Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 4 - Evidence, February 17, 2003 - Morning
VANCOUVER, Monday, February 17, 2003
The Standing Senate Committee on Foreign Affairs met this day at 9:04 a.m. to examine and report on the Canada- United States of America trade relationship and on the Canada-Mexico trade relationship.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, ladies and gentlemen, I would like to call the meeting to order.
I am privileged to chair the Standing Senate Committee on Foreign Affairs. In just a moment I will introduce my fellow committee members, although I am sure you see some familiar faces. On behalf of the committee, let me welcome you and say how delighted we are to be here in Vancouver and to have the opportunity to hear your views on some of the international trade challenges that confront us today. Our mandate is to examine and report on the Canada-United States Trade Agreement of 1988, the North American Free Trade Agreement of 1992, secure access for Canadian goods and services to the United States and Mexico and the development of effective dispute settlement mechanisms. We are expected to present our final report no later than December of this year.
Let me say from the outset that we find ourselves in very difficult circumstances as they relate to our trade relations with the United States. No sector has been hit harder than the softwood lumber industry. No one knows better than you the devastating impact of the imposition of punishing export tariffs on your products: lost business, mills closed, skilled workers out on the street. Western grain farmers are on notice that they are the next Canadian industry to be targeted.
In the normal course of our daily business we shop around. As industries, businesses and consumers we shop for the best deal. It is the competitive marketplace. If you do not like the price you go somewhere else. However, Canada has nowhere else to go because there is only one buyer, the United States, and that buyer is holding us hostage. Eighty-six per cent of Canada's international trade volume flows south. Thirty-two to thirty-five per cent of our gross domestic product is dependent upon our trade with the United States.
British Columbia is among the least dependent provinces on trade with the U.S. but it is still the destination for 70 per cent of your export products, and more than half of that is softwood lumber. Let me remind you of the lineups at the border crossings south of Vancouver shortly after September 11 and the impact that that had on the businesses of this province that rely on the U.S. market.
Make no mistake about it; the United States is on a war footing. There is a preoccupation with security issues and with security at border points. If new security measures are imposed that slow the flow of traffic even by seconds then the impact will be devastating, not just for British Columbia, but also for all of Canada, and I do not think for one moment that I am overstating things. We are in a precarious situation.
We have come to listen. We want to hear your views, not just on trade with the United States, but on the need to explore new trade relationships and new markets to decrease our near total reliance on a trade relationship that has reduced our interests to irrelevancy.
I would like to introduce our witnesses: from Doman Industries, Mr. Bob Flitton; from Weyerhaeuser, Mr. David Larsen, who is replacing Mr. Paul Perkins; and from the British Columbia Lumber Trade Council, Mr. John Allan, its president.
Mr. Bob Flitton, Manager, Real Estate and Governmental Affairs, Doman Industries Limited: Mr. Chairman, it is a pleasure to have your committee take an interest in this subject, and it is a pleasure to be here with people like Senator Carney, whom I consider an expert in this subject, and she knows the frustrations as much as the rest of us do; and Senator Jack Austin, who has been involved in this subject for many years and also aware of our frustrations in the industry.
I would like to speak on behalf of Doman Industries. A speech was prepared on behalf of the company, but rather than reading the entire speech, I will just highlight certain paragraphs. I would also like to say that I really feel that I am here today representing Vancouver Island, the IWA workers on Vancouver Island, and the coastal communities. I am very much aware of their voice, and so please take that as the perspective.
I also want to add that this is Doman's perspective, and while it may not be 100 per cent accurate with respect to fact, it is 100 per cent accurate as to our perception of fact.
Doman employs approximately 4,000 people. Approximately 30 per cent to 40 per cent of Doman's workforce has been out of work for much of the past two years due to the softwood lumber dispute. Coastal communities have been ravaged, and many families reliant on forestry incomes have experienced severe hardship. I can tell you it has been painful to watch some families. There has been divorce, there has been bankruptcy and many, many problems. They are just beyond description.
Doman is a producer of higher-value coastal species, including Western red cedar, Northern coastal green hemlock and coastal Douglas fir, and we do not believe it is the target of the U.S. petitioners.
I handed out a single-page graph this morning. If you look at that, column 4 is Vancouver Island and column 5 is Doman's portion of Vancouver Island, of the shipments that we make to the U.S., and we are absolutely an insignificant player in this. Because of our high-value products we do not compete with U.S. industry. Our shipments are less than one per cent of annual U.S. consumption.
Because Doman has higher-value products, we are paying duties of approximately 27 per cent. Doman has been one of the hardest-hit companies in Canada on this particular matter. It is a made-in-the-U.S. problem. The U.S. has insufficient timber to supply its own softwood lumber market. The annual U.S. consumption of softwood lumber is approximately 56 million board feet against a domestic production of 35 million. Therefore, they only have the wood to produce two-thirds of what they need. Canada makes up most of the shortfall with 18 million board feet. Coastal British Columbia supplies about two per cent of the annual consumption. Other countries supply the remainder of the market and are taking advantage of the softwood dispute to increase their market share in the United States at this time.
U.S. officials confirmed in meetings earlier this year that U.S. trade laws were implemented to protect U.S. companies, and they agreed that they are not necessarily fair.
Proof of that is that if under-pricing of the Canadian timber resource does occur, it is not reflected in industry profitability. The return to the forest industry in the past 10 years has been meagre and often at a loss. Canadian companies perform no better on the stock markets than U.S. companies.
With respect to potential injury, the U.S. has found a potential for wrongdoing by the Canadian industry. They have not found wrongdoing, and I want to emphasize that. To this point, Doman has never seen any documentation that evidences anything that Doman has done to harm the U.S. industry.
A NAFTA panel will soon hear Canadian arguments that the U.S. erred in declaring that Western red cedar is similar to U.S. and other Canadian softwood product and therefore should not be exempt from the Canada-U.S. softwood lumber dispute. Doman will testify that Western red cedar differs from and therefore does not compete with the U.S. and other Canadian products and should be exempt.
I might add at this point that I have a gentleman from Weyerhaeuser sitting on my right, and Weyerhaeuser can take a lot of credit over the past two or three years for providing leadership in our fight against the United States.
In the current Doman Chapter 11 case, Doman contends that the U.S. legislation referred to as the Byrd Amendment, which takes countervailing and anti-dumping duties collected on softwood lumber imports from Canada and provides these funds to U.S. competitors, is a violation of NAFTA. Specifically, Doman argues that the Byrd Amendment provides an impermissible competitive advantage to U.S. producers, and the WTO recently announced that the amendment, in its opinion, is illegal.
In 1996, Canada and the United States negotiated a new softwood lumber agreement, and I believe that John Allan will go through the history of this in a little more detail in a few minutes. However, the 1996 agreement resulted in quotas being implemented, and we believe that the quotas that were applicable to Vancouver Island were unfair and we questioned the management of that process. More importantly, the 1996 agreement was for a fixed term of five years and was set to expire in 2001.
The key point there is that we had five years advance warning that that agreement was going to expire, and yet on expiration we had no strategy in place for moving forward with a replacement agreement.
Immediately on expiry of the SLA, the U.S. coalition did the expected and filed a new petition against Canada, which has had disastrous results.
Doman President and CEO, Rick Doman, travelled to Ottawa to present a proposal to International Trade Minister Pierre Pettigrew for a sliding-scale interim border tax. Doman did not receive a formal response to the proposal.
In the fall of 2001, Doman filed a petition with the Commerce Department in the United States making a number of legal arguments, including that the U.S. price as a benchmark for determining whether stumpage prices in Canada provided subsidies, called ``cross-border referencing'' was directly contrary to the plain language of the countervailing duty statute under chapter 19 of NAFTA, and the SCM Agreement, which defines subsidies. The statute and the SCM Agreement state explicitly that in determining whether a good or service has been sold for adequate remuneration, the department can only consider market conditions within the country being investigated.
In the fall of 2001, the appointment of Montana Governor Marc Racicot as a special envoy to the softwood dispute signalled a U.S. willingness to reach a new agreement. Governor Racicot, a senior Republican and to become the Chairman of the National Republican Committee, was appointed directly by President Bush to try and achieve a settlement in the dispute.
Doman met with Governor Racicot immediately after his appointment. In the meeting in Washington, Doman submitted a 50-page presentation, summarized by its recommendation for a 15-per-cent interim border tax on all lumber shipments to the U.S. at or below $250 per 1,000 board feet, FOB mill, and calculated on a shipment-by- shipment basis.
Mr. Racicot was receptive to the idea, but advised Doman that if he were to assist in the process he required the Government of Canada to make a proposal for U.S. consideration. On Doman's return to Canada, a copy of the presentation and Mr. Racicot's response were forwarded to Minister Pettigrew. We are unaware of a written Canadian proposal being submitted to the U.S.
Doman further reminded Canada in March 2001, in a meeting in Ottawa, that there was a deadline of March 21, 2002 by which, under U.S. law, the U.S. had to receive a proposal from Canada or the U.S. government would be unable to settle the dispute without the explicit consent of the U.S. coalition.
The failure of Canada to make the offer by that significant date resulted in the coalition obtaining unnecessary leverage in the negotiating process. The coalition was and is intransigent and unyielding in its position, making resolution impossible. In a later meeting with Doman, the Commerce Department indicated disappointment that a Canadian offer was not made, which made it difficult for them to deal with this matter.
I understand that there is a possibility that an offer was made, but that it was unrealistic. John knows more about that than I do, but until this morning, I was never aware of any offer having been made.
It had been well known that the U.S. would not involve itself in the softwood resolution process during 2002 so as not to prejudice the Congressional elections in November of that year. From March 2002 to November 2002, the negotiating process came to a halt.
Following the congressional elections in November 2002, the U.S. refocused on the softwood issue and indicated a willingness to push for resolution. New discussions ensued, primarily between the Commerce Department and British Columbia.
British Columbia was the province most affected by CVD and anti-dumping duties, and therefore, to its credit, the most prominent in and desirous of moving the issue forward. In a meeting between Doman and the Commerce Department in January 2003, they acknowledged that British Columbia's effort was key to moving forward, and some of that credit, of course, goes to John, sitting on my left.
Canada might have significantly increased its strength in the negotiating process with better liaison with U.S. consumer groups. Canada and key provinces, including British Columbia, would be well advised in the future to develop a better relationship with the National Association of Home Builders, the National Association of Realtors and major retailers such as Home Depot.
On February 5, 2003, the Commerce Department released a 20-page draft bulletin that should be the underpinning of a resolution in the near term.
That sentence is more optimistic than where I believe we really are. We are hopeful there will be a resolution, but we have a long way to go yet.
It is expected that a settlement will be based on an interim border tax similar to what Rick Doman proposed and Weyerhaeuser has since proposed, followed by amendments to provincial forest policies. It is the desire of Canada and the U.S. that the resolution be permanent, and that the eventual outcome, described in the media as ``exit-ramps,'' be understood from the beginning.
The U.S. is suggesting that the provinces eliminate all current constraints on companies that prevent them from adjusting to changing market conditions. Further, that the provinces implement an increased system of auctions of standing timber or logs sufficient to establish market prices that could be used to set stumpage on timbers from public lands. To help resolve this dispute, Doman and Weyerhaeuser have offered to make up to 25 per cent of their logs available to the highest bidder for domestic consumption.
Certain details of a resolution remain problematic. There is no agreement on the level or structure of an export tax, the fate of the $1 billion of Canadian duties already collected by the U.S., exactly what forestry reforms the provinces must make, the implications of anti-dumping initiatives and whether NAFTA or WTO legal action should be withdrawn as a pre-condition to settlement.
Under NAFTA trade law, Canada or any province may submit a request for a changed circumstance review. The Commerce Department then initiates a review pursuant to the regulations and will issue the final results within 270 days. If the Commerce Department is satisfied on a legal basis, it will revoke the current CVD order with respect to Canada or a particular province.
It is because of the 270-day timeline for finalizing the process after a submission by the province that Doman believes an interim Canadian border tax is critical.
In summary, Canada failed to formulate a position of consensus, which ultimately played into the hands of the U.S. coalition.
There was no apparent comprehensive Canadian political plan to persuade the U.S. administration and Congress of the merits of the Canadian position. Canada had cards to play but did not appear to do so. These included a linkage with the shipment of other natural resources to the U.S. or conditions for Canadian support in U.S. international policy.
In 2001 and 2002 the opportunity was missed to educate not only politicians engaged in the process, but all U.S. Congressional policy makers. In 2002 a number of U.S. senators were canvassed with respect to their knowledge of the Canadian position. The finding was a complete lack of awareness among those canvassed. Canada may have been better served had the softwood lumber negotiation process been more transparent.
