Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 14 - Evidence - May 1, 2007
OTTAWA, Tuesday, May 1, 2007
The Standing Senate Committee on Foreign Affairs met this day at 5:07 p.m. to examine and study upon international business policy (including bilateral and multilateral trade relations, softwood lumber agreement and others).
Senator Peter A. Stollery (Chairman) in the chair.
[English]
The Chairman: Honourable senators, first, I would like to apologize for the technical inconvenience. I want to welcome everyone to this meeting of the Standing Senate Committee on Foreign Affairs and International Trade.
Last November, the committee held a number of meetings on the softwood lumber agreement between Canada and the United States. It then studied, in December, Bill C-24, an act to impose a charge on the export of certain softwood lumber products to the United States and a charge on refunds of certain duty deposits paid to the United States and authorize certain payments to amend the Export and Import Permits Act and to amend other acts as a consequence.
On March 30, 2007, the U.S. Trade Representative, Susan Schwab requested consultations with Canada under this agreement and a first meeting was held on April 19.
We are here today to hear from two panels on this subject.
[Translation]
First of all, officials from Foreign Affairs and International Trade Canada will make a presentation to us on the government's position. We are pleased to welcome Andrea Lyon, Chief Trade Negotiator (North America), Suzanne McKellips, Director General, Export and Import Controls Division, and Stephen De Boer, Director, Softwood Lumber.
Then we welcome industry representatives Peter Clark and Carl Grenier, who are already present, and whom I will introduce in greater detail a little later. I now give the floor to Ms. Lyon.
[English]
Andrea Lyon, Chief Trade Negotiator (North America), Department of Foreign Affairs and International Trade Canada: Thank you very much. We are happy to be here today to give you an update on the implementation of the softwood lumber agreement. The agreement entered into force on October 12, 2006 and enabling legislation was passed on December 14, 2006. Much work has been done since that time to implement the agreement. For example, the U.S. countervailing and anti-dumping duty orders were completely revoked.
With respect to implementation, more than $4.5 billion U.S. in duties has been refunded to Canadian softwood lumber producers, the majority of which was through the innovative Export Development Canada mechanism that was established to expedite the repayment of duties. The return of these funds marks a significant infusion of capital into the industry and will benefit workers and communities across Canada.
Additionally, the softwood lumber agreement prohibits U.S. trade remedy action for the life of the agreement and for one year following termination. In that respect, the deal ended years of costly litigation. We are now primarily in the housekeeping stage with respect to the termination of the litigation and we are working with the various stakeholders, the provinces and the industry, to wind up those remaining cases over the next few weeks.
Both Canada and the United States are committed to the agreement. We are working closely to ensure that it functions smoothly. The agreement establishes a range of consultative mechanisms to ensure the orderly and commercially viable operation of the agreement and enhance binational cooperation. It will also ensure the development a more integrated North American lumber industry.
The softwood lumber committee was established and held its first meeting in February. It will supervise the implementation of the agreement, as well as the Canada-U.S. technical working groups also established at the first meeting of the SLC. Two working groups will address policy issues of interest to Canada and the United States, including, regional policy exits, log export restraints and lumber made from logs harvested from private lands.
Three technical working groups have also been established to ensure the smooth operation of the agreement's export measures and will specifically address data and reconciliation, permits and customs issues and scope issues.
Additionally the agreement provides for a binational softwood lumber council that will be granted U.S. $50 million. Of this amount, U.S. $40 million is to be paid to the council to support market development and sustainability initiatives with the remaining U.S. $10 million set aside by the council for arbitration under Article XIV of the agreement. The council has met twice and is proceeding with its work. We believe that this council will foster increased cooperation between the two industries.
Furthermore, three foundations were granted U.S. $450 million under the agreement to undertake meritorious initiatives in the United States, including disaster relief and educational projects related to the sustainability of forests as sources of building materials. The three foundations are Habitat for Humanity, the United States Endowment for Forestry and Communities and the American Forest Foundation. The Government of Canada has appointed three Canadians to serve as non-voting representatives on these foundations.
