Slow Progress on New Softwood Lumber Agreement

Even though the October 12 deadline has passed, there is still hope for a resolution to the US/Canada dispute over the embattled Softwood Lumber Agreement (SLA). Both sides are still negotiating in Washington, and there won't be any punitive measures taking effect in the near term. That said, a bipartisan group of senators is urging President Obama to encourage Canada to forge an agreement on a new softwood lumber trade deal.

Sens. Ron Wyden (D-Ore.) and Mike Crapo (R-Idaho), along with 21 other senators, said they are disappointed that Canada seems reluctant to follow through with completing a deal. Last week, the senators wrote a letter to the president stating, “We urge you to encourage Canada to fulfill Prime Minister [Justin] Trudeau’s commitment as contained in the joint statement and bring the negotiations process to successful conclusion with a new, stable and sustainable agreement.”

Earlier this year, Obama and Trudeau agreed to complete a new agreement that would address the concerns of US lumber producers. The primary contention has focused around claims of artificially low stumpage prices for timber harvested on Crown lands, which results in lower market prices for finished Canadian lumber. The two leaders agreed that Canadian exports should be held at or below an agreed US market share that the nations would negotiate in an effort to satisfy both sides.

"We are concerned, however, that since you and Prime Minister Trudeau announced this shared goal the Canadian government has been unwilling to put forth or seriously consider proposals consistent with that statement. Only this type of agreement will allow US lumber mills the opportunity to compete fairly in our own market and to make the investments necessary to grow the domestic industry to its natural levels of production and employment,” the lawmakers wrote in the letter. 

Industry Dynamics Have Changed

Both sides have a lot riding on this agreement, as a drastic measure either way would have a significant impact on hundreds of thousands of jobs in thousands of rural communities scattered throughout the two nations that depend on fair trade in lumber. Drafting a new version of the SLA will have to take into account a vastly different business climate and state of the forest products industry than the pre-recession economy of the original agreement in 2006. As we have noted in recent months, rapidly changing dynamics are dramatically affecting the industry in the form of mill closures, consolidations and export changes just to name a few. The Pacific Northwest and the Northeast regions have been hardest hit by many of these changes.

While it’s important to note that negotiations are ongoing, one of the underlying issues is nevertheless driven by current exchange rates. As the US dollar (USD) maintains a relatively strong position globally, the Canadian dollar remains soft amid low oil prices. As of this writing the loonie is valued at $0.75 USD, which essentially gives Canadian lumber producers a 30 percent cost advantage (one US dollar will bring $1.34 in Canadian funds). For example, lumber manufactured in Canada but exported to the US will include labor and material costs paid in Canadian dollars, but revenues will be paid in the form of higher-valued US dollars.

Since the original SLA was put in place, Canada's forest products industry has also diversified. Roughly 10 percent of exports now go to China, and major Canadian forest products companies have expanded into the US, making them much less vulnerable to new trade arrangements between the two nations.

Potential Consequences

Prior to the last iteration of the SLA, the US applied both countervailing and antidumping duties, which added roughly 27 percent to the cost of Canadian imports. Under the terms of the now-expired agreement, US producers were prohibited from filing new antidumping and countervailing duty cases until after October 12, a year after the official expiration of the SLA. But without a new agreement, the US could launch antidumping trade cases that could affect lumber imports as early as the spring of 2017.

If a petition is filed immediately, the US Department of Commerce may initiate an investigation next month, which could take between 65 and 130 days to issue a preliminary determination on countervailing duties, and even longer for the anti-dumping investigation. The earliest Canadian exporters could face duties is next spring, but said duties could be retroactive for up to 90 days.

"While our engagement has yet to produce a new agreement, our governments will continue negotiations though the standstill period has expired," read a joint statement from Canada's International Trade Minister Chrystia Freeland and United States Trade Representative Michael Froman.

They're aiming for an agreement that offers "the stability, consistency and flexibility necessary to achieve the confidence of both industries." It may be well-intentioned rhetoric, but both sides are getting antsy for a real-world resolution of some kind.