5. A Dickensian Deal (2007)
Canada has enormous forests that can produce an abundance of lumber, and there is a construction market in the United States to buy much of it. In normal conditions, this combination of plentiful supply and continuous demand should engender a vigorous market of willing sellers and ready buyers. Instead the sale of softwood, or construction, lumber has been the sorry subject of a hopelessly byzantine dispute between Canada and the United States for some 40 years, with no prospect of an end in sight.
That it has lasted so long is principally the fault of a US lumber industry eager to secure its share of its own domestic market at prices which will assure them ample returns. In an enduring achievement of expert lobbying, an industry based largely in the US Pacific Northwest and the South has persuaded successive US administrations to swaddle it in a protective cover. This protectionism, in turn, has spawned on the Canadian side an administrative machine comprising governments and industry, not so much to oppose it, but to manage the market limits imposed.
I remember the beginning of this longstanding dispute when first drawn to my attention in 1982 as a reporter with the Calgary Herald. Alberta, along with all other lumber-producing provinces, was hit with the first round of punitive US duties, in what turned out to be a seemingly eternal dispute. The issue followed me into my job in trade communications in Foreign Affairs. The drafting of news releases of lumber-related trade actions and counteractions always seemed to be a last-minute ritual of the Christmas season.
I finally had to confront the matter head on when in January 2007 I was put in charge of the softwood lumber controls division. I had succeeded in a competition to replenish the Department’s executive ranks. It had been a drawn-out process. A couple of years earlier, the Department announced that for the first time it was opening access to its executive cadre (directors and above) to employees who were not career foreign service officers. Traditionally, career diplomats were recruited through regular foreign service competitions conducted nation-wide. Success in these competitions opened the way to a career in the Department including the so-called “rotational” status under which officers would be eligible to postings as diplomats in Canadian embassies abroad.
But in 2005, through a rare, one-time-only competition, employees outside the official foreign service officer ranks, like myself, were offered an opening into a full diplomatic career. The process included written exams, executive aptitude tests including work simulations, and interviews before a board of three Departmental senior managers. I put my name forward in both the foreign service and international trade streams and to my great pleasure succeeded in both. It was truly fortunate for me, in that no similar competitions have been held since. But following my success in the 2006 competition, my next step was to identify an upcoming vacancy in the Department’s executive ranks and convince senior management that I could handle the job.
There was an open directorship in the yet-to-be organized softwood lumber controls division to administer the just-negotiated softwood lumber agreement, the fourth such deal between Canada and the United States. The eager victim of my own career ambition, I was assigned to be the director of softwood lumber controls under the 2006 softwood lumber agreement.
The importance of forestry to Canadian trade is not what it once was when decades ago forestry products, including pulp and paper, constituted Canada’s single largest export sector. Manufactured goods and energy products lead the way today. Still, forestry is an important industry and the government resources devoted to defending it are substantial. In my days in trade communications, I had overseen the department’s involvement in the international forestry partnerships program, an initiative aimed at responding to potent criticism of Canadian forest management practices by environmental groups. These criticisms reached their height in the early ‘90s during the campaign against the logging of old-growth forests on Clayoquot Sound on the west coast of Vancouver Island. Protesters blocking logging roads leading into the forest captured international attention that led to threatened boycotts of Canadian lumber by several European countries. In response, the Canadian government brought together the provinces (who are responsible for the resource) and industry to defend this important export industry. But in creating the international forestry partnerships program, the aim of the members was not just to defend the image of the industry, but also to work towards the implementation of sustainable forestry practices that could withstand environmental scrutiny. In a 1999 statement of the Council of Forest Ministers, the aim of program was described as being to make stakeholders “be better stewards of the forest resource and help us be recognized as such . . . (and) assist the forest sector maintain its international competitive edge while creating jobs in the numerous . . . communities that depend on our forests.”[1]
Our role in the department was to liaise with our missions in Europe to provide them with continuously updated information about the reality of the Canadian forest industry and the steady improvements in Canadian forestry practices. It was the missions’ job to persuade European decision-makers that Canadian forests were being sustainably managed and dissuade them from imposition of lumber import restrictions. Through persistent efforts throughout the late ‘90s, Canadian embassies in the Berlin, Brussels and London in particular were able to fend off an array of regulations meant to limit access to European markets of Canadian forest products supposedly harvested using environmentally unsustainable practices.
