2006 Softwood Lumber Agreement: History & Overview

2006 Softwood Lumber Agreement: History & Overview

Western Forest Economists

Wemme, May 8, 2007

Lois McNabbEconomics and Trade Branch

B.C. Ministry of Forests & Range

2

I Importance of BC Forest Industry

II History of Trade Issue

III 2006 Softwood Lumber Agreement

IV Durable Solution?

Outline of Presentation

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• Accounts for 7.6% of GDP and 29% of goods GDP

• Sales in 2006 were $15 billion, 36% of BC

manufacturing shipments

• Exports in 2006 were $13.6 billion, 41% of total exports

• Direct employment of 78,100 persons in 2006

• Including indirect effects, accounts for 200,000 jobs

Importance of Forest Industry to BC

4

Economic DependenceEconomic Dependence

Based on 2001 Census

5

History of Trade IssueHistory of Trade Issue

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“The 25 Years War”“The 25 Years War”

• 3 countervailing duty cases (1982, 1986, 1991)

• MOU: Export Tax/Replacement Measures 1986-1991

• SLA 1: Export Quota 1996-2001• Lumber IV: CVD and AD, 2001-2006• SLA 2: Export Tax or Quota 2006-

7Source: Random Lengths

Softwood Lumber Price DifferentialsToronto vs Boston

Softwood Lumber Price DifferentialsToronto vs Boston

Cross border lumber price difference: Toronto vs Boston 2x4 price difference as a percentage of Canadian price

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-

93

Jul-9

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94

Jul-9

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Lumber III6.5% Duty Consultations

andNegotiations

(No Duty)

Softwood Lumber AgreementQuota

Lumber IV

Canada's Wins at NAFTA and ECC, Sep/04 & Aug/05

SLA 2006

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Reality of the Past 25 YearsReality of the Past 25 Years

We have been playing a game we cannot win

Low US Lumber Margins

Engineer CanadianCost Increases

HigherLumber Prices

Higher US Timber Prices

The “Circle to Hell”

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Import Share of US MarketImport Share of US Market

Source: WWPA, AF&PA

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

BC Rest of Canada Rest of World

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Lumber IV LitigationLumber IV Litigation

• Department of Commerce Decisions Initial investigation: 27% duty Annual Administrative Reviews

• AR1: 20% duty

• AR2: 11% duty

• 8 NAFTA Appeals• 5 direct + 3 indirect WTO Appeals

US will drop Byrd Amendment in 2007

• Canadian wins at US Court of International Trade (CIT)

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2006 Softwood Lumber Agreement

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Key ElementsKey Elements

• Implemented October 12, 2006• 7 year term with option to renew for additional

2 years• Return of 80% of duties paid to Canadian

companies - ~US$4.3 billion• Canadian regions choose export tax or quota;

may switch at year 3 and year 6• BC chose export tax.• BC Coast and Interior treated as separate

regions

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Option A and Option BOption A and Option B

Prevailing Monthly Price

US$/mbf

Option A – Export Charge

Option B – Export Charge (%) with Volume Restraint

Over $US 355 No export charge

No export charge and no volume restraint

$US 336-335 5% 2.5% + regional share of 34% of US Consumption

$US 316-335 10% 3% + regional share of 32% of US Consumption

$US 315 or under 15% 5% + regional share of 30% of US Consumption

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Living under Export TaxLiving under Export Tax

• Tax rate depends on Random Lengths Composite Price – can be 0%, 5%, 10% or 15%

• If surge is triggered in a month, then a surcharge equal to 50% of tax rate

• Surge tax triggered if exports greater than 111% of BC’s market share.

• Federal government website shows monthly surge limits, and daily export levels by region

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Random Lengths CompositeRandom Lengths CompositeRandom Lengths Composite Lumber Price, Monthly Outlook

based on RISI April 2007 outlooks for Western SPF 2x4

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500

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$/m

bf

April 2007

January 2009

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Anti-CircumventionAnti-Circumvention

• Governments are prevented from actions that offset the export measure

• The agreement explicitly exempts: Programs that existed on July 1, 2006 Actions for purpose of environmental management,

as long as they don’t undermine pricing Payments or other compensation to First Nations to

address or settle claims BC tenure takeback compensation

• Disputes will be resolved through London Court of International Arbitration

17

First Potential DisputeFirst Potential Dispute

• US has requested consultations on surge trigger calculations and on certain policy changes by Ontario, Quebec, and federal govt

• Consultations April 19 in Ottawa• If not resolved in 40 days, can ask

for arbitration

18

Working GroupsWorking Groups

• The Agreement set up a number of working groups

• Softwood Lumber Committee has met once Set up working groups on scope and data issues

• Side letters to agreement identify working groups on: duty free access for Private land lumber examine the running rules to ensure they are

commercially viable• Working Group set up to examine potential

provincial Policy Exits from the agreement• Bi-National Industry group looks at marketing

opportunities and other areas for cooperation

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Benefits of SLA 2006Benefits of SLA 2006

• US$4.3 billion refunded to Canadian companies; half to BC

• End of litigation • Export tax stays in province and

increases government revenue• Coast benefits from US$500 cap • Remanufacturing sector benefits from

‘first mill treatment’ - no tax on value added

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Durable Solution?

21

March 26, 2003 – BC Announced Forestry Revitalization Plan:

1. Reallocation of Tenure

2. Reducing Constraints on Market Forces

3. Market-based Stumpage

Market Based Policy ChangesMarket Based Policy Changes

22

North American Ownership of MillsNorth American Ownership of Mills

• To bring a CVD case, US industry must have certain percentage of producers on board

• Canadian companies buying US mills:• Interfor• West Fraser• Canfor

• US companies buying Canadian mills:• Hampton• Pope & Talbot

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For more informationFor more information

BC Ministry of Forests & Range website:

http://www.gov.bc.ca/for

Choose link for Updates on Softwood Lumber Agreement (midway down in centre of page)• Implementation information• Links to information on litigation, negotiations and

history• Links to federal government, NAFTA, WTO, Random

Lengths historical summary