An international trade dispute between two federalcountries tests the wits of negotiators to ﬁnd the deal that will please the highest number of constituent units — anddisplease as few as possible.

That was the way Canada and the United States eventually resolved the trade dispute over softwood lumber inthe two countries where their federal governments are responsible for defending trade rights and disputing theactions of other countries, yet the economic impact ofwinning or losing a dispute is often regional.

Such tensions have always been present in Canada since well before Confederation, the time of Canada’s ﬁrst federal constitution in 1867, and have been part of thelong-running saga that is the softwood lumber disputebetween Canada and the U.S.

The elements of an intractable quarrel have always been in place. Canada has plentiful supplies of softwood lumber and the U.S. is virtually its only export market. Softwood lumber is made from trees that do not loose their leaves: spruce, pine, balsam, fir and other similar coniferous trees. The construction industry and furniture makers on both sides of the Canada-U.S. border use significant quantitiesof softwood lumber.

In Canada, the forests are government-owned in the principal producing provinces, British Columbia (B.C.),Alberta, Ontario and Quebec. Harvesting rights and stumpage fees, the prices paid for the right to cut the trees on government-owned land, are often embedded in long-term tenure arrangements negotiated between the province and the industry. In the U.S., and in Canada’s Atlantic provinces, the forests are for the most partprivately owned and market forces generally determine the price of the timber.

Should disputes arise, both Canadian and U.S. laws provide powerful weapons to fend off foreign competition

— anti-dumping and countervailing duties. Once an industry has launched a complaint, history has shown that investigating officials are likely to find dumping and/orsubsidization — only the extent remains in question.While the rules of both the World Trade Organization

William A. Dymond is the Senior Executive Fellow of the Centre for Trade Policy and Law at Carleton University, Ottawa,Canada and served as Director of the Centre from 2000 to 2003. He was formerly the Director-General of the Policy PlanningSecretariat of Canada’s Department of Foreign Affairs and International Trade. He also served as Senior Advisor, Trade Negotiations Office for the Canada-U.S. Free Trade Agr

Photo: Tom Brandt

(WTO) and the North American Free Trade Agreement (NAFTA) allow such actions to be challenged, disputesettlement cannot solve a problem when domestic interests are entrenched and enjoy substantial political support.

Canada’s provinces: new players in the dispute

Over Canada’s first 100 years as a country, from 1867 to 1967, there was little need or occasion for federalprovincial consultation on international trade issues. While the provinces might have been vitally interested in the economic impacts of trade, the federal governmentcontrolled the tools for handling trade disputes, essentiallycustoms tariffs on imports and the negotiation of trade agreements with other countries, which opened markets to Canadian exports.

But this began to change in the 1970s, when issues fallingpartly or exclusively under provincial jurisdiction, for example, government procurement and trade in services, crept onto the multilateral negotiating table in Geneva. When a previous free trade agreement and then NAFTAcame into effect, their rules and regulations caused the provinces to become more involved in the managementof Canadian trade policy. Intensive federal-provincial consultations on trade issues became a permanent feature of Canadian trade policy making, negotiation, and implementation.

In Canada, the softwood lumber story brought all the dimensions of federal-provincial management of Canadian trade policy into play. At the heart of the dispute are stumpage fees under exclusive provincial jurisdiction. But the Canadian federal can the

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U.S. and negotiate for a settlement. However, unlike most other trade disputes, Ottawa does not control the measures at the origin of the dispute.

Regional differences

There had also always been important regional differences.

B.C. as a single province accounts for about 75 per cent of Canadian exports. Quebec and the other provinces with stumpage practices of their own could reasonably apprehend being caught up in a dispute causingconsiderable damage to their lumber companies and workers. As each case wound its way through the U.S. system and subsequently in WTO and NAFTA actions,there was always a chance that the U.S. would pick off the provinces one at a time in separate deals. In these circumstances, Ottawa had to cross a minefield in order to construct and sustain a consensus.

The current dispute originated in 1982, when U.S. lumber producers complained that provincial stumpage practicessubsidized Canadian exports. The complaint was dismissed in 1982, but then succeeded in 1986 with a countervailingduty of 15 per cent on most Canadian lumber exports to the

U.S. Then the Americans agreed to drop the duties in return for a Canadian agreement to impose a 15 per cent tax on lumber exports.

