Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 7 - Evidence, November 21, 2006
OTTAWA, Tuesday, November 21, 2006
The Standing Senate Committee on Foreign Affairs and International Trade met
this day at 5 p.m. to examine the Canada-United States agreement on softwood
Senator Hugh Segal (Chairman) in the chair.
The Chairman: It is five o'clock and we do have quorum. Welcome to
this meeting of the Standing Senate Committee on Foreign Affairs and
International Trade of the Senate of Canada. We are fortunate this afternoon,
despite an impending vote in the other place, to have the Honourable David
Emerson, member of Parliament and Minister of International Trade.
As both the minister and our colleagues know, our activity at this committee
at this time is to study the softwood lumber agreement that was reached and to
reflect on its general connection with international trade agreements overall
and dispute settlement mechanisms as they exist in NAFTA and in the original
free trade agreement itself.
I understand the minister does not have an opening statement. I wonder if I
could just presume upon the minister and colleagues to ask if he might reflect,
having been intimately involved, along with others who are with him — Paul
Robertson, Andrea Lyon, Hugh Cheetham and Michael Solursh— on his view of what
impact the softwood lumber agreement, as achieved, will have on the dispute
resolution mechanisms that exist in NAFTA. Will it have any precedent-setting
impact, which could be problematic going forward, or might there be a more
salutary impact for other areas of difficulty as they might emerge?
Hon. David Emerson, P.C., M.P., Minister of International Trade: Thank
you very much, Mr. Chair. It is a great honour to be back with you to talk about
softwood lumber and other matters.
I look at chapter 19 from the perspective of someone who has been in the
softwood lumber business for a number of years and experienced chapter 19 in the
trenches, as it were. I have always looked at chapter 19, when it comes to
softwood lumber, as a somewhat imperfect dispute settlement mechanism.
It is better than any of the alternatives that are out there, notably the WTO
mechanism, in my opinion, but it is imperfect. It is imperfect in the sense that
the management and ownership of the forests and the forest industry in Canada is
so different from that in the United States. It brings into play arcane
complexities relating to the pricing of timber, the management of timber, the
management of access to timber, the management of environmental issues relating
to timber and the different parts of the forest products industry that we have
seen a world where legal and analytical and data amounts that are absolutely
huge have been amassed by those who have an interest in bringing actions under
U.S. trade laws against Canadian forest products companies, most notably lumber
The result has been that chapter 19 has led to a series of disputes that run
on for years. During those disputes, chapter 19 has permitted interim duties to
be applied for years before they are finally ground down by legal actions and
legal victories along the way. However, the disputes, despite winning legal
victories, are never really won in a business sense.
Therefore, we have had the result that we have just have gotten ourselves
through with the softwood lumber agreement, where the latest softwood lumber
dispute has gone on for five years. It started out with roughly 27 per cent
combined duties. We have only just got it down to 10 to 11 per cent in the last
brief while, with threats that it would have gone up in the 14, 15 per cent
range this fall.
All of that is to say chapter 19 has given us a valuable mechanism for
tackling trade disputes, in this case softwood lumber. However, for softwood
lumber, it has not been the ideal mechanism. That is why, in the softwood lumber
agreement, we have put in place a stand-alone dispute settlement mechanism to
deal with issues that would arise under the softwood lumber agreement — that is,
in matters pertaining to lumber and any issues of contravention and so on that
may arise under the agreement. That dispute settlement mechanism will be
relatively rapid, taking something like two to 10 months to complete. It will be
binding, and it will result in disputes being brought to a head very quickly.
It in no way compromises chapter 19 as a general NAFTA dispute resolution
tool. Chapter 19 remains. In fact, with softwood lumber sidelined as an object
of chapter 19 for the next seven to nine years, I think it will provide a much
better opportunity for the Americans in particular to become more balanced in
their view of chapter 19. As much as chapter 19 may be something we value
tremendously here in Canada for most sectors, it is not something that is the
object of adulation in the U.S — in fact, quite to the contrary. There are
substantial bodies of opinion in the United States that would like to see
chapter 19 eviscerated or eliminated.
Senator Stollery: As you know, we are here, as much as anything, on
the issue of dispute settlement mechanism. I should like to read into the
record, Mr. Chairman, an editorial that appeared in the Financial Times
on April 29, 2006, probably the English-speaking world's most widely read and
reputable business newspaper.
The heading is as follows: "Soft in wood and head: US-Canadian lumber deal
makes a mockery of free trade.'' The article reads as follows:
North America is often thought of as the home of free market ideology,
and the US and Canada are also supposed to be part of the North American
Free Trade Area (Nafta). Yet the governments of the two countries have
agreed this week to settle their long-standing dispute over Canadian exports
of softwood lumber to the US in a manner that would have made Comecom
officials of the Soviet era look like relative Friedmanites. Under the deal,
the US will lift import duties and hand back some of its past levies, but
only in return for Canada agreeing to impose an export tax that will rise if
the price and quantity of its lumber shipments into the US market strays
from certain limits.
If private companies were to attempt, on their own, to strike this kind
of anti-competitive deal, they would be rightly hauled before US and
Canadian authorities. Yet the latter can call it managed trade and get away
Sadly, however, it has only been through sporadic market carve-ups of
this sort that Washington and Ottawa have been able to reach any periodic
truces in their 20-year subsidy dispute. The US complains that Canadian
companies pay lower "stumpage'' fees to fell timber than their US rivals
south of the border. Most of the rulings by panels from Nafta and the World
Trade Organisation have been in Canada's favour, but have failed to settle
In the end, the softwood saga shows the limits of international disputes
procedures when the two parties are determined to ignore them and go on
slugging it out. However, the rest of the world is entitled to laugh when a
US official this week dared to call the deal "a solid market-based
The Chairman: I assume that you do not necessarily associate yourself
with those views but are just reading them into the record. Is that correct?
Senator Stollery: These are the views of the editorialist of the
Financial Times, but I certainly have to ask the minister what kind of
message that sends to the world when we in Canada have not had a discussion on
trade since the McDonald commission, when I was in the House of Commons. What
kind of message does that send to our competitors in the world? What does it
tell us about dispute settlement mechanisms if there is a dispute that neither
party really wants to settle? Where do we go with all of this?
Mr. Emerson: I am glad you read that into the record. It is a very
nice,Alice-in-Wonderland rhetoric, but the reality is that we live in Canada,
where thousands of people work in the softwood lumber business. We have to take
care of Canadians and Canadian workers. While we all wish that dispute
settlement was other than it is, we can all come up with a version of dispute
settlement that would be superior.
I strongly believe and the government strongly believes that the negotiated
compromise that we have established in a second-best world is a pretty decent
outcome and far better than we have achieved in the past. I would say as well
that the Government of Canada has been as strong as any country in terms of
promoting multilateral trade liberalization and improvements in the trading
system, including better dispute resolution and better rules around trade
remedies. I would far rather be using chapter 19 with all its warts than be
using a WTO dispute settlement mechanism only, in dealing with the issue that we
have just had to face. As you know, under the WTO, you do not get your money
back when you win a case. Your remedy is essentially to launch a retaliatory
attack on the trading partner that has violated WTO rules. You perhaps also know
that it is difficult as hell in Canada to find anything more than a few million
dollars in retaliatory tariffs that you can impose without doing more damage to
the Canadian economy than you are accomplishing through the retaliation.
It is not perfect, and I fully agree with the sentiment of the article, which
I presume is close to your sentiment, that dispute settlement is critically
important. It deserves more attention than it gets, but we also have to live in
the real world, where some countries are simply not prepared to make the kind of
revolutionary changes to dispute settlement that we would like to see, and it is
for very parochial protectionist reasons.
Senator Di Nino: Welcome, minister. Good to see you again. Without
taking anything away from my colleague's comments, I have a question that needs
to be asked. We can take a look at the enormous trade between the two nations —
perhaps we should say both the FTA and the NAFTA — of $300 billion to $400
billion annually. We have had many disputes, likely uncountable numbers, over
the years. What has our experience been generally?
