Softwood deal closer, but it won't be a good one

VICTORIA - Two years into the softwood battle, and it looks like we're
heading toward a deal that will leave Canada worse off than we were under
the old agreement.
The U.S. side unveiled two important documents this week, one a response to
Canada's proposals for a temporary deal and the other a blueprint for the
forest changes needed to bring the days of border controls to an end.
In terms of the temporary deal, we're down to a process that will be
familiar to anyone who has ever tried to buy a used car or a house, or
negotiated a union contract.
Both sides accept that a negotiated deal is the way to end the dispute.
Canada still talks about letting WTO and NAFTA appeals go forward, but the
reality is that resolving the dispute that way could take years, only to be
thwarted by new American trade barriers.
Negotiations have barely begun. But it looks like Canada is heading towards
a deal that will be bad news for the forest industry for the next several
years.
You can have interesting debates about whether Canadian producers are
subsidized, or B.C. rules force companies to dump lumber when the market is
weak.
But right now this is just about bargaining and relative power, not who is
right or wrong.
The goal for the American producers is to allow as little Canadian lumber
into the country as possible. Less Canadian wood means greater demand for
their products, providing both more sales and higher prices.
Canadians want an open border. Without access to the U.S. market, our forest
industry is wrecked.
Canada's opening proposal, delivered earlier this month, called for an end
to the 27-per-cent duties being collected by the U.S. They would be replaced
with an export tax that would go into provincial coffers. Under the Canadian
proposal, there would be no export tax on the first 17 billion board feet
shipped to the U.S. each year, $25 per thousand for the next billion and
$100 for any additional shipments.
What does that mean? Canada was effectively saying we'll hold our shipments
to about one-third of the wood consumed in the U.S., more or less our
traditional share. Canada doesn't want any significant trade barriers below
that level.
The U.S. proposal was structured differently. But basically, they proposed a
tax of about $35 per thousand board feet on all shipments up to 17 billion
board feet, and a tax of $175 on all wood above that amount. Since the
lumber is only selling for about $250 these days, that level of export tax
would kill any shipments above the quota.
And that would mean Canadian exports would actually be knocked back below
traditional levels, forcing producers to cut their output by about 10 per
cent.
The settlement likely lies somewhere between the two proposals, and Canadian
industry people seem confidence common ground can be found.
But it's a good bet that the final deal will involve some tax on all
shipments to the U.S., unlike the softwood agreement that expired in 2001
and allowed Canadian producers some free access. It will also involve a
substantial tax on higher volumes, to deter Canadian firms from shipping
more wood when markets and prices are strong.
Reaching a deal is just the first problem for Canadian companies, which have
been summoned to Ottawa for a meeting Wednesday to consider options.
Graduated tax levels mean some sort of quota system needs to be in place, or
companies will just rush to get as much wood into the U.S. as quickly as
they can to avoid rising duties. And allocating that quota among companies,
and provinces, is going to produce winners and losers.
The bottom line is that after two years of uncertainty and lost jobs, Canada
is likely to end up with a softwood agreement that is worse than the one
left behind in 2001.
Footnote: The news isn't much brighter on a long-term solution. B.C.'s
planned forestry changes address some of the ground rules the U.S. sets out
for ending any trade barriers. But it's unlikely that they will go far
enough, fast enough, to satisfy U.S. producers. Log exports, and the extent
of the new auction market in timber, will remain stumbling blocks.