Canada-United States Softwood Lumber Dispute Presentation to Western Forest Economists June 2015

Ministry of Forests, Lands and Natural Resource Operations 1

Presentation Outline

2

I. Importance of Forestry to BC

II. Trade Dispute History

III. 2006 Softwood Lumber Agreement

IV. Post 2015

Importance Of Forest Sector In BC

3

GDP $5.9B in 2011 12% of BC goods sector GDP Employment 60,700 in 2014 2.7% of total BC employment Exports $12.4B in 2014 35% of BC merchandise exports 34% of Canadian forest products exports Lumber Prod. 12.5 BBF in 2014 51% of Canadian lumber production Govt Revenue $719M in 2014 over $1 billion in good years

BC Coast vs Interior

Year 2014 Unit Interior Coast Province

Timber Harvest million m3 46.8 19.3 66.1

From private land million m3 1.7 5.4 7.1

% from private land % 4% 28% 11%

Lumber Production million bf 11,128 1,363 12,492

Lumber Exports to US million bf 5,636 566 6,202

Log Exports million m3 0.6 6.0 6.6

As % of Timber Harvest % 1% 31% 10%

4

Sources: Ministry of Forests, Lands and Natural Resource Operations Harvest Billing System Statistics Canada, CANSIM 303-0064 Department of Foreign Affairs, Trade and Development, Daily Export Reports Ministry of Forests, Lands and Natural Resource Operations, Log Export Permit Report

5

Trade Dispute History

The Main Argument

6

Different Forest Ownership: • Canada’s timber is ~90% from Crown land • US timber is ~90% from private land

The US claims: • Canadian lumber industry is subsidized • Main allegation is that provincial stumpage rates charged to

companies for trees logged on Crown land are set too low and do not follow markets

• As a result, lumber imported from Canada should be subject to countervailing duties

Canada disputes this assertion: • Stumpage rates are set in relation to markets • Economic rent theory says even if stumpage were low, it

wouldn’t lead to higher production

Share Of US Lumber Market

7 Source: WWPA Lumber Track

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US

Cons

umpt

ion

(mill

ion

boar

d fe

et)

Decomposition of US Softwood Lumber Consumption

BC Export Volume Rest of Canada Export Volume Rest of World Export Volume US Domestic Production

8

• WTO and NAFTA aim to reduce trade barriers, but set rules for exceptions: ‒ countervailing duties to offset government subsidies ‒ anti-dumping duties to offset companies exporting

products at prices lower than the prices normally charged in the home market

‒ emergency trade restrictions designed to “safeguard” domestic industries

• Each country has its own rules to investigate whether duties are justified – in softwood lumber, the US is applying its rules to Canadian imports

Background: International Trade Rules

9

• US industry petitions govt – Coalition for Fair Lumber Imports • US Department of Commerce investigates subsidy and

dumping • US International Trade Commission (ITC) investigates injury • US Trade Representative (USTR) – negotiates/administers

agreements • Each year, Commerce recalculates duties – can result in partial

refund of duties, or requirement to pay more • Uncertainty - exporters don’t know what level of tariff they

will end up paying • High duties – highest in Lumber IV was 27% CVD+AD,

eventually determined to be de minimis after many NAFTA panel remands

US Trade Rules

10

NAFTA And WTO Appeals

• Canada can appeal US CVD, AD and injury rulings to arbitration panels under NAFTA and WTO.

• NAFTA panels: ‒ whether US determination accords with US law ‒ can require the US to change its finding

• WTO panels rule on: ‒ whether US is consistent with WTO rules ‒ no authority to require the US to change its finding ‒ may authorize retaliatory measures

• In Lumber IV, Canada appealed numerous US decisions to NAFTA and/or WTO

11

Key Panel Decisions In Lumber IV

• Panel on injury – Panel required US to review threat of injury decision 3 times. On 3rd review, panel required US to find no threat of injury.

• Panel on CVD – Panel required US to recalculate CVD 5 times. On 5th Calculation, CVD rate below 1% ‘de minimis’ .

• Panel on AD – Panel returned calculation to US 3 times. Panel discontinued before final ruling.

12

Canada-US Lumber Dispute

82-83 Lumber I – Countervailing duty (CVD) case 83-86 No dispute 86 Lumber II – CVD 86-91 Memorandum of Understanding (MoU) 92-94 Lumber III – CVD 94-96 Agreement Negotiation 96-01 1996 Softwood Lumber Agreement (SLA) 01-06 Lumber IV – CVD and Anti-dumping (AD) 06-15 2006 SLA 2015 + ??

