Political economy of the U.S.-Canada softwood lumber dispute.

• Author: McKinney, Joseph A.

The United States and Canada enjoy the benefits of the world's largest bilateral trading relationship. The United States accounts for about eighty percent of Canada's total foreign trade, and Canada accounts for more than twenty percent of the goods and services trade of the United States. The two-way trade amounts to well over U.S.$1 billion per day. For the most part this trade flows smoothly and frictions concerning it rarely arise. However, United States-Canada trade is plagued by recurrent disputes within natural resource industries--the most important and persistent of these disputes is that concerning trade in softwood lumber. The intractability of this dispute is rooted in differences in ownership and management of natural resources in the United States and Canada, which in turn are reflections of different attitudes toward the role of the state in the two countries. Because these differences are unlikely to change within the foreseeable future, a permanent solution to the softwood lumber dispute is unlikely. The greatest hope for resolution is continued integration of the United States and Canadian softwood lumber industries. However, whether even increased integration of the industries can resolve the dispute is uncertain so long as differences in ownership and management of natural resources in the two countries persist.

1. BACKGROUND

   Softwood lumber trade between the United States and Canada has been a matter of some contention from the time that the Canadian Constitution gave provinces the rights to forest resources in 1867. (1) While arguments on both sides have taken on increased sophistication during the past quarter-century, the dispute is rooted in the longstanding structural differences in the Canadian and United States forestry industries. Some historical perspective reveals that attempts to restrict softwood lumber imports into the United States are nothing new.

   For a brief period of time in the mid-nineteenth century free trade in softwood lumber between the United States and Canada existed by virtue of the Reciprocity Treaty of 1854 which "provided for the free entrance into either country of natural products and unmanufactured raw material from the other." (Lower, 1938) However, the United States abrogated the Reciprocity Treaty in 1866 and imposed a twenty percent tariff on Canadian lumber, which was countered by a Canadian export tax of one dollar per thousand feet on pine logs (later increased to two dollars). (Lower, 1938)

   In 1890 the United States reduced its tariff by one-half in return for Canada's removing its export tax on logs which were desired as inputs by the United States lumber industry. For a brief period from 1894 to 1897, free trade again prevailed between the United States and Canada in lumber products. However, with the Dingley Tariff of 1897 the United States lumber industry succeeded in having a $2 per thousand board feet import tariff on lumber reimposed. (Lower, 1938)

   Early in the twentieth century the United States proposed another reciprocity treaty providing for free trade in natural resource products, but this time Canada rejected the proposal. In the Underwood-Simmons Tariff Act of 1913, despite pressures for continued protection by the domestic lumber industry, the United States Congress removed the tariff from softwood lumber. (Braudo and Trebilcock, 2002) This situation did not last for long, however. The Fordney-McCumber Tariff of 1922 established an average tariff rate on "Wood and manufactures" at 7.97 percent. (Taussig, 1931) The Smoot-Hawley Tariff of 1930 placed a specific tariff of $1 per thousand board feet on softwood lumber. (2) This act was amended in 1932 to raise the rate to almost twenty-five percent ad valorem equivalent, with severe economic impact on the Canadian industry. The tariff was reduced by about one-half by a trade pact agreed in 1935. (Reed, 2001) Subsequent trade negotiations reduced the tariff further so that by the 1950s the rate of protection was relatively low. In this favorable environment the Canadian import share of the United States market increased from around 5 percent in the late 1940s to over 13 percent in 1961. (Reed, 2001)

   In 1962 the United States Tariff Commission USTC), precursor to the United States International Trade Commission, investigated a charge by the United States lumber industry that it was being harmed by Canadian competition. United States producers proposed a market-sharing arrangement whereby lumber imports would enter duty free until they reached 10 percent of the domestic market but would face a 10 percent tariff thereafter. (Grafton, et al., 1998) However, in early 1963 the USTC ruled that the lumber industry was neither injured nor threatened with injury by imports from Canada, so no new protection was imposed. (Reed, 2001)

   As a result of the Kennedy Round of multilateral trade negotiations conducted between 1962 and 1967, the United States agreed to gradually phase out import tariffs on softwood lumber between 1968 and 1972. During this period concern existed in the United States that timber supplies were being depleted and that housing costs would increase as a result. Remarkably, an Advisory Panel on Timber and the Environment sought assurances from the Council of Forest Industries of British Columbia that Canada would be able to supply increased quantities of lumber at stable prices. However, the economic recession of 1981 caused a sharp drop in lumber prices, resulting in a bailout of the purchasers of federal timber contracts that cost United States taxpayers approximately $2 billion. (Reed, 2001) Consequently, protectionist pressures revived and have continued unabated since then.

