Softwood deal looks a bad bargain

VICTORIA - It sounded like big news, an end to the costly softwood dispute.
The first reports said Canada and the U.S. had hammered out a framework deal to end the trade battle, news that offered hope for a more secure future for B.C. forest communities.
And then it all started unravelling as forest companies and provinces picked at the deal reached by the new federal government.
Rightly, based on the sketchy details available. After almost five years of duties and legal battles Ottawa appears to have reached an agreement that looks much like capitulation.
Start with one big issue, the $5 billion in duties collected by the U.S. since 2001. Canada’s position has been that the duties are illegal. The federal government has claimed success in a series of legal skirmishes, even winning a NAFTA ruling that the money should be returned.
But the draft agreement would see the U.S. keep 22 per cent of the money, likely to hand it over to the American companies competing with Canadian producers. Canadian companies would only get back 78 per cent of the duties they had paid.
Disappointing, but not a dealbreaker if that was the only negative aspect.
But it isn’t. Canadian companies still face duties and trade barriers under the proposed settlement.
Canada had argued for free trade, rejecting the American argument that our industry was subsidized because provinces didn’t charge enough for trees on Crown land. The NAFTA agreement means Canadian producers should be able to sell into the U.S. without restrictions or tariffs.
The proposed deal includes both.
Canadian producers would be limited to supplying 34 per cent of the American market. That’s less than Canada supplied in 1995, the year before the last softwood deal was signed. And it’s about the level Canada has captured over the last few years, even with the duty.
So much for hopes for free trade. Even if Canadian producers were more efficient, and able to offer lumber at better price, they would be limited in how much they could sell to the U.S. The quota would do the work the duties have done for the past five years.
And even if Canada’s share of the U.S. market was below the ceiling a duty would be imposed anytime lumber prices fell below $360 US. Prices were below that level for much of last year.
It doesn’t look much like a win for the Canadian side. Quotas and duties remain in place, and the industry forfeits $1 billion.
The reaction was swift, and negative.
Even if companies - and provinces - could live with the terms, there are some major problems ahead.
It sounds simple to say Canada will observe a quota limiting exports to 34 per cent of the U.S. market.
But practically it’s a nightmare. Who allocates the quota, and how much does each company get to sell? The 1996 deal allocated quota based on sales over the previous few years. Coastal companies had been selling into a hot Japanese market during those years. When that collapsed, they were left without access to the U.S.
It’s not just competition between companies. Ontario is already complaining about unfair treatment. It had a poor year for exports to the U.S. in 2005, in part because of B.C.’s ramped up logging of pine beetle wood. Ontario fears that will be used to justify a permanent smaller share of the quota.
There are solutions. The quota could be auctioned and traded among companies.
But all in all, this looks like a mediocre deal after five years of sacrifice and struggle.
While B.C. may stand to do well on quota in the short term, the agreement falls far short of what the Campbell government has been arguing for over the last four years.
It’s not the agreement anyone wanted. Now we’ll see if companies and governments are desperate enough to accept it.
Footnote: B.C. launched a major overhaul of its forest management and stumpage systems to try and demonstrate to the U.S. that producers are not subsidized. The costly, complicated restructuring will have other benefits, but it didn’t help on the softwood front.