When Canada terminated the agreement in 1991 the American government responded with a new countervailingduty. Three years of dispute settlement under the Free Trade Agreement ultimately vindicated Canada. However,in 1996, faced with threats of a new countervailing case,Canada agreed to limit exports from B.C., Alberta, Ontario,and Quebec to about 35 per cent of the total U.S. market for softwood lumber.

Agreement expires, dispute begins

This agreement expired on March 31, 2001, and Canadian industry, the provinces, and the federal government braced themselves for a new episode of strife. It came quickly in the form of the application by the U.S. of combined antidumping and countervailing duties of almost 28 per cent. Canada promptly replied with a flurry of legal challengesunder NAFTA and the World Trade Organization. Canada usually won the NAFTA challenges, while the WTO cases produced wins and losses for both sides. A number of Canadian lumber companies sued the U.S. governmentseparately under provisions of U.S. law. The Bush administration, however, consistently refused to eliminate the duties or return the monies collected, no matter the dispute settlement result.

In January 2006, a snap election in Canada brought the Conservative government into power in Ottawa at a time when both sides were exhausted. More than $5 billion in duties had been collected from Canadian producers and under U.S. law would be remitted to the complaining U.S. companies. A stark choice faced the Conservatives: whether to renew the efforts to find a deal or continue disputesettlement actions with scant prospect of a final resolution.

On the U.S. side, while Canadian exports had fallen,imports from other countries had replaced Canadian

Photo: Troy Holtzworth

and the U.S. industry was no better off. Moreover, series of annual reviews had steadily reduced the duties under 10 per cent, substantially eroding the protection om Canadian exports. From the perspective of the Bush the dispute had come to dominate the Canada-U.S. relationship to the detriment of other Both governments concluded that it was time to close curtain on this episode.

2006 breakthrough: a compromise

2006 agreement captures the political reality of the 20 years of Canada-U.S. trade in softwood lumber: managed trade is better than contentious free The new agreement broadly provides for a Canadian tax tied to the market price of softwood lumber and U.S. consumption of lumber. The revenues collected will returned to the governments of the exporting provinces. B.C. coast and interior, Alberta, Saskatchewan, Ontario Quebec can choose to pay the varying export tax, or a export tax and limits on export volume control,varying with the price. Each province is allocated an share based on historical shares of the U.S. market. exports exceed 110 per cent of the base share, the exportwill be increased by 50 per cent. These measures do not to exports from the Atlantic provinces, the Yukon,Territories, or Nunavut. In addition, exportsom 32 companies found by the U.S. not to benefit from are excluded.

U.S. terminated all current anti-dumping and duties and has undertaken to dismiss new petition, trade action, or investigations againstsoftwood lumber while the agreement is in force. U.S. is also returning to Canadian exporters more than billion of the $5 billion in duties collected.

wo factors made the 2006 agreement possible: federalovincial dynamics began to work in favour of a and a subtle but important change occurred in management of Canada-U.S. relations under the new government.

Ottawa aggressively asserted its jurisdiction over dispute. As the deal began to come together, federal

Forum of Federations

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Photo: Trevor Haldenby

Canadian lumber waiting to move out from a shipping yard in Hearst, Ontario.

ministers decided that Canadian interests were greater that the sum of provincial interests.

National interest replaces animosity

Second, from its early days in office, the Conservative government abandoned animosity as a position for the management of the relationship with the U.S. and replaced it with a realistic pursuit of national interest. This changein tone induced the Bush administration to run some political risks in concludingthe deal. These were not inconsiderable in an election year that would produce serious losses for the administration. Under U.S. law, the president cannot terminate countervailing or antidumping cases without the agreement of the affected industry. U.S. lumber producers could count on robust congressional support from the U.S. southeast and northwest. In the end, the American producers were persuaded to forego countervailing or anti-dumpingduties and the prospect of $5 billion in exchange for seven years of stabilityunder a scheme that offered protection in periods of low prices without the risks and costs of litigation.

The outcome of the softwood lumber saga validates the observation byCanada’s new Liberal leader, StéphaneDion, that Canada is a country that works better in practice than in theory. Acute tensions among the provinces and between the provinces and the federal government created an incendiary mix that frequently came close to ignition. Collaboration by all levels of government produced a good,if not perfect, agreement and prevented serious damage to the federation. In negotiation, timing is everything. All the players here deserve credit for seizing the moment.

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