What was galling in the early 2000s about the efforts of the US softwood lumber coalition to impede Canadian lumber exports was that the Canadian industry and the provinces that oversaw it had taken extensive measures to create a more environmentally sustainable industry. Such improvements which required considerable investment should have in theory lowered Canada’s vulnerability to charges of subsidizing its industry and inviting trade retaliation. Under joint government and industry initiatives, the regeneration of Canadian forest stands was brought into balance with the quantity of timber harvested. Although “stumpage fees”, or royalties, charged companies for cutting timber varied from province to province, they were set by taking into account the amount of public investment in replanting forests, which task, if not mandated to industry, was undertaken by the provinces themselves. Nonetheless, the continuing complaint of the US industry was that the level of these royalties constituted a subsidy by Canada, and irrespective of the adjustments provinces made, the US industry would not relent in their charges of subsidization and dumping.
The finalization of the 2006 softwood lumber agreement was negotiated by the Stephen Harper government elected in January of that year. The agreement’s predecessor had expired five years before, and the previous government had striven to strike down US countervailing and anti-dumping duties that had been imposed in the meantime. Appeals made to various panels of the NAFTA and the WTO had produced, from the federal government’s perspective, a largely unblemished record of favourable rulings for Canada. The reviewing panels found little evidence of hidden government subsidies, nor a deliberate effort to sell lumber below prices prevailing in Canada’s domestic markets – the key indicators for the imposition respectively of countervailing or anti-dumping duties. However, at every turn, the US industry and government devised new ways to appeal, delaying interminably the possibility that a final judgement at the WTO would ever definitively resolve the matter. As Elaine Feldman, a senior trade policy official now retired, wrote in a study of the 2006 agreement: “Litigation created an endless loop in which contradictory rulings were handed back and forth between NAFTA panels and the U.S. International Trade Commission. . . (T)aking complaints to both the NAFTA and World Trade Organization . . . only further muddled the hoped-for outcome.”[2] Shortly after arriving in office, Prime Minister Harper was eager to notch a success for his still fledgling minority government. The department’s negotiators were advised to bring long-meandering softwood lumber talks to a close.
The deal resulted in the reimbursement of most of the duties paid by the Canadian companies over the several years when no agreement had been in place. The pay-out was some $4 billion worth, short of the $5.3 billion collected by US Customs, but enough, by improving their balance sheets, to satisfy the companies. However, the rules for the new regime were the most complex ever negotiated in the long-running dispute. Lumber exports to the US from Quebec, Ontario, Saskatchewan and Manitoba would be subject to quantitative quotas, limiting the amount that could be sold to the US. In Alberta and British Columbia, there would be no hard quotas, but an export, or surge, tax imposed on any quantities that exceeded a certain amount. As the newly appointed director of the softwood controls division it would be my job to police the quotas and monitor the quantities subject to tax.
Often in the discussion of trade policy, observers talk about “free” versus “managed” trade. There is no better example of the latter than the softwood lumber agreement of 2006. Clearly, this was one very large anomaly in the era of ever greater free trade among market economies and an especially glaring one in the tariff-free environment established by the FTA and the NAFTA.
My new office was in the former but newly renovated Ottawa city hall that was effectively becoming the department’s trade annex. Before several Ottawa-area municipalities were amalgamated by the province in the late 90s, these local fiefdoms resisted what they suspected would be their imminent demise by building modern new headquarters. The city of Ottawa was no exception, commissioning renowned architect Moshe Safdie to design a neo-modernist extension to the existing ‘50s tower that sat on Green Island in the Rideau River. With the departure of the city administration, after the forced merger of all the Ottawa-area municipal governments, the building became vacant. Its location on the opposite bank of the Rideau from the Pearson Building made it the obvious choice for an expanding Foreign Affairs, and particularly for the department’s trade branch. In homage to Japanese office design principles which were then the rage, managers occupied the core of each floor and were surrounded by cubicles for their staff that extended in concentric rows to exterior windows. My office was a small room with a four-person conference table into which exterior light struggled to penetrate a translucent glass wall. Outside my door laboured an array of export permit officers whose responsibility was to issue the licences for every lumber export destined to the United States.