Mr. Emerson: I have a table that was prepared by my officials on all
of the chapter 19 experiences under NAFTA. I am happy to share it with the
committee, although I will not take you through it generally. I will go back to
my opening comments in response to the question from the chairman, because I
believe that chapter 19 has been particularly difficult for softwood lumber, but
not as problematic for other sectors. There have been difficulties with chapter
19 in respect of delays and decisions not always going our way, the way in which
"subsidies'' and "dumping'' are defined, concepts of injury and threat of
injury, et cetera. However, I believe that the sheer complexity of the softwood
lumber business and the interaction between the state and the private sector in
ownership, pricing and regulation of timber and timber management have truly
created a bit of a monster, where chapter 19 for softwood lumber is particularly
painful. For many other sectors, it is much less so and can be much more
successful. For such sectors, it is much clearer whether an industry is
subsidized. The world of the softwood lumber industry is a very fuzzy and
complex world. That makes it difficult.
Senator Di Nino: Has it been Canada's experience that as a dispute
mechanism it has worked better, other than in softwood lumber? Have we not met
with a large degree of success generally in our relationship both under the FTA
and the NAFTA?
Mr. Emerson: I would say that generally speaking we have been very
successful using chapter 19. I would argue that softwood lumber has been a wild
outlier in terms of the use and application of chapter 19.
Senator Andreychuk: Welcome, minister.
Did I understand you to say that, despite chapter 19, it is not the fault of
the agreement but rather the complexity of the issue — that is, it does not
neatly fall into what agreements normally contemplate? Is that correct?
Mr. Emerson: It is kind of correct. Chapter 19 and NAFTA are set up on
respect for domestic laws of the partner countries. The problem with chapter 19,
in my view, is less to do with chapter 19 itself, although there are potential
improvements that I believe can be made — procedural and others within a NAFTA
agreement framework. Rather, it has more to do with the fact that it is driven
off domestic laws, which are forged by Congress. You think you will win on the
basis of today's laws, but you cannot preclude those laws being changed. The
history of softwood lumber has been this: When they think you are gaining ground
and you might win a series of cases based on one set of facts and arguments,
they tweak the regulations or the interpretation, or possibly the law itself. If
the partners are not fully committed to free trade and if you build a model such
as NAFTA and chapter 19 around respect for domestic law and the application of
it, then you will run into these problems.
Senator Andreychuk: It is ultimately political will to abide by the
agreements. May I ask a second question? Ultimately, in negotiations that are as
broad and as difficult as these, it cannot be applied evenly and as well
geographically. Could you comment on the effect on Saskatchewan?
Mr. Emerson: Sounds like an aggrieved province. The reality of the
softwood lumber agreement is that we have gone a long way, in terms of the
panoply of national interests to protect provincial forest policies, indeed to
protect their ability to evolve those forest policies in a reasonable way.
We have protected provincial choice in terms of what kind of mechanism they
would choose to put in place in weak markets. Saskatchewan has chosen to go with
what is called Option B under the softwood lumber agreement. Option B, in a poor
market, is basically a much-reduced export tax in exchange for acceptance of
quotas or volume restrictions, and when you get to volume restrictions, you then
nationally have to do some arithmetic. If you are going to put volume
restrictions in place, what is the base against which those volume restrictions
are to be calculated? That means you have to figure out what year or years you
use to calculate the normal level of export activity from a given region.
During the relevant periods for making these calculations, the industry in
Saskatchewan was not particularly aggressively focused on the United States
market. The consequence is that Saskatchewan feels it is being shortchanged in
terms of its quota volumes under Option B. However, I will say again that
Saskatchewan could have selected a different option, which would have been to go
to a market pricing, timber pricing system. If the province had gone to an
Option A, it would not have the same kind of quota-based problems it is now
We are working with Saskatchewan to help them to resolve where their lumber
and forest industries can go in the future, and we hope we will be able to help
them through the transition they are facing.
The Chairman: I wonder if I could beg your indulgence. There will be a
vote in the other place and a bell that may sound as soon as 5:30. I have
Senators Carney, Austin and Corbin on the list. I would ask honourable senators
to be as brief as possible in putting your questions, so that the minister can
respond to everyone on my list.
You will not allow me to do that, Senator Carney? Why not?
Senator Carney: I have specific concerns that may not be similar to
the others. That is why I came here.
The Chairman: If you get to ask your question and express your
concern, like all the others, that is not good enough?
Senator Carney: No.
The Chairman: Senator Corbin, you have the floor.
Senator Corbin: Mr. Minister, what, if any, legislation does the
current U.S. Congress have to adopt to bring the terms of the agreement into
Mr. Emerson: They do not need legislation. They have the executive
authority to bring it into play without passing legislation.
Senator Corbin: The president can do anything?
Mr. Emerson: Yes, on this particular issue.
Senator Corbin: He is not subject to review by Congress?
Mr. Emerson: I would say no, not on this. The Congress could not undo
Senator Corbin: Carl Grenier, of the Free Trade Lumber Council of
Canada, was before the committee last week. I am sure you know him well.
Mr. Emerson: Yes.
Senator Corbin: Mr. Grenier was rather flabbergasted to discover that,
just when full legal victory was in sight, the Government of Canada decided,
without serious consultation with industry — that is not necessarily my point —
and for a transparent political purpose — that also is not my point — that it
would settle by yielding to every U.S. demand and even more. Would the outcome
have been the same, had we waited for that legal decision?
Mr. Emerson: With respect to softwood lumber, I believe we have to
negotiate a solution. We have won home-run victories legally in the past, and we
have always ended up negotiating the final solution. I believe we could have won
and probably would have won more legal victories on the cases that have been
outstanding. They would have been appealed. We would have been into a period of
uncertainty again, with more duties, more legal expense, more uncertainty, for
probably a minimum of a year, and we would have had no ability to prevent, as we
do now, the instigation of yet another case.
I can tell you that, in the lumber market we find ourselves in right now, the
ease with which the Americans could make another case and probably make it
stick, to our pain and detriment, is greatly increased. This is absolutely the
worst time to be allowing ourselves to be exposed to U.S. protectionists.
Congress is becoming more protectionist, not less. The industry down there is
aggressive, and they were chomping at the bit waiting to launch the next series
I do not accept Mr. Grenier's comments in that regard at all.
Senator Carney: First, minister, because I am no longer on this
committee, I was not aware you were appearing until just a few minutes ago, so I
have not had a chance to read all your material. However, I do want to voice
some questions that I am asked, since I have sat in your place and understand
some of the challenges you face.
One of the issues is not whether you negotiate, because I negotiate an
agreement; it is what was negotiated. The Coastal Community Network told us last
month, through a forester for the B.C. government, that under this agreement, at
the present level of tariffs, the increase of log exports from B.C. will
continue to rise.
As you know, this is a very emotional issue because it involves exporting
jobs. The forester explained that, because the tariff now is well above the duty
that was imposed under the old arrangement, it is so profitable for Americans to
come and buy our logs — ship them south of the border and compete with us in our
lumber markets — that our mills will suffer.
I understand in the 73-page agreement that you have some side deal or side
arrangements to study this issue, but what steps are you taking to protect those
Canadian jobs on Vancouver Island that are lost by the increase in log exports,
which have already doubled and tripled in the last few years? That is the first
of three questions.
Mr. Emerson: I will make my answers quick so we can get to others.
Those who criticize this deal as not having solved the problems of the
coastal industry in B.C. I do not think are being entirely forthright about what
was proposed by the coastal industry in B.C. What was wanted was a relatively
wide-open concession on log exports in return for some improved treatment of the
coast in terms of the lumber market. There would not have been more restrictions
on log exports; there would have been fewer.