In closing, the Doman message to the Foreign Affairs Committee today is to improve trade relations with the U.S. and Mexico. An audit by an independent, qualified, professional auditor of the 2001-03 softwood lumber negotiations might be useful in determining how Canada may better prepare and strategize for negotiating future trade files, or if Canada would benefit by increasing trade resources in the United States.
Frank Dottori of the Free Trade Lumber Council spoke to you, I believe, a week or so ago. He advocated fighting this at WTO and NAFTA instead of negotiating. Again, that just evidences the differences among the positions of the different trade industries across the country. However, the problem with Mr. Dottori's proposal is that even if we fight this thing legally and win, there is absolutely nothing to stop the U.S. industry from filing another petition the very next day. Therefore, we have to get a negotiated settlement if we can. That would be best for both countries. Mr. Dottori also mentioned that the industry had made a request to the Canadian government for some bonding support to help pay the duty, which would have left the industry a little stronger in fighting this process, and I completely concur with his remarks on that matter.
The Chairman: Thank you very much, Mr. Flitton. We will have questions, of course, at the end of the presentations.
Mr. David A. Larsen, Vice President, Government and Public Affairs, Weyerhaeuser: Mr. Chair and honourable senators, good morning.
Senator Carney: Excuse me, Mr. Larsen, but could you explain your position with Weyerhaeuser?
Mr. Larsen: I am Vice-President of Government and Public Affairs for Weyerhaeuser's operations in Canada. I apologize on behalf of Paul Perkins, who is caught up in eastern travel. He was seeking to get back to Washington yesterday, but I think it is shut down by snow.
The focus of my remarks will be on a Weyerhaeuser proposal aimed at resolving the current softwood lumber dispute between the U.S. and Canada. We first tabled that proposal back in November 2002.
As a company with operations on both sides of the border, we were concerned that a wall was being built between the United States and Canada, one built of two-by-fours and two-by-sixes and two-by-eights. Why is Weyerhaeuser's perspective important? We think we have a unique, singular ability to view this dispute from both sides of the border. We are the world's largest manufacturer of softwood lumber, so our stake is clearly evident, and we maintain wood products facilities on both sides of the border. We operate 18 softwood lumber mills in Canada and 27 in the United States. We have operated in Canada for 37 of our 102 years of existence as a company, i.e. for more than a third of a century. We currently employ 10,600 Canadians. Our total workforce worldwide is 58,000.
As you know, for five years, ending on March 31, 2001, Canadian wood products imports into the U.S. were governed by a quota system called the Softwood Lumber Agreement. When that agreement expired, a coalition of some U.S. timber producers and lumber manufacturers filed complaints under U.S. countervail and anti-dumping laws, alleging unfair trade and demanding duties against Canadian lumber imports. Certainly Senator Carney can recollect similar cases going back 16 to 18 years. The result is that since May 22, 2002, Canadian wood products have been subject to combined countervail and anti-dumping duties amounting to 27 per cent.
The coalition of U.S. lumber producers who encouraged the imposition of these duties intended them to slow imports of softwood products from Canada and to raise prices for these products in the U.S. Instead, these duties have done neither and have contributed to a number of unintended and negative consequences. These include: unstable and lower lumber prices; layoffs and mill closures caused by distorted market conditions, which occurred on both sides of the border; a marked increase in European wood products imported into the U.S. earlier in 2002 because of the price volatility; uncertainty among customers and investors; and strained relations between the United States and Canada.
Clearly the anti-dumping duty does not work. In fact it backfired, as Canadian firms increased production to lower their unit cost or average cost. The anti-dumping duty has aggravated the oversupply situation in North America and has driven prices lower at a time of almost unprecedented market demand.
Also, because duties did not address the cause of the dispute, that is, differing methods in the United States and Canada of valuing timber, they offer neither a long-term solution nor a rational balance of supply and demand based on the most effective producers.
Most of the participants in our industry agree that the duties have failed to improve the situation at all. Since the Softwood Lumber Agreement expired, Weyerhaeuser has attempted to be an honest broker in reaching a solution with all the parties involved. We stepped forward last November because, quite simply, the current set of circumstances cannot be allowed to continue. Companies and their employees on both sides of the border are suffering immensely. Wholesale and retail customers are apprehensive and relations between Canada and the United States continue to erode. With the duties and losses mounting, time is the enemy of progress on this issue.
Before I get to our proposal, I think it is important to provide a broad context for this issue. Canadian wood products have played a large role in America's economy for many decades. Indeed, it was one of the motivators for Weyerhaeuser to begin investing in Canada back in the mid-1960s. In fact, the Canadian softwood industry has grown to its present size primarily because of the need to service the United States' demand for wood products. U.S. producers cannot satisfy the demand by themselves. Approximately one third of America's wood supply today is provided by Canada. In other words, the U.S. has been dependent upon and has benefited from wood provided by its Canadian neighbours for many years.
As Canada provided an increasingly larger proportion of America's wood needs, some U.S. lumber producers felt threatened by this competition. Some, as I have indicated, have argued that the Canadian form of timber valuation provides Canadian lumber producers with an unfair advantage. These producers, many from the U.S. Coalition for Fair Softwood Lumber Imports that we have talked about, first began trying to have countervailing duties imposed on softwood imports back in 1982.
Our proposal acknowledges that there is some merit to the coalition's arguments. The way Canada's log pricing system works tends to place U.S. mills at a competitive disadvantage when lumber prices are low. For all the reasons we have enumerated, and because the negotiations between our governments have thus far failed — although they have resumed — Weyerhaeuser is advancing a proposal that we believe will provide a good starting point for resolving the issue.
Our proposal should be viewed as a process to get negotiations started again and a potential permanent solution, although perhaps not correct in all its details. Let me quickly summarize it for you. It consists of two steps.
First, suspend all legal proceedings on both sides of the border, including the collection of countervailing and anti- dumping deposits on Canadian softwood by the United States, and the WTO and NAFTA appeals filed by Canada. If negotiations do not result in a resolution, these legal cases can be resumed. At the same time, introduce a sliding scale Canadian border tax that will remain in effect until long-term settlement is reached.
Since this battle is over structural lumber, we also propose, to echo the words of Mr. Flitton, that Western red cedar products be exempted from the tax as well as other high-value products valued at greater than $800 per thousand board feet.
Second, and this is the longer-term step, negotiate changes in Canadian log pricing practices to more closely resemble those in the United States.
In this regard we support the U.S. Department of Commerce proposal to let each Canadian province reach its own plan for a more market-sensitive system.
We also recognize that any solution must come up with an equitable distribution of the Canadian funds already on deposit to pay the duties, estimated to be about $750 million through the end of 2002.
We do not pretend to have all the answers, but we offered a place to start. We took our proposal to all the governments involved and to all the contending parties within the industries on both sides of the border. We are not wedded to our proposal, but we are committed to a permanent solution.
Both sides need to work together for an enduring solution to this issue. As North America's largest trading partners and long-time allies, the U.S. and Canada need to figure this out, and soon.
I will look forward to responding to any questions later.
Mr. John Allan, President, British Columbia Lumber Trade Council: Good morning, everyone. It is a pleasure to be here in front of you today, and as Mr. Flitton said earlier, this is a hugely important issue for B.C. and for Canada.
I am the President of the B.C. Lumber Trade Council, and in a previous life I was a deputy minister in the provincial government in various departments, including, like Mr. Flitton, forests, so we do bring a bit of history here to the file from both sides of the fence in terms of public and private service.
The B.C. Lumber Trade Council is made up of a number of companies in B.C. representing the greater part of lumber production and exports to the U.S. Our members include Canfor, Interfor, Lignum, Pope and Talbot, Riverside, Slocan, Tolko, Weyerhaeuser, Weldwood and West Fraser — some pretty big companies, including Canada's largest lumber producer, Canfor.
In 2001 our membership spent about $30 million, largely in legal fees, to fight this case. In 2002 we spent about $25 million, and we are predicting about another $25 million will be spent this year in legal fees, just by these 10 companies I have listed, if we carry on the litigation through the end of the year. We have spent money on both the subsidy and dumping cases and the appeals at the International Trade Commission on injury. Litigation is a hugely expensive and longstanding process, and I will come back to that in a minute.
By way of background, I know that you all know that forestry remains the dominant industry in B.C. It is still the number one employer, representing about 14 per cent of the workforce. All three levels of government receive about $4 billion a year in revenue from the forest sector in B.C., and about 270 communities depend on forestry for their livelihood. We have had our runs at the high tech and film industries in the province, but by and large, forestry is still the dominant industry, particularly in the hinterland, although it is also dominant in Vancouver, especially on Vancouver Island.
We are in the fourth round of litigation since 1982. Since that year, we have gone through, including the current round of litigation, four lumber cases, a quota that Mr. Flitton referred to, and a border tax. Therefore, we have had managed trade, in one way or another, between Canada and the U.S. for most of the last 20 years, although this fight goes well back into previous centuries. You can see a bit of the history in my presentation. Again, I would encourage you to take a quick look at it because it largely informs you why we are here today.
I thought that today I might give you a flavour for what has been happening in the last few weeks and what I expect to happen in the next week or two. I have been in Washington twice in the last four weeks, and I expect to be going back later this week for negotiations. However, as Mr. Larsen pointed out earlier, we have tariffs in front of us of 18.8 per cent, roughly, representing a countervailing duty, and 8.43 per cent representing a dumping duty, for a total, on average, of 27 per cent. There are different dumping rates in Canada for different companies.
Dumping is established through specific investigation of companies. Four of my members represent six companies that were actually investigated by the Department of Commerce. Each of these six investigated companies has its own dumping rate, ranging from 2.2 per cent to 12.4 per cent for, unfortunately, Abitibi. We have a range of tariffs in Canada today of about 21 per cent to 31 per cent, with most, however, paying the average of 27 per cent.
There was a period of time when bonds were required for all lumber shipments, and then as of last May 22, cash deposits were required from companies shipping lumber. Every stick of lumber leaving Canada requires a cash deposit attached to the shipment in order to pay for the duties. These are not final rates. These are cash deposits at the rate, as I said, of roughly 26 per cent, 27 per cent. Since May 22 through the end of December, Canadian lumber companies have paid U.S. $600 million in duties and cash deposits. My prediction is that after the first full year of this, we will have paid about a billion dollars. That is a huge amount of money leaving Canada. It goes into the U.S. Customs Department, and under an amendment to U.S. trade law that was snuck in at the last minute during the Clinton administration by Senator Byrd, those cash deposits, when they become final duties — and they do not become final duties until next November and I will come back to that in a minute — if they are upheld, flow into the hands of the U.S. petitioners, in this case, the U.S. lumber industry.
We have appealed the so-called Byrd Amendment at the WTO and have had some success there. However, there is no guarantee that the American government will ever obey any ruling of that body. So far as I am concerned, right now, U.S. law says that if they win through all these appeals and the duties are upheld, all the money that these Canadian companies are paying will flow into the hands of the U.S. lobby.
As I said, the rates today are cash deposit rates. They will not become final until the Americans conduct what is called an administrative review. That review will start one year from last May, in other words, this spring, and will take roughly a year and a half to complete. Therefore, Canadian lumber companies today do not know what their final duty rate will be for the last year of production and shipments. They will not know that rate until the fall of 2004. At that time, they could get a higher rate or a lower rate. The higher rate would mean they would have to pay more duties retroactively. The lower rate would mean they would get a refund, with interest. That is a huge amount of uncertainty.
If you ask why we want to negotiate, why my members would want to pursue negotiations, a so-called out-of-court settlement, why Weyerhaeuser would come forward with a proposal, why Doman would come forward with a proposal, it is because we will be in this litigation through the WTO, through NAFTA, through the administrative reviews by the Department of Commerce, by our calculations to at least the year 2007, perhaps 2008.
If a company wants to get out of dumping it has two ways to do that. It could win at NAFTA, and that is not impossible. You could win at NAFTA, probably within the next year, or you would have to go through three administrative reviews by the Department of Commerce and achieve what is called a ``minimus rate,'' a near-zero rate in each of three successful reviews in a row. That will take you to about the year 2007, 2008.
I can tell you, sitting here right now, and having seen the way the Commerce Department calculates the subsidy and the dumping rates, that that is impossible. They will manufacture ways of keeping companies caught up in this case. I am not being obnoxious. I am not insulting the Department of Commerce. That is the way life is in this file. The dumping rates we have seen so far are guaranteed to generate dumping margins.
On the subsidy side, the Americans use what was called ``cross-border pricing.'' They compared our stumpage rates in each province to the contiguous state on the other side of the line and came up with a manufactured subsidy rate in Canada. We have redone all their calculations, at least for B.C., and we cannot find a subsidy. The WTO has also ruled that cross-border pricing is inconsistent with the U.S. obligations under the WTO, but so far, all that that means is that the Americans can go back and recalculate the subsidy rates using a different methodology.
