On April 28, 2017, the US Department of Commerce placed a countervailing duty of about 20% on Canadian softwood lumber entering the United States. The media buzzed to life: suddenly everyone from Stephen Colbert to Al Jazeera was talking about Canadian 2x4s. Given the burst of interest in this topic, some of you may be asking “why is this so important?”
Economic significance
Canada is literally covered in forests—347 million hectares to be exact or 54% of our land base south of the Arctic treeline. Sixty-eight percent of these forests are dominated by coniferous (softwood) tree species such as spruce and pine, and an additional 15.8% are a mix of coniferous and deciduous trees.
Given our proximity to such vast forest wealth, it is therefore not surprising that our forest industry, softwood lumber included, is of huge economic importance to us as a nation. In 2016, forest products (including sawn lumber, wood panels, pulp and paper, and many other products) comprised nearly 7% of Canada’s exports, and 1.3% of our GDP. Job-wise, over 200,000 people are directly employed in the industry in hundreds of forestry-dependent communities across the country.
Softwood lumber represents about a quarter of Canada’s forest product export value and it is British Columbia’s largest single export. Sawmill by-products, such as wood chips, sawdust, and bark, provide the raw materials for pulp mills, panel plants, and bioenergy facilities. A threat to the softwood lumber industry is therefore a threat to the livelihoods of not only loggers and sawmill workers but also to Canadians in several other related industries.
A long history
Canada has exported wood products since the early 1800s, starting with the exports of naval masts from eastern Canada to Great Britain. By the 1830s, increasing volumes of sawn lumber were shipped to Britain, the United States, and the West Indies. At this time, one of the earliest major trade disputes erupted between the United States and Canada. Its source: the ambiguous border between Maine and New Brunswick and the rights to ship American logs to port via the (Canadian) Saint John River which drains Maine’s Aroostook River.
On the west coast, logging began in the 1850s, cutting trees near the ocean for shipment to markets around the Pacific. The completion of the Canadian Pacific Railway in the 1880s redirected much of that lumber eastward. Production increased rapidly, and by the late 1920s B.C. was responsible for half of Canada’s lumber production—a share that has continued to this day.
Canada’s lumber exports—the bigger picture
While the United States has traditionally absorbed 80–90% of Canadian softwood lumber exports by volume, the past decade has seen a significant shift in trade patterns. With US housing starts crashing from a peak of 2.1 million in 2005 to fewer than 500,000 in 2009, demand for the wood products out of which these houses are built also tumbled. US housing starts are still recovering, and many analysts suggest it will take another 2–3 years before they recover to their long-term average of 1.4 million starts per year.
While the US market was sputtering, China exploded onto the scene, rising from an export share of below 1% to become Canada’s second largest lumber market in just five years. Indeed, from 2009 to 2013, the extra volume of wood shipped to China enabled many B.C. mills that would otherwise have had to shut down to stay open.
What is driving the current United States/Canada lumber trade spat?
At the root of the softwood trade conflict is the American assertion that Canadian logs are subsidized. Ninety percent of Canada’s timber harvests originate on government-owned land. Unlike in the United States, where most sawmills bid to purchase logs from private forest lands, many Canadian sawmilling companies have been granted long-term timber harvesting rights (tenure) and charged a set fee (stumpage) for harvesting. As the calculations and/or methodologies for determining the stumpage vary among provinces and are based on a variety of criteria, many US sawmillers question their transparency and, correspondingly, whether or not Canadian sawmill companies are paying a fair market price for their logs.
The current trade dispute represents the fifth time the issue of “log subsidies” has flared up since 1982. The details of this long saga are beyond the scope of this blog, but if you are curious, The Globe and Mail has published several excellent synopses and editorials. “Softwood IV” (2001–2006) resulted in the negotiation of a new Softwood Lumber Agreement, in which the Canadian government agreed to collect a tariff on lumber shipments to the United States. This agreement ended in October 2015, and following a 1-year cooling-off period, on November 28, 2016, the US industry approached the US Department of Commerce alleging the Canadian industry of having subsidies that are harming the US industry. “Softwood V” had begun.
What’s next for Canada’s softwood lumber trade?
Given the relative size and proximity of the United States, it will likely always be the most important market for Canadian lumber. Other export markets, particularly in Asia, also have the potential for substantial growth and present a good sales opportunity. However, due to the extra cost of shipping lumber to ports on the west coast, these overseas export markets are not as accessible to producers east of the Rockies.
It is unlikely that the US lumber lobby will change its mind over its belief that the Canadian industry is subsidized (especially given that restrictions on Canadian imports raise lumber prices in the United States, and therefore make the US industry more profitable). It is equally unlikely that Canada will sell off its publicly owned forest lands, or allow unrestricted log exports. That leaves Canadians with two options for selling our lumber stateside: either fight the US duties in court or negotiate peace via a new trade deal. Canadian sawmillers are responding not with panic, but with a resigned sigh: “here we go again.”