Today, what we have is what is called a surplus test, as you know, where,
after advice from a couple of committees that operate in British Columbia, we
permit log exports only when there is a surplus of logs based on local demands
from sawmillers. There are all kinds of problems with that, as you know,
senator, so we are working with the Province of B.C., and they are involved in a
fairly advanced way already. We are doing a complete review of the coastal
industry and the question of whole log exports in British Columbia. We are
working in consultation with the province to try to devise a policy that will
integrate into the softwood lumber agreement, as there is provision to do over
the next year or two, but will also work in the best interests of the coastal
lumber industry in B.C. and, we hope, result in less, not more, exports of whole
Senator Carney: On that point that, what is, at today's market prices,
the effective tariff at the border that has to be jumped by B.C. producers
compared to the duty that existed before?
Mr. Emerson: Are you talking about the tariff on logs?
Senator Carney: No, I am talking about lumber.
Mr. Emerson: Today, it would be 15 per cent.
Senator Carney: At today's market prices?
Mr. Emerson: Yes.
Senator Carney: It was supposed to be — when this was negotiated in
April it would be zero, so it is back up to 15 per cent.
Mr. Emerson: There was no "supposed'' to about it. It was always
negotiated that at certain prices it would be zero — that is, above $355, and
below that it would step up in notches from 5 to 10 to 15. We are in a very bad
lumber market right now. If you look at history, about half the time in the last
10 years we would be in a tariff-free zone.
This is really important — because people do not remember this enough.
Remember that you have a market-based timber pricing system in B.C. now, both on
the coast and in the interior. When you have a market-based timber pricing
system, the fact that you have an export duty of 15 per cent gets captured in
the bids for timber. You have bought yourself the protection of a timber pricing
system that, to some degree, inoculates you against the tariff itself.
Senator Carney: The magic words there are "to some degree,'' because
it is not 100 per cent market based in British Columbia. We do not need to get
into that debate, because it is boring for the others, but it is not
My third question is on the future of NAFTA. As has been pointed out before,
Congress controls trade policy. The president does not have control of trade
policy. That has been a problem before, because presidents of the United States
have not been able to interfere with this process. Given the fact that there may
be a change of government in the States, what is the protection in this
agreement that we will not face this situation earlier than the seven years that
has been forecast for its effect? At any given time under U.S. law, X percentage
of lumber producers with Y percentage of the market can launch a trade action
under U.S. law and the president cannot stop them. What is our protection?
Mr. Emerson: Our protection is the softwood lumber agreement. Industry
cannot launch a trade action while the softwood lumber agreement prevails. If
the government of the U.S. or Canada chose to terminate the agreement, the
agreement contains termination provisions that are stronger than in any other
trade agreement we or the Americans have. However, any country can essentially
terminate an international agreement after a certain notice period. I do not
expect that to happen, and industry certainly cannot, by themselves, launch
trade actions against Canada, even if the government changes.
Senator Carney: Over the full seven years?
Mr. Emerson: Right.
Senator Austin: My understanding of the terms of reference of the
minister's appearance today related really to chapter 19 and the dispute
settlement mechanism, so I will limit my questions at this stage to that area. I
am sure we will see the minister again when the bill is here.
Minister Emerson, the question I want to put to you is the current status of
the actions taken by the American lumber industry on the constitutionality of
chapter 19. Can you tell us what the status is of that litigation?
Mr. Emerson: The status of that litigation is that both the Government
of Canada and the Government of the United States disagree with the position
being taken by U.S. industry, and we intend not to proceed with that case.
Senator Austin: Has U.S. industry abandoned its case?
Mr. Emerson: They have not, at this time, abandoned that case.
Senator Austin: How do you prevent them from pursuing this issue? The
two governments in agreement have no force and effect, unless there is an
agreement that is absent from the softwood lumber agreement for the U.S.
industry to abandon their constitutional litigation.
Mr. Emerson: Our advice is that the mootness doctrine we have applied
to the cessation of litigation applies in this case as well. The case is
Senator Austin: You are expecting the U.S. Court of Appeal to accept
that argument at an appropriate future time?
Mr. Emerson: Yes.
Senator Austin: I am curious then as to why we would not want to know
whether chapter 19 is constitutional. I am speaking now of Canada. What did the
government base its decision on? If this were such an important dispute
settlement mechanism, I would have thought that we would like to know, for
future purposes, whether we can rely on it, or do we get a decision and then it
is vacated for constitutional reasons? That would undermine NAFTA totally, so
would we not want to find out whether this particular dispute settlement
mechanism is something we can depend on?
You will remember that Mr. Mulroney's government made, as its principal
argument in determining the value of NAFTA, that we had a dispute settlement
Mr. Emerson: The bottom line is that this was a negotiated settlement
involving the termination of litigation, and this was part of the body of
litigation that was to be terminated. My own instinct on it is that if the
United States already agrees that chapter 19 is constitutional, and the
Government of Canada agrees that it is constitutional, there is as much risk
going the other way. If this case were to proceed and for some bizarre reason it
were ruled that chapter 19 was not constitutional — that is as big a danger as
the benefit of finding out that it is constitutional. It was part of the
withdrawal, cessation of litigation.
Senator Austin: I understand the minister was a part of the deal, but
the U.S. industry was not told, as I would have thought, if you want your $500
million you have to vacate this particular claim. I do not understand, and
perhaps you can explain to us, why that was not required of them.
Mr. Emerson: I am not a lawyer, as you know. I am told that, as
private parties to it, that we could not require that of them. It is a matter
for a legal expert, not me.
Senator Austin: We have required Canadian industry to cease their
litigation as part of the softwood lumber agreement.
Mr. Emerson: We have applied the mootness doctrine and we have not
required that all Canadian companies withdraw from litigation.
Senator Austin: Is the Tembec case still in play?
Mr. Emerson: The Tembec case is still in play.
The Chairman: Colleagues, the bells are ringing in the other place,
and the minister has stayed as long as he said he could. I want to thank him for
joining us today.
We may indeed be seeing him again, depending on where legislation ends up. We
wish you every continued success.
We now turn to Mr. Gordon Ritchie and Professor Marc Busch, Karl F. Landegger
Professor of International Business Diplomacy, School of Foreign Service,
Mr. Ritchie was one of the principal architects of the Free Trade Agreement
between Canada and the United States, and was a senior adviser on the minister's
softwood lumber negotiating team in 2005.
Dr. Busch teaches international trade, policy and law. His current research
involves developing countries and WTO litigation. He has been a consultant with
DFAIT's trade law division, has published widely, and has also addressed the
NAFTA article 2022 panel on dispute settlement. Dr. Busch joins us from
Mr. Ritchie, could I invite you to make an opening comment?
Gordon Ritchie, Chairman of Public Affairs, Hill and Knowlton, as an
individual: Honourable senators, with your permission, I will make a few
comments in English, and then I will be happy to answer your questions in the
official language of your choice.
It is a pleasure to be here with you tonight on what I hope for all of our
sakes is the last time I will ever be asked to testify on this subject, although
I am reliably informed that some Washington lawyers plan to pass the franchise
on to their children and grandchildren.
The Chairman: I think it is called the gift that keeps on giving, Mr.
Mr. Ritchie: That seems to be the case. The last I heard, legal fees
had amounted to $350 million.
Mr. Chairman, I suspect I am not here in my official capacity with Hill and
Knowlton, but rather because of past experience and therefore I would underscore
that my views are strictly personal and represent no one else's opinions and
I have taken the liberty of providing the clerk with some notes to circulate
in advance, but in the interests of time, permit me to condense my comments to
just a few key points.
In reviewing the latest softwood lumber agreement, you have quite rightly
chosen to focus at the outset on one of its most troubling aspects — that is,
the long-term implications of trade disputes. I will leave it to the academics,
including Dr. Busch, to deal with the broader questions.
From a practitioner's perspective, the critical relationship is obviously the
United States, the main instrument is the NAFTA, and the biggest challenge by
far has been the softwood lumber dispute. As Senator Carney and others are very
well aware, these concerns were the centrepiece of the original FTA
negotiations. America was in a foul protectionist mood and Canada was at risk.
