10 things to know about the Canada US softwood lumber dispute
WoodsCamp was founded in part to innovate supply chains so producers can compete without resorting to trade barriers. It hasn’t been possible to stave off this year’s trade war, but at WoodsCamp we’re motivated to make it happen by the time we find ourselves here again. In the meantime, here’s some context for the current news around Softwood Lumber:
1.) This round of the softwood lumber war predates the Trump administration.
It has his spin on it, and the flourish of dairy supply management and NAFTA are his and Ross’ to be sure. But the wheels were set in motion for this ruling long before Trump was a twinkle in the electorate’s eye…
2.) Today’s announcement concerns one of two investigations launched by the Department of Commerce on December 16, 2016 (anti-dumping and countervailing duty investigations respectively) following a petition by the US Lumber Coalition. It’s not legislation. This part of the SLA cycle just happens to coincide with the first 100 days of a new president. There’s no guarantee things would have been any different under Clinton – I suspect it would have been just the same. Here’s a useful primer on the history of the dispute: http://bit.ly/2pfF4Y3
3.) This will certainly harm the house construction industry in greater measure than it will protect the Lumber industry. In the end, it’s not about jobs. It’s about the price of lumber and how difficult it is for US producers to operate profitably within the market price due to how fragmented their supply chain is relative to Canada. Here’s another helpful explainer on this front: http://read.bi/2q2bghE
4.) The way this is playing out is political, to be sure. That it’s become part of the wider narrative of re-negotiating NAFTA and Trump catching a Wisconsin Dairy Farmer on Fox News complaining of being shut out of the Canadian market (thanks to Trump’s reneging on TPP mind you) is coincidental. http://bit.ly/2oJjwC4
5.) Today the Dept. of Commerce issued an Affirmative Preliminary Countervailing Duty Determination in their investigation. As part of their determination US Customs and Border inspection have been instructed to collect the tariffs as determined from here onward. They also allege that there’s been a bump in imports in advance of the ruling so tariffs should be collected retroactively on imports over the past 90 days. Huge impact on the cashflow of these mills and brokers – some of them won’t be able to get over the hurdle. These amounts get held in escrow until a final ruling is reached in September. If the tariff stays, the money stays in the US. If they determine the tariffs were applied in error, the money goes back to the Canadian companies… although this would be cold comfort to those mills who will have gone out of business by then. History tells us there’s a non-trivial chance that part of the money will not be returned from escrow and will simply be distributed to US lumber companies and the US Forest Service (See the first link above).
6.) June is a preliminary finding on the Anti-Dumping investigation. Today’s ruling is just the beginning. There are quite a few more turns of the screw to come.
7.) While diverting supply to China is a live option on the West Coast… not so much for the East. Which is pretty greasy as Quebec has been pretty innovative in indexing it’s crown stumpage to market based auctions and the Maritimes has largely the same timberland structure as South of the US border – mostly held by private landowners – but has been slapped with the same tariffs as the rest of Canada where supply can be better optimized as it comes from a single supplier – the crown.
8.) Note the tariff that was negotiated by JD Irving (3.02%) relative to the mill down the road in NB who buys supply from the very same wood basket (they’ll pay 19.88% on any new shipments and are about to receive an invoice for 19.88% of the value of all shipments over the past 90 days). Jim Irving bet that with his deep pockets they could afford better lawyers and lobbyists in Washington if they negotiated separately from the rest of Canada. He was right. Irving threaded the needle. They are the big winner today. They buy logs in the same market as mills who have to pay 16% more than them in duty. Not only that, Irving owns one of the largest Building Supply chains in the Maritimes. It’ll be interesting to see if they continue stocking domestic producers. I suspect they will as they now have a pretty sweet deal on sending every stick of Irving produced lumber into the US market.
To their credit, JD Irving has issued a statement arguing that the finding in their separately argued case warrants a continued exemption for the other New Brunswick and Atlantic Canadian mills. http://bit.ly/2pkGDpQ
9.) Nova Scotia mills thought they’d successfully made the case for an exemption. The US Lumber Coalition recommended it to the Dept. of Commerce. An exemption was not included in this preliminary determination and so the tariffs will apply to Nova Scotia mills as of 90 days ago. The exemption may come in when the final ruling is reached in September. By then, depending on what kind of loan guarantees the federal government can offer, the damage may already have been done.
10.) There will be a shortage of lumber in the US market driving prices up – which will serve US producers. It’s not possible to magically turn on more mill capacity and instantly find more sustainable log supply. Who will step in to fill the void? Watch to see if the higher price of lumber combined with trade barriers means Russian producers from Siberia can now afford to supply the US market more cheaply than Canadian producers.
If you have any questions or feedback, leave us a note in the comments below. To learn more, check out some of the other posts on our blog.
Alastair grew up playing in forests and ravines but spent most of his career as a professional sitter making videogames. When he moved to Lunenburg, a house with a Woodlot rekindled his love of the woods and set him on a new path. Today he’s committed to technology and business model innovation that benefits rural communities.