2006 Softwood Lumber Agreement

Last week at the Forest Economic Advisors’ Forest Products Forum at the World Forestry Center in Portland, OR, the US Lumber Coalition stated it does not support simply extending the 2006 Canada-US Softwood Lumber Agreement when it expires on October 12, 2015.
The agreement was renewed in 2013 with no changes. If it is allowed to lapse next year, there is a one-year ‘stand-still’ period during which neither side can file cases. This important trade deal, flawed as it is according to both Canadian and US players, has provided stability to industry by eliminating the constant rounds of trade disputes in various forums that were going on for decades.

Agreement Expires October 2015

Madison’s spoke to representatives of the US Lumber Coalition this week to get some clarity on this latest announcement.
“A simple extension won’t provide a platform for a stable agreement moving forward,” said Zoltan van Heyningen, Coalition representative and speaker at the FEA conference, during a phone interview with Madison’s Tuesday. There are three main issues the Coalition membership has with the current SLA:
• there has been a dramatic shift in North American log prices due to market forces since the Agreement was signed in 2006;
• continued concern over the exit ramp and market conditions in Quebec; and,
• enforceability of the SLA in light of the recent grade 4 decision.
“There has been a dramatic shift in the cost of doing business for operators globally, due to increased exports to China and other factors, except for those in Canada,” detailed van Heyningen on the first point. “The gap in log prices between Canadian and US producers has increased since the 2006 SLA was signed. Canadian companies are insulated from global market forces therefore don’t follow suit when log prices change.”

According to van Heyningen, this circumstance renders the border measure [export tax] mechanism less effective given log prices, and the trigger of US$365 mfbm on the lumber composite is not what it used to be “if you have to pay world prices for logs”.
Eventually, van Heynigen said, the US producers will reach a breaking point where they would ask why they are in this Agreement and would consider “tearing it up”.
The second point, on Quebec and the exit ramp, has been detailed in previous issues of your Madison’s Lumber Reporter.
By way of explanation, van Heyningen said, “Currently, Quebec can promise to undergo some fashion of reform that does affect [log] pricing toward market but can still fall short of actually achieving global log prices.
“The problem with the current Agreement,” van Heyningen detailed, “is that it doesn’t recognize incremental measures toward market. The Coalition would like to see more flexibility.”
By way of explanation, van Heyningen said, for example, if Quebec or another province made changes to its log pricing policy such that it was at a competitive disadvantage to other provinces, that province might argue it should no longer be subject to the softwood lumber export tax. The Coalition’s position is: if a province moves toward market pricing but hasn’t achieved it, then why should operators there get a free pass on the tax?
As for the price of Grade 4 logs in BC, the Coalition believes that the LCIA ruling on the most recent arbitration “undermined the integrity of the Agreement”, said van Heyningen.
“That tribunal ruling created a road map where a province could make changes [to log pricing] which amount to a subsidy but as long as it is not officially written down [by Canada] there is no breach.
“The tribunal ruled that there was no document from a Canadian province proving a subsidy. BC changed scaling guidelines but didn’t prove how many cubic metres of logs were graded as #4, which could lead to the conclusion that ‘everyone’ now knows how to reduce stumpage in the next down market cycle.”
“This means the 2006 SLA can’t be enforced effectively,” stated van Heyningen.
The Coalition’s understanding is that Canada‘s current mandate is limited to “renewing this Agreement”, and “for how many years will we extend the Agreement?”  The Coalition is hopeful that the two governments will be able to engage in discussions that go beyond such a limited mandate.  Madison’s sent inquiries to the Softwood Lumber Division and to the media department at International Trade on Tuesday morning but still had not heard back by press time Friday. “We are hoping for a sustainable agreement for 2015 because that’s what everyone wants,” said van Heyningen. “Our priority is to have an agreement that is sustainable and works. The alternative would be seeking relief under the U.S. trade laws to manage the differences between the two systems.”
Madison’s subscribers will remember the inflated costs of previous trade filings and disputes on the lumber file between Canada and the US. In the end it was only the lawyers who made any true gains. In terms of moving forward, Madison’s asked if all this means a re-write of the current Agreement. “The Coalition is still working on having a comprehensive proposal,” answered van Heyningen. “There needs to be a will [on both sides] to actually negotiate.
The Coalition says it is “hoping to break out of a cycle of a lack of willingness to discuss” the Agreement. “If the Canadian position is to just hold firm and not negotiate then this trade deal will crumble,” said van Heyningen.
Madison’s reached out to Foreign Affairs, Trade and Development Canada also Tuesday for comment.
The reply, from media spokesperson Caitlin Workman  was:
“The Canada-U.S. Softwood Lumber Agreement will expire in October 2015.  There is general interest in Canada to maintain the predictability and stability that the North American industry has enjoyed as a result of the Agreement.
• Canada looks forward to continue working with the U.S. government on ways to foster a positive trade environment for the North American industry.
• The federal government will continue to defend the interest of the softwood lumber industry across Canada, recognizing it’s vital economic importance for all regions.”