The U.S. government record of voluntary compliance with its international
obligations under the GATT was spotty at best and, I would point out, it has
remained very poor under the WTO. The dispute over softwood lumber flared up at
this time and it was very much on the minds of negotiators on both sides of the
Logic dictates that a free trade area has no place whatsoever for
anti-dumping and countervailing duties at the internal border. It makes no sense
at all, but Congress was not in the mood for logic.
We did the best we could with what I described to your predecessor committee
as a Rube Goldberg solution. Binational panels were to be established to ensure
that both countries complied with their own laws, the strength and weakness of
the agreement, and the decisions of those panels were final and binding under
The system has worked remarkably well for the overwhelming bulk our bilateral
trade. Most of the easier disputes are resolved before they get to the panel
stage, and I think Dr. Busch will attest to that. The decisions of panels on
difficult cases have generally been respected and implemented, if not always
with good grace. It is true that most of the complaints have involved American
abuses of their own free trade laws and in almost all cases the panels have
found that the American authorities were wrong to impose those duties certainly
at the level they proposed.
By and large, however, trade has moved freely and has been very much to
Canada's advantage as our exports have more than tripled and the trade balance
has swung dramatically in our favour.
The obvious exception is softwood lumber. I will not bore you with a recap of
the history of this problem child of free trade beyond observing that it has
always been too explosive to accommodate within the free trade agreement.
At the outset, it was carved out in a special deal. When that was terminated
and the Americans overreacted, Canada won its case in the panels but eventually
was compelled to reach a special agreement on lumber. When that expired, the
cycle was repeated and successive governments tried and finally succeeded in
negotiating the deal you have before you.
What advice, in summary, would I have to offer this committee? First, the
NAFTA dispute settlement, for all its flaws, is working surprisingly well for an
overwhelming bulk of our cross-border trade. It is naive to call for negotiating
improvements in this system. I can assure that the American view of acceptable
improvements would involve weakening, not strengthening, a regime that has
proved embarrassingly effective in calling them into line.
Second, a problem in lumber, I would argue, is not so much the provisions of
the FTA/NAFTA as an American political system that has permitted one powerful
industry with jobs and cash to throw around to capture the American executive
and legislative branches to the point where the administration has, with the
apparent blessing of the Congress, directly flouted U.S. law. Those who wish to
propose changes in the American political system are indeed welcome to it.
Third, the softwood lumber agreement is far from ideal, but it is, in my
judgment and experience, the best settlement that could be negotiated under the
circumstances. I know. I was there under a previous government attempting just
I would agree with virtually all the industry leadership that the agreement
serves Canadian interests much better than any realistic alternative. This
emphatically involves continuing litigation, which sadly is in the interests of
no one but the lawyers on the case, and perhaps their children and
grandchildren. My advice, when it comes to it, will be to hold your noses,
approve the softwood lumber agreement and leave the rest of the FTA and NAFTA
dispute settlement machinery in place to do its good work on the rest of our
The Chairman: I shall now call on Dr. Busch in Washington, and then we
will open the floor to questions from our colleagues.
Marc Busch, Karl F. Landegger Professor of International Business
Diplomacy, School of Foreign Service, Georgetown University, as an individual:
Thank you very much, Mr. Chairman. I applaud your committee's examination of
the implications of the softwood lumber agreement for NAFTA and for dispute
settlement more generally. There has been a great deal of debate in Canada as
well as in the United States about what this agreement actually means. Those in
favour of the agreement, especially in Canada, see it as a good deal and perhaps
the best deal that could have been had under the circumstances. Those opposed to
the deal see it as perhaps a compromise that falls well short of what could have
been had in future or successive litigation. I fully concur with Mr. Ritchie's
observation that this could well go on for many generations if let to its own
In net, like Mr. Ritchie, I see the agreement as being a good deal for
Canada. First, the SLA — the Softwood Lumber Agreement — has a number of
promising elements, which this committee has already taken up in a previous
meeting. The bigger picture, though, is that litigation typically produces deals
either before or after litigation has been fully vanquished. Indeed, settlement
is the norm, not the exception. What is interesting is, of course, that most
settlements are struck before a verdict is rendered by any international trade
panel at NAFTA, or at the WTO, for that matter. Opinion polls in Canada seem to
bear out that most Canadians appreciate that settlement is what litigation
brings to bear. That perhaps is why the SLA is viewed more or less as a good
deal to be had under the circumstances.
The SLA, though, should not erode confidence either in NAFTA or in dispute
settlement more generally. As Mr. Ritchie says, the NAFTA was struck under very
peculiar circumstances, and chapter 19 is a very interesting compromise that has
worked exceedingly well for Canada, especially outside the context of softwood
If we want to summarize this, the system did work, notwithstanding U.S.
interpretations of section 129 and what happened before the Court of
International Trade. Even here, the Court of International Trade rendered a
decision that looks very much in line with what Canada had hoped for. While
other litigation has been terminated, the WTO decisions are still on the books.
These will not be forgotten any time soon. To have held out longer, to have
sought more litigation, would only have raised the prospect of retaliation,
which Canada knows is not an appealing one.
The obvious question, then, is, has the SLA rendered a lasting peace? Clearly
not. For two reasons, though, we are unlikely to relive the past in the future.
The first is that we learned in this round of litigation that Canada has allies.
It has allies that have electoral representation in the Congress, notably Home
Depot and the Home Builders' Association, and these alliances need to be forged
even stronger than they were this time around. In anticipation of whatever comes
after the SLA, either its lack of renewal or its obsolescence, given market
circumstances, these alliances with industry partners in the U.S. need to be
forged even stronger than they are at present.
The second point is that, as an example of managed trade, the SLA is likely
to face international pressure in the future. It is one thing to offer a managed
trade solution when the U.S. and Canada are literally doing this on a bilateral
basis. As we know, the Europeans, the Chileans and others are increasing their
market share of softwood in the U.S., and just like the semiconductor
arrangement with the Japanese in the 1980s, the U.S. will find it increasingly
difficult to manage trade as more international partners become party to this
dispute. We have already seen a lot of interest on the part of third parties in
the WTO litigation, as where Europe and Japan have reserved third-party rights.
This is a clear signal to the United States that there is interest on the part
of other trade partners, who will not be either cut out of the United States
market or stand by idly as free trade rules are flaunted.
It is important for us to think about the future and lasting peace. There are
two things we have learned from this last round of the softwood dispute. One is
that there are domestic constituents in the U.S. who are on Canada's side, and
the other is that there are international partners with whom we can forge
stronger commitments to global trade rules.
The Chairman: Thank you very much for that.
Senator Dawson: You use the expression "hold your nose.'' Hold our
nose, but for how long? Is it worth holding our nose if it only lasts two or
three years, or do we hold our nose because it will go from seven to nine years?
Other witnesses have mentioned holding our nose and letting it go. I did agree
that it is better to go forward, but is there a minimum at which it is
worthwhile holding our noses? Do we do it for two years, three or four years, or
do you think if it is only for two years it is worthwhile?
Mr. Ritchie: There is no minimum. I hope it will last the maximum,
that is, from seven to nine years. But it is not impossible that something might
arise and result in an earlier conclusion. If this happens, it is not so certain
that the benefits would outweigh the costs of this agreement.
Still, I do not really think that this is going to happen because it is not
in the interest of the American producers. Second, the connection with other
possible options must always be underscored. As the minister has pointed out,
the day after the dispute ends, even if it is in favour of Canada, we can count
on the American industry to launch a new case, with a high probability of
I would have liked there to be a minimum period set of seven years. But even
the WTO, GATT and the Free Trade Agreement only had six-month terms. The
compromise gives additional assurances, but the longer it lasts, the better.
Senator Dawson: Several witnesses have told us that, because of the
very nature of softwood lumber and the lumber industry in the United Sates, and
the fragility of the Canadian industry, perhaps this was an exception. Do you
think, from your experience, that there are other areas in which they might use
the same tactics with us or does it depend on the arbitration mechanisms? Maybe
softwood lumber was an exception?