From January 2007, I was introduced to the cumbersome ongoing administrative machinery that would make the softwood lumber agreement work. My division had the practical responsibility to manage the quotas and monitor the levels that would trigger surge taxes. There was a second division – called softwood lumber policy – whose role was to coordinate the regular multilevel consultations with the provinces and US trade authorities in both the department of commerce and the State department. Given the agreement’s many moving parts these consultations were virtually constant, involving in each instance a different group of players. At the top of the “governance” structure was the binational softwood lumber council, a body that brought together the most senior officials of both the United States and Canada to review the ongoing operations of the agreement and give future guidance.
It was a revelation to me, in attending the first of these councils held in Washington, to see the abundance of brainpower deployed in this cause. At a reception organized by Canada in the Canadian embassy, I was struck by the legions of lawyers in attendance, illustrative of the hefty financial stakes involved in managing softwood lumber trade. As much as one theoretically preferred “free” trade, there was lots of money to be made in “managed” trade. It is estimated that legal fees paid out in the various cases preceding the conclusion of the 2016 agreement amounted to some $500 million![3] What’s more, given the perennial nature of this dispute, it was evident that many of its parties, American and Canadian, might have an interest in maintaining quotas, export taxes or similar restrictive arrangements, to secure, and even inflate, their piece of the pie.
My boss, Suzanne McKellips, the director-general of Canada’s export control bureau, likened the situation to the interminable lawsuit of Jarndyce and Jarndyce that is the foundation of the plot of Charles Dickens’s Bleak House. The suit Dickens describes has deteriorated into nothing more than a struggle to extract professional fees from a case whose objective (the settling of an estate) has become entirely secondary. “It’s about nothing but Costs, now. We are always appearing, and disappearing, and swearing, and interrogating, and filing, and cross-filing, and arguing, and sealing, and motioning, and referring, and reporting . . . and equitably waltzing ourselves off to dusty death, about Costs.”[4]
Prospects for profiteering aside, the 2006 softwood lumber agreement was not signed at an auspicious moment for the Canadian lumber industry. Housing construction in the US was in a steep downturn due to extensive mortgage defaults in various regional markets. These defaults were in fact the most important precursor of the 2008 world markets crash that summoned a precipitous contraction of economies worldwide. Canada’s softwood lumber exports had been falling since 2004 from $11 billion and were still dropping when the agreement was signed, eventually bottoming out at about $5.7 billion in 2009.
The quota system applied in Quebec, Ontario, Manitoba and Saskatchewan. The quotas imposed on Canadian lumber companies were not fixed amounts but annually adjustable quantities based on historic moving averages. The calculations followed extremely complicated equations, but recent declines in Canadian lumber sales were built into the calculation of future quotas, meaning that they were bound to diminish over the first few years of the agreement. Moreover, a particularly perverse condition of the agreement was that quotas would be reduced as market prices fell, so that companies would not only have to sell less by volume, but prices per thousand-board-feet would also be lowered.
The acute awareness of these falling indicators by Canadian lumber company executives stimulated some creative interpretations of the agreement’s mathematical quota calculations as a way to forestall, or reverse, the short-term trend. The calculations were doubly important since they would have an effect not only on the global quota level but also in the share that each company would receive in what was a rapidly shrinking market. The management of this twisted thicket of quadratic functions and logarithms was the responsibility of the young senior economists that I had the good fortune to hire during my first weeks in the office.
