.S. trade cases would be brought for a set period.

Negotiating a settlement is challenging for reasons beyond the difficulty of reaching agreement on the nature and terms of the import restrictions. In addition to reaching agreement between the U.S. and Canadian federal governments, the settlement would also need the support of the Canadian provincial governments, as well as the U.S. and Canadian lumber industries.

A one-size-fits-all import restriction also is not likely to be negotiated, because the economics of the Canadian softwood lumber industry vary between the eastern and western provinces.

Moreover, there are other complications:

• determining how to treat lumber from the maritime provinces, which is made from privately owned trees;
• excluding Canadian lumber made from U.S. logs;
• accounting for lower-quality lumber;
• formulating an anti-surge mechanism against Canadian imports;
• and adjusting for imports from countries other than Canada.

All of this shows why a settlement has not yet been reached and may take several more years.  

The final implication of the softwood lumber cases is what impact they may have on the talks to renegotiate NAFTA. The cases should nominally have no effect because they are separate from the negotiations. However, softwood lumber looms in almost any trade discussion between the United States and Canada.

The greatest impact of the dispute most likely will be on the negotiation of whether to retain the Chapter 19 binational panels in NAFTA. The United States has clearly stated that it wants to delete Chapter 19, thereby requiring all appeals of antidumping and countervailing duty determinations by NAFTA countries to be heard by the respective domestic court.

Canada sought the Chapter 19 binational panels in the U.S.-Canada Free Trade Agreement, subsequently had it included in NAFTA, and is now vowing to fight hard to keep it in NAFTA. With the latest softwood lumber cases now likely going to a Chapter 19 binational panel, Canada will resist ending Chapter 19 even more.

The softwood lumber dispute between the United States and Canada is significant in terms of the billions of dollars in trade at stake, as well as both countries’ domestic politics. As in the past, the right combination of political will and economic circumstances will be needed to resolve the dispute, at least for a while.

In the meantime, we can expect more litigation and the continued impact of the dispute on NAFTA.

Stephen J. Claeys focuses on issues relating to international trade as a partner at Wiley Rein LLP, which represents clients in complex, high-stakes regulatory, litigation and transactional matters. Claeys previously handled international trade issues in the White House, the House of Representatives Committee on Ways & Means and the Department of Commerce. He was the lead Department of Commerce negotiator for the last U.S.-Canada softwood lumber agreement.