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NAFTA 2.0 & Lumber Industry Setbacks

Why is the forestry industry suddenly in decline? Does NAFTA 2.0, also known as CUSMA, also known as the USMCA, have anything to do with it?

For months now, we have been hearing about declines in B.C.’s forestry industry. Many workers in this industry are now without work.

The Tolko mill, a stalwart in downtown Kelowna, now states, “we simply cannot operate in current conditions.”

Various explanations have been offered for the forestry industry’s current situation.

Some suggest that a lack of building activity in the United States has dampened demand for Canadian lumber products.  However, U.S. housing starts are up 12 per cent.

Other explanations proffered include the pine beetle and provincial stumpage fees.  But the pine beetle has been around a long time. Increased stumpage fees may have had an impact, but did this really cripple an entire industry? And, if so, why not reduce them?

The Forests Minister stated that international pressures including low lumber prices and U.S. import tariffs are factors.  The B.C. government feels unable to reduce stumpage fees because U.S. producers characterize it as a “subsidy.” 

B.C. lumber producers have been paying U.S. duties on shipments to the U.S. since April, 2017.

They are now struggling amid softwood prices that have plunged 40 per cent since mid-2018.

Has the United States-Mexico-Canada Agreement (NAFTA 2.0) significantly and adversely impacted the forestry industry?

You may recall that U.S. President Trump required the North American Free Trade Agreement (NAFTA) to be renegotiated. The result is known by various monikers, including NAFTA 2.0, the USMCA and the CUSMA. I’ll refer to it by the federal government’s preferred label, CUSMA.

On January 3, 2018, before CUSMA was signed, the U.S. imposed final countervailing and anti-dumping duties on imports of certain Canadian softwood lumber products.

That same day, the federal Minister of Foreign Affairs responded by issuing a statement that “Canada’s forestry industry supports good middle-class jobs in communities across our country. The Government of Canada will continue to vigorously defend our industry and its workers against protectionist trade practices.”

“U.S. duties on Canadian softwood lumber are unfair, unwarranted and troubling. They are harmful to Canada’s lumber producers, workers and communities, and they add to the cost of home building, renovations and other projects for American middle-class families.”

“Canada has already begun legal challenges of these duties under NAFTA and through the WTO, where Canadian litigation has proven successful in the past. We will continue to work with the provinces and territories, as well as with Canadian industry and workers, to find an enduring solution. Canada will also continue to engage with the U.S. Administration and with American legislators to come to a new agreement on softwood lumber.”

What is the status of this wrangling, post- CUSMA? As of the time of writing, inquiries to the federal government for an update on these “vigorous” “legal challenges” have not received a reply.

CUSMA’s signing date was set before the parties had even agreed what they were signing.

In the fall of 2018, Canada’s ambassador to the U.S. quipped that perhaps a low-ranking Canadian official with a bag over his head would be best person to pick to officially sign the agreement on Canada’s behalf.

In 2017, the federal government, announced $867 million in measures to support forest industry workers and communities affected by U.S. measures targeting softwood lumber. In 2016, the forest industry accounted for $22 billion of Canada’s GDP.  In 2015, it directly employed more than 200,000 Canadians. 

This contrasts with a certain Quebec-based engineering firm, which idly threatened to jeopardize 9,000 jobs. 

Although CUSMA has been signed, it is not yet effective. To become effective in the U.S. it must be approved by both the U.S. House and Senate.  Further U.S.-friendly changes may be requested.    

To become effective in Canada, implementation legislation is required. In May, 2019, the federal government tabled an implementation bill.  It passed second reading and was referred to the Standing Committee on International Trade.  However, earlier this month Parliament dissolved for the federal election. So the implementation bill died on the order paper. To become effective, it will need to be reintroduced after the election.

As Canadians, we owe it to ourselves to demand more transparency and accountability from our federal government. At the very least, it ought to educate Canadians on the terms of this deal, before a new implementation bill is introduced.  

Post-Script

After publication of this article, the following response was received from the Public Affairs Bureau of Global Affairs Canada:

Canada’s forest industry sustains hundreds of thousands of good, middle-class jobs in communities across our country. We firmly believe that the U.S. countervailing (CVD) and anti-dumping (AD) duties on Canadian softwood lumber are unfair and unwarranted. That is why we are challenging these duties at the WTO and under NAFTA.

Under NAFTA, Canada is challenging Commerce’s AD and CVD determinations, as well as the International Trade Commission’s determination of material injury. On September 4, 2019, the NAFTA Panel ruling on Canada’s injury challenge issued a positive decision for Canada, asking the U.S. to review its finding that Canadian softwood lumber imports materially injured U.S. producers. The U.S. International Trade Commission has until December 3 to provide the NAFTA binational panel with their Redetermination on Remand. This decision does not immediately put an end to the punitive U.S. duties, but it is an important step in the right direction. Canada and the United States continue to be engaged in discussions regarding the composition of panels to rule on Canada’s CVD and AD NAFTA challenges.

Canada has also launched CVD and AD challenges through the WTO’s Dispute Settlement System. The first hearing in Canada’s CVD case took place in February 2019 and the second hearing is scheduled for October 16-18, 2019.  The WTO panel’s final report on Canada’s WTO AD challenge was publicly released on April 9, 2019. In its report, the panel agreed with Canada that the U.S. Differential Pricing Methodology (DPM) fails to identify a pattern which is a requirement to use the exceptional methodology to calculate dumping margins. However, Canada did not agree with the WTO panel’s separate findings on the U.S. practice of zeroing and its use of the differential pricing methodology. Canada appealed the panel’s findings on these two issues on June 4, 2019.

Information on the current U.S. AD and CVD duties rates being applied to Canadian exports of softwood lumber is available on our website through the following link:  https://www.international.gc.ca/controls-controles/softwood-bois_oeuvre/other-autres/faq.aspx?lang=eng.  

For information regarding the scope of products covered by the U.S. CVD and AD orders, please refer to the Scope of the Order Appendix I in the notice issued by the U.S. Department of Commerce on January 3, 2018:

https://www.federalregister.gov/documents/2018/01/03/2017-28484/certain-softwood-lumber-products-from-canada-antidumping-duty-order-and-partial-amended-final.

https://www.federalregister.gov/documents/2018/01/03/2017-28483/certain-softwood-lumber-products-from-canada-amended-final-affirmative-countervailing-duty.

We trust this information will be of assistance.