I urge you today to understand that there is a huge amount of money flowing out of Canada, and it will take years to settle this case through the legal process. As Mr. Flitton said, let's say we win. Let's say we win at the WTO. Let's say we win at NAFTA. Let's say we win all the remands where the rates go back and forth between Canada and the Department of Commerce. Then you are probably looking at a fifth lumber case, because there is nothing, as Mr. Flitton said, to stop the Americans from coming back at us.
Why do we want negotiations? Well, it is because the litigation is lengthy. It is expensive. It is risky. There is no guarantee for either side, and I think in any case of litigation you always see if an out-of-court settlement is possible.
We do not want a deal at any cost. It has to be reasonable, but at the moment, the construct of a deal would look like this. The Department of Commerce has the legal ability to issue policy bulletins. A draft bulletin has been released already. The bulletin prescribes those, shall we say, free market conditions that should drive forest policy in Canada, and if a province wants to change its forest practices to be consistent with the bulletin, it would then go through what is called a ``changed circumstance review,'' and the subsidy rate would be recalculated. Arguably, if you met the requirements of the bulletin, your subsidy rate would go to zero.
Now, there is considerable symmetry between what is in the bulletin and what the B.C. government wants to do in terms of forest policy changes. The B.C. government would like to go to a market-based forest policy, and that is consistent with the bulletin. Other provinces are having a little more difficulty with the bulletin, but there are three options. You can go to public auction of timber, or you can go to a private market, similar to the way Quebec prices its timber, or you can go to a reference price, which is probably the way Ontario would like to go.
There is some room in the bulletin, if you will, for every province in Canada to perhaps find a solution, although I am not saying it will be easy. However, our problem is that the policy bulletin process leading to the changed circumstance review does not provide a solution for dumping.
As Mr. Larsen pointed out, dumping has had a huge, unintended consequence in Canada. Dumping is an allegation that you are selling below cost, and in order to get your cost down, if you are a Canadian lumber producer, you add shifts, you ramp up your production, you drive your unit cost down. However, as you drive your unit cost down you produce more lumber; therefore more lumber comes on the market, the price goes down, and it is a bit of a race to the bottom, quite frankly. You always have to watch your price margins relative to your cost margins. There is a bit of a zero sum game in dumping by raising production in Canada, hence exports from Canada have only dropped about four per cent from when the duties were imposed. I am sure the Americans were thinking they would go down by perhaps 15 per cent or 20 per cent.
With a very negligible fall off in exports, Canadian mills, in the main, have managed to survive the case. We have had a number of shutdowns in B.C. Exports are way off in Quebec. There have been curtailments in Quebec, but where else have they occurred? Well, in the U.S. The dumping has hurt both sides, in my view, and that has made the Americans more interested in finding a negotiated solution.
We have to get rid of the dumping case, and that is a feature of the B.C. government's proposal. It is explained in my slides, but if we can get rid of the dumping case, then I would say ``more normal'' production patterns would resume on both sides of the border, and you would get more market stability flowing from a situation where we could negotiate forest policy changes around timber pricing through the policy bulletin route. If we could negotiate with the Americans to get the dumping case withdrawn, and then implement, in the short term at least, a border tax in lieu of the subsidy rate, then we probably have the makings of an interim solution, and a long-term solution driven by long-term policy change.
Right now there are a number of proposals out there for a border tax. Mr. Larsen's company has indicated a bottom end loaded tax, where the tax rate would be 25 per cent at the bottom of the market, and he alluded to the fact that his company feels there is some merit in the American position that at the bottom of the market, Canada is not taking its fair share of downtime. The reason is simple. Our stumpage systems react much more quickly to price changes than the American systems, and so when the market goes down, our stumpage rates tend to go down faster than theirs. Hence, we keep running while they do not.
If we can get more symmetry in terms of our timber pricing process, lags, leads, et cetera, relative to the U.S. system, then we would be on a more even playing field in terms of the way timber pricing reacts to changes in the marketplace. Perhaps we can find an interim solution that takes timber off the bottom of the market through a fairly high tax at low prices and going to zero at higher prices. The B.C. government proposal had a system of step reductions in tax, with seventeen-and-a-half per cent at the bottom end of the market and going to zero at the top. Canada put a proposal on the table in Washington two weeks ago for a sliding-scale tax of 18 per cent at the bottom of the market and going to zero. Therefore, there are all kinds of proposals out there from Canada. They are being advanced.
The American side is still looking at a fairly onerous set of taxes. The coalition position right now is that you would convert the current subsidy rate of 18 per cent to a border tax and have a sliding scale dumping tariff, depending on price. That is unnecessarily high, but all these proposals have the same objective in mind, have the tax higher at the bottom end of the market to create some stability and higher prices. You do not want prices to go too high, however, because we have seen a huge influx of lumber from Europe in the last, say six years. That is the new competition. As prices were driven up by the quota agreement and stayed up through the end of that agreement, we had new competition from Europe. European mills that use Russian logs have been built in the last few years, and European lumber companies have made huge inroads into the Eastern U.S., to the point where they are now major competitors with us.
We are going to pursue two tracks. I know that my members, the rest of Canada and the federal government will pursue the litigation for as long as it takes. Mr. Dottori's position here in front of you last week was well made, in the sense that we cannot give up in the litigation at this time. We must keep driving that and appeal the trade cases at NAFTA and the WTO. However, we also need to negotiate a solution to this file if we can, and I do believe that solution lies in long-term policy change with a front-end border tax in place, perhaps for a year or two years, to bring about some stability.
I believe Ottawa is firmly seized with this file now and has given some relief to the industry. They have given some relief to the trade associations, the value-added sector included. They have invested money in overseas market development, research and development and new market opportunities, and that relief is welcome. If we can find an economic solution to this file that suits both sides, that is the way we should go.
I would also encourage you to think about this, that we now think of this file as an integrated North American file. It makes little sense to have another lumber case coming at us when the current agreement, if we find one, expires. I think both sides of the border now need to be thinking about an integrated North American lumber market. We must find some way of pre-empting these Department of Commerce filings against us and the petitions from the U.S. lumber industry. The lumber industry is largely an integrated global industry now, and it makes little sense for us to be fighting among ourselves when there is competition from Europe and South America and companies on both sides of the border should be working to increase our market share for wood products elsewhere. Of course, if you keep fighting trade battles and adding tariffs, all you are doing, in addition to encouraging offshore imports, is encouraging product substitutes like plastic and steel.
Obviously, there is a huge amount of detail behind these remarks, but again, just to give you a flavour, negotiations are resuming later this week in Washington. I believe we probably have about two weeks left to find the broad parameters of a deal, and we will be back at it, probably by Wednesday night or Thursday, in negotiations both on the policy bulletin and around the border tax.
The Chairman: We have heard this about the bottom of the market and the market going up and down because it is a commodity, and the only thing that I do not understand is why, when I had thought that there was a housing boom in the U.S. and therefore the market would be going up, I am told that it is the opposite. Is that correct? Could you just clear that one up for me? Maybe there is no housing boom.
Mr. Flitton: Well, there is a good, stable housing industry in the U.S., and the principle you are stating should be correct. There are two factors that I think come into consideration here. One is that the increased shipments from the kiln-dried SPF producers in Canada greatly increase the supply of low-value wood, which has impacted the market. More importantly, I think the market has been a little skewed in the last few months because of the extreme cold weather they have been experiencing in the Eastern U.S. Construction has pretty much dropped off in the East, and that has had a lot to do with it. It will start coming back shortly.
The Chairman: This bottom of the market factor has appeared in just the last few months?
Mr. Flitton: I think that it has been more skewed than it would have been because of the extreme cold in the East.
Mr. Larsen: The fact is that during the five-year period when we had lumber quotas for the States, many companies in Canada increased their capacity, so although we have had tremendous demand for lumber in the market, the available supply is much larger than it was five years to seven years ago. It is an oversupplied market now, with new production on both sides of the border, and globally as well, with lumber coming in from Europe and Asia as well as South America. The world did not stand still during those five years when we had quotas, which were relatively stable. Now we have a structural oversupply in the marketplace for lumber that is not going to go away, even if we solve this issue next month.
The Chairman: No, that sounds very serious.
Mr. Allan: I would like to add one more comment on the dumping issue. If you shut down your mill, you have to amortize the cost of the shutdown into your dumping tariff. There is this natural reaction to not shut down, and to run your mills as hard as you can in order to survive the dumping tariff because you are going to be reviewed this spring by the Department of Commerce, which will analyze your past behaviour. All the companies are worried that their dumping tariff could be recalculated at a much higher rate. Also, we have about a billion-and-a-half feet of lumber coming in from Europe and about 19 million feet coming out of Canada, so there is just a huge oversupply, backstopped by this dumping tariff that causes you to avoid a shut down.
Senator Austin: There are so many ways to get into this topic that I feel a bit daunted. However, thinking it over, I would like to start by imagining some of the conditions that Canada would like to see in a comprehensive agreement with the United States on the softwood lumber trade. One of them, and suggested by all of you at one point, is a negotiated agreement that cannot be reopened through further action by the U.S. industry. If that were to be the case, then one has to hypothesize an agreement that would change domestic U.S. law as well as domestic Canadian law, and at least reach the stage of an executive agreement between the two countries, so that Congress would have to take action here. If that supposition is correct, I imagine that we could have an interim agreement, but it would be dependent on Congressional and Parliamentary action. Is that the sort of long-range scenario that you see, and does it include the suggested Canada-U.S. lumber industry council that we have seen mention of in the media? What would its function be? I would like all of you respond to that, but perhaps in the same order that you gave your evidence.
Mr. Flitton: It is my understanding that, under U.S. trade law, we can reach an agreement with the United States that does not require Congressional approval, if that answers your question.
Senator Austin: I would like you to give us some details, if you have them. Under U.S. trade law, the Commerce Department can make a determination, but as I understand it, nothing under the existing trade law prevents the coalition from again commencing action on countervail and dumping.
Mr. Flitton: Unless they consent to the agreement, which is what Commerce is looking for. That is why the Canadian government and industry and the U.S. government and industry are at the table hoping that all the parties can come to a permanent agreement.
Senator Austin: However, nothing prevents U.S. lumber manufacturers from taking action on their own, which has the same legal consequences as a coalition taking action. How do you get all action shut down?
Mr. Flitton: You are correct. Technically, any company can file a petition against Canada. From what our U.S. attorneys tell us, the only way to stop that is with the support of the U.S. Secretary of Commerce. If they do not have the support of Commerce, they will not get very far with a petition.
Senator Austin: According to the prevailing judgment, Commerce has to make a determination based on facts, so there would be a process.
Mr. Flitton: If Commerce is satisfied that the Canadian industry has made policy changes that implement market principles, they will not make a determination in the interests of the U.S. company that made that petition.
Senator Austin: At what level do Canada and the United States make this agreement that bars further action against the Canadian industry? Is that an executive agreement between the two governments?
Mr. Flitton: I believe it is a cabinet decision. It is the Secretary of Commerce and the Canadian Minister of International Trade at Foreign Affairs.
Senator Austin: Therefore, it has the standing of an agreement between the two governments.
Mr. Flitton: That is correct.
Senator Austin: I wonder whether Mr. Allan and Mr. Larsen would give the same answer?
Mr. Larsen: I commend you, Senator Austin, for your vision of an agreement that cannot be reopened, but as an industry, and maybe because we have been involved in it for more than 20 years, we do not dream that big yet. What we do dream about is some interim measures that allow you to actually negotiate a long-term settlement and some policy change in Canada. The third part of that, the third leg on that stool that John alluded to briefly, I think, is a cooperative council of the two industries, where we start to build demand for lumber in North America together, since we have much in common and a great stake in that. We can both succeed if we work together, focus on the real competition, which is offshore lumber, as well as competition from concrete or plastic or steel, and have much more of a market orientation and focus on the business we are in, not on the trade dispute we are in. It is hard to imagine, since we operate on both sides of the border, creating legislation in which there would not be some hole that somebody could drive through later on in terms of an action against Canada, so it almost has to be by consent and agreement and building a different kind of relationship from the one we have today.
Senator Austin: You can understand that I would be deeply troubled if we had to go through the Congressional process in any way, because amendments on amendments on amendments and single issues can hold that process to ransom. Therefore, if it is clear in your minds where you are going with respect to the final shape of an arrangement, that is to say, a durable executive agreement between the U.S. government and the Canadian government that could not be opened up or overturned, I think that is clearly the way we want to go.
Mr. Larsen: The bottom line is we get a ceasefire for a period during which we can build a different kind of relationship with the U.S for the future.
