Geoffrey HalePolitical Science 3170

The University of LethbridgeOctober 28, 2010

OutlineThe Softwood Lumber Dispute

Past, present, future?Chapter 11

Purpose / contextPolitical contestation: property rights, non-

discrimination, and public policy goals.Outcomes and prospects

Softwood Lumber – Aberration or “Canary in the Coal Mine?”Several disputes since early 1980s

Softwood Lumber I (1983) – US Department of Commerce rejects challenge to Canadian provincial forest management policies

Softwood II (1986) – Canada agrees to SLA I – 15% export tax on all softwood lumber exports in response to US DOC finding of injury (1986-91)

Softwood III (1991-96) – Further disputes under NAFTA; concluded by SLA II – export tax agreement on Cdn. Exports (1996-2001)

Softwood IV (2001-06) – Multi-tiered dispute at NAFTA, WTO, US Court of International Trade – concluded by agreement on two-tier export tax combined with export quota for low tax provinces (QC, ON, MB, SK).

Common features of disputesChallenge by U.S. Industry (Coalition for Fair Lumber

Imports) strongly supported by lumber state senators (Pacific NW + Southeast US)

Effort to identify Canadian forest management practices (esp. stumpage fees) as effective subsidy causing harm to U.S. industry reflective of different forest management, property ownership and taxation policies in each country.

Competing interests in both countries Different forest management practices, industry structures in BC,

Ont./QC, Maritimes Dissenting voices: US consumer groups (esp. Homebuilders),

Canadian environmental groups and B.C. First Nations.

Softwood Lumber IVAggravating features

Initiated by B.C. Government’s insistence on cancellation of SLA III (2001), challenging U.S. Policies under NAFTA

U.S. “Byrd Amendment” (1999) providing share of AD / CVD duties levied to plaintiffs – “ambulance chasers’ bill of rights” (ruled in violation of WTO, 2003, NAFTA, 2005)

US DOC rejection of initial Chapter 19 NAFTA rulingsMixed results from Canadian appeal to WTO, muddying

legal watersCFLI constitutional challenge to NAFTA dispute resolution

processes under Chapter 19 (opposed by Bush administration)

Growing politicization of NAFTA in both countries made political climb-down risky pressures for negotiated settlement

SLA III: “the Good, the Bad and the Ugly” Negotiation of 7 year

“market stabilization” deal – driven by falling U.S. Housing, lumber prices

$ 4 billion of $ 5 billion in US duties collected returned to Canadian producers

Binding arbitration of disputes by LCIA

Renders constitutional challenge “moot”

Two-tier, phased export tax No barriers to Cdn. Imports when

prices over $US 365/mcf Escalating tax

15% (BC, Alta) with no volume constraints

5% (ON, QC, MB, SK) with quota. $ 1 billion in US duties retained

$ 500 mm to community funds (e.g. rebuilding New Orleans)

$ 500 “signing bonus” to industry Followed by collapse of U.S.

housing prices in 2006-09Weekly average prices: USD / mcf.2005 393.12 2006 325.73 2007 283.12 2008 256.25 2009 221.92 Oct.2010

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Softwood Lumber:Trade Politics vs. Underlying Market IssuesNorth American market still faces lumber surplus

e.g. SLA grievance on BC subsidies for beetle-killed wood.Medium-term weakness of U.S. housing industry with high

proportion of U.S. homeowners “under water” following market meltdown of 2007-09.

BC industry has consolidated; Ontario and Quebec industries face comparable challengesBUT – pine beetle infestation has seriously damaged BC

industry in short-medium termCda.-US exchange rate parity major challenge to industry

competitiveness.Market reorientation, shift to higher value added

productsBC industry likely to depend on Chinese market for

medium-term growth; options for ROC??

Summary – Chapter 19 / WTO DisputesGrowing integration of Canadian, U.S. economies

has reduced vulnerability of Canadian firms to U.S. trade remedy sanctions only 2 cases since 2004, 1 “successful”.

Dispute resolution system remains vulnerable to political end runs in Washington by special interest lobbies with political connections.

Disputes based on major differences in regulatory systems best contested through WTO enabling coalitions of aggrieved countries to increase critical mass of economic risk to major trading powers.10 of 14 recent cases (2007-10) against major trading

powers in cooperation with one or more major powers.

Chapter 11 Disputes Objectives: protect foreign investments against arbitrary

expropriation by nationalist governments, discrimination in favour of locally-based industries Lock in policy changes of 1980s (Canada), 1990s (Mexico)

expanding opportunities for foreign investment. Establish minimum standard of treatment for foreign

investment (no less favourable than domestic investors) Requirement to pursue “least trade restrictive” measures

necessary to achieve public policy goals. Impose due process disciplines on use of domestic “public

interest” regulations Requirement for “fair and equitable treatment”. Broad scope for environmental, land use regulations, but subject

to non-discrimination, demonstrated relationship between regulatory objectives and outcomes.

Provide precedent for “investment protection agreements” at WTO, elsewhere.

Political challengesChapter 11 opponents

generally object to expansion of investment rights clauses on grounds of “public interest” assumptions in regulation.

fear external constraints on environmental and other regulations through risks of paying compensation to investors

Key issues: burden of proof, non-discrimination, good faith.

Restrictive interpretation by NAFTA Commission (2001) to apply relatively narrow construction of “national treatment” requirements to Chapter 11-specific measures.

Chapter 11 cases in Canada Ethyl Corporation (MMT) (1998)

Compensation of $ 13 mm paid re: import ban on gasoline additive which continued to be produced by other firms in Canada (1998)

Also challenged by 3 Canadian provinces, MMT manufacturers on basis of discriminatory regulation under Canadian AIT

S.D. Myers (2000) Compensation of ~ $ 9 mm for ban on PCB exports for processing in US facility; Tribunal viewed measure as protecting Canadian processors at expense of U.S. firm.

Pope and Talbot (2001) Tribunal rejected claim BC treatment of Pope and Talbot under SLA II violated Chapter 11 $ 500,000 in damages for secondary requirements arising from the regulatory dispute.

Abitibi-Bowater (2010) Federal government paid $ 130 mm. claim following Nfld./Lab. expropriation of A/B paper mill in

Grand Falls, NF after plant closings related to firm’s bankruptcy proceedings. No effort made by NF government to negotiate terms or pursue due process.

CONTRAST Chemtura (2010)

NAFTA tribunal upheld Canadian ban on lindane, related processes for licencing “replacement products”.

Firm assigned $ 3.5 mm. in court, legal costs in addition to own costs.

Emerging Challenges under Chapter 11Federal government has legal responsibility for

defending Chapter 11 claims under NAFTAGrowing number of claims come from actions by

provincial governments – e.g. Abitibi-BowaterMost likely to be related to measures arising from

jurisdiction over health, environmental and land use regulation.

But – due process, proportionality standards still apply.No current constitutional mechanism for federal

government to recover costs from provinces in such cases, even if actions taken in total disregard of NAFTA provisions.