The Softwood Lumber Soap Opera

The softwood lumber dispute is back!!!! In October 2015, the latest Softwood Lumber Agreement expired after essentially buying a little less than a decade of Canada-U.S. trade peace. Late last week, the two sides met in Ottawa to see if they could head off expensive trade litigation over the issue. They failed.

A new round of litigation will undoubtedly be coined Lumber V, meaning this is the fifth round of this long-running dispute. For those of you that haven't been following, the longevity of the softwood lumber dispute is shocking. Regardless of when you mark the start of each phase -- expiration of Agreements, negotiations, or initiation of litigation-- the intractability of this dispute can hardly fail to impress.

Lumber I, October 1982–April 1986
Lumber II, May 1986–December 1986
Lumber III, October 1991–April 1996
Lumber IV, April 2001–October 2006
Lumber V, October 2015-- Present


The outcome of last week's meeting should have been predictable to anyone that has followed this issue. It follows a depressingly familiar pattern. Much as a chef would draft a recipe for cookies, one can draft a recipe for this dispute. It goes something like this:

Softwood Cookies

1) Managed trade agreement is about to expire
2) Rookie civil servants take on the issue thinking "this time will be different."
3) Stakeholder consultations ensue in preparation for "negotiations."
4) Lip service is paid to stakeholders other than producers; namely, environmental, first-nations, and consumer groups.
5) Governments and industry stakeholders play out string in negotiations (last week in Ottawa, for example).
6) Aggrieved U.S. lumber producers launch trade remedy cases with U.S. agencies.
7) Canada launches futile challenges to U.S. agency conclusions in NAFTA and WTO.
8) Elements validating positions of all sides under international law are found in NAFTA/WTO decisions.
9) Lawyers representing private sector on both sides line their pockets.
10) Stalemate ensues, rookie civil servants get tired and propose a new managed trade arrangement.
11) Stir in a bit of resentment by Canada at not being treated "fairly" by the U.S.
12) Repeat.

S. Peterson, Vancouver Sun, July 8, 2006

Why? Why is softwood lumber such a ridiculously intractable dispute? The big villains in the softwood lumber saga tend to be U.S. trade lawyers representing producers. I understand why. Many D.C.-based trade attorneys have made out very well litigating on behalf of their softwood clients. Indeed, there is a degree to which these law firms, and the producers they represent, simply go along with the charade of a negotiated solution just so they can get to the main event; big billable hours during the litigation phase.

Crown vs. Private Lands

However, the real reason softwood is so intractable, and the one from which all related issues flow, is a simple difference in how land is managed. In the U.S., most softwood lumber is harvested off of private lands, or auctions of public land access rights. In Canada, all timber is grown and harvested on "Crown" or public lands managed by the governments of each major timber producing province (B.C., Alberta, Ontario, and Quebec). Put differently, the source of the softwood dispute is in where the authority to "price" the resource actually resides.

Under Section 92 of the Canadian Constitution (1867), provinces are given exclusive jurisdiction over natural resources within their territory-- they act as stewards of the resource for citizens. Each timber producing province has its own "stumpage regime"-- the rate charged private timber companies to harvest logs on public lands. Not only are "stumpage regimes" opaque mechanisms for pricing a public resource, they have been subject to employment targets in provinces like British Columbia where, until recently, forestry was the province's largest employer.

In the United States, softwood lumber produced off of public lands is harvested only after auction at "market" prices. Moreover, the locus of U.S. softwood lumber production is increasingly concentrated on private tree farms in the U.S. Southeast where long growing seasons have provided an advantage over harvesting trees in the Pacific Northwest. Moreover, protection of certain species, such as the Spotted Owl, pursuant to the Endangered Species Act have significantly reduced harvests off public lands in the Northwest.

Hence, the source of the dispute is essentially one in which the Americans claim their softwood lumber is harvested sustainably at a market price that reflects the true value of the resource. In contrast, the U.S. claims, Canadian "stumpage" fees are levied on private firms in ways that confer a tax-payer-backed subsidy to Canadian industry. In other words, "stumpage" rates are levied to achieve employment targets, rather than an appropriate return on a public resource. To complicate matters a bit, each of the four major timber-producing provinces has its own "stumpage" system-- in my view, each uniquely opaque. On top of that, the Atlantic provinces of New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland have been able to exempt themselves from the softwood lumber dispute because much of their timber industry harvests off of private lands.

Hence, when American producers look north to their Canadian competitors, they see a tax-payer-subsidized industry that does not have to keep input costs in line with "market prices."  Moreover, the perpetually weaker Canadian dollar adds another cost advantage in the U.S. market that floods the American construction industry with cheap, subsidized, and unsustainably harvested Canadian timber.

Solutions Ahead?

One solution would be for Canada to simply amend its constitution such that provinces were stripped of their direct jurisdiction over natural resources. Not going to happen. Or, the U.S. Congress could amend the nation's trade remedy laws to stop this kind of thing. Also not going to happen.

The only other glimmer of hope is that Lumber IV (2001-2006) saw some significant shake-ups in the coalitions of U.S. stakeholders. First, in part because of relative proximity to Canadian import markets, the interests of Southeastern U.S. timber producers are not necessarily aligned with those remaining in the Pacific Northwest. More importantly, there has been significant cross-border consolidation among timber producers. Firms like Weyerhaeuser, for example, now have significant harvesting interests in both countries undercutting the strength of their position favoring one side or the other.

That consolidation arguably weakened the strength of the U.S. timber producer lobby to drive the issue. Yet, it wasn't quite enough to change the dynamics entirely since we ended up with yet another managed agreement in 2006.

Two other dynamics emerged in Lumber IV that may have a larger impact on Lumber V;  the formal opposition of consumer groups (represented by the likes of major retailers like Home Depot and Lowes, or end use construction firms) that oppose trade restrictions because of their impact on U.S. housing construction; and the involvement of both environmental and first-nations organizations concerned with the sustainability of the forestry sector.

I am skeptical that any of this will result in anything other than another 2006-style managed trade agreement, but these dynamics are making it tougher and tougher to repeat the cycle (cookie recipe) of the last three decades. In the meantime, one bit of advice to Canadians is to not take things personally. In previous iterations of Lumber, Canadians have viewed their treatment at the hands of the United States as unfair, and contrary to the spirit, if not also the letter, of agreements like the NAFTA. Canadians have a point there, but shouldn't treat softwood as a barometer for a broader bilateral relationship. Moreover, the overwhelming majority of Americans don't know or care that there's a festering dispute with Canada over softwood.

Know also, however, that the Americans also have a good point to make where the management of Crown Lands via "stumpage" is concerned that begins with the opaqueness of the rules and extends to whether "stumpage rates" adequately capture the value of Canada's timber resources.

Could this time be different?

Perhaps, but I wouldn't bet the farm on it.