All of these achievements attest to the high level of bilateral cooperation and work since the enabling legislation was passed. However, disagreements are inevitable in the implementation and administration of such a complex agreement. It was for this reason that we included in the agreement various institutional provisions to allow for a full exchange of views. Consultations represent an efficient and expedient way to share information with the United States and to work through any disagreements in a constructive manner.
We maintain ongoing and very close consultations with the forestry industry and the provinces to address issues related to the administration and implementation of the agreement and to ensure a functional and long-lasting agreement that is to the benefit of all Canadians involved in this sector.
As part of this ongoing process of managing the agreement, the United States inquired into the nature of a number of Government of Canada, Government of Ontario and Government of Quebec programs at the February meeting of the softwood lumber committee.
Subsequently, on March 30, the United States requested consultations with Canada under the agreement's dispute settlement mechanism. This action reflects the normal operation of the softwood lumber agreement's dispute resolution mechanism, which provides a formal channel to resolve U.S. or Canadian concerns regarding the softwood lumber trade outside of arbitration. Consultations are designed help resolve differences through an improved understanding of the measures at issue.
The consultations took place on April 19 here in Ottawa. The United States requested consultations, as I mentioned, to discuss a number of issues including Canada's interpretation of a technical provision in the agreement called the adjustment factor. This relates to the calculation of U.S. consumption which in turn is used to determine export volumes for certain regions. The United States also requested consultations to discuss those programs I mentioned earlier of the federal, Ontario and Quebec governments.
During those consultations the Government of Canada maintained that we have properly interpreted and applied the adjustment provision in the agreement and with respect to those programs it is the position of the Government of Canada that those programs are in full compliance with our obligations under the agreement.
In closing, we believe that the agreement is operating well as demonstrated by the achievements that I just enumerated. Both sides have a vested interest in ensuring that the agreement operates smoothly and we will continue to work with the United States to resolve any differences that may arise.
The Chairman: Thank you very much. Before I call on Senator Ringuette, I would like to welcome back to the committee Senator Andreychuk, Senator Segal and Senator Di Nino. There has been an interruption in their attendance and it seems to have calmed down.
Senator Ringuette: Thank you for your presentation this evening. I understand that you implement the government policy but you are not responsible for that policy.
On page 2 of your presentation, you indicate, ``We are working with the provinces and industry to wind up a number of cases over the next few weeks with regards to the NAFTA proceedings.''
Are you saying that some cases are still open and, therefore, that there is still room to continue with the litigation?
Ms. Lyon: When we concluded the softwood lumber agreement, it was recognized, and remember at the time we had about 20 active cases and the agreement called for the termination of these cases, that in order to implement the agreement by October 12 we simply did not have the time to get all of those pieces of litigation terminated in a timely manner. The agreement called for a certain number of cases to be terminated following entry into force and then recognition that the follow on cases were moot. They were moot because the underlying basis for our case, that is, the imposition of duties and refund of deposits, would have been taken care of by the U.S. obligations under the agreement. The delay that we are referring to, and I would not call it a delay, I would call it a normal procedural process, has resulted in the termination of the majority of the cases pertaining to softwood lumber. There are just a few outstanding cases but we are obliged to terminate those cases, as required by the terms in the agreement.
Senator Ringuette: Is the West Fraser case a private litigation?
Ms. Lyon: The duty refunds case has been issued. The decision came down in the latter part of 2006. What the court found, if memory serves, is that they would not apply the relief that had earlier been found because it was likewise moot. The relief would have been return of deposits and the revocation of the orders. That had already been taken care of, by way of the U.S.'s obligations under the agreement.
It is not so much up to private parties; it is up to the courts to determine whether the conditions of mootness have been met. That case has been terminated, but it was an important case for Canada. We think it will continue to have persuasive effects with respect to their finding on NAFTA duty refunds.
Senator Ringuette: Is this case ongoing?
Ms. Lyon: No, the court decision was rendered in October, I believe.
Senator Ringuette: Which of the cases are ongoing?
Ms. Lyon: We will get back to you with the specifics on that question. We understand that out of about 20 cases, there are a couple of NAFTA cases outstanding.
