Learning from history

The 8,891 km boundary between Canada and the United States is often referred to as "the world's longest undefended border," but that's only in a military sense. Despite free trade agreements, disputes over softwood lumber have been ongoing since 1982, stemming, largely, from US sentiment that the Canadian softwood lumber industry is unfairly subsidized.

With multiple investigations, appeals and decisions over more than 30 years, it's not hard to see a pattern:

1. The US lumber industry lobbies for tariffs to increase the price of Canadian imports.

2. Tariffs are imposed by the US government.

3. Canada appeals to a North American Free Trade Agreement (NAFTA panel, or the World Trade Organization (WTO)).

4. A decision is rendered.

5. The United States challenges the decision, if the decision is in favour of Canada.

6. An agreement is reached.

Negotiations usually take years. When the 1996 Softwood Lumber Agreement expired on April 2, 2001, the final legal text of the next agreement was not signed until July 1, 2006, and resulted in the return of $4 billion of the $5 billion in tariffs charged to Canadian companies between 2002 and 2006.1

Learning from the present

History tells us to expect a lengthy negotiation period, but what about the present? Let's explore the current circumstances that could have an impact on the duration, or difficulty, of the agreement process:

  • A growing tide of protectionism. Between Britain voting to leave the European Union, and both US Presidential candidates opposing the Trans-Pacific Partnership Free Trade Agreement, it's clear that import restrictions are increasing in popularity across the globe—in both emerging and established economies.
  • The US election. This election, in particular, is creating increased uncertainty overall, and will likely result in a reduced focus in reaching an agreement, at least in the short term.
  • The underlying cause of the lumber dispute remains. Canadian lumber is cheaper to harvest and export than American lumber.

Preparing for the future

Both countries are bracing to head back to court in this longstanding dispute. There is speculation that the US lumber industry will file a case for tariffs by the end of October, after which the US Department of Commerce would have up to 20 days to begin an investigation, and a further 65 to 130 days to issue a preliminary determination.2 This could mean that tariffs could start to be applied by early 2017.

So how can you prepare?

Plan, plan, plan

When you consider the potential effects on your business, what impact will a protracted dispute have on your revenue and sales projections? Will you have enough to cover your fixed and variable costs, both short term and long term? If not, how can you reduce your expenses, or what financing options could be available to inject cash into your operations without creating a crippling debt burden?

It's important to plan ahead, thinking about not just the most likely, but also the worst case, scenarios to ensure your business can survive and thrive in challenging times.

Speak up

The US softwood lumber industry has a strong lobbying voice in the form of the US Lumber Coalition—an alliance of large and small softwood lumber producers from across America. Their singular purpose is to address what they refer to as the "gross under-pricing of timber" and they will lead the industry in the development of new petitions against Canadian softwood imports, should an agreement not be reached quickly.

Given the pressure expected from the US lumber industry, it's important for Canadian companies to stand up and be heard as well. Lobbying and legal expenses should be factored into your plans and budgets, whether you speak for just your company, or collaboratively with the rest of the industry.

Footnotes

 1 "Summary and Explanation of the U.S.-Canada Lumber Dispute", Penn State Law, https://pennstatelaw.psu.edu/_file/aglaw/Lumber_Trade.pdf  (accessed November 1, 2016).

2"Answers to frequently asked questions in the trade dispute", Random Lengths, http://www.randomlengths.com/in-depth/us-canada-lumber-trade-dispute/  (accessed November 1, 2016).

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