Mr. Ritchie: It is a case apart, completely exceptional, in my
opinion, for political rather than economic reasons. But it is a very powerful
and very well organized industry. They like these protracted struggles. It costs
an American producer less to put out some money to buy lawyers and politicians,
to restrict imports from Canada at the border, than to restructure their
business as they should to deal with Canadian competition. They are always going
to choose this option.
So, from my experience, I would say there are other very sensitive points.
Earlier, the senator from Saskatchewan talked about that province. Wheat, for
example, and the Canadian Wheat Board is another prime target. The fishing
sector, fisheries, is always a prime target. A number of agricultural sectors
are often targets.
However, with the possible exception of steel — and another extreme case is
maritime shipping and shipbuilding — I know of no case in which the industry has
been so completely able to capture the American government apparatus. I
underscore that because an ambassador here who shall be nameless took exception
to my making this assertion, which has since been fully vindicated by the United
States Court of International Trade. They had such influence over the U.S.
government that the government was prepared to blatantly violate U.S. law in
order to accommodate this special vested interest. In my experience, I have
never seen a case like that.
Not to be Pollyannaish about it — but there is the danger that the same law
firm that has been so successful as the gunslinger on this will hire itself out
to some other industry and offer to engage in the same search, destroy and burn
tactics. However, to this point, I have not seen any evidence of any ability for
them to mobilize that kind of leverage in any other sector.
The Chairman: Can I ask Dr. Busch whether he wanted to comment? I
noticed Mr. Ritchie sort of stayed on the fence and did not really tell us how
he felt about that phenomenon. Do you want to add your own perspective to that,
Mr. Busch: The issue of how long it is continued for is obviously
something best gauged by the market circumstances. As was pointed out by
Minister Emerson, this is a very tough time to be thinking about a lot of
deviation from the terms of the agreement with lumber at the current price —
where it triggered the export tax; this is certainly not a time to be thinking
about moving away from something that looks like the softwood lumber agreement.
My sense is that, especially in the eyes of business, it will have to be a
wait-and-see strategy with respect to the market conditions.
As well, the point made earlier about increasing protection in the U.S.
Congress, the U.S. is currently having to rethink a number of bilateral and
preferential trade agreements. At this moment, I certainly would not want to
throw a wrench into the system and raise new opportunities for the coalition in
the U.S. to make it even harder for Canadian businesses to sell in this country.
Senator Smith: I agree with Mr. Ritchie's observation that the
fundamental problem here is the U.S. political system. This is a bit of a
political question, although it is more of a U.S. political question.
In a previous life, I used to go down there on a number of occasions and was
in a number of those law offices you are talking about. I have a pretty good
idea of what some of those bills were.
I always found it frustrating, even when we had the change of government
here, in terms of the U.S. president and his soulmate that recently assumed
office — you never had the feeling that, to the extent there were IOUs that he
could use with some of these congressmen, if he wanted to cross the finish line
and get something happening, it was never happening. While normally,
philosophically, I have always felt more comfortable with Democrats than
Republicans, on this particular issue, if you are reading the tea leaves on the
impact of these negotiations, given the elections of a couple of weeks ago and
the shift in both houses, what impact do you think this will have over the next
months and years?
Mr. Ritchie: I am not so foolish as to attempt an answer to a
political question from the honourable senator, who is much more familiar with
those matters than I. Is your question relating to this particular instance or
to the more general?
Senator Smith: I think this industry, in particular, because there is
a union influence there, too. I am wondering whether it makes it more difficult
or is there some little light down the tunnel that we are not aware of?
The Chairman: I wish to add an amplification of that. I know Dr. Busch
in his previous work has looked at individual congressional districts and the
effect of those congressional districts with respect to actions taken by
Congress on trade matters.
Senator Smith: I should like them both to reply.
Mr. Ritchie: If you permit, Mr. Chairman, why does not Professor Busch
have the first crack?
Mr. Busch: It is interesting to reflect on why we signed the 1989 FTA.
The fear at the time was that with rising U.S. protectionism, we, as Canadians,
would be hurt every time the United States lashed out at Europe or some other
With the change in both houses, as the senator points out, there is a great
deal of concern that U.S. trade politics will take a turn for the worse in terms
of embracing a more protectionist stance. We are already seeing the results of
this election in terms of the sabre-rattling with respect to a number of trade
agreements that the U.S. has in the pipeline, including with Columbia, Peru and
The Democrats have already made it very clear there will be new conditions
saddled on to these deals that include labour and environmental standards.
Malaysia has already fired a shot across the bow saying that this is
unacceptable to that country. This is proof that the Democrats will be doing
exactly what many of them campaigned on the basis of, seeking to pursue
something that they term "fair trade,'' which is often code for a protectionist
The number of free traders who lost in the recent House and Senate elections
is quite impressive. What is even more worrying is that very few of the
Democrats who have come to power to take the place of various Republicans are
saying anything positive about trade with the exception, interestingly, of the
Doha trade round.
There has been some talk in Washington these past couple of days, after the
meeting in Vietnam this past weekend, that the Doha trade round may benefit from
the concern on the part of many member countries of the WTO that the U.S. trade
situation, given the congressional elections, is so dire that something must be
accomplished before George Bush loses trade promotion authority this coming
summer. The one area where we are seeing the Democrats apparently willing to
talk with the president is on Doha, the trade round at the WTO. All other bets
are off right now, and trade seems to be greatly imperilled.
This is exactly why we struck the 1989 FTA — and as I said earlier, it is
reason enough to have a go at this SLA and to not think about opening up
anything any time soon, least of all NAFTA. It will not get done. As Mr. Ritchie
points out, should we open that Pandora's box, it will only look worse after the
Senator Austin: What do you think might be the outcome with respect to
the extension of President Bush's trade agreement authority, which expires at
the end of June or in July of 2007?
Mr. Busch: That is why I said he will lose it in July of 2007. Again,
the word on the street here in Washington is that there may well be a deal that
is possible, where trade promotion authority would be narrowed to the Doha round
only. This would allow the president to get the deal done under Doha, but it
would not allow him to bring back to the Congress for a yea or nay vote, no
amendment, any trade deal he is currently negotiating. That would likely include
Korea, and that would include the others I mentioned earlier.
The sense on the street is that, if there is any possibility of a compromise,
it would only be limited to the Doha trade round. It would not be more general.
Senator Stollery: It has been interesting. I was a member of this
committee when we looked at the free trade agreement in 1988-89. I never thought
I would be having this conversation so many years later.
Mr. Ritchie: Nor did I, senator.
Senator Stollery: To the business of the bilaterals that the Americans
are talking about — Columbia/Peru and Malaysia/Korea — I find it hard to believe
they would reach a dispute settlement mechanism better than the one that we
have. I must say that I cannot understand how Columbia or Peru or any of those
other countries would ever win a dispute against the United States.
Let us go back to the Byrd Amendment for a moment. There have been two
elements to the dispute on softwood lumber. As interesting as the conversation
is that we have been having, it has ignored the importance of the WTO ruling.
The Byrd Amendment was dealt with, as I understand it, only because a number of
countries went after the U.S.
We all know that sanctions can be imposed on a major trading partner and that
they tend to rebound, but there is a strength in the multilateral system. I
believe Professor Busch made the point that in the lumber business other
countries become actors in the U.S. market. I believe we heard from a witness
before the committee the other day that they are up to about 5 per cent. The
more actors there are, the more difficult it is for the American protectionists
to impose questionable tariffs and trade barriers because they have to deal with
countries that can retaliate.
As I recall the Byrd Amendment, it was the threat of Japan, Brazil and the
European Union, who are serious customers and players in trade for U.S. goods.
That was when the U.S. decided that it had better start talking. Is that not the
case? We abandoned the WTO with this SLA. Although everyone seems to agree that
we will win the next case, we seem to have gotten out of that. Have we not lost
potential allies who are able to impose sanctions? Brazil is a lumber-exporting
country. I do not know the details of the lumber business, but, certainly, when
you anger the other players then you risk facing serious sanctions that have
What happens then? Is that where we are going? Is not the purpose of the
multilateral trade system to avoid going up against just one country? What
chance does Columbia or Panama have against the U.S? I was reading in a
Panamanian newspaper about the free trade agreement with the U.S. The
agricultural interests in Panama were against it because they knew they could
never win a dispute with the U.S. Once an agreement becomes part of the
multilateral system with many countries going after the U.S., if an injustice
occurs, then those countries as a group stand a chance of winning the dispute.