The export, or surge, taxes, which applied to Alberta and British Columba, posed another challenge. The thresholds lumber companies would have to hit before the taxes would apply were set for entire provinces and not for individual lumber companies. Similar to the quota system, the tax rate would rise punitively in a range from 5 to 15 per cent as market prices fell. As shipments would arrive at the border, the exporter would inform permit officers in my division of the quantities involved. But there was no coordination between lumber companies on total aggregate volumes, and no individual company could know whether their shipment had reached the threshold to trigger the surge tax. That level would be declared by the Canada Revenue Agency based on the numbers received from Canadian customs border posts on a daily basis.
In the department, it was generally believed, in the interests of preserving harmony among all participants in the agreement, that surge tax thresholds ought to be avoided. At the same time, it was not considered the government’s duty to advise individual companies to hold exports back. This led to the rather uncomfortable process of monitoring Alberta and BC exports with the hope that the threshold would not be breached, but not being prepared to do anything to stop it. Nonetheless, if the taxes did kick in, we needed to be prepared for the negative fallout from the companies who would bear the brunt of the tax.
Daily working life of a softwood lumber bureaucrat is illustrative of the aggravating complexity of “managed trade” agreements and the unforgiving hours spent on trying to manage them. In spring 2007, several of my officers and I gathered at the art deco headquarters in Washington DC of the US Department of Commerce, named the Herbert Hoover Building after the president who was burdened with managing the initial years of the Great Depression. We were there to tackle some of the initial issues that had arisen to date. While most of our exchanges with US counterparts were generally civil, my direct equivalent, a commerce veteran with the somehow evocative – even Dickensian – name of Jim Terpstra, took pleasure in being obstinate and rhetorically irritating. He had been on the file for years, and it was difficult to determine whether his obstreperousness was for his and others’ entertainment, or whether he genuinely sought tactically to extract some yet-to-be determined advantage. Since his endgame seemed obscure, I assumed his demeanour was largely an act that we had to humour. Yet our meetings proceeded with difficulty as we sought to counter his rhetorical thrusts and dispose of his objections.
The most important issue during the meeting was the need to reconcile the statistics that we had on Canada’s softwood lumber exports with those the US customs authority had in its possession. Given the need for Canadian companies to remain within their quotas or avoid surge tax thresholds, correct numbers were obviously vital for the success of the agreement. My US counterpart was claiming Canadian companies had vastly exceeded the appropriate levels and warned that measures might need to be taken to punish non-compliance. What made his assertions so aggravating was that the more he stormed on, the more time was being wasted before sitting down with the technicians in the US customs bureau to compare and reconcile our databases.
The meeting eventually closed with our commitment to work diligently to review the numbers, which is precisely what my staff had come to Washington to do. In prolonged talks, which took place in at least three separate sessions in both Washington and Ottawa – to reconcile only the statistics from the first quarter – we were able to bring our numbers within a four-per-cent difference which, given the complexity of the trade, was considered adequate reconciliation. But the person-hours expended to reach this decision were substantial.
The inefficiencies involved in maintaining such a system were obvious, although the direct cost to the Canadian taxpayer was limited. Expenses for operating the softwood lumber agreement were offset by the revenue generated from the sale of export permits. But as economists point out, such expenditures constitute lost opportunity costs. Money expended for administrative purposes is money diverted from investment in more productive activity.
The minutiae of managing the agreement may foster a certain ennui, but enactment of the provisions can have a profound real-world effect. On the eve of the 2007 Canada Day long weekend, I was summoned to the office of international trade deputy minister Marie-Lucie Morin. The deputy’s office was still located on the eighth floor of the Pearson building, so we marched in early summer heat across the Rideau River bridge separating the buildings for this relatively rare meeting with the department’s top civil servant. Morin wanted to know whether figures from the end of June would reveal that BC and Alberta had crashed through the threshold that would trigger surge taxes. Earlier in the month, McKellips had herself been asked to report to Morin about the likelihood of the threshold being broken. I had advised her on the strength of the figures that I had to date that, if the current trend continued, exports would fall short of the target. Unfortunately for me, further calculations made by my staff following her meeting suggested indeed that the export floor might be breached. Clearly, the fact that my initial data had caused McKellips to unintentionally mislead the deputy did not sit well with her. An economist by profession, she was a veteran of Canada’s department of finance, and though normally friendly and courteous, she could also be justifiably exacting.