Senator Austin: I have heard all three of you say that you want a managed trade agreement for the North American lumber industry, and that is what U.S. industry and U.S. Congressional leaders told colleagues here and me, when we were in Washington, is their objective. Three years ago, they said we need sliding scales with respect to pricing and volumes. We need a managed system for the total industry, and it is clear that this changes the nature and shape of the B.C. industry quite dramatically and shifts vested interests inside the industry.
Turning to Mr. Allan, I thank you for your remarks today, which were very clear, and if you have any comments on the previous two questions, fine, but my question to you is how would such a managed trade agreement change the structure of the B.C. forest industry, both private and public?
Mr. Allan: Your question is a good one, and the answer is pretty complicated. As I see it, we could get out of the current case a couple of ways. We could stay in the litigation and win, and probably end up in another trade case.
The Chairman: Another trade dispute.
Mr. Allan: Another trade case, another dispute, a new round. We could have a settlement involving an agreement to impose a short-term border tax that a province could get out of by implementing certain forest policy changes — agreeing to go to auctions, for example, for timber pricing — and that agreement could be signed off on by Canada, probably through DFAIT, the Department of Foreign Affairs and International Trade, and on the U.S. side the Department of Commerce and probably the United States Trade Representative. An example of that kind of agreement was the Softwood Lumber Agreement that ran from 1996 to 2001, which the American industry signed off on. Letters of approval were actually solicited from the U.S. lumber industry. They are called ``no-injury letters,'' and that agreement was not breached during its lifetime. It ran for the five years. There was an arbitration provision, and we had disputes and fights within the context of the agreement, but it basically pre-empted any legal action by way of a petition on subsidy or dumping.
I think that if we have a signed-off interim agreement this time, we will have to get the U.S. industry to sign up again. One company cannot bring a petition. The threshold is 50 per cent of lumber production in the U.S., and the coalition basically controls whether petitions are filed or not.
The third way out of the current situation is the so-called changed circumstance process, where the Commerce Department has said that they will issue a policy bulletin that will prescribe forest policy changes that, if a Canadian province pursues them, pretty well guarantee there will be no subsidy claim.
The problem with that process, as I said earlier, is it does not solve the dumping issue, and only addresses subsidy, which is largely how timber is priced in Canada, and there is a process whereby the bulletin can be appealed, so it does not preclude another petition alleging subsidy two years from now. There is no guarantee that the bulletin will stand the test of time.
Therefore, you have this somewhat hybrid approach right now, where we are pursuing the bulletin process, and at the same time, an interim tax.
Senator Austin: Does dumping also require 50 per cent of the industry?
Mr. Allan: Yes, it does, minimum 50 per cent.
Senator Di Nino: I just wanted some clarification. While the presentation that the three of you have, in different ways, made about a negotiated agreement was continuing, I believed that you meant ``negotiated agreement'' not only between the two sovereign states, Canada and the U.S., but also within the industry, and that question was raised when Senator Austin was speaking. Is that correct, that any negotiated agreement would also include the industries on both sides, as well as the two sovereign states?
Mr. Allan: Clearly this type of file has to involve government-to-government negotiations. There are all kinds of anti-trust concerns about industry negotiating agreements to manage the market, but certainly I think you would want to see an agreement where industry was reasonably comfortable with the terms and conditions.
I do want to clarify one thing. When we talk about ``managed trade,'' we have had managed trade for the last 20 years, but I think the goal for everybody this time around is free trade. We will have managed trade for probably a year or two, but I think it is fair to say that in B.C., the ultimate goal of the industry and the government is to eliminate the border tax, implement policy change and have free trade in lumber on both sides of the border. Now, I do not want to sound naive when I say that, because we know what the Americans are like, but that is the goal this time around.
Senator Austin: Let me pursue then the last question that I addressed to you, Mr. Allan, and that is the impact on the communities of British Columbia, on employees and on the provincial revenue structure of what you call a ``free trade regime,'' because it is a 180-degree turn, as you know, in the way in which we have designed our forest policy.
Mr. Allan: Well, as I said today, we have paid U.S. $600 million in duties through to December. Let us say for the sake of argument that is a billion dollars Canadian. Half of that has come out of B.C. In terms of government revenue, I think the government's objective is very much to see those tariffs turned into border taxes, so the money at least goes to the federal government to be passed on to the provincial government.
Second, our stumpage system adjusts for duties, so the government has lost money that way.
Last but not least, we have had a number of mill closures in B.C., notwithstanding my arguments about mills ramping up. Slocan Forest Products has permanently shut a couple of mills. Abitibi has taken downtime in the North. The coastal industry, and I leave it to Mr. Flitton and Mr. Larsen to speak about that because they have mills on the coast, has been harshly impacted by the tariffs, in addition to other factors. The coastal industry is pretty much in crisis right now in the province, and when the duties came on, there was a prediction that we would lose something like 20,000 jobs in B.C. That has not happened because of this need to manage for the dumping tariff.
However, I need to say this as well: Running flat out is not a sustainable strategy. Some companies are burning cash. You can look at public company results. For example, Canfor's results came out last week. They lost over $50 million in the last quarter. Some companies are burning cash in order to survive to either fight through the litigation or find a negotiated solution. Without giving anything away to the other side, there are many companies in Canada who cannot fight these duties forever and a day, all the way to the year 2007, in terms of their bottom line financial situation.
Senator Carney: Mr. Chairman, I want it on the record that I am quite happy with this line of questioning.
Senator Austin: In our B.C. system we have dedicated resources to two mills, based on a social policy meant to sustain communities and sustain employment. I am trying to understand what happens, in your free market system, to the social underpinning that our policies have provided till now?
Mr. Flitton: Thank you for the question, because it is important to the future of the industry, but I believe that we will have a more competitive industry in British Columbia, and a more competitive industry will bring better long-term stability for everybody. I agree in principle with where the province is going on forest policy. I am a little concerned that they will use the softwood lumber negotiations as a wedge for doing some minor things with which we might not be happy. However, they are saying in a strong and principled way that they are doing away with this socialistic attitude, and that will make the industry more efficient, more competitive, and will bring much more stability to the communities, to the workers and to the industry, in my opinion.
Senator Austin: It certainly will be the case, Mr. Flitton, with respect to those industries that are at the top of the competitive heap, and yet we have seen a number of towns in this province where investment capital and social capital have been destroyed by the current situation. I am wondering whether in a free-market situation you would not urge, as a former deputy minister, some form of transition adjustment policy. In a free market, there will be winners and losers. What happens to losers who built their industries on the old policy structure?
Mr. Flitton: Quite frankly, much of the shaking out in that regard has already occurred; there will be communities that lose and there will be communities that gain, and we have experienced it. We have already been through a lot of that. I can think of a community that was totally dependent on one mill where a decision has been reached between the employees and the company to suspend operations. The employees have been offered relocation opportunities to other mills, where there will be, in my opinion, a much more stable environment. Now, that is a benefit to the workers. The community itself is going to have to make an adjustment predicated on the fact that the main source of employment is gone, and that happens in life, but long term, I believe it will be healthier for everybody, and I repeat that.
I would make one point, Senator Di Nino, with respect to your comment about companies on both sides of the border coming to an agreement. One of the conditions for a settlement is that any litigation be withdrawn, and Doman currently has a Chapter 11 legal action pending in the United States. We are quite willing to come to the table on an equitable agreement, and we hope that prior to any settlement, we will be asked to withdraw our legal action and at that time get an idea of what the agreement will look like. We do expect to be fully cooperative, and my experience is that many companies in the United States feel exactly the same way.
The Chairman: You will recall that last week, Senator Carney, we were told that the legal costs since the 1980s were estimated to be $800 million, which was, to me at any rate, a pretty large number.
Senator Carney: First of all, each of you has done a marvellous job in presenting a very complicated situation very clearly, almost to the point that you could think that the solution is to negotiate and accept the American Department of Commerce bulletin, set up the bilateral commission to administer it, have a sunset clause kind of arrangement and that would solve the problem, but as you all know, it is not that easy. It is not that simple. Before pursuing my colleague Senator Austin's points, I just want to make a couple of issues clear.
One is I think that you would agree that Congress controls trade policy, not the executive, and Congress has never been willing, to date, to give up that power. It is important that we understand that there can be no such thing as a bilateral, president-to-prime-minister agreement on this. It is entirely in the hands of Congress, and that is why our friend, Senator Baucus, has now moved a resolution in the Congress to double the rate of duties, so that no matter how much we may wish to have this settled, until Congress gives up its right to manage trade and make trade agreements, it will not be resolved, as you all point out. There is a formula in the States whereby X per cent, you say 50 per cent, of the industry have to represent Y per cent of the production. I do not know the figure. I believe it is about 60 per cent.
Mr. Allan: Something like that.
Senator Carney: Another group in another area could bring another trade action, so it is a constant Achilles heel.
I wanted to say that in reading the U.S. policy bulletin and then the B.C. proposal, which is a year old, that proposal pre-dates the Commerce agreement, the original B.C. agreement that was presented.
Mr. Allan: There was a B.C. proposal last spring, a year ago. The more recent one, in my slide package, was from November last year.
Senator Carney: Yes, but there are, as you pointed out, similarities between the two.
Mr. Allan: Yes.
Senator Carney: My assessment is that it is extremely intrusive. I mean that the Americans will be dictating Canadian forest policy. In particular, they will be dictating social policy in British Columbia for the length of this agreement, and that is something that we have to address. A foreign country will be dictating how government sets social policy in B.C., and also how our companies do, because if you are going to have a commission, there is going to be a problem for companies operating within rules that, as you point out, may take some time to evolve. Therefore I think it is extremely intrusive.
One of the two areas that I would particularly like to explore is what will happen to sustained yield management. The Commerce paper uses the word ``maximum'' profitability, operating for ``maximum'' profitability, and B.C. has always used ``optimum'' profitability because we have social costs and benefits. What will happen to the ability of the province to maintain the forests on a sustained yield basis in perpetuity, and will they be able to set forest policy so as to maintain communities and jobs, or will we see a situation where the timber is south of the border, the logs go south of the border, the jobs go south of the border and we become merely the harvesters? I should say that my son-in-law is a faller and runs a falling company, so there is nothing wrong with being a harvester.
The Chairman: I guess the community is closed down.
Senator Carney: The community is shipping its entire job base to the Americans, and that is something we should explore. The question is what is happening? You are both ex-Department of Forestry deputy ministers. What will happen to the ability of the government to function in the social policy area, and what will happen to sustained yield forestry?
Mr. Allan: Well, let me take a first crack at that and my colleagues can join in. The first point I would like to make is that as late as last week, both industry and the B.C. government were pushing back on the Department of Commerce folks on that bulletin you are referring to, particularly over something we call an ``effects test.'' If we are to pursue market-based policy reform in B.C., we have told the Commerce Department clearly that then the results speak for themselves. Do not come back and measure us if we go to free-market or market-based policy reform in this province. Do not come back and measure us. Did our costs go up? Did we lay off more people? Did mills shut down? The market will drive the results and it will speak for itself.
There is an element in that bulletin of constant measurement, constant oversight, and wanting the results to be predetermined. The first draft of the bulletin we saw listed a bunch of negative consequences that were to be visited on us: layoffs, mill closures and higher costs. We have pushed back on that part.
Senator Carney, on your point about sustained yield management, we also feel that the bulletin is flawed in its use of the phrase, ``operate at maximum profitability.'' We have made the point to the Commerce Department that if we wanted to maximize profits, we would liquidate the forest as fast as we could, and if the American interest is in proper, responsible forest management on an economic basis, they would want us to manage on a sustained yield basis. They would want us to manage the AAC as we have historically, and bring it into a long-term equilibrium.
We do have one particular problem in this province right now, the so-called mountain pine beetle. We have a beetle epidemic in this province and the companies, particularly in the Interior, are being directed to harvest beetle-attacked trees as fast as possible, but this is largely a substitution program, in which the beetle-free trees are being left alone and the readily or recently attacked wood is being harvested quickly in order to manage the spread of this epidemic. Notwithstanding what you read in the paper of American claims, this is not timber that is sold at bottom-end, fire-sale prices. This timber attracts normal stumpage rates.
We are having an AAC discussion, an annual allowable cut discussion, with the Americans, and we have assured them we will manage on a sustained yield basis and they should not be trying to force us to liquidate our forest. What you are seeing in that bulletin is an amalgam of economic principles and forestry principles. Frankly, it is not well drafted.
In terms of provincial policy, community stability and social engineering, I am with Mr. Flitton. I think those days are largely behind us in this province. In my experience, companies can and do shut mills in this province, and they are not really penalized the way the Forest Act says they should be. It happens particularly on the coast, where the industry is older than in the Interior. It has excess, outdated equipment. It needs modernization, and I think some turnover on the coast is inevitable.
