Disputes on softwood lumber have simmered for more than 20 years, but the most recent conflict boiled over in May 2002, when the United States imposed duties of 27 per cent on Canadian softwood lumber, arguing that Canada unfairly subsidized producers of spruce, pine and fir lumber.

An agreement in principle to end the dispute was reached in December 2003, but it collapsed two days later. The issue went before North American Free Trade Agreement panels and the World Trade Organization several times. Rulings have usually gone Canada's way.

Canada's protracted dispute with the U.S. over softwood lumber finally ended in April 2006 with an agreement that would require the U.S. to return about 80 per cent of the more than $5 billion in duties it had collected on lumber imports. The deal was signed in July 2006, but lumber industry groups in three provinces and the B.C. government said they would not support the final draft agreement. However, after the federal government made some adjustments, provincial governments agreed to support the deal. B.C. came on board first, with Ontario and Quebec following suit.

The deal removes tariffs on lumber, but includes export taxes that kick in if the price of lumber drops. Producers would have to pay an export tax between five per cent and 15 per cent depending on the price reduction.

The agreement remains in effect for seven years, with the possibility of renewal.

At issue

The dispute centred on stumpage fees – set amounts charged to companies that harvest timber on public land. Many in the U.S. see Canadian stumpage fees as being too low, making them de facto subsidies. A U.S. coalition of lumber producers wants the provincial governments to follow the American system and auction off timber rights at market prices.

The U.S. responded by levying tariffs on incoming Canadian lumber in May 2002.

Overview of the dispute

The bickering between Canada and the United States over softwood lumber is like a case of sibling rivalry. It dates back several decades. Even within Canada there were divisions. The B.C. Lumber Trade Council argued a trade war with the Americans over softwood lumber would be costly and should be avoided by accommodating U.S. demands. The Free Trade Lumber Council, which includes lumber producers in Quebec and Ontario, wanted to fight it out. What most Canadian foresters and governments do agree on is their goal: free trade in softwood lumber.

In August 2001, the Bush administration backed a U.S. forest industry bid to hit Canadian lumber with billions of dollars in duties. Two months later, the duty was increased when the government imposed an anti-dumping duty on top of the original duty. Dumping is a term used to describe the sale of goods to another country at less than what they cost to produce.

The duties were applied separately following the expiration of the softwood lumber agreement between Canada and the U.S., which governed exports from April 1, 1996 to March 31, 2001. Under that agreement, the U.S. guaranteed market access to Canadian exporters for five years and permitted the import of 14.7 billion board feet per year of lumber without fees. The agreement applied to $10 billion worth of lumber produced in British Columbia, Alberta, Ontario and Quebec.

The agreement didn't apply across Canada. Since lumber harvested in the Maritimes comes mostly from private land, Maritime provinces weren't subject to the U.S rules. With no extra duties to deal with, Maritime producers saw business rise.

When the agreement was signed, Maritime provinces accounted for about five per cent of Canada's lumber production. In the five years following, production in Nova Scotia and New Brunswick soared 62 per cent to more than 1.2 billion board feet. That compares with 1.5 billion board feet produced in Ontario. In New Brunswick, 90 per cent of softwood lumber exports go to the United States.

The trade war took a toll on Canadian jobs. Thousands in the industry lost their jobs, including about 15,000 forestry workers who were laid off in British Columbia.

In 2001, then-U.S. trade ambassador Robert Zoellick vowed the trade war would continue until Canada imposed its own taxes on lumber exports. Canada has refused to do so.

On July 29, 2003, it seemed as if there might be a breakthrough in the dispute when officials on both sides announced a draft deal. As part of the draft, Canada had agreed to cap lumber exports to account for 30 per cent of the U.S. market, down from 34 per cent. If the quota was exceeded, Canada would have to pay a penalty. The plan was nixed two days later when U.S. producers said Canada needed to make more compromises.

A NAFTA decision on Aug. 13, 2003 was considered a partial victory for the Canadian side. A panel ruled that, while the Canadian lumber industry is subsidized, the 18 per cent tariff imposed on softwood lumber by the United States is too high. While the ruling didn’t throw out the duty imposed more than a year earlier, it ordered the U.S. Commerce Department to review its position.

The NAFTA report said the U.S. made a mistake in calculating its duties based on U.S. prices, and by not taking Canadian market conditions into consideration. It ordered Washington to recalculate them. NAFTA decisions are legally binding and must be put into effect within 60 days.

Two weeks later, a WTO panel concluded that the U.S. wrongly applied harsh duties on Canadian softwood exports. The panel also found that provincial stumpage programs provide a "financial benefit" to Canadian producers. But, the panel made it clear that the benefit is not enough to be a subsidy, and does not justify current U.S. duties.

