Suhail Abboushi (2010) (excerpts from A trade dispute between the USA and Canada)
Stumpage is the price a private firm pays for the right to harvest timber from a given land base. It is paid to the current owner of the land. Historically, the price was determined on a basis of the number of trees harvested, or “per stump”. Currently it is dictated by more standard measurements such as cubic metres, board feet, or tons. To determine stumpage, any stand that will be harvested by the firm is first assessed and appraised through processes aimed at finding the volume of timber that is to be harvested. A given stumpage rate, measured in $/volume, is then applied to the amount of timber to be harvested. The firm will then pay this price to the landowner.[
What is the significance of the Canadian softwood lumber trade with the US? What is the background of the US trade barrier against Canada on softwood lumber (SL)?
One largest Canadian exports to the USA. Canada ships 70 percent of its lumber production to the USA.
2005: Canada’s provinces shipped 21.5 billion board feet of lumber (value US$ 7.4billion). 1840s. 1890s, 1930s, 1980s, … : Dispute arose in 1982- debate started in the USA& continued over imported Canadian wood.
Resolutions of limited durations had been introduced:
• Trade barriers continued to be imposed: US countervailing duty (CVD) and anti-dumping duty (ADD)/tariffs
• Amountedto about $ 100 million a month
Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the usual form of a tariff. Some common examples of NTB's are anti-dumping measures and countervailing duties
Countervailing duties (CVDs), also known as anti-subsidy duties, are trade import duties imposed under WTO Rules to neutralize the negative effects of subsidies. They are imposed after an investigation finds that a foreign country subsidizes its exports, injuring domestic producers in the importing country. According to World Trade Organization rules, a country can launch its own investigation and decide to charge extra duties, provided such additional duties are in accordance with the GATT Article VI and the GATT "Agreement on Subsidies and Countervailing Duties".
'Countervailing Duties'
Tariffs levied on imported goods to offset subsidies made to producers of these goods in the exporting country. Countervailing duties (CVD) are meant to level the playing field between domestic producers of a product and foreign producers of the same product who can afford to sell it at a lower price because of the subsidy they receive from their government. If left unchecked, such subsidized imports can have a severe effect on domestic industry, forcing factory closures and causing huge job losses. As export subsidies are considered to be an unfair trade practice, the World Trade Organization (WTO) – which deals with the global rules of trade between nations – has detailed procedures in place to establish the circumstances under which countervailing duties can be imposed by an importing nation.
Definition of 'Anti-Dumping Duty'
A protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. In the United States, anti-dumping duties are imposed by the Department of Commerce and often exceed 100%. They come into play when a foreign company is selling an item significantly below the price at which it is being produced. The logic behind anti-dumping duties is to save domestic jobs, although critics argue that this leads to higher prices for domestic consumers and reduces the competitiveness of domestic companies producing similar goods.
Why do US lumber producers argue for tariff on SL?
• Stumpage fee is non-market based, decided by provincial governments, and isbelow market prices.
• Even a small per unit cost differential advantage forCanadian producers results in substantial cost advantage over US producers.
• Timberland in the USA, is auctioned in a market-based system of bidding. InCanada, auctioning is limited.
• Canada does not allow non-Canadian companies to acquire Canadian logsharvested in Canadian public timberlands
• Result: Does not allownon-Canadian companies to export Canadian logs.
• Canadian share of the US market for softwood has been rising and currentlyaccounts for 34 percent.
What are Canada’s counter arguments ?
• The stumpage fee is not a “price.”
• It is a “tax” imposedby the government on the “tenure holder” in return for the right to harvestgovernment-owned natural resource, timberland.
• Stumpage fees in Canada are adjusted regularly to reflect changes in the marketconditions
• The fees do not provide competitive advantage to Canadian producers
• The stumpage system meets the test of “adequate remuneration” set out in UScountervailing laws.
What are the provincial restrictive regulations on lumber companies?
Canadian provinces place restrictive regulations onthe lumber companies with regard to the use of timberland and the sharing ofinfrastructure costs.
Canadian companies pay:
• income tax
• stumpage fees
• do not own the lands they log.
Unlike Plum Creek and other UScompanies, Canadian companies cannot harvest timber land and then build housingprojects or other real estate development
Such projects added $ 75 million to PlumCreek’s bottom line in 2004 (see, Cushman, 2006).
Why does Canada fear disruption of its US market for SL?
The Canadians arealarmed because suppliers from Scandinavia, New Zealand, and Chile have beensupplying the US market and grabbing a growing share of the market.
US imports ofnon-Canadian softwood have quadrupled in the last decade.
To remedy the decline inits market share in the USA, Canadian companies embarked on cost-cutting strategies.
• introduced laser technology in their mills which increases lumberproduction of logs by 15 percent.
• Production cycles of 24 hrs to cut their cost per unit.
Such measures have partially softened the impact of tariffs onmarket prices (see, Aldrich, 2005).
