NEWS RELEASES

September 10, 1996 No. 157

MINISTER EGGLETON ANNOUNCES

SOFTWOOD LUMBER PLAN

The Honourable Art Eggleton, Minister for International Trade, announced today a plan to allocate on a company basis the export of softwood lumber to the United States.

Under the the Canada-U.S. Softwood Lumber Agreement announced April 2, 1996, the United States made an unprecedented commitment not to launch any trade actions on softwood lumber exports from Canada for the next five years. Canada was thus able to ensure continued secure access to the U.S. market, protecting Canadian jobs.

Today's plan implements a provision of the agreement by providing allocations to lumber companies in British Columbia, Alberta, Ontario and Quebec which will permit these companies to export specific quantities of softwood lumber to the United States without payment of any export fees.

"This plan is balanced and fair to the provinces and to the softwood lumber industry," Mr. Eggleton said. "We consulted extensively, and have achieved considerable consensus in both Western and Eastern Canada among companies and provinces which would be affected by this plan."

Mr. Eggleton said the plan:

allows companies already established in the lumber market to continue their traditional patterns of trade;

provides for the possibility of allocations for new entrants;

permits some change in a company's share to provide for growth; and

takes a balanced approach to meet the interests of the industry throughout the country.

The new allocation system, implementing a provision of the Canada-U.S. agreement, provides that lumber companies based in British Columbia will receive 59 per cent of the initial allocations with 23 per cent for Quebec firms, 10.3 per cent for Ontario companies and 7.7 per cent for Alberta firms.

This allocation, based on recent export shipments, goes to primary producers and to remanufacturers which further process wood by such processes as sawing, planing and treating, materially changing the form of the lumber. While wholesalers will not receive direct allocations, the primary industry has provided written assurances to the federal government that it will continue to use wholesalers in the provinces as distributors to the United States -- in other words, to maintain "business as usual."

"I will monitor the system closely over the next few months to ensure that these assurances are being kept and that the system is working to the benefit of all segments of the softwood lumber industry," Minister Eggleton stated.

The allocation will also be reviewed annually for the next four years, with adjustments to be based on changes in firms participating and on the previous year's exports. The plan will permit changes to the allocation system to respond to developments in the lumber industry and trade.

Under the Canada-U.S. Softwood Lumber Agreement announced in April 1996, no export fees will apply to shipment of 14.7 billion board feet a year originating from British Columbia, Alberta, Ontario and Quebec. That number exceeds the level of lumber exports to the United States from the four provinces in all previous years except 1995. For exports above that level, the Canadian government will collect fees of US$50 per thousand board feet for the first 650 million board feet, and US$100 per thousand board feet for greater quantities. Any money collected from these fees will be returned by the Government of Canada to the four provinces affected by the agreement. The agreement does not cap exports to the United States, which have in recent years amounted to about $8 billion annually.

The new system is one element of the Canada-U.S. Softwood Lumber Agreement, which was entered into by the federal government to avoid costly countervailing duty actions which have been threatened by the United States.

- 30 -

For further information, media representatives may contact:

Nicole Bourget

Director of Communications

Office of the Minister for International Trade

(613) 996-6271

Media Relations Office

Department of Foreign Affairs and International Trade

(613) 995-1874

This document is also available on the Department's Internet site: http://www.dfait-maeci.gc.ca

BACKGROUNDER

Canada-U.S. Softwood Lumber Agreement

The Canada-United States Softwood Lumber Agreement, announced on April 2, 1996, provides Canadian exporters with a guarantee against U.S. trade actions for five years. It includes an unprecedented U.S. government commitment to dismiss any new petitions for trade action.

In return, Canada agreed that softwood lumber exports to the United States originating from British Columbia, Quebec, Ontario and Alberta that exceed 14.7 billion board feet a year will be subject to a US$50 per thousand board feet border fee for the first 650 million board feet, and a US$100 per thousand board feet fee for greater quantities.

Revenues collected through the export fee by the Government of Canada will be distributed to the provinces in accordance with their respective shares of lumber shipments subject to the fee.

No fee will apply to shipments below 14.7 billion board feet, a level which is even higher than the 1992-94 average annual exports of softwood lumber from those four provinces to the United States. If the fee were applied to the record shipment level of 16.2 billion board feet in 1995, 91 per cent of exports from those four provinces would enter without payment of the fee.

The federal government has established company allocations after consulting the lumber trade -- producers, wholesalers, other exporters -- and the provinces, as well as other interested parties.

No fees are required for lumber originating from Manitoba, Saskatchewan, the Atlantic Provinces or the Territories. These are exempted from the agreement.

The Agreement provides for an increase in exports without fee for each calendar quarter when the average price exceeds US$405 per thousand board feet in the first two years and US$410 in the last three years. Canada has qualified for at least a further 92 million board feet of exports without fees from April to June 1996, and may qualify for an additional 92 million board feet in the current quarter if the average price remains above this "trigger" price.

Softwood lumber export allocations

Allocation to exporters of how much they can ship without a fee avoids distorting effects of a rush to the border, and allows the Canadian lumber industry to plan its marketing and shipping in a normal, orderly way. This principle was recognized in the Canada-United States Softwood Lumber Agreement announced on April 2, 1996. It was, of course, up to the Government of Canada to decide how the allocation would be made.

