US duties fail to crimp Canada wood trade

Several months of punitive US duties against lumber from Canada have not dented shipments needed for booming US housing construction, much to the dismay of the US wood products industry. A long US-Canada fight over lumber trade resulted, last spring, in duties averaging 27 percent on Canadian spruce, pine, fir and other softwood varieties used for homes. But instead of slowing imports and raising prices for US wood, the opposite has taken place. Shipments have increased as Canadian mills cut more lumber to cover their costs and the booming US housing market easily absorbed the extra supply. Prices of some products have fallen as much as one third.

"There definitely hasn't been the impact that you'd expect from a 27 percent duty," said Deborah Regan of the Coalition for Fair Lumber Imports, which represents US lumber companies and timber landholders. The failure of the duties to discourage Canadian companies from selling their wares in the United States has created an opening for the two countries to try to end their dispute, according to one trade specialist. "If the (duties) are not taking care of the problem," said Jeffrey Schott, senior fellow at the Institute for International Economics. "It's going to continue to create pressure to find another way of stabilizing the trade." As a result, Schott expects both governments to make renewed efforts to try to negotiate a settlement, something that has long eluded the trading partners.

When the US duties were finalized in May, Ottawa condemned them, insisting its companies were not the beneficiaries of illegal subsidies as Washington alleged. Some industry officials at the time predicted the lucrative $6 billion US market for Canadian wood would vanish. Charles Tardif, president of the Quebec Lumber Manufacturers Association, proclaimed in May, "This is the beginning of quick agony for the lumber industry here. This is a closing of the US market." Echoing that sentiment was Frank Dottori, chief executive of Canadian forest products company Tembec , who said, "I can't sell a product with a 30 percent tax on it." To be sure, the Canadian industry announced some layoffs and mill closings this year, pinning at least some of the blame on Washington's anti-dumping and countervailing duties. Even so, trade statistics show Canada's shipments of softwood lumber remain robust, even with the duties. For the first seven months of this year Canada sent about 11.4 billion board feet of softwood lumber across the border.

That compares with 11.2 billion board feet during the same period last year and 10.4 billion in January-July 1998 when voluntary trade restrictions were in place, according to government and industry data. Along with strong exports has come falling prices. As Canadian mills reacted to the duties by cutting more wood to cover costs, cash prices for spruce, for example, fell from $300 per thousand board feet in March to $190 on Oct 1. The phenomenon has surprised even the US industry that worked so hard to win the tariffs. There's no disputing the demand for lumber in a US market that has seen robust construction and record sales of new homes fueled by the lowest mortgage rates in 30 years. Christopher Sands, a Canada trade specialist at the Center for Strategic and International Studies, said the United States "may not be self-sufficient in lumber, but the Canadians sure have lumber coming out their ears." But that might not fully explain Canada's eagerness to ship wood even with a 27 percent tax attached. Both Sands and Regan speculated Canadian companies probably are counting on eventually getting hundreds of millions of dollars in duties refunded, plus interest.

This could happen if Canada wins legal challenges, or if a negotiated settlement provides for refunds. And big Canadian companies may be enduring the duties in the hope that smaller rivals will collapse. Growth of lumber companies like Weyerhaeuser that operate on both sides of the border, Schott added, help blunt the effect of the duties because they "have an interest in ensuring the profitability of their investments on both sides of the border." Over the years, Canada has captured about one-third of the US softwood market with little competition. Now, with the US-Canada lumber fight in full swing, countries like Chile, Sweden, Finland, France and Germany are looking for openings in the American market, said Frank Graves, a former Tembec executive who now is the chief operating officer of Ilim Pulp Enterprise, a Russian forest and paper products company.

The most aggressive challenge will come from Chile and Brazil in coming years, Graves said, especially if the United States reaches free-trade agreements with those countries. In the meantime, Canada's hold on the US market does not seem shaken. Does that mean the US industry has any regrets about going down the highly litigated path of import duties? "That was something kind of discussed" last week at a Coalition for Fair Lumber board meeting, Regan told Reuters. She said the rhetorical question was raised, "'Would you be better off without 27 percent (duties)?' Nobody suggested you remove them," not without first securing a deal with Canada.