The softwood deal: a broken election promise

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Whether or not Parliament passes the softwood lumber agreement this fall, it will be for reasons having little to do with the substance of the deal itself. It is a bad deal, and one that contravenes the Conservative election pledge to “stand up for

Claiming — without evidence — that “a clear majority” of lumber producers now support the Canada-U.S. softwood lumber agreement, Prime Minister Stephen Harper says this is sufficient for his government to bring forward implementing legislation in Parliament, though it almost certainly falls far short of the original 95 per cent support target.

Given the significance of this settlement — far beyond the commercial effects on a single industry — who won and who lost and what the implications are for Canada, are questions that bear close scrutiny.

The U.S. government now holds over $5 billion in duties extracted over the last five years from Canadian exporters. Despite Canada having won virtually all the legal actions against the U.S. under NAFTA and the WTO, the U.S. government has continued to stonewall or simply disregard rulings, and has refused to hand back this money.

More recently, the Canadian side went to the U.S. domestic trade court, which ruled two days before the April 27 initial agreement that the U.S. law (the Byrd amendment) that would remit this money to U.S. plaintiffs could not be applied to Canadian companies. (The WTO had ruled earlier that the Byrd amendment was illegal.) It also found that U.S. maneuvers to avoid implementing a NAFTA ruling were illegal. In July, the same U.S. court ruled that the Byrd amendment itself was unconstitutional. Hence, U.S. companies were not entitled to a penny of this money.

As part of the settlement, the Canadian government handed over $1 billion of the duties collected from Canadian companies — $500 million to the U.S. companies, and $450 million to the Bush Administration. This was the American price for giving Canada at least two years of lumber peace. In addition, the Americans secured tough restrictions on Canadian access to their market and got enhanced control over Canadian forest policies.

The U.S. industry's cut of this money covers their legal fees and replenishes their war chest for the next round of the lumber dispute. The Bush White House cut (to use for aid projects as it sees fit) is nothing less than a huge slush fund for the upcoming Congressional elections — an unprecedented campaign gift from the Harper government to the Republican re-election bid, paid for by the Canadian lumber industry.

On the Canadian side, apart from a small group of large continentally integrated companies, the vast majority think it is a bad deal. They feel let down, coerced, and sacrificed by their own government for larger political ends.

Having spent hundreds of millions of dollars on litigation they could see light at the end of the legal tunnel. Canadian WTO and NAFTA victories were tightening the noose, and, more importantly, U.S. trade courts were ruling in Canada's favour. They are bitter that their own government pulled the plug just as they were on the cusp of winning the legal war. They are bitter that the government has kneecapped them into submission: offering cash advances only for those who sign on, and ominous threats to the holdouts — no cash advances, no cooperation, no support.

The Canadian firms feel they have been fleeced to the tune of one billion dollars. They have bought a pitifully short period of peace and have bolstered their enemy's capacity and incentive to resume the fight. They have forfeited the legal gains they made over the last four years and will have to start again from scratch in the next lumber round. They are saddled with a cumbersome quota management system and enforcement rules that, as they now stand, are commercially damaging.

Most companies are experiencing varying degrees of financial distress after years of export surcharges and legal costs, with a dollar that has risen from 63 cents to 89 cents (US) since this dispute began, and with North American lumber prices heading downward. The head of the Quebec forestry council (which reluctantly voted to support the agreement) told the Parliamentary committee his members desperately need financial oxygen in order to survive; otherwise they would have voted differently. David Milton, Ontario Lumber Manufacturers Association president, added: “The companies won't support it, but they will capitulate because they have no choice.”

Producers are facing difficult economic conditions over the next few years. The softwood agreement will make things worse, especially for small and medium producers. Mills will close; thousands of jobs will be lost; communities will suffer.

The Harper government sees this agreement as a win despite the fact that it clearly breaks a Conservative election promise. Closing a deal (whatever the price) will give the Conservatives bragging rights — that unlike the previous Liberal government only they have the respect and the clout to reach agreements with Washington. It will allow the government to put this dispute to rest — at least for a while — and get on with its deep integration agenda of tying Canada ever more closely with Fortress America.

I have long believed the NAFTA dispute settlement mechanisms were ineffective. This settlement sounds the final death knell for NAFTA dispute settlement, and with it any pretence that rules have replaced power politics. Why would any Canadian company ever cast its lot again with the NAFTA Chapter 19 or Chapter 11 processes?

More importantly in my view, Canada forfeited its rights under NAFTA Article 1905 to withdraw concessions bargained under NAFTA. It could, for example, have withdrawn its obligation to give the U.S. proprietary access to the majority of our oil and gas. Though unlikely under the Harper government, such action would clearly cause Washington policy-makers to sit up and take notice.

Furthermore, this represents a further loss of Canadian policy freedom. Though B.C. and other provinces have been harmonizing their policies to comply with U.S. demands, this agreement goes farther. It gives the U.S. Administration an effective veto over policy changes and imposes detailed reporting requirements on provincial and federal governments. It will also encourage the export of raw logs and investment in wood-processing facilities south of the border — a setback for policies aimed at enhancing domestic value-added production.

Finally, it can only exacerbate inter-provincial tensions. The complex options in the agreement which involve different blends of export taxes and quotas, combined with the onerous enforcement rules is a recipe for heightened conflict — between regions and between companies.

Whether or not Parliament passes the softwood lumber agreement this fall, it will be for reasons having little to do with the substance of the deal itself. It is a bad deal, and one that contravenes the Conservative election pledge to “stand up for Canada.”

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