Is that not where we are going in this business?
Mr. Ritchie: Senator, I commend your comments and have given that
speech occasionally myself. However, I would introduce a few caveats within this
room. The first is that we should be under no illusion that any free trade
agreement ultimately rests upon the willingness of partner countries to
retaliate or undertake compensatory withdrawal or, failing the success of that,
to terminate the agreement. Therefore, second, when it comes to GATT and WTO, I
repeat, contrary to the theology, the U.S. track record is spotty at best — a
very polite way of putting it — in terms of voluntary compliance. Some cases are
settled on the way through the process but only when the U.S. is threatened with
serious retaliation by serious partners that it is prepared to contemplate —
Senator Stollery: Which was the case with the Byrd Amendment.
Mr. Ritchie: — complying with its obligations. Third, I would observe
that on important issues, Canada is on its own. The unwillingness of the other
WTO countries to constructively support Canada on the softwood lumber dispute —
with the exception of the Byrd Amendment issue, which could touch them, their
willingness was measured at much less than their 5 per cent market share. They
were perfectly prepared to have the Canadians take a beating at the hands of the
Americans, which meant the only recourse Canada had was to be prepared to
contemplate serious retaliation or termination of the agreement. For obvious
reasons, neither of those was considered an acceptable strategy.
In respect of the Byrd Amendment, let us be under no illusion on that. First,
it was perpetrated by a Congress that, arguably, and I will defer to Professor
Busch on this, was less protectionist than the current Congress. It is not only
that you have seen a shift to the Democrats but also that you have lost many
free trade Republicans and that the new Senate leadership of the Republicans
includes, for example, Senator Trent Lott, who owns a sawmill. What more can I
The Byrd Amendment was an egregious breach of international obligations.
There was never any question but that it was completely contrary to the WTO. The
WTO laboriously got around to finding against the Americans, who refused to
comply until they were threatened with retaliation because the implications went
far beyond lumber. The Europeans are prepared to let us take the heat on lumber,
but when it looked like it might affect some of their products, they became
interested, which is your point.
Even then, you will recall that the remedy proposed by the U.S. Congress was
tailored specifically to ensure that the U.S. lumber producers would continue to
get their money, as they saw it. This was not a voluntary compliance. Under
great pressure, the Americans agreed to a solution that would have left us and
our lumber producers hanging out to dry.
I recognize that, under some circumstances, the multilateral system has some
advantages. However, first, it works very slowly; second, the results, putting
it kindly, are somewhat erratic; third, the Americans are not voluntarily
compliant unless and until they are under enormous pressure; fourth, they will
not be put under that pressure on an issue that does not directly engage the
interest of the Europeans and the Japanese, who will not come to bat because of
truth and justice and Canadian interests; and fifth, the resolutions are not
retroactive, so if we had won a WTO resolution, our producers would have
received none of the $5 billion. When you put all that in a package, the WTO has
I will open one parenthesis. I was not involved in the decisions, but in my
view it was a major strategic error for Canada to have gone to the WTO with
respect to the lumber dispute. I would have adamantly insisted upon keeping
focussed on the one forum. Why? Because the FTA provisions with all their
failings are an awful lot stronger and tougher than the WTO provisions, which
provide for retroactivity and have the force of U.S. law. Although the
administration resisted it, the courts have since confirmed that.
For those reasons going to the WTO, which was explicable, I understand the
reasons and section 129 and all that, and they did not anticipate the Americans
getting away with what they were able to pull on that. It took everyone's eye
off the ball and enabled the U.S. merchants of spin, including the
administration and their diplomatic representatives, to blow smoke over the
whole issue and seriously weaken Canada's very strong moral position on that.
You have heard distinguished American spokespersons claim there were a lot of
cases involved and Canada won some and the U.S. won some. That is absolute
nonsense. Canada won on every single material issue that was ever addressed by
any responsible tribunal, at the international, binational or national level.
The rest was smokescreen.
The Chairman: Professor Busch, did you want to comment on that?
Mr. Busch: I wanted to add to Mr. Ritchie's point that it was a
resounding success at the WTO. Obviously, there are questions that JLT, the
DFAIT lawyers, must ask in terms of forum shopping. In this case, I would
suggest that, in fact, it was very useful to go to the WTO simultaneously.
Canada had never done that before. It sent a loud signal to the United States
that this time around was going to be different, that there was considerable
anger, and, moreover, we were able to draw the attention of the world to the
disputes that the WTO did entertain. We had to win a couple of cases on appeal,
but ultimately Canada did prevail on the substantive issues brought before the
It was useful to draw third-party interest, inasmuch as it put a spotlight on
U.S. measures, and so in this regard the effort was certainly useful as a way to
offer transparency on a dispute that truly is between Canada and the United
In terms of the senator's question about whether the multilateral institution
will offer us opportunities to draw in other players, the answer is absolutely.
So long as they do enter as co-complainants, their efforts will be useful in our
efforts to curtail protectionism. As third parties, they may be less useful than
we might like to think. It turns out that negotiated settlements are much more
complicated and less likely when third parties are drawn to a dispute. By third
parties, I mean what the WTO means by third parties, namely, countries that
reserve rights; they offer testimony but they themselves are not bringing legal
actions against the defendant.
In Canada's case in softwood, in the future, if this does go to the WTO yet
again — when JLT sends my twin daughters, who have been invited to join the
staff in 2027, to litigate softwood lumber VII — it would be much more useful to
have Europe, the Japanese, the Brazilians and others as co-complainants.
The problem, as Mr. Ritchie points out, is there are incentives to "free
ride,'' to allow Canada by itself to strike down these measures and for these
other countries to benefit, doing very little on their own. If we can muster
their interest in these disputes to file as co-complainants, given their market
share in seven to nine years' time, they could prove useful in having the U.S.
turn away from these protectionist measures.
The Chairman: We are informed that there will be a recorded vote in
the chamber at 7:07 on a motion by Senator Banks.
Senator Andreychuk: A one-hour bell for a vote at 7:07.
Senator Di Nino: Welcome to both Mr. Ritchie and Dr. Busch. Let me
take a quick moment to make a comment. There has been a great deal of
observation about how long this has been going on and how much longer it will
continue. My personal opinion is that it will go on forever, as long as we have
business relationships. It is probably incorrect to think that we can solve any
of these issues permanently. Yes, Dr. Busch, in 2027 your twin daughters will be
there to represent Canada, I hope.
The other thing is that if we did solve all these problems what would lawyers
do? They would all starve to death. That certainly would not be something my
very good friend Senator Smith would like.
The Chairman: It is a risk that some of us can live with.
Senator Smith: I have twin daughters, too, Mr. Busch.
Senator Di Nino: Maybe they can start a new law firm called Twins
I should like to explore with the witnesses other forms of remedies. In
effect, what is it that we may have done that was wrong or should be doing that
we have not? I refer to some of the comments made particularly by Dr. Busch when
he talked about the allies that we have in the U.S. As well, we have heard in
the past that we may not have been as active in those communities as we should
have been as a country.
As two interested observers, I wonder if you could inform the committee as to
what you think other remedies could be. These problems may never be solved, but
they could be resolved in other ways or at least the number of disputes could be
Mr. Busch: The idea of remedies is the heart of the matter with
respect to the NAFTA litigation and the Court of International Trade's rulings
on the litigation that went domestically.