   Before discussing the dispute as it has unfolded over the past quarter-century, it may be helpful to consider the characteristics of the softwood lumber industries of the two countries. At the heart of the softwood lumber dispute is the fact that the softwood lumber industry is organized and operates quite differently in Canada as compared to the United States.

   1. Characteristics of the Industry

      The characteristic of the Canadian lumber industry that most clearly sets it apart from that of the United States is the degree of public ownership of forest lands in Canada. Approximately 94 percent of forest lands in Canada are publicly owned, and more than 90 percent of the lumber supply comes from publicly-owned (Crown) lands. (Natural Resources Canada, 2004) The rights to harvest lumber are often bundled with required forestry management practices. In some instances provincial authorities set requirements mandating that a certain amount of timber be harvested and sometimes prohibit sawmill closures or reductions in production capacity. Stumpage fees (for the right to harvest timber on publicly-owned land) are set in most instances by the provincial governments.

      Within Canada the province with by far the largest production of softwood lumber is British Columbia, which in 2002 accounted for 51.3 percent of Canadian production. In 2002, Quebec produced 18.9 percent of Canadian lumber, Ontario 10.9 percent, the Maritime Provinces 8.6 percent, and the Prairie Provinces 10.4 percent. (3) Between 1995 and 2001, production in British Columbia declined by 32.3 percent, while it increased by 71.1 percent in the Maritime Provinces, by 10.3 percent in Quebec, by 25.1 percent in Ontario, and by 8.9 percent in the Prairie Provinces. The net result of these shifts was that Canadian production of softwood lumber increased by 11.3 percent during this period. While Canada's softwood lumber industry is more concentrated than in the United States, it is not highly concentrated. The largest five producers in 2000 accounted for 53.8 percent of production, and the largest 20 accounted for 66.7 percent. (USITC, 2002)

      Canadian logging, lumber and pulp and paper industries directly employed 361,000 people in 2002 and accounted for 2.8 percent of Canadian GDP. (Natural Resources Canada, 2004) The importance of the United States market to Canadian softwood lumber producers is seen in the fact that in 2001 more than two-thirds (68.1 percent) of Canadian production by value was sold in the United States. For British Columbia 72 percent of production was exported to the United States, accounting for almost one-half (49.2 percent) of total Canadian sales of lumber to the United States. (USITC, 2002) Of Canada's 2002 exports of softwood lumber, 83 percent were shipped to the United States while Japan, the second largest market, received only 13 percent. (Natural Resources Canada, 2004)

      In contrast to the situation in Canada, in the United States 58 percent of forest land is privately owned, and 95 percent of timber harvesting is done on private lands. (USDA, 2004) Payments for harvesting timber are generally negotiated by private parties, except for the small amount of harvesting done on public lands for which payments are determined by public auctions of harvesting rights. Because lumber companies in the United States must pay private landowners market-determined prices for their timber, they suspect that Canadian producers who pay non-market-determined stumpage fees (typically much lower than the prices paid for timber by United States lumber companies) to provincial owners of timber thereby gain a distinct economic advantage.

      According to the United States Forest Service, 779 establishments produced softwood lumber in the United States in 2001. As in Canada, the industry is not dominated by a few producers. The five largest producers accounted for 32.4 percent of production in the year 2000, whereas the twenty largest accounted for 53.8 percent of production. (USITC, 2002)

      The United States forestry industry is also geographically diverse, with production occurring in at least 28 states. The fact that softwood lumber producers are located in many different states (and many Congressional districts within some states) helps to...