Softwood Makes a Hard Sell

A battle between the U.S. and Canadian lumber producers has been building since the April 2001 expiration of a U.S./Canadian Softwood Lumber Agreement reached in 1996. Under the terms of that agreement, Canada had a limit of 14.7 billion board feet of duty-free lumber to U.S. lumber yards each year. Tariffs set for shipments would kick in beyond that level. In return, the U.S. agreed not to launch any trade action against Canada.

In April 2006, a proposal reached under NAFTA stated Canadian lumber firms would be held to 34 percent share of the softwood lumber market in the U.S., broken down regionally between Canada's lumber-producing provinces and based on 2004–05 exports. In return, the U.S. would give back about $4 billion of the $5 billion it collected in duties since the expiration of the previous agreement. Canada would impose an export tax that would vary according to lumber prices, export levels and the value of the Canadian dollar.

Although most U.S. timber is harvested from private land at market prices, the Canadian government owns 90 percent of the country's timberlands and charges stumpage fees for logging based on the cost of maintaining the forest. U.S. timber companies contended Canada's stumpage fees were kept artificially low to allow mills to sell wood below market value. U.S. firms pressured the American government to impose extra duties on Canadian lumber to lock-in prices. After the duties were imposed, Canada took its case to the World Trade Organization and NAFTA in May 2003.

Though an agreement has been reached, neither side is completely happy with the deal. U.S. lumber producers fear dramatic price shifts, and some builders remain worried about softwood's price. "The NAFTA panel decision is gravely flawed and signifies a potential end to an important antidote in the U.S. lumber industry's efforts to counter the poison that is Canadian lumber industry practices," said Steve Swanson, chairman of the Coalition for Fair Lumber Imports, in his address to the U.S. Senate Commerce Committee Subcommittee on Trade, Tourism and Economic Development.

Bernie Markstein, director of forecasting and assistant staff vice president of the NAHB, says that under the terms of the agreement, "Canadian firms can still import as much as they want to ... if they are willing to pay the price. But some of the more stringent rules, some of which aren't being enforced as of yet, impose big limits on the amount of lumber that can be imported."

If the U.S. tightens its grip on Canadian imports, builders may have to look to other sources, such as Europe, for their lumber. "Even if you want more, you can't have it. We have lots of lumber sitting to the North of us but we might not even be allowed to use it. We would have to import lumber from Europe at a higher cost," Markstein says. "From a builder's perspective, this is just crazy. Technically either side can opt-out after two years, but I think this will stick for awhile. And it still officially hasn't passed yet. Both sides are still pushing it through."