On Aug. 10, 2005, an "extraordinary challenge panel" under NAFTA dismissed American claims that the earlier NAFTA decision in favour of Canada violated trade rules.

"We are extremely pleased that the ECC dismissed the claims of the United States," said International Trade Minister Jim Peterson.

"This is a binding decision that clearly eliminates the basis for U.S.-imposed duties on Canadian softwood lumber. We fully expect the United States to abide by this ruling, stop collecting duties and refund the duties collected over the past three years," he said.

Washington’s initial response was that the ruling doesn’t settle anything – and that it will take more negotiations before this dispute is wrapped up.

But by November 2005, the U.S. Commerce Department said it would comply with the NAFTA ruling, even though it disagreed with it.

The following month, the U.S. Commerce Department said it had recalculated its countervailing and anti-dumping duties on softwood. The result? The new duties would be set at a total of 10.8 per cent, almost halving the old rate. The decision was expected to save Canadian lumber companies $600 million a year.

Still unclear was how or if the U.S. would refund some of the billions in duties it has already collected. And once again, the U.S. lumber industry signalled it might appeal.

The Canadian government, in the meantime, announced $1.2 billion in aid for the Canadian lumber industry just before the election was called. U.S. interests called it another kind of subsidy and Washington said it was "disappointed."

In February 2006, the U.S. lumber lobby said the World Trade Organization had ruled that the U.S. had complied with its international obligations while applying anti-dumping duties against Canadian lumber imports. Canadian officials countered that the U.S. was continuing to artificially inflate anti-dumping rates by using different calculation methods to avoid complying with an earlier WTO decision.

In March 2006, a NAFTA panel again ruled in Canada's favour, finding that Canadian softwood lumber exports are not subsidized. At this point, the total duties collected by the U.S. had reached $5.2 billion.

In April 2006, a World Trade Organization appeal body rejected Canada's request to overturn an earlier decision by the U.S. International Trade Commission. A group of lumber producers in the United States known as the Coalition for Fair Lumber Imports claimed this ruling as another victory in their long-running softwood lumber dispute with Canada.

Framework agreement reached

Then, on April 26, 2006, came word that Canada and the United States had reached a framework agreement that could form the basis for an end to the dispute.

The framework agreement called for the U.S. to return about 80 per cent of the $5 billion in duties that U.S. Customs has collected in the previous four years. Canadian-sourced lumber would also be kept to no more than its current 34 per cent share of the U.S. softwood market.

Canada will also collect an export tax on softwood lumber exported to the United States if the price drops below $355 a thousand board feet.

The following day, Prime Minister Stephen Harper told the House of Commons that Canada and the United States had agreed on a seven-year deal to end the dispute.

Softwood deal signed

On July 1, 2006, trade ministers from Canada and the U.S. signed the final legal text of the softwood lumber deal. David Emerson, Canada's international trade minister and U.S. trade representative Susan Schwab signed the agreement in Geneva, where ministers were attending international trade talks.

The deal is based on the April 26 framework agreement. Emerson says he will introduce legislation in September 2006 to confirm the agreement and hopes to have it in place by October 1, 2006.

Parts of the deal include:

• Import duties of $4 billion the U.S. charged Canadian companies since 2002 will be returned. But the U.S. keeps $1 billion.
• A seven-year term, with a possible two-year extension.
• A ban on the U.S. launching new trade actions.
• Restrictions on Canadian exports will kick in if prices fall too far.
• Neutral trade arbitrators will provide final and binding settlements of disputes.

Three provinces eventually jump on board

A deal was signed, but not everyone was happy with it. Lumber industry representatives in B.C., Alberta and Quebec, and the B.C. government have expressed concern about the final draft of the softwood deal.

The B.C. government and lumber industry representatives wrote jointly to Ottawa on June 30, 2006 — before the deal was completed — saying "the current draft agreement has not met some of our key requirements. We will, therefore, not be able to offer our support," Canadian Press reported. B.C. is Canada's biggest softwood producer.

The Alberta Forest Products Association says the clause allowing either country to end the deal after three years undermines its value.

The Quebec Forest Industry Council said it was not ready to support the deal, citing worry about the escape clause.

But the federal government negotiated with the U.S. to rework the deal to address some of the softwood industry's concerns.

The newest version of the agreement includes concessions that make it harder for the U.S. to pull out of the softwood lumber agreement before it ends, and that foster stability in the forest industries. For example, if the agreement isn't renewed, or if the U.S. decides to bail out, the Americans cannot re-impose duties until one year after the deal was killed. The U.S. also must give Canada six-months notice, up from the three months.

These extra clauses give the lumber industry more stability, which could help producers to recoup their losses over the years.

On Aug. 22, 2006, Harper announced that his government would introduce a bill in the House of Commons in September to implement the agreement, saying the main softwood producing provinces and a "clear majority" of Canadian forestry companies had given it their support.