The Softwood Lumber Agreement
For a quick look at the issues scroll down to The Bottom Line...
When NAFTA came into effect on January 1, 1994, it held the promise of Adam Smith’s dream in its framework. Free trade, like Natural Selection, is a beautiful concept in its simplicity. It elegantly allows economies to maximize output, efficiencies and profit, while minimizing costs for the overall benefit of all.
A little on Free Trade
The uncomfortable downside to Free Trade is that as economies become more efficient sometimes a sector in one country is diminished and increased in another country. If the Japanese make a better car for lower costs than the Americans they will steal the market share. This makes many US autoworkers mad, worried and uncomfortable, and they lobby for tariffs to be imposed on Japanese car importers.
Free Trade is fair, even though it may be uncomfortable. The reality is that if somebody does a better job at creating something, like a car, that person deserves to be in business and the other person deserves to be out of business. The bottom line is that the consumer gets a better product for less money, the Japanese car maker makes money, the American car maker goes out of business, and the worker does something else that he/she is good at.
A poorly adapted organism does not survive if it can not compete for resources with another organism that can. A for-profit company does not deserve to be in business if it can’t compete in the market. This harsh reality is difficult for many people to accept.
Do what you are good at. Cro-Magnon (Homo sapiens) replaced Neanderthal (Homo neanderthalensis) as larger cranium capacity provided a evolutionary competitive advantage. Toyota, Honda and Nissan have replaced GM, Chrysler and Ford as fuel efficiency, reliability, hybrid-technology and lower costs have provided an economic competitive advantage.
What makes Darwin’s Origin of Species and his theory of transmutation (the first name given to evolution) so successful is its simplicity and elegance. The most productive organisms are those that have adapted to the present environment. Those unable to adapt are removed from the food web. If GM, Chrysler and Ford find a way to adapt they may survive the current environment, even thrive.
What of the Logging Industry in British Columbia? What is the current environment? What features are poorly adapted? Why is it dying?
BC Forestry
In BC we are good at logging. We farm logs, replant them, and have innovative ways of manufacturing the wood.
The BC Forest Industry is decimated, but not because it has been unable to adapt. The Munroe Report from a few years ago essentially gave management several powers that allow the industry to remain competitive. BC Forest companies received the rather reasonable adaptation of being able to change and adjust the workers shifts to avoid waste, travel time and over-time payments. The IWA (the union), which has now been bought-out by the United Steel Workers (USW) because so many workers lost their jobs, was fervently opposed to the ruling. Whether or not these measures are deemed fair by the average person the union was legally forced to accept the Munroe Report, and the USW has re-accepted that provision in the most recent negotiations because of one simple fact: If they didn’t adapt then the Forest Industry in BC would have died.
In British Columbia we have various forces, market and social, that either impede or promote economic success, but in the end we have indeed adapted in many ways.
Why then, are we still dying as an industry?
The Argument
The US breached NAFTA and imposed tariffs on BC forestry companies as a result of the US Forestry lobby.
The American Argument: Canada breaches NAFTA because it subsidizes BC companies. They therefore deserve a tariff.
The Canadian Argument: Canada does not subsidize, it is just that the Crown owns all the forests in Canada, and can set the stumpage prices lower (American Forests are privately owned). The Americans have imposed an unjust tariff.
This has gone to international court many times, and each time Canada has won over the past 15 years.
The New Softwood Lumber Agreement
Before the agreement was signed by then Minister of International Trade David Emerson, there was a duty of 10.8% charged on unlimited volumes, paid to the US by Canadian lumber exporters. This was a breach of the NAFTA agreement. (note Atlantic provinces were exempt – deemed not to be subsidized: greater private ownership of timberland; these were hardship provinces, had low volumes of exports, i.e. not a threat).
The NAFTA judiciary panel ruled in favor of the Canadian Government time and time again. The Softwood Lumber Agreement was signed 2 weeks prior to the NAFTA panel rejecting any further appeals by the US Government. Essentially it was pushed through on politically greased wheels by the Harper/Bush administrations.
Why?
The US saves face, and money for the US Forestry Lobby. The newly elected Canadian administration scores an apparent ‘Win’ for Canada, and stronger ties with the Bush Administration.
Canadian companies received 80% of the $5 billion owed to them, even though the NAFTA panel ruled multiple times that the US must pay the full amount.
Many people consider 80% of something to be better that 100% of nothing. But there’s a twist.
The new deal still requires BC Forestry companies to pay a duty, but this time the money is collected by the Canadian government, rather than the US government. Provisions within prevent Ottawa from redistributing the funds back to the forestry companies.
The new deal is complicated, based on the price of lumber in the US. (There were one of two options for each province to choose (and when chosen not switch). BC and Alberta chose “Option A”.
Option A
Lumber Price = Over U$355 Tax Rate = No Tax
= U$335 - U$355 = 5%
= U$315-U$335 = 10%
= Under U$315 = 15%
OptionB
Lumber Price = Over U$355 Tax Rate = No Tax
= U$335 - U$355 = 2.5% + 34% of US regional market share
= U$315-U$335 = 3.0$ + 32% of US regional market share
= Under U$315 = 5.0% + 30% of US regional market share
Current price is under U$315.
With the current economic crisis, companies operating in Canada now pay 15% tax instead of a 10.8% duty. They are worse-off than they were before. Even American companies operating in Canada are unable to survive and compete with companies operating in the US; examples include Weyerhaeuser (one of the world’s largest forestry companies), AbitibiBowater, and Pope & Talbot.
We are left with a situation that has nearly sunk the BC Forest Industry, yet financially it makes no sense for the Canadian government to rescind the deal because it keeps the cash. The provincial and federal political issues are very complex and are hamstrung for ways to help the industry without incurring the wrath of a highly aggressive US Forestry Lobby. Further, BC companies have farming licenses that require them to log a minimum amount therefore they cannot cut production to save on variable costs. The BC government is also trying to have the tree licenses turned back in order to give more to First Nations.
The Bottom Line…
---BC Forest Industry is owed $1 Billion.
---The tax/duty is now higher (15%)
---The international courts have ruled that Canada was always in the right and the US was violating the trade agreement.
The Canadian government sold-out the forest industry and painted it into a financial corner. BC companies are afraid to complain, and many back the deal in hopes of not rocking the boat and keeping the $4 Billion. This is not Free Trade, it’s government intervention, it’s giving a competitive advantage to a less productive company. As a result BC Forestry is dying. Adam Smith and Charles Darwin would be appalled, and so should we all.
TP
Many thanks to Csaba Hajdu for assistance with the numbers
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