Softwood Lumber: With new tariffs announced, what next?

Here in the United States, I wake up each morning as the light dawns and turn to the morning’s Tweets. I am reminded of Louis XIV’s courtiers, staring into the Sun King’s morning chamber pot, trying to forecast how the day would go.

Thus on to a new front in the Wars Against our Friends (think of how future historians will write about this) – this week it is with Canada over softwood lumber, after U.S. President Donald Trump announced new tariffs of up to 24 percent for Canadian imports on Tuesday.

What do we know so far?

A long history

This is certainly not a new dispute, albeit now Trump-driven, bursting over Ottawa. Disputes over softwood lumber have been going for a long time. 

The current tussle began in 1982 (although The New York Times notes that the U.S. and Canada have been at odds over softwood lumber in one way or another since the 19th century). This battle has progressed through four separate rounds of litigation (Lumber I through IV), all of which Canada won, in all sorts of courts, and was much tied up in the North America Free Trade Agreement negotiations and in the creation of its Dispute Resolution Mechanism.

Trump’s action could not — or should not — have been a surprise. The last agreement (Lumber IV) came into force in 2006 and expired on Oct. 12, 2015. The agreement provided a grace period of one year after it ended during which the U.S. could not launch a trade action against Canada. Just a month after the end of the grace period, on Nov. 25, 2016, the U.S. industry (that is, the U.S. Lumber Coalition) filed a petition with the U.S. Department of Commerce alleging that Canadian lumber exports are subsidized, injure the U.S. industry and that Canadian exporters are guilty of dumping (meaning, selling to the U.S. for less than the lumber is worth in order to retain a larger market share). The U.S. Department of Commerce announced it would investigate the complaint on Dec. 15. Then, on Jan. 6, the U.S. International Trade Commission ruled that Canadian softwood lumber exports had injured the U.S. industry. (All of this happened on Obama’s watch, remember.) This meant that preliminary duties likely would be imposed in April 2017 and final duties imposed by the end of that year. In other words, this is all scarcely an unanticipated blast from the Trump cannon.

The roots of the issue are clear enough. In its most elementary format, the dispute focuses on the fundamental difference in U.S. and Canadian forestry ownership. In the U.S., forest lands are largely held by lumber companies. In Canada, they tend to be owned by the government, and American mills contend that Canadian provinces subsidize their industries by charging low royalty rates for cutting trees. 

The issue is – and has become – far more complicated, of course. 

Regional politics are much involved (British Columbia and Quebec account respectively for about 60 and 20 percent of Canadian lumber exports). For example, under the 2006 agreement, exports from British Columbia and Alberta paid a tax based on a four-week moving average of the Random Lengths Framing Lumber Composite Price. For imports from the other provinces, an export tax and market share quota applied.

And then there’s domestic politics. The powerful and extremely secretive U.S. Lumber Coalition has been opposed by the National Association of Home Builders, which underlines how housing costs will rise because of tariffs placed on softwood lumber, much of which is used to frame new housing construction.

The long story illustrates nicely the impressive power of interest groups in (mainly but not exclusively) U.S. politics, as well as the manner in which the parties (again mainly but not exclusively) in the U.S. have twisted and bent to get around a raft of trade rules and findings.

Three possibilities going forward

But why did Trump bring this up now? And what happens next? In the Trumpian era, these are not easy questions to answer. 

With so much on his plate at this moment – talking up his new and contentious budget proposal introduced this week, tap-dancing around other contentious issues (funding the border wall with Mexico, for instance) to keep the federal government open past Friday, opening a new front on the struggle to repeal and replace Obamacare and deciding whether to go to war with North Korea – it is hard to imagine that Canada is high on his agenda. But who knows what evil lurks in the hearts of men. Or whose voice Trump heard last.

As for what is to come, there are three possibilities:

One, this may be one more Trump-bump that will just go away in the night. But not likely. Remember that the process of levying new charges on Canadian softwood lumber exports is well advanced, without Trump’s intervention.  

Two, the issue may be upgraded to serious. What has been a chronic problem will become mortal.

Three, this could relaunch the same game plan as in the past. Negotiators will square off again and much of the same ground will be covered. After much discussion, something will be worked out. Parties will disagree and resist, politics will intervene. The birth of Lumber V won’t be pretty but will ultimately happen.

The NAFTA connection

The third option is more likely, and more likely still if it is viewed by Washington as an initial demarche in the renegotiation of NAFTA. 

Trump’s position here has zigged and zagged, particularly in the past few days. After clawing at NAFTA (the worst trade agreement ever, he insisted), rumours early in April suggested that he would opt for renegotiation. A day later, what purported to be a draft letter from the acting U.S. Trade Representative to Congress was leaked. The letter said the president intended to “initiate negotiations on NAFTA and its architecture” and laid out a list of topics for consideration which most trade specialists would consider reasonable – not to “tear up” NAFTA but to reform it and bring it up to date.

But, then, his announcement earlier this week of trade actions against Canada was followed by a statement from a “senior official” saying that “President Trump is likely to sign an executive order formally withdrawing the United States from the North American Free Trade Agreement, a move that would set the stage for renegotiating the deal with Canada and Mexico and fulfill one of Mr. Trump’s major campaign promises.”

This seemed to make sense (a word that is hard to use in this context) given how Trump has backed away from several key trade promises – to label China a “currency manipulator,” and to impose a new border tax on imports, for example. Indeed, on April 1, The New York Times stated that, on trade, Trump was “talking loudly and brandishing a small stick.”

But then, as was reported on Thursday, Trump said that the U.S. would not pull out of NAFTA but renegotiate it.

So, while many uncertainties remain, we do know that the most recent softwood action was not initiated by Trump. Rather it is one more step in what has long seemed to be an interminable dispute that plays out in its own logic and time. Softwood will continue on its own or, perhaps, wrapped in NAFTA renegotiations.

It seems very likely that some renegotiation of NAFTA will take place. Few disagree with the idea that it is time to review the agreement and bring it up to date. What we don’t know is what the U.S. posture will be – working with partners to improve and modernize the agreement or demanding new concessions and threatening to pull out if it doesn’t get them. Some fear that NAFTA may be the ground where Trump can finally show his macho mettle and give the U.S.’s best friends a good thump.  

Obviously much depends on what Trump does next — and also on how Justin Trudeau’s people respond (on softwood lumber, Chrystia Freeland said Tuesday Canada is “going to play hard”).

In the meantime, the waiting game continues.