I do not think we will see many mill closures in the Interior, frankly. It is a well-capitalized, efficient industry. Its weakness, perhaps, is that it is designed to meet the American demand, but as you know, when the American market is hot and we do not have too much trade harassment, it is a hugely profitable industry. The rate of return on capital employed in the Interior lumber industry in 1999 was 39 per cent. Even in the worst of years, they managed to break even. The answer is to make that industry as competitive as possible, as low cost as possible, and designed to compete in what is increasingly becoming a huge global market.
Senator Carney: I am interrupting you because you are getting off the topic, which is who pays the silviculture costs? Who sets the standard for the logging roads? Who determines the multi-use of a publicly owned forest base? Who determines access? I notice the Commerce Department paper is suggesting — this is going to be really popular — that the amount of public land in B.C., which is now 95 per cent, be further reduced by creating more parks in order to take more public land out of the commercial forest. That is all very well, but we already have 13 per cent of the forest base, of the land base, in parks, and reducing the base of forest land means reducing production and jobs and will impact communities. Specifically, who pays for the silviculture and who determines the use of the forests? Then I want to get on to the auction issue.
Mr. Allan: A fair comment, and fair questions. It is my understanding that that park reference is aimed at Quebec, not at B.C. I do not say that is an acceptable answer. I am just giving the details of what I know about the debate and the negotiations around this bulletin. B.C. has nothing to be ashamed of in its park agenda and what has been implemented. We have well over 12 per cent of the land base in protected areas in this province, and the government will continue to set standards, in my view. The provincial government will set standards, and as many of you would know, we are moving to more of a results-based forest management system in this province. The government introduced amendments to the Forest Practices Code in the fall to make it results based. They will be off-loading a lot of costs onto the industry, but by and large, the government will continue to dictate our forest management system, with industry implementing a lot of what the government used to do.
I do not foresee the Department of Commerce having too much oversight in B.C., frankly.
Senator Carney: That is an interesting perspective. I would like to ask Mr. Larsen from Weyerhaeuser and Bob Flitton to comment on the tenure issue. The whole thrust of the changed circumstance review is toward an increased auction system, and that sounds very reasonable, so why do we not go to a timber auction system? There are different species. There are different grades of timber. There is the mountain pine beetle problem. Mr. Flitton, you say that Doman offers to make 25 per cent of its logs available to the highest bidder for domestic consumption. You do not say ``international consumption.'' I should explain that the original base of timber auction here was about 13 per cent. The B.C. government set aside 13 per cent of the harvest for smaller companies, and then they moved that up to about 20 per cent. What do you consider to be a basis for auction? Also, what percentage of your own tenured lands under tree farm licences are you prepared to give up to achieve that auction, and how much do you want to be compensated for doing so? Those are very important questions.
Mr. Flitton: Extremely important questions. On how much of our tenure do we propose to give up, our answer is zero.
Senator Carney: That makes limited land available for harvest for auction. Go ahead.
Mr. Flitton: I will just try to explain this very quickly. First of all, approximately 25 per cent of the harvested logs in British Columbia currently are up for public auction. That is either from the small business program or from private lands. With Weyerhaeuser and Doman's proposals to put up another approximately 25 per cent, 50 per cent of the logs in British Columbia would be up for public auction, and our understanding from our spies in Washington is that would probably be enough to satisfy the U.S. coalition, at least as a first step, and these forest policy changes that we are talking about would slowly increase that figure over time.
I want to talk about the log auction, because you are talking about standing timber and I am talking about logs. There is a huge difference here.
Senator Carney: They are two separate issues, and they both have to be addressed because you have private lands and public lands. However, I just want to point out that going from 13 per cent to 50 per cent of your harvest on auction is a huge step, so go ahead, please explain.
Mr. Flitton: It is a huge step. It completely changes the dynamics, and by the way, when you are talking about what this does to the industry, we have run a matrix to project what will happen with employment. We actually see our company increasing employment on Vancouver Island and the mid-coast.
We have gone down to Washington on the issue of the standing timber. We have met with senators. We have met with Congress people. We have met with a lot of Commerce people and International Trade people. You have a tree that is standing and somebody has to cut it down. The tree is then moved into the ocean or into a logging truck and to a market. Doman's position is that it is not who cuts the tree down that is important; it is what happens to the log after it is cut. We are talking about a log auction, whereas a lot of people are talking about a standing timber auction. The U.S. has made it very clear to us that they are really interested in the log, not the standing timber, and that has been a focal point of the representations that we keep making down there.
Doman has a company called Western Forest Products, which is a major logging company, harvesting company, and very competitive. They are one of the most competitive companies in the industry in British Columbia, and we think that to chop it up into a bunch of smaller companies would make the industry less efficient because of the loss of economies of size and scale. That is one of the reasons we promote log auction rather than timber auction, and I think Weyerhaeuser have recently come to a similar principle.
Senator Carney: Would you like to deal with that? That leads to the question of log exports, a very controversial subject here. I should say that Weyerhaeuser bought MacMillan Bloedel, which was part of the history of this province, and from the earliest days of H.R. MacMillan, who was our chief forester, has really determined forest policy in British Columbia. You have done an excellent job in continuing that historic perspective. You have huge private holdings. You have huge public holdings where you have the rights to cut. What percentage are you prepared to give up?
Mr. Larsen: I believe that Weyerhaeuser was the author of the original proposal to surrender timber on the coast, and I want to emphasize that this is a specifically coastal solution — and Mr. Flitton is from a totally coastal company. Two thirds, or 70 per cent, of our operations in Canada are not in coastal B.C., they are elsewhere, and the kind of auction we are talking about is not the solution for all those other places. Auctions do depend on multiple buyers, multiple sellers and the ability to move the logs around. In the coastal area of B.C., if you can get logs to tidewater, you can move them at very low cost, which opens up the possibility for quite a vibrant auction process.
We did bring forward a proposal some time ago to surrender up to 25 per cent of our coastal public forest licences and put those logs into an auction process for coastal B.C.
Senator Carney: How much compensation did you want for that?
Mr. Larsen: We did not define what we would seek in compensation. We do not think it would necessarily be cash. It could be other things. Certainly, in some cases, we have had tenure through the licences we inherited on the coast for up to a hundred years, so we think as a matter of principle, there should be compensation for those tenures, but we have not specified what it should be and think it would be a product of negotiation.
Senator Carney: Then what would prevent all those logs at auction from leaving British Columbia for your U.S. mills? I should explain here you cannot export logs from public lands unless you have been turned down, I think by two other mills, but you can export logs from privately held land, and I think we will have evidence that those figures have increased. Under your proposed solution, what would prevent logs and jobs from being exported to the U.S. mills, which is a big fear in the communities?
Mr. Larsen: What would prevent it is provincial log export policy, which has historically prohibited the export of logs from public land in British Columbia. You can export logs from public land if, after an advertising process, there is no domestic buyer, but by and large, it has been fairly tightly regulated, and somewhat regulated for logs from private land as well.
We do hold private land in British Columbia, which also came to us through the MacMillan Bloedel transaction. It is about 240,000 hectares of coastal land in B.C. We are seeking to reduce restrictions on exporting those logs, but on public land I do not think it is a significant issue. B.C. can regulate that.
We have also talked about, as a potential solution to this, Canada introducing mirror legislation to what they have in the States with respect to log exports from public land. For example, in Oregon, if you export logs from private land you are not allowed to buy logs from public land. We do not export any private logs from Oregon. Washington State similarly constrains and limits exports of logs from public lands.
Senator Carney: Who would make up all these increased buyers and sellers? The base of the American proposal is that somehow or other you need more buyers and more sellers in order to get higher prices, but in an industry that is actually consolidating, who are all these buyers and sellers, and are they going to come up from the States and buy the timber or buy the logs? What is the impact? Who are we talking about here?
Mr. Larsen: I think as we surrender our tenures, one of the buyers for those logs and bidders for the logs is going to be Weyerhaeuser, because we operate six facilities in the coastal region and we need to supply our sawmills. We cannot do it after surrendering 25 per cent of our timber, so we are going to be in the market buying logs, expecting to be shoulder to shoulder in competition with some other companies to buy those logs back, and similarly having some access to logs and tenders that they surrender. We do not intend to be the only ones doing it, but we thought as a symbolic move and to get something started, we ought to break the logjam. We have to do something dramatically different and so we were willing to participate in an auction process.
Senator Carney: I have been very much focused on British Columbia, and I know my colleagues would like to ask about Quebec and other provinces, but I do want to ask how this would work in a place like Gold River, a community that has been devastated through the loss of its mill, and subsequently, its tenure. I should explain that the mill was built there on the basis that it had the rights to the surrounding timber, and that kept this marvellous community going. The mill closed and the town was devastated. The population fell by at least a half and it has had a tough time, but I understand that Doman is talking about creating another 85 jobs in that community. Is that just a wish list, or does that involve how this industry is changing, and what are you doing for Gold River?
Mr. Flitton: Well, I cannot say today what we are doing for Gold River, but I can tell you that Gold River lost a pulp mill, which did cause a decrease in employment, but I think the community has stabilized very well. Even though it is a smaller economy than it used to be, it is a very stable economic climate.
Senator Carney: However, you have offered 85 new jobs, have you not?
Mr. Flitton: There has been talk about new jobs in Gold River, Nanaimo, and other places, but I really cannot talk about specifics. If I can add a quick comment on the log export issue, Doman is opposed to log exports. We actually need more than a hundred per cent of our current annual harvest just to match our production capability, and will be a vibrant competitor at the sales too. However, the U.S. is asking for access to British Columbia logs. It really burns me. The U.S. has a problem with many other places in Canada because of an oversupply of low-priced lumber going into the U.S. This is my perception. They are angry at other parts of Canada and want to solve it by having access to the logs on Vancouver Island and the coast of British Columbia. I do not think it is right or fair. That issue has yet to be resolved, and I am very eager to see what will happen.
The Chairman: Thank you.
Senator Lawson: Those were excellent presentations from all three of you, and the preference for a negotiated settlement appeals to me.
Going back to Mr. Larsen and the Weyerhaeuser proposal, in talking about withdrawing from all actions at the WTO or at NAFTA or whatever, as an old labour negotiator, I see that makes a lot of sense, with one exception. You are telling us that Canadian forestry companies have paid a total of about a billion dollars in duties and fees. If this runs to 2007, then you are talking about $2 billion or $3 billion. I see that, and then I see the coalition on the other side and I am listening to all their complaining and whining in the papers that this duty has backfired on them and they are all suffering, they are closing mills and they are losing and so on. Then they see this pool of $2 billion or $3 billion and say, ``Well, wait a minute. Maybe we will make a lot more when they divide this up among us.'' Therefore, if you are going to withdraw everything, it seems to me the Byrd Amendment must also be withdrawn. I understand there has been some kind of decision from some tribunal or court that it is illegal, but you have to be certain that that has taken place. You need to make sure that you bury the Byrd Amendment or you lose your bargaining position. Is that not a reasonable approach?
Mr. Larsen: We proposed what we thought it would take to get both sides to the bargaining table. Canada would suspend its legal process under WTO and NAFTA because we thought that was necessary to get the U.S. coalition to the table, but in return, there would be an interim border tax that the Canadian federal government would collect, so the money would stay in Canada and stop accumulating. It would still leave anywhere from $600 million to $750 million in an escrow account, which would be the subject of negotiations as we move forward. It was what we thought it would take to get both sides to the table, with each side not thinking they had to risk their whole case on an uncertain negotiating process.
Senator Lawson: What about the Byrd Amendment? Was there an official decision that the amendment was illegal, or what is the status of that?
Mr. Larsen: I think there has been a decision or two from WTO against Byrd. Then what is the U.S. going to do about Byrd? Well, for a long time they might do nothing. They might study it some more. I know it is in President Bush's economic package and budget for this year, but who knows what will happen when it gets to Congress? It seems they will have to respond to Byrd being struck down. We are confident, and Canada is confident, that Byrd will be struck down, but a lot of months can pass before that happens. We do not think Byrd is going to be an issue, but on the other hand, in U.S. politics we have found that almost anything is possible.
Senator Lawson: I think one of you said that the legal fees total about $85 million so far. For how long has this been going on?
Mr. Allan: That is just from my group.
Senator Lawson: Just from your group?
Mr. Allan: Yes. That is just my group. The 10 companies have paid, during 2001, 2002 and 2003, about $85 million.
Senator Lawson: Therefore, if this runs to 2007, you are talking about $200 million or so.
Mr. Allan: Well, if we are still around.