The Chairman: This committee is somewhat knowledgeable about the softwood lumber issue. We looked at it when we reviewed the FTA and when we studied the bill.
We are aware that the pressures rise as the market shrinks in the U.S. In other words, the U.S. producers become more active in pursuing legal channels if the U.S. lumber market shrinks and prices drop. I assume that with the housing collapse, of which everyone is aware, that would be the case right now, that is, that prices for U.S. lumber will drop and the market will shrink. In the past, that has started attempts by U.S. producers to go after Canadian producers, because Canadian producers have about 33 per cent of the U.S. market.
Is that the case now?
Ms. Lyon: The agreement prohibits the United States from taking any trade remedy cases for the life of the agreement and for one year following its termination. The United States industry has no ability to pursue such trade remedy action for the life of the agreement.
Senator Downe: For further clarification, you referred to the April 19 meeting when the Americans voiced their complaints. If it is not resolved within 40 days, they can go to arbitration; is that correct?
Ms. Lyon: That is correct. Either party can request the establishment of an arbitral panel 40 days after the original request for consultations.
Senator Downe: Is it correct that if Canada were to lose that arbitration, the Americans could impose various sanctions?
Ms. Lyon: We are getting down the road in terms of whether the United States would actually request arbitration.
Senator Downe: I appreciate that. I just want to understand what the agreement allows.
Ms. Lyon: In terms of the technical operation of the agreement, in the event of a finding of a breach by Canada, the arbitral panel would call on Canada to remedy the breach. If it were a negative finding, it would be remedied by adjusting the export tax to offset whatever breach was found.
Senator Downe: If we lost the arbitration ruling, the Americans could either increase the export duties or reduce the volumes on duty-free exports?
Ms. Lyon: Canada could do that, by virtue of the fact that we imposed the measures at the border.
Senator Downe: Is it correct that if these measures are taken, the agreement allows either party to cancel the agreement with 30 days notice?
Ms. Lyon: Again, there are a number of procedural steps before that would take place. There would have to be a determination or assessment by the United States that we had not taken sufficient measures to correct the breach. That would have to go to arbitration, and there are various other procedural steps, at the end of which you have the potential for the other side to claim that we are in violation of the agreement and they can request consultations with a view to terminate. That is the nth step in a fairly lengthy process.
Senator Downe: The agreement provides that the arbitration decision must be made within six months.
Ms. Lyon: Yes, the decision must be made within 180 days.
Senator Downe: Yes, and after that, the agreement can be cancelled within 30 days.
Ms. Lyon: Other procedural steps that must be taken would be based on an allegation that Canada had not conformed to the ruling of the arbitral panel.
Senator Downe: I appreciate that, as my colleague said earlier, the officials here are implementing and interpreting the agreement; they did not sign it. I believe the government may have oversold this agreement by selling it as a long- term solution while there are all kinds of provisions for the Americans to cancel with very short notice.
Ms. Lyon: That would apply in a case where the United States had not implemented the finding of a panel. It is equally available to both parties.
Senator Downe: I agree with that. Again, I do not want to argue with the officials, but many Canadians were concerned when only $4.5 billion was returned and the rest of the money may be used to fight us to get out of the agreement.
The Chairman: The issue of a collapsed housing market with a collapsed market for lumber means that there will be more pressures. It just feeds on itself.
Senator Segal: I do not mean to be argumentative, but a collapsing Canadian dollar has also produced significant difficulties in terms of pressures. We are seeing quite the opposite now, so that would be a countervail to the collapsing markets in the United States.
What will our response be to this normative representation from United States officials on the stationery of the Executive Office of the President? What do we do?
Ms. Lyon: This is further to the request for consultations.
Senator Segal: Yes.
Ms. Lyon: Consultations have taken place. They were held here in Ottawa on April 19. The United States is now reviewing the outcome of those consultations. We have indicated we would be happy to respond to any further questions they may have. That is the status of the issue.
Senator Segal: What consultation would take place between government officials and the various constituent industry groups in the country, who rarely agree with each other on the time of day?
I am interested to know what you would be doing, because I am sure they will be exerting immense pressure to be part of any discussion, whether it is of relevance to their interests or not.