The stakes were high when I went to see Morin on the Friday afternoon of June 29. Making it particularly difficult to give the deputy a definitive answer was the fact that Saturday, June 30, would be a regular working day at the Canada-US border. For my staff and I this was not going to be a celebratory Canada Day weekend. Rather, I assured the deputy that we would monitor closely the incoming data throughout the weekend to provide her with the latest on the morning of Tuesday, July 4, when everyone returned to work. I found among my analysts a volunteer to monitor the incoming permit applications, and through several calls a day he was able to keep me up to date. By Tuesday morning, I was pleased with the work that we had done but, given processing delays from freight-forwarders who frequently managed the permit applications for their customers, our numbers were still not definitive. We reported to McKellips that we were unable to say on the morning of July 4 whether the threshold had been breached, but it became evident in the following days that BC and Alberta companies had “blown through” their surge tax thresholds. This pattern would be repeated on numerous occasions in the following months, adding new costs to the Canadian product and putting a further strain on access to the US market. For all the intense monitoring carried out on that Canada Day weekend, the results demonstrated the futility of a process that had no effect on companies’ commercial behaviour and inevitably saddled them with higher costs. For everyone involved, from deputy minister Morin down this “managed trade agreement” containing uncontrollable variables would be an ongoing administrative headache.
New annual quotas were to be negotiated for firms in the following years, when part of the challenge was to reallocate quantities following the closure of numerous Canadian mills that had become unviable. Major companies such as Abitibi Bowater, Domtar and Western Forest Products were forced to close several of their historic mills. Eventually, the outcome of the 2006 agreement would be seen to represent a significant victory for the US industry’s protectionist stance. Before the agreement, Canadian companies commanded 35 per cent of the US market, against the US industry’s 63 per cent market share. Post-agreement Canadian companies supply 28 per cent of the market relative to US firms’ 71 percent.[5] In dollar terms, the softwood lumber market for Canadian producers recovered over time, but at $10.4 billion in exports in 2017, it had not returned to the $11-billion record of 2004. Softwood lumber is a sector that remains a vestige of what used to be seen as the mercantilist past. But protectionism has seen a strange and astonishing revival in the tariff wars characteristic of many trading partners’ recent relations with the United States. Will zero-sum economic diplomacy set a new course for years to come, or will it constitute an aberration? Economists are beginning to contemplate an era where efforts to open markets and remove barriers will no longer be the default position for government policymakers. Instead, trade negotiations could again resemble the mercantilist jousting common before the mid-twentieth-century establishment of the General Agreement on Trade and Tariffs (GATT). If ever there was hope that Canada-US softwood lumber trade would eventually be treated conventionally within a free trade arrangement, such prospect seems inconceivable now. The Canadian lumber industry is once again labouring under new tariffs imposed by the US in 2017, which will lead in all likelihood to efforts to negotiate another restrictive agreement, and continued positive rulings in Canada’s favour by WTO dispute panels mean little in the face of the United States’ effort to disparage and neuter that organization.
As much as I found my job as director of softwood controls interesting, my communications and policy background had not naturally prepared me for a role so dominated by mathematical calculation. Departmental management agreed that the position should preferably be undertaken by someone with an econometrics backgound. By mutual agreement, I negotiated a new post in another division that would permit me to manage an issue that, as shall be seen, would become – for a strange moment – more contentious than softwood lumber and significantly affect the outcome of the next federal election.
https://scics.ca/en/product-produit/news-release-canadian-council-of-forest-ministers-ccfm-preparing-forestry-for-the-next-century/ ↑
Feldman, Elaine, “Some Lessons from the Last Softwood (Lumber IV) Dispute”, The School of Public Policy Publications, Volume 10:24, October 2017, University of Calgary. ↑
Feldman, op cit ↑
Dickens, Charles, Bleak House, Everyman’s Library, Alfred A Knopf, New York, London, Toronto, 1991, p. 95. ↑
Congressional Research Service, “The 2006 US-Canada Softwood Lumber Agreement (SLA); In Brief”, May 18, 2017 ↑