Watch what happens to NAFTA.
Earlier this week, the Trump administration announced a preliminary decision to impose a 20% tariff on Canadian softwood lumber imports. The move stems from an ongoing trade issue that dates back at least to the Reagan administration, which is poised to hurt both the US and Canadian economies if the countries can’t resolve it.
Lumber mills in Canada and the U.S. essentially have different ways of buying timber. In Canada, timber comes mostly from trees grown on government-owned lands, while U.S. lumber mills mostly buy their timber from private landowners through competitive bidding. At issue is that the US views Canada’s practice as a subsidy to its lumber industry giving it a competitive advantage over U.S. producers. And since Canada also restricts its log exports, this depresses Canadian timber prices even lower, increasing the advantage Canadian lumber has in the U.S. market.
The US has dealt with this issue for almost four decades. In the past three cases where Commerce found subsidies, Canada agreed to restrict lumber exports to settle the matter. This could happen again. Needless to say, there are no guarantees, and it will likely take a while before the latest case is resolved.
Every industry in the US has a right to file a case with the U.S. government to determine whether imports are being subsidized. Once that’s determined, domestic industries have a right to file a case and get an answer from the U.S. government as to whether a subsidy exists. The Department then continues its investigation to assess a final duty rate. Then an independent agency, the U.S. International Trade Commission, still has to find that the subsidized imports injured the domestic industry before duties are applied. While career civil servants conducted this investigation and the law is supposed to operate without political influence, whoever is in the White House can reasonably claim credit for what his government does.
Trump’s announcement this week comes after the lumber industry filed a case with the US Department of Commerce. Since 1980, it’s the fifth case filed by the industry. In the most recent case, a preliminary finding determined that Canada offered a lumber subsidy of 19.3%.
Each of the last three cases resulted in a U.S. Canada lumber agreement, under which Canada decided that it was better to restrict its lumber exports than having the U.S. impose tariffs. And that is an outcome that would not be surprising this time around as well.
Does that mean that all will be well in U.S.-Canada trade relations insofar as lumber is concerned? There are still risks. Canada can appeal U.S. agency decisions to a World Trade Organization (WTO) panel and under the North American Free Trade Agreement (NAFTA) to a bi-national panel. Challenges to U.S. trade remedies are often successful. President Trump’s 2017 Trade Policy Agenda criticizes international dispute settlement as an interference with U.S. sovereignty. Moreover, during the last lumber case in 2001, the domestic industry also challenged the constitutionality of NAFTA dispute settlement which end rights to appeal to U.S. courts.
If the U.S. government fails to implement an international panel’s decision, that could trigger trade hostilities. If it is a WTO decision, ultimately Canada would have a right to retaliate against U.S. trade. Lumber is a big trade item for Canada, and the retaliation authorized could cost Canada billions of dollars. If a NAFTA panel were disregarded, this could undercut the basis for continuing to have NAFTA, and hundreds of billions of dollars worth of trade between the two countries could be at risk. If Canada and the US cannot come to an agreed or at least tolerable result on lumber trade, the costs to our two economies would be very high. There would be no winners.
Alan Wm. Wolff was a senior trade negotiator with in both Republican and Democratic administrations. He is a Senior Counsel with Dentons LLP. He was counsel to the domestic U.S. industry for several rounds of lumber litigation and negotiated settlements. This article is written on behalf of no client or organization.