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Soft Lumber/Soft Power: How China Influences the US-Canada Softwood Lumber Dispute

Wednesday, October 12, 2016 6:43
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(Before It's News)

Softwood lumber disputeI recently spoke on the U.S. Canada softwood lumber dispute at an American Chamber of Commerce in Canada event. I was subbing for my colleague Bill Perry who could not make it because he was in China. My talk focused on the history of the dispute, its key issues, and most importantly, what will likely happen if new AD/CVD petitions are filed and investigations initiated. This post builds off my presentation and it focuses on how China will affect the next round of the US-Canada Lumber wars, expected to start this week.

For the past ten years, the United States and Canada have abided by a 2006 agreement that regulated Canadian lumber imports into the United States with a system of export fees and quotas triggered by specified average US market price points. That 2006 Softwood Lumber Agreement is set to expire this week and with that expiration, a coalition of U.S. lumber producers is expected to immediately file a fifth round of antidumping (AD) and countervailing duty (CVD) petitions seeking US government investigations to determine whether Canadian lumber is unfairly dumped or subsidized and is injuring the U.S. domestic lumber industry.

Many of the issues in this fifth round of the US-Canada Lumber trade war likely will be the same or very similar to issues raised in the previous four rounds. US lumber producers will likely allege that Canadian lumber producers benefit from a wide array of government grants, loan guarantees, tax preference schemes and other subsidies provided by the Canadian federal and provincial governments. The US lumber producers will contend that these subsidies give Canadian lumber an unfair competitive edge.

The primary issue remains whether Canadian lumber is unfairly subsidized by the Canadian system of “stumpage rates,” which is the price paid for the right to harvest lumber from provincial land. Since most Canadian forests are on “crown” land controlled by the Canadian provinces, Canadian stumpage rates are primarily set by each province. Since most US lumber is harvested from privately owned land, US stumpage rates are primarily market determined through competitive auctions. US lumbers producers are unhappy with the benefits Canadian lumber producers allegedly receive from the provincial stumpage system.

This next round of lumber dispute will likely be more than just a simple replay of previous lumber investigations since there have been a significant developments since the last round was settled in 2006. Two China-related developments in particular could have significant impact.

First, China has been the most targeted country for US CVD investigations; the US Department of Commerce (“DOC”) has conducted about forty CVD investigations against China since 2008. In many of these CVD cases against China, the DOC calculated very high subsidy margins, often based on aggressive interpretations of CVD laws and regulations. The CVD investigation practices developed by the DOC in these Chinese cases will likely be applied in the next Canadian lumber CVD investigation. The DOC will no doubt conduct its CVD investigation against Canadian lumber mindful of how it might affect on-going and future Chinese CVD cases. Unlike past Canadian lumber CVD determinations where CVD margins never exceeded 20%, the DOC could very well calculate a much higher than expected CVD rate in Lumber V.

The other significant post-2006 China-related change is the growth Canadian lumber exports to China. In 2006, 82% of Canadian softwood lumber exports went to the United States. By 2011, the United States received only 53% of Canadian softwood lumber exports. China in particular became a significant market for Canadian lumber, much of which was from British Columbia.

In addition to developing alternative export markets (like China), a number of Canadian lumber producers have developed alternative production options by acquiring US lumber mills. As of 2015, major Canadian lumber producers (such as West Fraser, Canfor, and Interfor) now own more sawmills in the United States than in Canada, and they are now also among the top ten largest U.S. lumber producers.

Canadian lumber producers that now have the option to ship their lumber within the US from their US sawmills and to export their Canadian lumber to China are going to be well-positioned to withstand settlement terms demanded of them by the US lumber industry. At a minimum, the new cadre of Canadian lumber producers with China and/or internal US options will almost certainly make it harder for Canadian lumber producers to unify around a common negotiating position against their US counterparts.

China’s influence on even Canada-US timber relations will no doubt be felt.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.

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