Softwood lumber decision Tuesday is Trump's next chance to hammer Canada

U.S. Commerce Secretary Wilbur Ross stood beside Donald Trump as the U.S. president called Canada's actions against American trade interests "a disgrace."

"That also includes what's happening along our northern border states with Canada, having to do with lumber and timber," he said, a vague snark that swivelled heads on both sides of the border.

The testy trade in two-by-fours wasn't expected to be raised until this Tuesday, when Ross's department is expected to levy countervailing duties on Canadian softwood lumber.

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It's the first of two much-anticipated decisions. The second, on anti-dumping duties, was delayed to June 23 at the request of the U.S. Lumber Coalition, an extension the Canadian side had expected. 

The powerful lobby group petitioned the American government in November, arguing U.S. producers and workers are injured by subsidized imports from north of the border.

Most of Canada's lumber comes from Crown lands, which governments manage. However, Canada contends its pricing is not artificially low: Crown timber auctions are designed to reflect market rates.

A final, combined duty rate won't be set until November. The U.S. International Trade Commission will confirm it in January 2018. The Canadian government won't be able to appeal until the entire process is complete. 

Preliminary duties: how damaging?

Canada's lumber companies are bracing themselves for a financial hit in the meantime.

Some analysts are predicting countervailing duties of 10-15 per cent and anti-dumping duties of 20-30 per cent.

For comparison: the combined duties prior to the last softwood lumber agreement in 2006 were about 27 per cent.

Are the analysts right?

"There are so many things that are variable. I'm not sure how they could actually put together a calculation. Plus there are known unknowns for how they can gin up the duty rate," said Susan Yurkovich, the president of the Vancouver-based Council of Forest Industries.

"If it was based on facts and solid evidence, then there would be no duty, right?" she said. "It's what's going to be in the make-believe minds of the department of commerce.

"Whatever the final duty rate is, we will begin the appeal as soon as that's posted," Yurkovich said. "The full impact is not going to be felt until we start paying the combined duties next year."

Punishing Canada's industry too aggressively could be risky for Trump. 

"A lot of the people that voted for him are going to be negatively impacted when tariffs are placed on Canadian lumber," said Naomi Christensen, a senior policy analyst with the Canada West Foundation. 

Trump may champion the American dream, but research from the U.S. homebuilders association found that for every $1,000 increase in house prices (due to higher lumber costs), 153,000 families are priced out of purchasing a home.

The same research suggests a 25 per cent lumber duty could cost 8,000 construction jobs. Other types of manufacturing could also be hurt: Canadian lumber is used for everything from pallets to mattresses (bed frames made of wood from cooler climates are, apparently, less prone to squeak.)

U.S. timber producers may have higher sales in the short-term, but over the long-term, builders may switch to cheaper materials, Christensen said, cutting everyone's demand.

"It's really all very intertangled," she said. "Unfortunately, the lumber lobby is very loud. A lot of the time the consumer voices in the U.S. aren't as vocal."

Less to fear now?

The last lumber deal negotiated by the previous Conservative government expired in 2015. A one-year litigation standstill prevented the U.S. lobby from petitioning for new duties until last fall.

Efforts to negotiate a new deal continue under the Liberals. But Trump's trade representative still isn't confirmed, making talks difficult.

"This is an important sector," Canadian Finance Minister Bill Morneau said Friday in Washington. "You'll see from all of us a continued focus on this issue."

As Trump blasted away last week, Trade Minister François-Philippe Champagne left for China, to promote Canadian wood in Canada's largest alternative market.

Vietnam, Thailand, Indonesia, the Philippines and even Mexico could pick up more slack if American sales slip.

Both financially and strategically, Canada's industry is in a better place now than a decade ago.

Large Canadian companies have expanded into the U.S., so their overall balance sheets won't be so badly hit.

With U.S. housing starts on a bit of a march and the Canadian dollar relatively low, demand has been strong and may remain so, even after duties are paid.

But Tuesday's decision may still burn: duties may be retroactive for up to 90 days. Price hikes after the fact can be hard to swallow. 

Canada's timber supply also isn't what it once was, following infestations and forest fires.

Tied up in NAFTA targeting

Smaller companies, particularly those in Eastern Canada (far from Asian shipping ports), need American customers.

Particularly troubling this time: the Americans haven't exempted the Atlantic provinces, where timber is mostly harvested on private land.

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The Canadian industry has also been fighting on a second front. 

Earlier this month, a NAFTA review panel ruled that U.S. tariffs should be lowered or dropped for several Canadian mills that manufacture the kind of glossy paper used in magazines or catalogues.

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Softwood lumber isn't part of the North American Free Trade Agreement as it stands.

That didn't stop Trump from framing it as part of the "trading disaster" he's going to renegotiate or scrap. What could he have meant, then?

Dispute settlement provisions included in NAFTA's Chapter 19 allow Canada to appeal U.S. lumber duties to both a NAFTA review panel and the World Trade Organization.

Trump's draft letter to Congress about his priorities for renegotiation suggested eliminating Chapter 19. Appeal panels frequently rule against U.S. interests (and may do so again, should this dispute reach that stage.)

The last softwood lumber deal set tariffs and market access limits — offering not free trade, but managed trade, for a limited time only. 

"I hope the federal government is thinking: what win can we give the U.S. to include softwood in NAFTA?" Christensen said. "If we don't have this happening every decade or so, that would be beneficial."