How are US timber owners benefitting from the trade dispute?
Timberland ownersin the USA are benefiting from this trade dispute: e.g.
• Plum Creek Timber companywhich owns 8 million acres of timber land in two dozen states. The company is in timber business and also in real estate development of logged offlands.
Why does Abboushi argue that many US jobs depend on Canadian lumber exports?
Although US advocates of timber trade restrictions in US Congress, complain that
US jobs are lost due to Canadian lumber exports to the US, for every lumber or sawmill job protected in the US, there are 22-25 American workers in industries that depend on Canadian lumber. Curtailing the supplies of Canadian lumber or raising their prices hurts the thousands of US workers dependent on these imports.
In contrast, the US timber industryis increasingly relying on Mexican labor for thinning and replanting jobs. Many of thejobs “protected” by trade restrictions are now jobs filled by imported labor
How did NAFTA arbitration panel rule in 2006?
Again and again, and in March 2006, NAFTA arbitration panels ruled for Canada, againstthe USA, a total of 11 times:
• Declared the tariffs illegal
• Demanded the return ofcollected duties to Canadian companies who paid them (Canada Appeals, 2006).
What is the latest agreement between Canada and the US?
Latest agreement
• In April 2006, Prime Minister, Stephen Harper negotiated with President George Bush an agreement to suspend this dispute forseven years
• Both sides agreed to return to the previous regime of “managedtrade.”
• The USA will drop the tariffs, both CVDs and ADDs
• Return 4 billion ofthe US$ 5 billion already collected in tariffs
• US will keep $ 1 billion : half ofthat will be given to members of the Coalition of Fair Lumber Imports who initiatedlitigations against Canada.
• Canada agreed to cap its share of the US market at34 %
• Canada to impose an export tax and limit its shipments oflumber if prices in the USA were to fall below their current levels.
See: Table III summary of export taxes in relation to domestic price in the USA.
What is the critique based on the Canadian constitution, of the US position on SL?
Canada’s constitution and timberland ownership
Canada’s constitution confirms that:
forestland ownership belongs to the provinces
eachprovince has its independent method of managing its timberland.
allprovinces have long-term land tenure arrangements giving logging rights to loggingfirms.
companies pay stumpage fees for cutting the trees, hauling them away, andplanting replacements to sustain forestry in the forest lands.
The US timber lobby does not recognize Canada’s constitutional authority - brushes aside the Constitution issue and proposed a remedy: sellCanada’s forest lands to private businesses or halt imports of Canadian lumber!
In sum:
Canada’s public ownership of timberlandis not a trade issue.
Canada’s Constitution assigns exclusive authority to provincialgovernments over natural resources like timberland.
Why is US position on stumpage fees of Canada wrong?
Stumpage fee is not lower than “market price”
British Colombia designated 20 percent of its forest land to be managed in anopen-auction free market system.
The province decided to use the prices set throughthis “free-market” mechanism to determine the stumpage fee rates for the rest of theprovince’s forests, so that the stumpage fees would not be lower than the “market”price.
To this date, this “free-market” arrangement has not resulted in any price orstumpage fee reductions.
The stumpage fee charged by the province under thetraditional system was not artificially lower than the “market” based price.
Explain why fee calculations are complex and vary across provinces
Complexity of fee calculations:
The precise stumpage fee calculations are complex and vary across provinces.
Canadian timber companies are under numerous restrictions that furthercomplicate the calculation of stumpage fees, e.g.,
- Canadian companiesare not allowed to log “at will” – they are restricted by “Annual Allowable Cut.”
- Exporting raw logs is prohibited. Timber companies are required to own andoperate local saw mills.
- Canadian companies are required to build and maintainroads and highways to timberlands.
- These companies are required to replant all logged out lands.
- They may not use logged out lands for any commercialdevelopment – the government continues to own those lands.
Observers and analystsof this dispute situation agree that the impact of this web of regulations andrestrictions on a uniform pricing, or stumpage fee, in Canada’s provinces is difficult toascertain.
Where are the most profitable sawmills in the US and in Canada?
Profitability
The Global Lumber/Sawnwood Cost Benchmarking Report (December of2005 by International Wood Markets Research and other organizations)
USWest Coast sawmills with advanced technologies are the most profitable in the world –about three times the average rate of profitability world-wide.
British Columbia’s mills,which are equally advanced in technology and capacity as the West Coast mills, werethe third most profitable, lagging behind the US mills, despite the lowerpriced timber they have access to.
Would the April 2006 agreement bring alasting solution to the conflict and let market solutions prevail?
All sides to the dispute hope:
April 2006 agreement could bring alasting solution to the conflict and let market solutions prevail
Doubtful that thisconflict would have a lasting resolution: Reasons…
- US disregard for agreements
- Can. Land-ownership structure versus US strategy of acquisition
- A pattern of managed trade interim solutions.