2nd wave of softwood lumber duties sets up 'dangerous' talks for Canada

The other shoe is set to drop for softwood lumber producers Friday as the U.S. Commerce Department is expected to reveal preliminary anti-dumping duties on Canadian imports.

Combine this with the retroactive countervailing duties announced in April, and the already-high stakes for trade negotiations between Canada and the United States may rise again.

Regardless of whether there's evidence of unfair trade, don't expect a finding that lumber was not dumped "because you can't get any leverage for NAFTA negotiations from that position," said Cyndee Todgham Cherniak, an international trade lawyer with LexSage Professional Corporation.

"You would need to have anti-dumping duties and countervailing duties for that negotiation to lead to a position where Canada has to concede."

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Late in 2016, the U.S. Commerce Department initiated two separate investigations following a complaint from the U.S. lumber industry.

The first focused on whether lumber production in Canada is unfairly subsidized by government. It resulted in countervailing duties of up to 24 per cent, depending on where the two-by-fours come from.

The findings of the anti-dumping investigation will be based on the prices charged for that lumber in the U.S. If it concludes lumber has flooded in at discount rates, duties are the remedy that levels the playing field for American producers.

Analysts expect anti-dumping duties between ten and 12 per cent. Both duties will be added to shipments from Canada for the rest of the key summer construction season. 

Late in 2017, a final determination by the Commerce Department will set a combined duty rate for Canadian lumber, in effect for five years or more. It's not rare for the final figure to differ from the preliminary duties.

Canada is expected to appeal to both the World Trade Organization (WTO) and a North American Free Trade Agreement arbitration panel, likely after the final duties are known in early 2018.

Demand still strong

Canada's lumber industry enjoyed a rare stretch of tariff-free trade with the U.S. in 2016, after the previous softwood lumber agreement expired. Its U.S. market share rose to 32 per cent, but has dropped to about 27 per cent after the new duties.

Three-quarters of Canada's exports go to the U.S., although the federal government is aggressively pursuing alternative markets, particularly in Asia.

Figures cited this week by the Montreal Economic Institute, a think tank that promotes free market solutions, said that between January and May of 2017, the price of lumber in the U.S. rose by 17 per cent. Construction for a single-family home is $2,400 US more expensive.

"It is still too soon to evaluate these effects over the long term since there is much uncertainty in the market, with each player pursuing its own strategy," said MEI analyst Alexandre Moreau in a release. "For the moment, the weakness of the Canadian dollar, the strong demand on the American side and high prices are allowing Canadian producers to partially absorb the effects fo the tariffs."

Canadian lumber producers have laid off some employees. But it's unclear whether Canadian production was just returning to previous levels after its brief tariff-free boom.

Todgham Cherniak, the trade lawyer, said the U.S. industry is banking on both duties inflicting real pain. The April finding of "critical circumstances," which allowed duties to be applied retroactively, was meant to add to the cost of not settling yet, she said.

What does the U.S. government want? "It's hard for anybody to get their head around the dynamics of this administration," Todgham Cherniak says.

Canadian hypocrisy?

U.S. Commerce Secretary Wilbur Ross said he would like softwood lumber to be dealt with before NAFTA renegotiations begin later this summer.

But Canadian negotiators have seen little evidence of serious negotiation to date from the Americans, with Foreign Affairs Minister Chrystia Freeland confirming last week the two sides remain far apart.

"I think you'll see negotiations start in earnest on softwood throughout the rest of the summer," said trade lawyer Dan Ujczo. But he sees only a 50-50 chance of a deal at this point.

Part of the problem? A hypocritical argument Canada's making on the effect of lumber tariffs on homebuilding costs.

Ujczo will testify at NAFTA consultations in Washington next week on behalf of several clients, including the Western Canada Alliance of Wall and Ceiling Contractors, which isn't happy with a recent move on Canada's side.

Contractors have been hit by a separate trade dispute over gypsum drywall — and this time it's the Canadian government that's refusing to lift duties on U.S. imports, adding to the cost of homebuilding for its own citizens.

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"Part of it is that Canada wants a negotiating chip," Ujczo said, but "it's very dangerous for Canada to be playing this game right now."

Putting rising construction costs for U.S. consumers at the heart of its softwood lumber argument in the U.S. may backfire.

"'Start at home first before you come talk to us' would easily be the U.S. position on that," Ujczo said.

'Red meat' for Trump

"The U.S. doesn't care if it's hurting the Canadian forestry industry. It's protecting to make America great again, right?" Ujczo said. 

"Mexican drywall is coming into Canada to fill that demand," he said. "That's red meat for the Trump administration."

Canada could easily take the drywall issue off the table, he suggested.

It's not the only thing Canada may need to concede.

When he dug into the math of the April countervailing duties decision, Ujczo said, it's clear the Commerce Department is targeting B.C.'s raw log export restrictions for private land.

It may intend to protect sawmill jobs, but he said it's an "antiquated protectionist measure" that Canada should be prepared to deal away.

The larger NAFTA renegotiation is "inextricably intertwined" in the minds of many members of the U.S. Congress, he said. 

"Softwood lumber has always had the potential to throw everything off the rails," he said. "It certainly can change the tenor and tone of the NAFTA negotiations."

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