Senator Lawson: Right. If you do get a settlement, you might save a few hundred million dollars in legal costs.
Mr. Flitton: By the way, legal fees in Washington start at about Can. $400 an hour and quickly work up from there.
Doman has been in discussions with a leading U.S. trade lawyer. He actually teaches trade law at two major universities in the Eastern United States and is a trade adviser to Congress. We have had lengthy discussions about the Byrd Amendment and he is absolutely of the opinion, and in fact has offered to take our case on a contingency basis, that the Byrd Amendment is illegal, any legal action will see it struck and any company that is damaged by it will win. That is the basis of a legal action we currently have in progress in the U.S., and if they want us to withdraw from this action on the basis that all legal actions will be withdrawn, we will want to discuss with them the implications of the Byrd Amendment.
Senator Lawson: That is all very helpful. I have one final question on that for Mr. Allan of the Lumber Trade Council. Did Canfor not have an individual case? Is that still ongoing?
Mr. Allan: Yes. They have a Chapter 11 NAFTA lawsuit ongoing.
Senator Lawson: The withdrawals would not include Canfor's case?
Mr. Allan: That is all subject to negotiations.
Senator Di Nino: Why has Doman, and not the industry, taken on this challenge to the Byrd Amendment?
Mr. Flitton: That is a very good question. Somebody else will have to answer that. We do not belong to John Allan's group. I have a lot of respect for what John is doing and for his organization. I think that John has some difficulty, and I will not ask him to respond to this but it is my perception, because of the fact that there are two industries in British Columbia. There is a coastal industry and there is an Interior industry. They are very different. Doman saw that up front and we decided to fight this battle individually, and if other companies want to come to the table and deal with the Byrd Amendment with us they are welcome. We extended that invitation to the B.C. Lumber Trade Council and to others in Canada. They may in fact join us before it is over, but at this point they have not.
Mr. Allan: We are involved indirectly. The appeal at the WTO is government to government, so the lawyers are Government of Canada lawyers from the Department of Foreign Affairs and International Trade. We have regular meetings with them. We helped them write the brief. Our lawyers are working with the federal lawyers on all aspects of the case and we are actually sharing the costs.
Mr. Larsen: We are in a similar position to Mr. Allan, and we are part of his group. I think there are many other irons in the fire on the negotiating front, and if we do have to deal with Bryd, it is downstream, even though our lawyers in the U.S. think it is a terrible law and will be struck down. It can take a long time to get rid of a bad law in the United States and we did not want it to prevent us from focusing on a more immediate resolution.
The Chairman: I must confess that I am not clear on who will strike it down. Presumably Congress passed the law, and I am a parliamentarian in our system, but it seems to me it would have to be struck down as being unconstitutional. How else would it be struck down? I am not clear what the remedy is if Congress passes a law, even if the WTO says it does not conform to international norms. What actual remedy is there? I do not quite see that, but I do not want to get launched on it.
Senator Carney: It is an important question because the WTO has said it does not comply with international law.
The Chairman: What is the remedy? I do not see the remedy.
Mr. Allan: In my view, Congress would have to repeal the law. The chances of that happening in the near term are zero, politically speaking. As Senator Carney pointed out, the Congress runs trade law and policy, and they will not give it up for anything.
The Chairman: Congress is sovereign.
Mr. Larsen: I am not a U.S. lawyer, but my understanding is the Byrd Amendment was a rider to another huge piece of legislation, and you could remove it just as easily with another rider.
The Chairman: However, the point is that it has to be removed by the Congress.
Mr. Larsen: That is right.
Senator De Bané: I must say to our three distinguished witnesses that I am very distressed that the media of this province are not here, because you are such first-rate witnesses and experts.
The Chairman: I think they are here, sir.
Senator De Bané: Not enough of them. I am sure we have the most competent ones, but it is such an important issue, and your presentations were very thorough. I will put three short questions to our three distinguished witnesses.
To Mr. Larsen from Weyerhaeuser: You operate under two regimes, one in the United States, one in Canada, so obviously both are workable. You have been in the States for over 100 years. Here in Canada, that American-style regime exists in the Maritimes. In your opinion, and because you are straddling both countries, why would it not be practical to impose it on other provinces, particularly British Columbia? Why would that cause great problems?
Number two, for Mr. Flitton: You said something that really surprised me. You say on page 9 of your brief:
There was no apparent comprehensive Canadian political plan to persuade the U.S. Administration and Congress on the merits of Canada's position. Canada had cards to play, but did not appear to do so. This included linkage with shipment of other natural resources to the U.S., or conditions for Canadian support for U.S. international policy.
You say that there has been no apparent comprehensive Canadian political plan, and it would be very interesting to hear from you about that.
Mr. Allan, I was very much impressed by your mastery of that complex file, and I would like to put to you the following question: Assuming that the United States were in position to be self-sufficient in lumber, which it is not, would you still maintain the current negotiation stance of the ten largest companies that you represent? We make a big deal out of the fact that they are not self-sufficient, so why are they complaining, those cry babies. Maybe we have to look at what would happen if we really want to achieve this long-term project of your vision of a fully integrated North American lumber industry.
The last thing I want to tell the three of you is that I was absolutely flabbergasted last week when a professor at Carleton University in Ottawa told us, ``Hey, the lumber issue is a very tiny thing. It affects barely 300 communities in Canada, so let's not let that issue get in the way of the bigger picture.'' We all were absolutely flabbergasted by that kind of attitude. However, maybe this is what goes on in some universities.
The Chairman: We were all flabbergasted when we heard it.
Mr. Larsen: You talked about Weyerhaeuser's history of more than 100 years in the United States and 37, 38 years in Canada, where we operate under both systems and understand the differences. Our experience of the market cycle for lumber over almost four decades now is that return on capital in Canada for our lumber investment is about the same as in the United States. Therefore, we understand at a very fundamental level that what the U.S. coalition is alleging here is not true, and we certainly never bought into or supported that part of their case. We do not think that Canadian companies are subsidized.
We are talking about an auction solution for coastal B.C., where we would surrender 25 per cent of our licences, but we are not recommending that for the rest of Canada, where the operations are actually bigger by volume and scale than on the coast. We do think there will be a need, as a result of negotiations, for some sort of auction process in each province, just as a validator of market prices for logs and timber. We think there is a high symbolic demand from the U.S. for that. They are saying to us, ``No, you cannot just have an administered system in some of these provinces, where that is almost all that exists. We want some kind of market mechanism that is transparent, with enough transactions at arm's-length that we can see that Canadian timber is being valued in a fair way.'' We are willing to consider that argument on their part. Otherwise, as Mr. Allan said, we will seeing lumber case 5, lumber case 6, lumber case 7, because they look at our system and cannot see any market mechanisms. I think we in Canada can look at many provinces and find a place where a market mechanism would fit. If there were an auction in Northern Saskatchewan, in many cases we would be the only realistic bidder, because we are the only one with facilities within 200 miles. Will an auction work there? We do not think so, but there are other places where it will. We would argue that there are places where you could set up an auction process, as a validator of market prices for timber, and that is what we are calling for outside of coastal B.C. Then the Americans can have what they think is a transparent window into the market process in Canada.
Mr. Flitton: My question was with respect to the comprehensive Canadian political plan. As I said earlier, in 2001 when the Softwood Lumber Agreement expired, we had known for five years that we were going to need a replacement agreement. Therefore one reaches the inescapable conclusion that if we had come out of the gate in the spring of 2001 with a very comprehensive plan on how we were going to tackle this matter we would have made better progress. It has been a frustration to us that we have not.
Doman Industries has an attorney in Washington representing us, in fact we have a number of them, but there is one in particular who was himself a Congressman for 12 years. He is very well connected. I can tell you that when I was in Washington, he got me an introduction to the Vice-President of the United States. He got Rick Doman and I a meeting with Max Baucus. He opened many doors for us that would not otherwise have opened, and the words in this paragraph are his. He really believes that Canada, number one, could probably benefit from better legal advice than they have been getting in some areas. He believes that Canada could have had a stronger policy with respect to this matter and been more aggressive coming out of the starting gate.
We deal with industry all across the country. I have sat in meetings with our industry cohorts from Quebec, Ontario, Alberta and other provinces, and it is frustrating. John and I were talking this morning about a senior member of the negotiating team in Canada who sits in the foyer of the hotels and tells one story and walks into the meetings and tells a different story. I have always been of the opinion that what was needed in this process was for Canada to get everybody into the room and simply sit there and talk until we came to some consensus about where we should been going with this, instead of dealing with it on an ad hoc basis. Now, Canada has made statements with respect to natural resources. They have made statements with respect to international trade policy, but they have been ad hoc statements. There has been no comprehensive plan for dealing with this matter.
I understand that Minister Pettigrew appeared before your committee and made an argument for greater political resources in Washington to improve the capability of the Canadian government in dealing with the industry there. I will share something with you. I went to a major law firm in the United States totally unrelated to any Canadian company in this industry or this particular matter and asked to speak to their senior trade lawyer. I said, ``I just want to ask you a question. In your perception, what is the capability of Canada in dealing with trade issues in Washington?'' It was not good and that is unfortunate. If we can get that resolved, I think the softwood industry would fare better, as would the wheat industry, the steel industry, et cetera, and I hope that that is something to which you people can give some thought. Thank you very much.
Mr. Allan: My first question was, assuming the U.S. was self-sufficient in lumber, would we still maintain our negotiating stance? I think that was the base of your question, and my short answer is yes. Even if the U.S. were self- sufficient in lumber they would still need certain Canadian types, grades and quality. A rose is not a rose is not a rose. A two-by-four is not a two-by-four is not a two-by-four. The lumber that Western SPF produces primarily in this province is a superior product. Canfor is Home Depot's biggest lumber supplier. Companies like Weyerhaeuser and Doman produce cedar products. They too are caught up in this case. They are not structural lumber producers, but there is a huge market for that kind of product in the States.
Your other question was what are they complaining about? It is all about market share. Our share of the U.S. market runs traditionally around 33, 34, 35 per cent, and when it goes above that level, the American lumber industry gets very nervous. Our share was in the teens in the 1970s. It grew rapidly with American expansion and the withdrawal of American timberlands for environmental reasons. These are all outlined in my presentation. There are two types of companies in the U.S. lumber coalition. There is the timberland owner, and there is the small, independent sawmill. The latter are mostly in the Southern U.S., and they are smaller and relatively inefficient in comparison with us. I hate to throw these numbers out at you all the time, but in B.C., 70 per cent of our sawmills produce 50 million feet or more of lumber a year. In the U.S. South, 70 per cent of the mills produce less than 50 million feet. Our superior efficiency, our economies of scale, our lumber recovery factors are second to none in the world. We have a truly modern, efficient, well-run industry, particularly in the Interior of B.C., and we can compete with anybody, so when the Americans see our market share creeping up, they impose tariffs, quotas, taxes. The theory is that drives up the lumber price. The theory is that enhances the value of the timberland, and so the timberland owner has a higher capital value on his books, and the U.S. sawmill owner, the small, independent fellow, has a better chance of making a rate of return because the lumber price is higher. This independent sawmill owner is at the mercy of the timberland owner in the U.S., and when that owner does not like the price for his logs, he withholds them from the market until the price goes up.
It seems that it takes about a year for the U.S. market to adjust, whereas in Canada we adjust in a number of months, and I spoke to that issue some time ago. It is all about market share and price.
Senator Carney: I have a point of order, sir. As a supplementary to Senator De Bane's point, we are often asked why DFAIT did not do more, and I hate to make the Liberal government look good, but I have sat in Mr. Pettigrew's chair, and I wanted to put it on record that the forests are a provincial jurisdiction. Trade policy is federal, but the forests are a provincial jurisdiction, and the industry is industry. It is not a government-owned industry. Before the 1996 Softwood Lumber Agreement ran out, Doug Waddell, ``Mr. Softwood'' in the department, who has been on this file for most of his career, went across the country to speak to every province and the industry groups and said, ``What do you want us to do if the agreement runs out?'' He told me this personally. At that time, it was not expected that there would be another attack by the coalition — right or wrong, stupid or not — and in general, the provinces said, ``Thank you very much, but we do not anticipate any more problems on this file. We are going to free trade.'' Our consul general in Seattle told me the same thing. ``Why are you worried about this, Pat? You are always making trouble and causing all this commotion, but in fact, there is going to be no problem on this.'' The industry said, ``Thank you very much, DFAIT, but we have no intelligence that this file is going to be reactivated, and we think we are going to free trade.''
It has been frustrating for DFAIT, which did hold consultations, and collectively, the industry, the government and the provinces read the tea leaves incorrectly. I wanted to make sure, Mr. Flitton, because I know that there is frustration on all sides. DFAIT does not own the provinces. They do not own the government, and for the record, they can only respond to requests.