Canada is certainly doing the right things. I do not think there is a magic
bullet that has been missed in all of this litigation. As has been pointed out
earlier this evening, when the WTO renders a decision, it is looking for
prospective compliance. The issue of retroactive damages is somewhat difficult
to pin down in WTO law. Interestingly, there are a number of anti-dump cases
under GATT where retroactive damages were potentially issued. It is not
completely out of the question that the WTO could not offer some assistance in
In terms of the Court of International Trade's verdict as to how NAFTA and
section 129 would lend to the clarity of how this refund would happen, here
Canada got it all right. As has been pointed out, despite the fact that the
system works, the U.S. has proved intransigent on the issue. As far as we can
tell, we have done everything right. There is not a missing something out there
that has not been tapped as of yet. We have to make sure that, politically
speaking, we get the upper hand. This relates to your other point, which is
whether there are communities or alliances that we can make use of to better our
odds of winning in the future. The answer is certainly yes.
As I mentioned before, the difference between softwood lumber IV and some of
its earlier incarnations is that this time around we had Home Depot based in
Georgia, which has significant electoral influence. We have a number of other
groups that are adamant that they not pay more for the cost of building a house,
especially during a potential market bubble-bursting period as we have now in
the United States. This is not the right time for these anti-dumping and
countervailing duties to be raising the cost for the Home Builders' Association
for constructing a house, and this is exactly what we have to get out. More
effort has to be made to publicize this information, that this is something that
is hurting the Americans as much as it is Canadians.
One example this committee may find useful in reflecting on is this: Vietnam
ran into a similar problem here in the United States. The U.S. imposed
anti-dumping duties on Vietnamese catfish imported into the U.S. There is a
small but vocal catfish industry in the U.S. and it demanded assistance in
combating Vietnamese catfish imports. They did this in two different ways. They
hit the Vietnamese with an anti-dump duty as well as a labelling and health and
safety standards dispute.
Then George Bush discovered something that was rather interesting in his
political calculus, and that is that more Americans derive a paycheque
processing catfish than catching catfish. The processors of catfish do not care
about the nationality of the catfish they process. This led Bush to move quickly
to overturn the protectionism, and the Vietnamese catfish are pouring into this
country, quite literally.
The example is instructive in thinking about how Canada also has to get the
information out that these duties, and the absurdity of managed trade in
softwood, must come to an end, if not for the betterment of Canada, then for the
betterment of domestic constituents, which in this country have considerable
electoral clout, including Home Depot.
Mr. Ritchie: I want to add to that a quick conceptual structure, which
has to do with consumer and producer interests. As you know from your
experience, better than I, the producer interest tends to be narrowly focused
but very deep. It is worth a lot of money to a producer to effect an outcome.
The consumer interest may be much bigger overall, but it is very thin.
How is that relevant to this discussion? When the U.S. puts up a protective
tariff, yes, it has some impact on Canadian producers, but it has the biggest
impact on U.S. consumers.
If Canada were to retaliate, we would simply compound the impact on our
Canadian producers, with a further adverse impact on our Canadian consumers, who
would be paying more for the goods they were importing, which is why it is
irrational to retaliate unless that is the only means by which you can get the
other guy's attention and you believe you will get his attention.
In this particular case, first, that is why the recourse we sought to have
was through the FTA mechanism that would invoke U.S. law rather than the brute
force of retaliation/counter-retaliation games. As you all understand, for
Canada that is a no-win kind of solution. It was shocking that the Bush
administration thwarted that effort by denying that they were obliged to follow
their own law, and that is one of the things that made this latest dispute so
Secondly, as a caution when it comes to allies, there are huge constituencies
in the United States that are suffering from U.S. protectionist action on
softwood lumber. What is not widely understood is that, while the Canadian
producers were required to pay approximately $5 billion in deposits, U.S.
consumers will have themselves paid over $15 billion in higher prices. Clearly,
there is a huge U.S. consumer interest.
In my experience, that was absent at the negotiating table and it is absent
in the halls of Congress. There is no question that Home Depot and, above all,
the U.S. Home Builders' Association, can mobilize a huge body of interested
parties. Yet, when they come to the Hill, they have 14 items on their agenda,
and one of the smallest items is the fact that a protectionist action will
somewhat increase the cost they will be passing on to buyers of the homes they
Therefore, while it was a worthwhile endeavour to mobilize that kind of
support, which I strongly supported, do not hold your breath for the day when
the interests of homebuyers will outweigh the interest of the sawmiller who
provides jobs in the riding of the senator or congressman, and has the cash
wherewithal, under the interesting American political electoral financing
system, to significantly convey their wishes to the elected representatives.
I do not disagree at all in principle with Dr. Busch, but in practice I have
to tell you that at no point ever in over 20 years of negotiating this issue
with the Americans have I detected any sensitivity on the American side of the
table to the impact on U.S. consumers of softwood lumber.
The Chairman: Could I just ask, without taking Senator Di Nino's time:
Is that because, in your judgment, the vast breadth of the U.S. economy is such
that no specific consumer issue produces the kind of pointed lobby that might be
helpful in support of fairly priced Canadian exports?
Mr. Ritchie: That is a big part of it. The interesting thing is that
if ever there were a case where it should have been effective, it was lumber.
Representing one third of that market, we are a very significant determinant in
the overall level of prices, so it does not take an economist long to show a
direct causal link between the tariff at the border and the price paid by U.S.
consumers. Nonetheless, the impact, which was estimated at a couple of thousand
dollars per home, paled by comparison, especially during the period of the U.S.
Mr. Busch: Could I jump in on this point? I agree with Mr. Ritchie
that consumers, as the people who shop at Home Depot, certainly do not have the
incentive to mobilize for the purpose of political action. However, what is
really quite interesting these days in the Congress is that we are seeing
retailers, as a business-to-business or value-chain constituency, mobilized with
I need only point your committee to the experience of the textile industry in
the United States and Europe to see the successes of retailers as of late. Under
tremendous import pressure from China, we have seen retailers in the U.S. and
Europe mobilize for the purpose of upending managed trade agreements that are
currently in place in Europe until 2007 and in the United States until 2008. In
an odd way, for those of us who study political economy of trade issues, the
striking thing that we are seeing these days is the rise of the retailer as a
politically influential constituency.
I truly hope this will prove to be true in regard to softwood in the future.
I agree with Mr. Ritchie's points, but I am hopeful, given what we are seeing on
Capitol Hill right now with respect to textiles. There is no greater pressure in
this country, no more jobs at stake in this country, than in the case of
textiles being potentially exploited by Chinese imports, and yet the retailers
and the consumers they represent seemingly have won the ear of Congress and have
enjoyed a modicum of success of late. I am hopeful that we can tell a similar
story to our children — the ones who staff this interesting law firm in the
future — that there is an opportunity here.
Senator Di Nino: Both of the commentaries are very interesting. My
question is a simple one. Is Canada paying enough attention to these other types
of remedies and are we dedicating enough resources? One of the recommendations
we made a couple of years back was that we should have more trade offices and
more consular offices in those areas where we are doing business. Obviously,
this is on softwood lumber, but there are other products and services as well.
Are we, as a country, paying enough attention and dedicating enough
resources, in your opinion, to the other remedies that may be available to us
that at least help in this dispute that we have?
Mr. Ritchie: The question of optimal resource allocation, particularly
in our U.S. consular and diplomatic services, is a difficult and complex one. My
only observation would be that, going back to when we conducted the original
free trade negotiations, we were very sensitive to that and we mobilized every
consular office to go to the local congressmen and senators and make the pitch.
We received some receptivity.
When we tried to do the same thing on an issue such as steel or lumber, we
received a very different reaction, for the simple fact that our consular
officials do not vote in their elections, whereas the workers in the sawmills
do. It was a completely unequal contest. Should it be done? Of course. Will it
change the political calculus of the log-rolling — I hate to use that term in
this context — senator or congressman? No. The calculus will always be in favour
of that producer/worker interest.
The Chairman: Dr. Busch, did you want to add to that in some way?
Mr. Busch: The only thing I would add is that we do see in this
country, for example, the Mexican government and various Mexican trade
associations doing a far superior job at getting information out to elected
officials in Congress about the negative implications of protectionism against
producers in Mexico than most countries seem to do here.
