A good deal -- 25 years too late

It was always apparent that the softwood conflict could end only with Canada's capitulation. Hotheaded threats of retaliation against American wine vastly overstated our leverage. Airheaded vows to divert our lumber to China were simply delusional. We were never going to bring the Americans to their knees; nor were we ever, however many international trade panels might rule in our favour, likely to bring them to their senses. So capitulation was a given. The only question was what kind of capitulation. In simplest terms, we could give the Americans the process they wanted, or we could give them the outcome. That is, we could adopt a market-oriented system of pricing timber, whether by auctioning the right to cut trees on government land or by privatizing the land itself, at the cost of conceding the Americans' point: that our system of government-administered "stumpage" amounts to a subsidy, in effect if not in law. Or we could insist on maintaining the current system, and accept overall limits on our exports to the United States. The agreement just negotiated appears to be a combination of the two. In the immediate term, Canada has agreed to limit lumber exports to roughly current levels. But a route has been opened to escape from these restrictions, in return for the sort of policy reforms the Americans have long sought. That could potentially make the difference -- between an acceptable deal and a great deal. Even without this latter provision, the terms of the deal are surprisingly good. Canadian lumber exports would face no restrictions at current prices and volumes. Only if prices fell below $355 per thousand board feet (they are currently at around $370) would Canada begin to impose an export tax (replacing the current American tariff), and then only at a rate of 5%. The lower the price, the higher the tax: At prices below $315 -- a rarity, in the last decade -- the rate rises to 15%. Depending on their circumstances, regions could choose to pay a lower tax, in exchange for quantitative limits. Finally, there would be a "surge mechanism," limiting each region to no more than 110% of its recent share of the US market. Based on Canada's overall market share of 34%, I read this as meaning we could climb as high as 37% -- our historic peak -- without penalty. None of this is terribly pleasant, nor does it remotely resemble free trade. But compare it to previous agreements the two countries have struck in the more than two decades since this fight began. The 1986 Memorandum of Understanding imposed a flat 15% export tax, while under the 1996 Softwood Lumber Agreement, the tax started at roughly 15% on exports in excess of 14.7 billion board feet -- then about 30% of the U.S. market -- and rose sharply from there. As bad deals go, this one's not half bad. But the real key to the agreement lies in two little-noticed paragraphs on the second page. The first, marked "policy exits," stipulates the two sides will make "best efforts" over the next 18 months to define the sorts of reforms to our forest management practices that would allow each province to escape from the agreement's export limits. As it is, the Atlantic provinces are already exempt, since in those provinces timber is mostly harvested from private lands. (A number of Quebec firms located along the U.S. border are also exempt, on similar grounds: They buy their logs from private lots in Maine.) What is more, the agreement provides for binding dispute panels, to settle such questions as whether a given policy reform would result in true market pricing of timber rights, free of subsidy. To avoid questions of bias, the panels would be made up of commercial arbitrators from outside North America. There's nothing terribly new in these provisions. Indeed, the present agreement is remarkably similar to previous Canadian proposals, put forward as recently as last fall -- one reason the Liberals looked so ill as the Prime Minister announced the terms of the deal. That includes the controversial matter of how much of the roughly $5-billion in tariffs collected in past years would be returned to the Canadian industry: The present government agreed to leave about 20% on the table, as the previous government was fully prepared to do. The difference is that this time the Americans were in a mood to deal. I rather doubt this had anything to do with Stephen Harper's skills as a negotiator. But it almost certainly did reflect the Americans' interest in better relations with Canada, or at least with a government interested in having better relations with them. We thought these things didn't matter. They do. The real question, however, is not why the Americans were willing to accept our concessions, but why it took us so long to make them. We are now prepared to admit our forestry management practices are in need of reform: Indeed, British Columbia has lately moved to market-based pricing of timber in the coastal regions. Why were we not prepared to make the same reforms 25 years ago? Had we done so, we could have spared ourselves billions of dollars in tariffs, and millions more in lawyers' fees. Instead, we made the disastrous decision to seek refuge in a thicket of legal technicalities. Yes, we won a number of rulings -- but we also lost a few. And even where we did win, it was less on the merits than on narrow questions of trade law: whether the Americans had proved "injury" to their own producers, and so on. The problem wasn't just that this legalistic strategy was unlikely to prevail in the end. It was that, on the merits, the policies we were so determined to defend were in the wrong: wrong, not because of any harm they did the Americans (they should rejoice in our willingness to sell them lumber at a discount) but because of the injury to our own interests. So far as the provinces have been underpricing stumpage fees, they have been encouraging overcutting of timber. So far as they have been subsidizing the lumber industry, they have been shortchanging other industries, diverting capital and labour to cutting trees that might have been more productively employed in other pursuits. It's a shame it took the Americans to force us to do what we ought to be doing anyway, for our own sake. But it's even more of a shame that it took them two decades to do it.