The Chairman: I think that was a very important observation, Senator Carney.
Senator Di Nino: I think it is important enough that we should ask our colleagues, for purposes of our ability to refer to it when we are preparing a report, whether they agree with that.
Mr. Flitton: I would just like to just say that I am aware that there are frustrations at the Canadian government level. I am aware of the frustrations that the minister has in dealing with this matter. There is a lot of autonomy, so to speak, within the provinces because it is a provincial forest industry, and it is very difficult to bring the provinces together on a common line of thinking.
To the best of my knowledge, Doug Waddell or Doug Ketchison, one of them, wrote a letter broadly canvassing the industry about the issues that might come up in this particular matter. I do not believe that Doman Industries received that. To the best of my knowledge, Doman did not talk to them. Had we done so, we might have tried to convince them otherwise. I know that very early in this issue I tried to talk to both of them about our point of view, and they disagreed with us.
Regardless of what may or may not have happened, it does not change the fact that we had five years' notice that the agreement would run out, that a replacement agreement would be required. We did not have that in place and that is unfortunate. I am not placing blame on any particular person. I will accept a portion of it just like everybody else, but I think that generally, it made Canada divided, it weakened us, and it has dampened our ability to achieve something better than what we have.
Mr. Larsen: My first reaction to Senator Carney's observation was that only a pathological optimist would be in the lumber industry, i.e., you are always hoping things will progress and finally be resolved. We share your regard for the job that Mr. Pettigrew has done on a very difficult file. It is difficult to achieve alignment in this industry in Canada, to get them all marching in the same direction and even to agree on what should be done. I have enormous understanding and sympathy for the challenge the federal government faces in their role on this issue. It has been very complex, and Senator Carney has been there herself in trying to understand the complexities and idiosyncrasies of this industry as well as the complexity of the lumber issue itself. I certainly have a high regard for Doug Waddell and I accept his observation — everybody was wrong again. We were hoping this managed approach would gain us more than five years, and it did not.
Mr. Allan: Hindsight is 20/20, and we can all read the tea leaves after the fact. I do not think the federal government had much choice in what they did. During the Softwood Lumber Agreement, around 1998, it became, you might say, the whipping boy. In 1998 it was a poor market in the U.S., it was a poor market offshore, and there was the Asian meltdown. Those companies that did not have quota tried to ship to the U.S. and could not, so they became ferocious opponents of the quota agreement. That charge was led in Canada by an outfit called the Free Trade Lumber Council. I am not being negative about them. That is just the fact. Even within my group, a number of people with substantial quota interests turned negative towards an extension or renewal of that agreement. It became a non-starter, largely because there were two classes of lumber shippers in Canada, those that had quota and those that did not. What we experienced in the quota years was a constraint on our ability to ship lumber, but relatively higher prices. That is the way quotas work.
That agreement expired on Saturday, March 31, 2001, and the petition was filed by the coalition on Monday, April 2. To add to Senator Carney's remarks, we kind of knew there was a petition coming at us, but we could not get our act together — the industry, east, west, DFAIT, whatever. I was at the Doug Waddell meetings. He came out here and talked to us in a public meeting. I knew Doug when I was in the government. He is an intelligent, first-class public servant who works very hard at this file and is very knowledgeable on it. His hands were tied. Now, I am not letting Ottawa off the hook completely —
Senator Carney: Certainly I am not.
The Chairman: I do not think anybody is.
Mr. Allan: — but the fact of the matter is that the Canadian industry told him not to negotiate, and it was not until much later that they met with Mr. Pettigrew and asked him to start negotiations. That led to this process that Mr. Flitton referred to, managed by former Governor of Montana, Marc Racicot. He showed up and we thought he was the greatest thing since sliced bread. He was a breath of fresh air. He was going to solve the problem. Then he learned the reality as well, that the coalition runs this file and they chose not to negotiate with us leading up to last spring, a year ago, and Governor Racicot became a victim of this issue. He disappeared off the face of the earth, never to be seen again. Now we have a senior member of the administration, Grant Aldonas, Undersecretary of Commerce, wanting to try to find a solution, and that is the only game in town right now, besides the litigation, and that is the game in which we are playing.
My view is that the coalition has enough political power to frustrate any deal. Therefore, the agenda is one where the economics, as they impact the coalition, must generate an interest on their part to negotiate, and that interest is there right now, simple as that.
Senator Setlakwe: I have three short questions. The first was addressed in part by my colleague, Pierre De Bané, and it has to do with your remarks, Mr. Flitton, about the position of the Canadian government. Do any of you know exactly when the government is going to come to a conclusion, because the rumour mill has it they are about to reach an agreement with the Americans, and I wonder to what extent this is true?
The second has to do with the sliding-scale border tax, which is an export tax. I think that my colleague, Senator Carney, had a lot to do with it when she was minister, and Senator Austin enlightened me this morning by pointing out that this export tax would not be remitted to the companies. The Americans would never accept their being remitted to the companies, so what is the point, whereas if we succeed in arriving at a negotiated settlement, the countervail and dumping monies will be remitted to the companies.
My third question has to do with European imports. To what extent is that a permanent situation, and what is the status of lumber exports to the European community? They are exporting to the U.S. Are we exporting anything to them?
Mr. Flitton: I will start with your last question, if you do not mind, on European imports. The international producers actually play a very small role in the U.S. market. Some of them are more than 250 per cent over their previous shipments into the United States, but they are still relatively small players.
By the way, Rick Doman was invited to appear here today and I am speaking on his behalf — he sends his regrets — but Rick is actually in Europe right now discussing the capability of the European market with respect to lumber products.
What opportunities are there for Canada to sell lumber in other parts of the world?
As Senator Carney very adequately explained earlier in our discussion, the forest contains fir, hemlock, cedar, softwoods, deciduous, coniferous — different profiles. When you go into the forest to cut, you take whatever the profile is. You do not go in and get a particular tree. You take a clump of them. The nature of our market is that certain logs that come out of that market can only be sold in the United States. It is the only market we have. Regardless of whether we want to sell our products elsewhere in the world, we always have to have a ratio to what the U.S. will take.
There are countries in the world that could potentially be huge markets, where we would love to sell our lumber, and I will give you China as an example. However, the idea of using lumber just has not reached that country to any degree yet. They use round logs, and to go to them and say, ``Look, we want you to change from a log to a piece of lumber,'' will take a huge adjustment in the whole social fabric of their community. It will take a long time. Developing other international markets will not be an easy thing to do.
If we go to a Canadian border tax, the money will go to the Government of Canada, and the U.S. requests that it not benefit the forest industry, whether in British Columbia or wherever. The current duties are paid into a fund at the border, so they are in the possession of the United States. How they will be distributed, whether they go to the U.S. industry, the Canadian industry or the governments, has not yet been settled and will be the subject of negotiations, about which John can speak a lot better than I.
Then your first comment was with respect to an agreement. I will be surprised if we have an agreement soon. I am hopeful that we can, but I can tell you that people like John and I sat in a room in Washington a year ago and thought we were going to come out of it on a particular afternoon with an agreement. It turned out that we were nowhere close to it. My inner soul is quite pessimistic about when we will reach an agreement, but I can tell you that I am extremely confident that the will exists on both sides to get an agreement in the next couple of weeks, and if it is achievable, we will, but certainly we have some high hills to go over yet.
Mr. Larsen: Senator Setlakwe, on your first question, I was listening closely to Mr. Flitton because I want to know too. I think we are in an important time window driven by U.S. electoral politics, and certainly when Weyerhaeuser tabled its proposal last year we had that very much in mind. We think there is a period of time between the beginning of this year and probably midyear when it is possible to get an agreement. We believe that if we do not, then U.S. electoral and presidential politics will sweep away the opportunity, and we will have only the legal process with which to move forward. That is why we think it is worth a big push and a major initiative right now to try to seek an agreement. The coalition does seem to be willing to negotiate, as Mr. Allan said, and we have a political window in which we can do something.
In terms of the border tax, it is true that the companies do not get the money back, but we think, as an American- based company that operates in Canada, it is far better for the money to at least be retained in Canada, and some of it can, we hope, be reinvested in the public forest resource, which is what happened last time there was a border tax in Canada. At least Canadian taxpayers had their equity in the public forests rebuilt somewhat, so we think that benefit alone makes it worthwhile. We are not going to get the money and we accept that.
In terms of the European imports, our readings are that European lumber imports now are tailing off a little, and it is really driven by exchange rates. There has been some depreciation of the Euro and other European currencies, the Scandinavian currencies, which has been more substantial than we have seen in Canada. We can die on that cross, too, the fluctuation in the U.S. exchange rate, but Europe is suffering more than we are now and we are seeing some reduction in European volume. We think we are certainly poised to take advantage if it reverses.
We have worked for a long time to build our lumber markets in Europe, and we are still trying to hang on to them. Certainly we have good markets in Europe for certain species from the coast. We are always looking for new opportunities to build on those markets. We are just a bit distracted now because of the softwood lumber issue, but I think you are right, a long-term solution lies, in part, in finding more diverse markets for Canadian lumber products.
Mr. Allan: Senator Setlakwe, I do not really have anything to add to the comments of my two colleagues. I agree with everything they have said. I think the opportunity is there to get a deal right now, but it is not a large window, and we have a fair way to go. The rest of the comments I would agree with 100 per cent.
Mr. Flitton: I might just add that we are putting our expectations on John Allan to get the deal done.
Senator Setlakwe: I have a question with regard to the export tax. My perception is that the government is and has been against it. Why?
Mr. Allan: Again, I go back to the point in time Senator Carney alluded to, when DFAIT surveyed folks across Canada about what they wanted and were told, ``We want free trade. We are going to fight through litigation. We are going to win the litigation, and we are going to get free trade.'' That was largely agreed to by all the companies in Canada. The Free Trade Lumber Council was, I would say, in the extreme position on that. The difference in my group was that we said, ``Well, in order to get to free trade, you may need an interim agreement or a bridging agreement. You may need something in place so that we can get to a point where we have free trade, either through litigation or through negotiations around policy change, because the U.S. industry and government were saying to us in 1990 and 1991, near the end of the Softwood Lumber Agreement, let's get out of managing lumber. Let's just go to free market solutions here and move on. Of course, you could say to yourself that it was somewhat cynical of the U.S. coalition to take that position. They are asking us to move to a forest management regime that is not replicated in their country. They are asking us for extreme changes, and at the time, Mr. Pettigrew took the stance, and I think it was appropriate, that he wanted to litigate. He did not want to negotiate anything by way of a border tax. We had to have a long-term, permanent solution, and a border tax, it was felt at the time, would just be agreed to and then everybody would relax, go home and never talk again, just like when we had the Softwood Lumber Agreement. Once it was signed, everybody relaxed, went home, did not talk again, and the idea of the Softwood Lumber Agreement negotiations in 1995-96 was let's put the quota deal in as a temporary solution and then talk long-term policy change to get to free trade. However, every time we have an interim agreement we never get to the long term.
This time around, the Commerce Department has insisted that we deal with the long term first and the tax second. I believe Mr. Pettigrew takes his cues to some degree from industry, and that is where industry is at right now in Canada. Let's get the long-term solution in place. We will maintain the litigation to keep the fire going under the negotiations, and we will deal with the tax as a second order of priority.
Senator Austin: As a footnote to your history, and I agree with it entirely, a meeting was held in Ottawa in February 2001 with certain people, including myself, to discuss the issue of the federal stance, and the softwood lumber industry position was as you describe it. Provinces and the industry felt that they had an opportunity to break through to a free trade arrangement and did not want to consider a border tax, although it was proposed. It was clear at that time that moving from a quota system to an import tax would be acceptable to the coalition, but it was not acceptable to the Canadian industry and an opportunity was missed. The DFAIT took the instructions, if I can put it that way, or the consensus in the industry and amongst the provinces, and I do not see how they could have acted otherwise. To act independently of the constituencies they were representing would have been impossible. In our system, we have a federal-provincial dimension that makes the negotiations extremely complex, while the U.S. does not have a state system interposed between the coalition, the industry, and the Department of Commerce.
Included in any number of things I would like to pursue are two issues. First, I take issue a little with Mr. Flitton on the question he raises on the last page of his presentation, which is linkage with other issues in the Canada-U.S. trade system. Linkage is occasionally suggested when people in the forest industry are angry, but I hope that on further consideration, it would be apparent to all that linkage would have very serious impacts on the forest industry in the reverse situation, if another industry asked to use our forest policy to help them sell tomatoes or some other products. It is very good for political posturing, but I am sure it is not attractive.
