U.S. Tariffs on Canada's Softwood Lumber Tax Markets at Home

The Trump administration isn't happy with the Canadian way of doing business these days.

First it was the way the country controlled its dairy market and the cautious way it eyes prospective foreign imports. Now apparently it's the way the forest-rich country views the cost of harvesting lumber from its government lands.

And to be honest, it's not a surprise. The U.S. government largely has a hands-off policy when it comes to the fees that forest growers charge for harvesting their trees. Since most U.S. lumber comes from private growers, competition, not government rules, sets the price of lumber. And it's largely demand and availability that determine what's sold, not government oversight.

But that's not the way things are done in Canada. And that irks President Trump.

Earlier this year, Trump raised concerns about what is called government "stumpage fees" in Canada, asserting that they were too low and were in effect, depriving U.S. buyers of revenue. In his view, the fact that each province sets the flat cost that Canadian lumber companies  must pay to cut down trees meant that the lumber exporter had an unfair market advantage before the lumber got to the border. In effect, he said, Canadian companies were getting a subsidy from the government.

To Canadians, that's a curious way of looking at forest sustainability.

The Canadian government sets mechanisms for international trade, but it's the provinces that set the stump fees. In British Columbia and Quebec for example, the country's two biggest lumber exporters, the rates are set to meet the needs of multiple kinds of industries, domestic and exported. By doing so, the provinces are able to manage and encourage a broad spectrum of domestic forestry uses that proponents argue, create a more sustainable and stronger industry.

And, while the Trump administration may not agree, it also saves money for U.S. manufacturers and consumers. Overhead is reduced, and higher fees are almost always passed on to the consumer.

Plus says Statistics Canada, the government agency for managing historical data, "[weaker] American lumber exports leads to a drop in shipments." In other words, keeping Canada's most talked-about product affordable not only encourages buyers (that's American businesses) but keeps the incentive up for shipping the product.

But in recent months, the Trump administration has tried to change Canada's way of administering its lumber industry. In April the administration announced it was assessing tariffs of 3-24 percent on Canadian lumber companies, with the rates determined by the amount of financial discount it felt the particular company was receiving from the government.  According to the Trump administration, five Canadian companies were receiving larger "subsidies" from the government and assessed them with larger penalties.

Then in November, the U.S. Commerce Department determined that Canada was also guilty of violating anti-dumping laws and assessed additional fees against its primary lumber supplier eventually amounting to about 20 percent higher penalties. Those stumping fees yielded benefits for Canadian suppliers, said the department, and were owed to the U.S. government.

Subsidies or political differences?

Canada of course, doesn't see eye-to-eye with the Trump administration on this issue.  So after months of discussions, Ottawa announced last week that it would be appealing the decisions to the North American Free Trade Agreement, under what is called Chapter 19.

The challenge avails Canada of one of its prime rights under NAFTA. It also ups the irritant for Trump, since Chapter 19 is at the heart of what the president wants to change at NAFTA negotiations.

Under Chapter 19, a member state has the right to request a review by a panel of five arbiters, mutually selected by the two countries. The arbiters will then decide if the tariffs and findings are actually legal according to the agreement.

Canada is also considering appealing to the World Trade Organization, which has heard disputes in the past. In 2003, the WTO ruled that in effect, while the disputed stumpage fee system did provide a "financial benefit" to Canadian companies, they weren't subsidies and applying duties by the U.S. government was illegal.

Trump: Chapter 19 amounts to'aberrant panel decisions'

Arguments over Canadian stumpage fee rates have been going on for years, long enough to create their own lengthy chronicle of formal disputes. For the most part however, the outcome has remained the same: Canada's incentive-building stumpage fees weren't subsidies because they weren't specifically directed at foreign commerce. They took domestic markets into consideration as well.

But in this case, the Trump administration has its eye on more than just tariffs. It wants Chapter 19 removed from NAFTA.

