October23

It’s Our Duty

By Tony Shepley

The US and Canada, although neighbors and friendly in a number of regards, have had a contentious relationship over softwood lumber exports from Canada to the US for many years dating back as far as the 18th century. Softwood lumber exports from Canada to the US are big business, over $7 billion per year. With big business comes big politics and although we have had our differences with Canada over vegetables, steel, pork, autos and dairy products, the elephant in the room has always been lumber. Since the early 1980’s, things have been especially prickly over lumber imports from Canada into the US and in 1982 the first phase of the modern era trade war, known as Lumber 1, began, as a result of depressed lumber prices in the US Pacific Northwest which aroused the protectionist instincts of US lumber producers who were convinced that the Canadian government was unfairly “subsidizing” the Canadian forestry industry.

Canada is the second largest country in the world by area with 3.5 million square miles of territory. Canada makes up 6% of the world’s land area. 89% of Canada’s land is held by federal or provincial governments and is known as Crown Land. As the largest landowner in Canada, the Canadian Government is therefore one of the very largest landowners in the world. The US by contrast has a high level of private ownership of its lands and legislation passed during the Clinton administration ended timber leases and harvesting of trees on some 90% of federally owned timberlands, pushing the majority of US timber harvests onto private land. US stumpage (the price paid by loggers and mills for standing timber) is determined by auction to the highest bidder, while in Canada, the Crown Lands have stumpage fees that are set by the government according to their own pricing formula.

“As soon as you tell Americans that our industry takes place on government lands, they think there is something shady going on” says Harry Nelson, professor of forest resources management at the University of British Columbia in Canada. US producers have long maintained that the Canadian government undercharges for stumpage. However, Canadian producers argue that Crown stumpage fees are market based and that they actually pay more for their logs than US producers. Everyone believes their side of the story but the following two facts should make you wonder. Exhibit A shows that the World Trade Organization, which arbitrates trade disputes, has agreed with Canada’s position that stumpage is not subsidized a majority of the times it has ruled on this over the years. Exhibit B is that Canada brings a lot of logs back from the US to Canada to mill. For instance, Maibec, well known as the largest producer of white cedar shingles in the world, brings 60% of its saw logs in from the US. If logs are cheaper in Canada, why would this occur?

Countervailing and Anti-Dumping Duties (also known as anti-subsidy duties) are imposed under World Trade Organization rules to neutralize the effects of subsidies. In the US, duties are assessed by the International Trade Administration of the US Department of Commerce. One of the larger spending lobbies in Washington at some points during the past 10 years has been the Coalition for Fair Lumber Imports, now known as the US Lumber Coalition. They are a lobbying group of mills, landowners, and both private and publicly traded forestry companies who span the breadth of the US and who have effectively lobbied to keep duties in place to keep lumber prices high. The current duty imposed in 2017, after the expiration of the 10 year Softwood Lumber Agreement effectively raised prices 20.83% on softwood lumber. To add insult to injury, in the spring of 2018, cedar shingles and shakes were included into the duty at the same 20.83% with no advance warning, by an action of the US Customs and Border Patrol.

The US does not produce anywhere near enough softwood lumber to satisfy its own domestic needs. It produces an even smaller percentage of cedar shingles and shakes compared to the domestic consumption of these items. Depending on market conditions, up to 80% of Canadian lumber exports come to the US. Cedar shingles and shakes are an even higher percentage. We don’t produce enough of these in the US to come anywhere close to filling our demand for these items. A duty on these items simply becomes a tax on every end user who buys them. Duties drive inflation and protect the interests of domestic producers at the expense of every consumer. Duties also tend to create market turmoil.

A frequent question we have been asked in the past month is whether the duty will go away because of the recent trade agreements being forged between the US and Canada. We believe that removing the duty on softwood lumber or even reconsidering the inclusion of cedar shingles and shakes is probably not even close to being on the table. The US Lumber Coalition’s lobbying efforts have been surprisingly effective. Their reported spending has sometimes topped $2 million per year in Washington, and the level of protectionist sentiment in the US is high. Looking at the world trading situation, Canada and Mexico are being used as practice for the real target, China. We can see recent policy really toughening up and the US is now using trade as political leverage along with military presence. Therefore, the answer to the question of whether the duty will go away or be reduced is “not likely”. An interesting footnote is that in 2006, under some pressure from a NAFTA review panel, as part of the new agreement that was put in place to stabilize trade tensions, the US agreed to return back to the Canadians $4 billion in duty money that had been collected at the border. The US government kept $1 billion for themselves and the US consumer who had paid the extra money got zero. How interesting that we return money to the very Canadian producers who we accused of being subsidized, giving them a $4 billion windfall?

Perhaps we allowed that windfall because the duties we have imposed over the past 30 years have been very damaging to Canada, costing them thousands of jobs and creating economic panic and lumber market instability. As only politicians can do with money that is not theirs, we cut Canada a deal as part of the next 10 year (2006-2016) Softwood Lumber Agreement (SLA) that, in conjunction with the effects of the Great Recession, created a very stable lumber market for most of the 10 years between 2006 and 2016. Upon the expiration of the SLA in 2016 and the re-introduction of the next Countervailing and Anti-Dumping Duty in April of 2017, the market de-stabilized yet again and inflated prices in the US, pushing pricing to record levels earlier in 2018. Adding in shakes and shingles under the duty in March of 2018 further inflated market costs. As always happens, fear sparked irrational behavior in the markets.

But the good news….and there is good news…. is the miracle of a market economy. It took a while longer than any of us wanted, but buyers finally have been able to start pulling in the reins. When a market overheats and goes too high, too fast, it ultimately runs out of steam. So although our issues are a small part of a larger world trade strategy and no one is out to give us any direct relief, we are starting to feel some anyway. The administration seems very confident that its overall stance on trade is working and in a number of ways, it seems to be. So while we don’t see the likelihood of rescinding the duty in the near future, we do see prices easing off while suppliers find levels that buyers are willing to pay. In the meantime, we as an industry will continue to push hard for the next agreement with Canada to bring back market stability. The United States Mexico Canada Agreement (affectionately nicknamed NAFTA 2.0, the successor to the NAFTA treaty), should allow us to get to work on this. Please take every opportunity to remind our representatives in Washington of the importance of forging agreements with our Canadian friends instead of poking at them.

Watching the political maneuvering in Washington reminds me that politics is a lot like mating elephants….it all takes place with a lot of snorting, stomping, and trumpeting, everything takes place at a very high level, and it takes two years for anything to finally happen. Be patient, my friends!

 

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