For example, the natural resources industry in British Columbia and Alberta reacted with enormous negativity to the idea that the export of oil and gas or the construction of a north-south pipeline would be part of this negotiation. I do not think that linkage is in Canada's interest at any time, and that is a representation, Mr. Flitton, rather than a question.
The other issue is that one of our purposes as a committee is to make recommendations on our overall trade policy posture. Are there ways in which we can improve our multilateral position and our sectoral position through the multilateral process? For example, does Doha impact on the B.C. forest industry? If so, in what way might we represent your interests in the Doha round? Is there any opportunity to work within the context of the NAFTA arrangements for a better dispute settlement mechanism, or is it your view that the forest industry trade relationship is now so unique that it should have stand-alone arrangements? Those are really two questions.
Mr. Flitton: I will just speak quickly about linkage. I have total respect for your comments. I know I have put some specifics into the sentence here, but I can tell you that it is the general view of our very wise and knowledgeable attorneys in the U.S. that Canada should do more at the prime ministerial level to make the point to the United States that these issues are critical, that they need to be resolved and that they should be part of a bigger envelope of Canada- U.S. negotiations. I would not want to begin to tell you how that should happen, which leads to the second part of your question, on NAFTA and Doha.
All I can say is that I truly believe that it would be beneficial for somebody to study this process we have been through, analyze it and talk to some of the key players, and come to a conclusion on what can be done to improve our Canada-U.S.-Mexico relationships in the future.
Canada, in my opinion, has done a very good job of fighting this matter legally under WTO and under NAFTA, but it just does not seem to have any teeth, and somehow or other that is an issue that needs to be resolved, but I do not have the answers for you.
Senator Austin: I think you have put your finger on the pivotal issue in negotiating. If we win at the WTO, we are entitled to trade retaliation. Can you imagine Canada in a trade retaliation session with the United States? What would we bar from coming into our market, and would our Canadian political constituencies accept not having lettuce in the wintertime, or oranges or grapefruit, or whatever else we would consider for retaliation? We have a very interesting problem in that we cannot put much bite on the U.S. They can put a lot of bite on us.
Mr. Flitton: People ask me why Canada does not take a stronger position in dealing with the U.S., and I say, let's not forget they are our customers, and you do not deal with a customer in that fashion. We have discussed this around a boardroom table in Washington, D.C., with some very learned attorneys, and they told us that if there is one area where Canada should improve its capability, it is to be stronger in lobbying the Senate, because they are nowhere near as strong as they need to be.
Max Baucus has led the argument for the coalition, a very nice gentleman, very impressive, and I sat in a meeting with him. Now, John Ragosta has been the lead lawyer for the U.S. coalition for 25 years, and Mr. Baucus said to us, ``You people are not being realistic in this matter.'' I said, ``No, that is not true. It is Ragosta who is not being realistic in this process.'' He looked at me and said, ``Who is Ragosta?'' I almost fell out of my chair. I was just in absolute disbelief.
Senator Austin: Does anyone have a comment on Doha or a special trade regime for the forest industry apart from NAFTA?
Mr. Larsen: Certainly we are interested in Doha. The U.S. is the natural market for a significant volume of Canadian lumber, in terms of value and access, because of the nature of lumber as a product and shipping it long distances. We are certainly well positioned to be the dominant, the major supplier of lumber for that U.S. market, which is in some ways the most lucrative and coveted market in the world. However, certainly we are hoping to diversify our markets.
In terms of the NAFTA dispute processes, I think lumber is, for better or worse, outside it now. I was reflecting on the perplexing remarks of the professor who said this is not important. I heard somebody say, if you look at the trade flow between Canada and the U.S., it is $350 billion a year, although I am not sure if that is the right number, and $50 billion of that trade is controversial, so in fixing the $50 billion, we should not upset the rest, which is going okay. Is free trade successful? Possibly it is, but if you are part of that controversial $50 billion, it is not a very good place to be, and we have certainly felt trapped there for 20 years.
To the extent you can modify the dispute resolution mechanism under NAFTA without in any way upsetting the rest of it, we think Canada would be well advised to look at those options, but it is hard to draw a lesson from all the experience that the three of us have been through in the past 20 years in terms of how to actually modify policy and resolution processes. I am not sure where you would start.
Mr. Allan: We have been consulted on Doha. We are making comments to DFAIT. I think we have to fight as hard as we can in these multilateral trade processes to make our point.
I agree with Mr. Flitton. We are somewhat small relative to the U.S. in terms of economic power, but I also thought, Senator Austin, there already was a special trade regime for lumber. It is one where lumber gets screwed every time; pardon my remark. I have seen correspondence from President Reagan to Bob Packwood of Oregon, ``Do not worry, Bob. We will get lumber fixed.''
Lumber is a political file, and Washington is a political town, so I agree with Mr. Flitton's comments. If Ottawa could spend more time, effort and resources on political activities in Washington, I think that would be money well spent. We have a fairly good, aggressive Ottawa-funded advocacy program going on right now, delivered through the Forest Products Association of Canada. We are involved in that, as is Mr. Larsen. It is very effective, but it was a bit late in starting. We have action on Capitol Hill. We have ads running. There is an increased awareness of lumber, but again, as Mr. Flitton said, some people in the U.S. administration, some U.S. politicians know about it and some do not. When you see senators and Congress folks signing letters, you know they do not even know where Canada is half the time, so it is just a political file that needs political action.
Senator Carney: I just wanted to make a comment and then ask a question. On Senator Setlakwe's point, I wanted to make it clear again that when I held this file, we adopted the export tax to avoid the countervail, because it was clear, as we now know, that it was easier to get into a countervail than to get out of it. Also, the export tax would give the provinces time to change their stumpage and management policies to comply, which they did, and we kept the money in Canada. It was returned to the provinces. It was an interim rather than a long-term solution. However, I also want to support what Mr. Allan has said. I was viciously attacked for it, raked over the coals, attacked on hotline shows because it was interference and considered by the industry as a barrier to free trade.
My comment and my caution to your negotiators is that free market solutions are not ``free'' in this file, and I am afraid the communities will pay the costs. I get no comfort from the fact that the social impact on communities, which is not industry's direct responsibility, is not being addressed in this.
Mr. Flitton, I agree that Gold River may be stable, but it is stable at half the population it was when the mill was going.
If the agreement that develops adopts the policies set out by the Commerce Department bulletin, and which is being reflected in the B.C. government's position, we should be very clear about what will happen, because the tie between timber from an area and mills in the same area will be broken and the community will lose its assured timber supply.
Secondly, the allowable cut provisions, which require you to maintain a minimum cut, partly for forest management and partly to supply mills and keep them open, will be eliminated, and market pricing will replace the present stumpage system, which allows for the offsetting of social costs.
Until we have a better idea of how the coastal communities will be impacted by any negotiation, I do not think we should draw too much comfort from the current framework. Now, you may have some comment on this.
Mr. Allan: Senator Carney is very accurate in describing where the province wants to go on policy change. I believe they want to go to an auction-based timber pricing system, where timber is auctioned on the stump, not a system driven by logs, as Mr. Flitton was talking about earlier. I believe they do want to eliminate something called ``cut control,'' which is a rule that prescribes what companies must cut every year on a minimum and a maximum basis. I believe they will eliminate what are called ``appurtenancy'' clauses in the Forest Act, and in timber processing documents and licences, whereby a certain volume of timber must be processed in adjacent mills.
By way of response, I would say, first — and this came up earlier and was not addressed — in the throne speech last week, the government did outline that there would be a transition fund available for workers and communities if the adjustment costs were too painful for both groups.
Second, the Americans always pinpoint these three areas in trade cases: the so-called timber pricing methods, mandated requirements like appurtenancy, and cut control. Arguably, if we eliminate them and go to a new system then we have, at a minimum, buttressed ourselves against future cases, notwithstanding their political nature. We should get a better shake in NAFTA and the WTO if we have made these changes.
Third, the current provincial government was elected with a mandate to make these changes, and the ministers have been publicly indicating for months now that this is the way to go. I do not deny that Senator Carney's concerns about the workers and the communities are justified, but I think it is inevitable that the forest industry in B.C., in Canada and globally, must maintain relative competitiveness, and these artificial, if you will, barriers are probably not the way to go in the future. Mills do close in this province for economic reasons, and will continue to do so, with or without these changes.
The government has embarked on this course, and I would say the challenge is to implement and manage it properly, rather than fight against it.
Senator Lawson: Briefly talking about the political aspects of this, prior to the midterm elections in the U.S., I had the occasion to be in D.C. with an old friend from my days there who is a heavyweight lobbyist. He is very active and well connected, and we were talking about the Canada-U.S. relationship. He was expressing the concerns of the Bush administration. They want to do more drilling in Alaska, but they were not certain they would get approval. President Bush had said that he wanted less dependence on the Middle East and more emphasis on developing resources in North America. He was somewhat surprised and pleased to hear from Prime Minister Chrétien when they met about how much we had in the tar sands, in the North and so on. He was very pleased about that. Of course, you may recall that people in Canada were saying to the Prime Minister and the government, ``Well, get tougher with President Bush. Call him up and tell him if he wants some of our resources, he has to do something about the softwood.'' I said, ``Well, there is some merit to that. Why would he not do something to solve that very serious dispute?'' He said, ``That overlooks a very important political reality.'' I said, ``Tell me about that.'' He said, ``You may not know that the Bush administration has a very dedicated team working hard to regain control of the Senate and the Congress. Most of the members of the coalition are from the southern states. He needs those votes. He may do something cosmetic about your problem, but he will not do anything to risk those votes in the South. That is a political reality.''
Senator Di Nino: I am quite happy to allow our colleagues, particularly our B.C. colleagues, to take the lead on this, and I think they have done a great job today. It just goes to show once again that we have a lot of talent in the Senate.
My question really follows on from something that Senator Lawson and Mr. Allan said about increasing our resources in Washington. We have heard from at least a couple of folks, if not more, in discussing the trade issue with the U.S., not specifically softwood lumber, that we should enhance our opportunities outside Washington, in effect, put more resources into stakeholders, as I think Mr. Flitton said in his presentation. That runs contrary to where my thinking had been going, that we should not necessarily lessen our efforts in Washington. I agree that maybe we have not been as tough or as strong as we should have been. I wonder if you would like to comment on the opinion that, at least as it relates to the lumber issue, we should be spending more of our government resources, our DFAIT resources, on trying to get some additional friends to support our position in the U.S.
Mr. Flitton: Are you talking about spending more resources in Washington for that or elsewhere?
Senator Di Nino: I am saying that there have been a number of suggestions that we should go outside Washington and work with the stakeholders in the trade disputes. This would be the folks that you talked about already, the housing industry and so forth.
The Chairman: I think that what Senator Di Nino is referring to is the evidence that we have that the consumers, of course, in the U.S. are paying for much of this, and should we not develop relationships with people who have an interest in lumber imports from Canada.
Mr. Flitton: Before I answer your question, I want to make one quick comment. You talked about talent in your Senate committee or the Senate. I have dreamt more than once of having Senator Carney leading our charge in Washington.
Senator Carney: I am available. I would be on government business.
The Chairman: We will not get into that, senator.
Mr. Flitton: She was tenacious in the 1980s in dealing with this matter, I can tell you.
Talking about Washington versus non-Washington lobbying, it should be 100 per cent Washington. The National Association of Home Builders has an office seven blocks from the White House. The National Association of Realtors has an office nearby. All these groups are centred in Washington. Unions have offices down there.
Going back to what Senator Lawson was saying about this being political and the president not wanting to upset people, for every person who agrees with the coalition position in the United States there are 25 who are opposed to it. There are unbelievable resources there to be capitalized on, and we have not done so. The consumer interest far outstrips the coalition interest, but someone has to make that point to Congress, to the senators. Nobody has told them that.
Mr. Allan: I welcomed the consumer voice on the file for the first time in an organized fashion a couple of years ago, but it is spread out over a large base and is not as focused as the producer voice. President Bush has something called an economic forum or round table. The chairman of that is the CEO of International Paper, the leading funder of the coalition. This is all about pure power politics in Washington. You have to get on Capitol Hill and better educate senators and the folks from Congress on Canada and Canada's trading relationships with the U.S. It is as simple as that.
Mr. Larsen: I agree with what Mr. Allan just said about reaching out to consumers. I had been involved in the effort funded through DFAIT to advocate more down in Washington, and it all happens inside the Beltway. I think John is correct that well-organized interest groups get their way in Washington and you have to be there advocating all the time. The consumer group is just too diverse. The impact, although widespread, is so small that it is hard to get them to coalesce around the issue. It is an inside-the-Beltway game.
The Chairman: On behalf of committee members, I want to thank all three of you for having provided an extremely interesting and informative morning for the committee.
The committee adjourned.