The allocations plan is a national program under the Export and Import Permits Act. The plan provides for a national advisory committee involving industry and the British Columbia, Alberta, Ontario and Quebec governments. In addition, provinces may establish their own advisory bodies to assist them in providing advice on administration of the allocations to the federal government.

The allocation is to primary producers and remanufacturers. Remanufacturers further process softwood lumber by such processes as sawing, planing and treating, materially changing the form of the lumber.

The new allocation system, implementing the Canada-U.S. agreement, allocates shipments on a company basis. The initial allocation amounts to 59.0 per cent for British Columbia firms, 7.7 per cent for Alberta companies, 10.3 per cent for Ontario firms and 23.0 per cent for Quebec companies.

Wholesalers

While wholesalers will not receive direct allocations, the primary industry in each of the four provinces in question has provided written letters of commitment that it will continue to use wholesalers as distributors to U.S. customers on a "business as usual" basis.

In addition, the federal government will allow primary producers to transfer any portions of their respective allocations to wholesalers in an expeditious manner, so as to allow wholesalers to export softwood lumber to the United States.

Furthermore, the federal government has established an advisory committee consisting of two prominent Canadian wholesalers and two primary producers. The committee will be chaired by Ron MacDonald, MP for Dartmouth, Nova Scotia, and Parliamentary Secretary to Mr. Eggleton, and will report to Mr. Eggleton on a regular basis concerning any changes in the value of exports handled by Canadian lumber wholesalers. The federal government has expressly reserved the right to "claw back" allocations given to primary producers and to redistribute some portion to wholesalers if the "business as usual" commitment to Canadian wholesalers is not maintained.

The decision to make the allocations directly to primary producers and remanufacturers was based on such factors as:

the advice given to the federal government by most of the four provincial governments affected and their respective major lumber associations;

the fact that primary producers and remanufacturers have made an extensive long-term investment in plant and equipment;

the fact that primary producers are closely linked to managing the forest resource, a factor of strong interest to several provinces;

the fact that primary producers and remanufacturers contribute heavily in jobs and value-added to provincial economies; and

the fact that associations representing primary producers have provided firm undertakings to continue using wholesalers for lumber exports to the United States.

The system provides for flexibility to accommodate normal market adjustments such as growth and new entrants.

New entrants

The plan, announced today by Mr. Eggleton, reserves the following allocation for "new mills" over the next 18 months:

294 million board feet (equivalent to 2 per cent of the 14.7-billion allocation) without payment of any export fees;

184 million board feet bonus available under the Canada-U.S. agreement, without payment of any export fees; and

150 million board feet, which carries an export fee of US$50 per thousand board feet.

The above provision is designed to provide access to export allocations for new mills which began production in 1995 or 1996, or had verifiable investment commitments to build by April 1, 1996, or those mills with major capital investments in new capacity since January 1995. However, in order to to establish precise selection criteria and allocations by the end of November 1996, advice will be sought from industry and provinces. The objective of these provisions is to secure the jobs which will result from these new mills.

Other matters

A process to allocate up to an additional 500 million board feet at a US$50 per thousand board feet fee has been agreed to by the industry and has been incorporated in the plan. There are also provisions to protect the percentage share of the market held by small producers.

The allocations will also be reviewed in January and annually for the next four years, with adjustments based on changes in firms participating and on the previous year's exports. This will permit changes to the allocation system to respond to developments in the lumber industry and trade.

Allocations will be adjusted when they are under-utilized and unused allocations would be returned to a national pool for redistribution. Allocations could be transferred from one company to another with Ministerial approval.

Softwood lumber case history

Softwood lumber has been an area of Canada-U.S. trade friction for over 15 years. In 1982, the United States conducted its first countervailing duty investigation of softwood lumber from Canada, and concluded that provincial timber harvesting costs called stumpage fees did not confer a countervailable subsidy to Canadian lumber producers. In June 1986, a second countervailing duty investigation was initiated.

In December 1986, Canada and the United States signed the Softwood Lumber Memorandum of Understanding (MOU), under which Canada imposed a temporary export tax of 15 per cent on softwood lumber entering the U.S. market from Canada.

In October 1991, Canada terminated the MOU. In response, the United States initiated a countervailing duty investigation and imposed an interim bonding requirement on imports of lumber from Canada except from the Maritime Provinces and Newfoundland.

In 1992, the investigation resulted in the imposition of countervail duties against Canadian lumber.

The Canadian government, the provinces and the lumber industry filed challenges against the final determinations of subsidy and injury before two Canada-U.S. Free Trade Agreement (FTA) Chapter 19 binational review panels. In 1994, the United States terminated its countervailing duty action after an FTA Extraordinary Challenge Committee affirmed the findings of the FTA Subsidy Panel that the U.S. Department of Commerce should not have found Canadian programs to be countervailable subsidies.

As a result, the United States refunded $800 million of countervail duties that it had collected from Canadian exporters.

Since the last Chapter 19 panel case, there have been changes both in the market and in U.S. law which rendered another Canadian victory before a binational review panel far less certain. These panels are only empowered to rule on whether the United States has properly applied its own domestic law on countervail duties.

Given the importance of this trade, both countries agreed to establish a bilateral consultative process to create better understanding, resolve problems and avoid further litigation in this sector. Canadian provinces and industry were fully engaged in the process throughout 1995.