Source: Random Lengths

Price Differentials Illustrate Level Of Protection

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-

93Ju

l-93

Jan-

94Ju

l-94

Jan-

95Ju

l-95

Jan-

96Ju

l-96

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15

Cross border lumber price difference: Toronto vs Boston 2x4 price difference as a percentage of Canadian

price

Lumber III 6.5% Duty

Consultations / Negotiat

ions (No

Duty)

Softwood Lumber Agreement Quota

Lumber IV SLA 2006

Canada's Win at NAFTA and ECCSep'04 & Aug'05

13

14

2006 Softwood Lumber Agreement

15

Key Features Of 2006 SLA • Came into force October 2006. Expires October 2015 • Returned 80% (US$4.3 billion) of duties to Cdn companies • Two options: (A) Export tax, or (B) Quota with lower tax • Tax collected by federal govt, remitted to provinces • Bottom loaded tax - rate declines as lumber prices rise • Free trade under either Option when benchmark lumber

price is over US$355/MBF • Canada must notify US of changes to forest policy, US can

challenge, certain ‘safe harbours’ (eg environmental) • Dispute Settlement by London Court of International

Arbitration • US agreed to one year standstill on expiry

Lumber Prices And Incidence Of SLA Tax

16 Source: Random Lengths

$175$195$215$235$255$275$295$315$335$355$375$395$415$435$455$475$495$515$535$555

Soft

woo

d Lu

mbe

r Pric

e In

dex

($U

S/m

bf)

Softwood Lumber Agreement (SLA) Export Tax Trigger Points

No Tax

5% Tax10% Tax

15% Tax

SLA in force,Oct 2006

SLA expiresOct 2015

June 2015

What Happens Next?

17

2006 SLA expires in October 2015 Possible scenarios post-2015: • Extended or Renewed Agreement • New CVD/AD against Canada (Lumber V)

‒ One year standstill to Oct 2016 • New Agreement

Key Factors For Future Of Dispute

18

• Market Pricing of Timber: ‒ 2003-2006: BC implements an auction based pricing

system for timber ‒ 2013: Quebec implements similar system

• Reduced Timber Supply in Canada ‒ BC’s harvest expected to fall ‒ Ontario and Quebec harvest also lower

• Diversified Exports ‒ BC and Canada now export a significant share of their

lumber to Asia • Cross Border Mill Ownership

‒ BC companies now own about 14% of US production

• Established in 2003 • Core business goal: To provide credible representative

price and cost benchmark data for the market pricing system (MPS) through auctions of public timber

• BCTS auctions timber tracts to highest bidder: ‒ Approximately 20% of AAC; representative sample ‒ Auction characteristics (e.g. sealed bid, upset rate method,

etc) designed and periodically reviewed with advice from MDI auction consultants.

‒ Minimal eligibility requirements: bidding pool of about 1,000 registrants

19

BC Timber Sales

20

BCTS Auctions

BCTS Auction Prices

Major Licensee Estimated

Auction Prices

Cost Adjustment 5) Costs to represent forest management responsibilities major licensees have that BCTS auction purchasers do not (Tenure Obligation Adjustments) are subtracted from estimated auction price.

1) Timber stands representing the variety of provincial harvest are auctioned.

2) Each auction yields a winning price, which varies with stand characteristics. This is what BCTS harvesters pay.

4) Characteristics of major licensee stands are inputted into MPS equation to estimate auction price for non-BCTS stands.

Stumpage for Major Licensees (~80% of Harvest)

Market Pricing System Uses Auction Results

BCTS Stand Characteristics

MPS Formula 3) Statistical relationship between winning price and stand characteristics is estimated.

Major Licensee Stand Characteristics

6) Result is stumpage billed and paid by major licensees.

Mountain Pine Beetle Epidemic Is A Disaster

21

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Pine

Vol

ume K

illed

(mill

ions

of c

ubic

met

res)

Year

Entire ProvinceTimber Harvesting Land Base

Current Estimate of Observed Annual Red-Attack (2014*)

Current Estimate of Projected Annual Red-Attack (2014*)

*2014 Publication: 1999-2013 Aerial Overview Surveys and BCMPB.v11

730 Million Cubic Metres Killed To Date

22

Falling BC Timber Supply

23 Source: FLNRO AAC: Allowable Annual Cut

30

40

50

60

70

80

90

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

mill

ion

cubi

c met

res

Actual AAC AAC Outlook

BC Lumber Exports Have Shifted To Asia

24 Source: StatsCan

0

5000

10000

15000

20000

25000

30000

35000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Thou

sand

Cub

ic M

eter

s

BC Lumber Exports By Destination

United States China Japan Rest of World

56%

29%

8%

7% 86% 1%

10%

4%

25

Cross Border Ownership

Conclusions

26

• Forestry sector is key to BC’s economy, and lumber exports to US are key to BC forestry

• Declining BC timber supply and diversification of exports to Asia mean BC lumber exports to US not likely to rise

• BC’s forest policy and timber pricing system is market oriented, robust and defensible: – Pricing based on auctions makes sense – MPS is regularly updated and reviewed to ensure validity

• Thus, increased US protection against BC and Canadian lumber imports is not warranted.