In March of this year, Trump laid out his objectives for the NAFTA renegotiations. High on the list was getting rid of the arbitration system that allowed members to appeal government decisions.

“[Chapter 19] panels have ignored the appropriate standard of review and applicable law, and… aberrant panel decisions have not been effectively reviewed and corrected,” said the administration, which sees Canada's success rate in appealing duties and other issues as evidence of improper assessments. It also wants allowance for what it calls "snapback tariffs," in which the U.S. can assess increasing penalties if it feels its own markets are being affected by the other member's imports.

U.S. tariffs passed on to consumers

But as U.S. homebuilders have recently discovered, tariffs don't just penalize the importing country. Tariffs against Canadian suppliers rose to as much as 31 percent this summer as the two countries attempted to work out their differences. As Bloomberg business writer Jen Skerritt reported in September (reprinted in the Toronto Star), while those fees translated to higher costs for suppliers, they also resulted in more overhead for builders that were then passed on to U.S. consumers.

And in an even more ironic twist, it also resulted in higher profits for Canadian lumber companies.

"Shares of Canadian softwood lumber producers Canfor Corp. and West Fraser Timber Co. are outperforming their American peers with gains of more than 40 per cent this year, placing them among the top performers on the BI Global Paper and Wood Products Index," wrote Skerritt. By comparison she noted, U.S.-based Weyerhaeuser Co. reported a profit margin of only 10 percent.

And forestry companies in the U.S. aren't the only ones seeing a narrowing of profits. The U.S. home building industry is also feeling the pinch, since it not only increases overhead but ups the price tag for new homes. That was the observation of the National Association of Homebuilders in April when the Commerce Department first announced it was looking at imposing antidumping and countervailing fees against Canada

"NAHB is deeply disappointed in this short-sighted action by the U.S. Department of Commerce that will ultimately do nothing to resolve issues causing the U.S.-Canadian lumber trade dispute but will negatively harm American consumers and housing affordability," stated NAHB Chairman Granger MacDonald. About a third of the U.S. lumber supply comes from Canada, filling in for the U.S. industry which isn't robust enough to support the country's growing housing market.

Canada's softwood lumber heading to India and China

But the Canadians also aren't sitting idly by at the negotiations table. Ottawa, and the 10 provinces have been busy establishing or expanding other markets. Newest on the list of possible markets is India, which is looking at using softwood lumber to replace hardwood applications. China has also been dickering with British Columbia, looking at upping its quota of BC lumber products. In 2014, 43 percent of its wood supply came from the western province, which saw $1.4 billion in sales that year.

And the U.S. isn't staking its lumber supply on Canada, either. It's buying more Russian lumber as well as German and Swedish forest products. Russian exports to the U.S. are 42 percent higher than they were last year, reports Bloomberg. It's an "illogical" step that will threaten to increase costs for the average homeowner, says NAHB CEO Jerry Howard.

“Fewer houses are being built at the moderate price points, and they’re not being built because the cost of lumber puts them out of too much of the consumers’ buying range," Howard told Bloomberg. He estimated that for every $1,000 increase in cost, about 150,000 potential consumers are priced out of buying a home.

NAFTA: No budging

Meanwhile, the Canadian government remains optimistic that it will win at this philosophical war, which is largely what the Canada-U.S. softwood lumber dispute has come down to. Canada says it isn't about to change its political system of managing its forests to meet the demands of U.S. competitors, but it has said it is willing to continue the process of renegotiating periodic agreements, which is what has largely kept the peace between supplier and buyer.

For the Trump administration however, the stakes may be too high. It wants a rewriting of NAFTA rules, and neither Canada or Mexico seem ready to capitulate on provisions in the agreement that have stood to their benefit in past negotiations.

What the two countries are willing to do is shop for other buyers. For Canada, the world's top supplier of softwood lumber and other wood products, building a niche equivalent to last year's $24 billion U.S. market will be tough. But thanks to the Trump administration, it may now have the cred to do it.

Flickr images: Ruth Harnup; JenniferC.