While Mr. Ritchie is correct that there certainly is a lot of effort on the
part of the consular services, the embassy here in D.C., to get the word out,
there is always room for more information. What is surprising in the case of
softwood is that there has been very little discussion in the media about the
tremendous cost to domestic constituents. By that, I mean both businesses that
buy as well as consumers who go to Home Depot, as to the costs of these
The information is certainly being pumped out these days by the government of
Kazakhstan, which has a major PR initiative in this country right now. We are
seeing a number of countries really push hard trying to get the word out as to
their needs for stronger trade relations with the United States. At a time when
Canada has a number of disputes ongoing with the United States, it would be
useful to have more of that information piped into the channels that ultimately
get people to call their elected officials in Congress.
Senator Austin: Your comments of a few moments ago seem to indicate
that Canada made an enormous mistake in not having Wal-Mart on its side in the
softwood lumber issue, because Wal-Mart has an enormous clout in Congress when
it comes to trade issues, particularly consumer-related trade issues. That was
not my point; it is just an amazing process that we are discussing.
There are two issues that I wanted to raise with both witnesses. Before I
start, I want to say that this is a most stimulating and interesting discussion;
thank you both for it.
First, I should like to ask whether there would be any remediation available
if the part of the NAFTA agreement that was to establish a permanent secretariat
that would deal with fact-finding — not dispute settlement, but fact- finding —
could be either resuscitated or created. I do not think it ever got off the
ground, but it is part of the NAFTA agreement. Is it time that Canada and Mexico
asked the United States to put that particular group in play, so that the facts
can be removed to whatever extent it was intended from a dispute, and you just
get on with the politics and the law? I know that is an optimistic view, but I
did have a role to play in advising Mexico with respect to NAFTA, and it was one
that I pushed forward.
The other question relates to Doha. Listening to the discussion on Doha, what
would be different, particularly to you, Professor Busch? I was at the Doha
round both in Cancun and in Hong Kong. In the latter case, I was a minister of
the Martin government.
The stalemate that exists among the players with respect to issues that are
admittedly quite serious economic questions for all, I cannot quite see why
anybody in the U.S. Congress thinks that, in the next year, or whatever term is
available, the U.S. will move in a way that is sufficient to bring anyone else
on side or that anyone else will move in a way that is sufficient. I should like
a quick comment on the NAFTA Secretariat and then your comment on the Doha
Mr. Busch: On the fact-finding issue, I do not know if there are any
efforts underway to do what you are asking, senator. However, I doubt very much
that, in the softwood case, an independent fact-finding unit would have been of
much help. The dispute is largely over interpretation of legal obligations —
definitions of what a subsidy is, what an indirect subsidy is and things of that
sort. I am not sure this is simply a matter of doing a better job crunching
better data. Certainly, by all means, any effort to have data collected would be
of use more generally.
I wish to mention that I fully agree with both Minister Emerson as well as
Mr. Ritchie that NAFTA has worked well for Canada, outside of this dispute. Even
in this dispute, NAFTA did its job. It is just unfortunate we saw the U.S. drag
its feet in the way it did with respect to section 129.
In terms of the Doha round and any opportunities there to strike a deal,
there is some good news in the election, as I mentioned earlier, that is, that a
lot of developing countries — and we heard this from the APEC meeting this
weekend — have decided that they did miss the opportunity to offer better
negotiating agendas in the round, and they have decided to give it another shot.
Pascal Lamy has asked that the heads of the various committees return to
Geneva. My understanding is that they are returning to Geneva. This is certainly
good news. On the issue of why the round was suspended, in my view, it was
because everyone got their bluff called and now we have had a little time to
step back and realize what truly is at stake. The U.S. offered more than most
thought it would; the Europeans moved on their agricultural policies in a way
that shocked most; and the developing countries found themselves in the awkward
position of having to talk about not only industrial tariffs, but also, at least
as far as this weekend is concerned, they are now talking about traded services,
which is a very big priority to Canadians in particular because many of us earn
a paycheque in a traded service sector. This is certainly a very useful outcome.
My sense is that it really does reflect the fear that a more protectionist
Congress — and whatever is in store for this country in 2008 — does not bode
well for a commitment to the multilateral rules of the WTO, especially for
developing countries, which lack the capacity to negotiate a handful of
preferential trade agreements and be good citizens of the WTO at the same time.
To go to Geneva and to do this on a multilateral footing is a much more
efficacious strategy than is the approach to do the piecemeal bilateral or
regional deals, which truly only the United States and the European Union can
even remotely contemplate.
Mr. Ritchie: On the first issue, there is no receptivity whatsoever on
the U.S. side and never has been to any kind of fact-finding machinery under the
NAFTA. However, I would invite you, if the softwood lumber agreement clears the
other place and comes before you, to focus some attention on the potential
mechanisms for fact-finding under that agreement. The agreement does have
provisions, which at this point are just letters, but which could be potentially
used to at least narrow the levels of disputatious points before the next round.
On Doha, I find Professor Busch's comments very heartening. I must admit my
own view was, and I have to say remains, that Doha is moribund. It is on life
support and it is flickering, for very fundamental reasons. We have really taken
this just about as far as it can go unless and until there is a political will
to deal with three issues.
One of them is agricultural subsidies. When the most modest move on the part
of Europe, the U.S. and Japan, to name three, is taken as a major breakthrough,
we have an awfully long way to go there. That is of critical importance, not
just to countries like Canada and Australia, but to many of the developing
countries and agriculture in those countries, which would be destroyed by
subsidized U.S. and European exports.
Number two is trade remedies, and there is no willingness whatsoever to put
that on the agenda. Number three is market opening in the developing countries.
I would have to say that, back when you served as a minister, when you looked
around that table, there were probably more countries then committed to market
opening, free enterprise, economic systems than there are today.
On those three grounds, I will retain my skepticism; but Professor Busch has
been following this closely from the centre of the universe, so you may want to
give added weight to his observations on this.
Senator Austin: I feel the need to be optimistic, so I am leaning
toward Professor Busch. Of course, that other part of me has seen the action or
lack of it, and I agree with you.
Mr. Ritchie: I reflect your dark side, senator.
Senator Austin: Both of you reflect my ambiguity, but I would like to
Mr. Busch: Could I add something more on the issue of the Doha round,
to speak to the senator's skepticism. I understand the skepticism, and it is not
difficult in this town to be a little skeptical, but let me just speak to two of
the points raised by Mr. Ritchie.
On the subsidies issue, this is absolutely true. Once you take a look at the
U.S., Japan and the EC, you are talking about the bulk of all subsidies in
agriculture offered worldwide, however there are some interesting developments
as of late. The first is that Europe is on schedule to reform its common
agricultural policy by 2013 and cannot afford to offer these subsidies to the
new countries that are joining the EU. It is simply looking these days for a way
out of this very costly episode, and now with new countries beyond the recent 10
lining up to join, all of which certainly have the outstretched hand looking for
subsidies, it is likely that Brussels will increasingly become more optimistic
about trying to limit, or get rid of, these once and for all.
The other point to make very clear is that what a number of countries have
realized, as the Doha round is on life support, is that what is not had through
legislation is often had through litigation.
What we do know in this town, the centre of the universe, is that Brazil has
hired a DC law firm to determine the most exciting cases it can bring forward as
soon as the trade round is pronounced dead. We understand Brazil has been given
a list of 10 disputes, and there is no doubt that these are some of the most
exciting ones to be brought. We know that Brazil has challenged Europe on sugar
subsidies and challenged the United States on cotton, two very important
disputes. The reality is that it is easier to get something through legislation
than to get nothing through litigation. This has also compelled both the
Europeans, Americans and Japanese to take a second look, because they know a lot
of countries, including Brazil, will not sit idly by and have nothing in the
wake of the pronouncement that the trade round is dead.
The Chairman: I think I have exhausted the list of questioners, so I
want to thank, on behalf of the committee, Dr. Busch in Washington and Mr.
Ritchie here, for the insight and intellectual acuity you brought to us. We
appreciate the time you have made available from your very busy schedules.