Ms. Lyon: The consultations themselves are held at the state-to-state level, so it is between the two federal governments. As I mentioned in my opening statement, we have extremely close consultations with the stakeholders, the provinces, and with the industry. In some of the questions related to provincial programs, the affected provinces were very much involved in that process and attended the consultations for that part of the discussion that dealt specifically with their measures.
Senator Corbin: You seem to call ``administrative matters'' what the Americans formally call ``consultations.'' Could you define the two terms? What is the difference between consultations and administrative matters? Am I missing something, or is it too simplistic an idea?
Ms. Lyon: Consultations are a standard part of a dispute settlement process, whether that happens to be in the context of a softwood lumber agreement, the NAFTA or the WTO. As in the case with those other agreements, it allows an opportunity for the two sides to discuss the issues, to determine whether there is indeed an issue and whether the issues can be resolved to the satisfaction of both sides. The consultation provision is in the agreement for that reason.
Senator Corbin: Did the Canadians ask for consultations with their American counterparts? If you were to write a formal letter to the cabinet of the President, would you use the word ``consultation'' the way the Americans use it?
Ms. Lyon: If Canada were to request consultations under the auspices of the agreement on the dispute settlement chapter, then we would proceed in like fashion.
Senator Corbin: Does Canada ever ask for consultations on disputed aspects of the accord?
Ms. Lyon: It has not done so on the softwood lumber agreement yet.
Senator Corbin: Has it ever?
Ms. Lyon: It just took effect in early October, so we are in early stages in the operation of the agreement. Certainly, in the past, in the context of the WTO, in the context of the NAFTA, and some of you may recall the early days of the FTA, which was likewise an extremely complex agreement, at the outset, there were certainly consultations and use of the dispute settlement mechanism, which is normal in the implementation of a trade agreement.
Senator Corbin: Would you take us through the concerns or objections of the United States as worded in the letter from the trade representative, where we see a series of matters of concern?
Are you free to divulge how those different matters were resolved during the latest round of consultations? There is a whole pile of stuff implicating hundreds of millions of dollars here. Not only that, but it is also pretty brash on the part of the U.S. lumber industry, through the Department of Commerce, to meddle in what are strictly provincial programs to keep their industries afloat.
Take us through the letter to the Honourable David Emerson and tell us about the discussion. If anything was resolved, tell us what was resolved, and if it was not resolved, tell us why. Would you mind doing that? This is what this meeting is about.
Ms. Lyon: The carriage of the consultations between Canada and the United States is confidential.
Senator Corbin: Why is that?
Ms. Lyon: It is designed to ensure there is a candid discussion amongst the two parties and to ensure there is a thorough understanding. It is also possible that with some of the issues that were raised in consultations we need to be careful in the event that some of these matters do proceed to arbitration. The practice is that it is not in Canada's interests to divulge the details of what transpired during consultations in order to safeguard Canadian positions.
Senator Corbin: You said it is not in Canada's interests. Under what prerogative, rule of law, or whatever, do you exercise that discretion? Surely, the public has a right to know what is going on, especially the lumber industry. How is the lumber industry informed?
Ms. Lyon: The industry is informed through confidentiality agreements that allow us to divulge more specific information to protect ourselves should these matters proceed to arbitration.
Senator Corbin: How is a committee of the Senate able to gauge the value of this agreement if we cannot access those discussions and their outcomes? Would you like an in camera meeting so you could forthrightly tell us how these things go, the way you do with the industry and other partners?
Ms. Lyon: I should add that the confidentiality agreements are with counsel, so that we have the benefit of solicitor- client privilege in terms of our exchanges with our stakeholders. I cannot comment in terms of further inquiries as to disclosing what transpired in those consultations.
Senator Corbin: Is that not a traditional bureaucratic trick to prevent the free-flow of information? This whole deal has been the object of widespread controversy and, at times, anger, right across Canada, more in some provinces than in others.
Senator Segal: I have a point of privilege.
Senator Corbin: State your privilege.
Senator Segal: My privilege is that it is completely inappropriate for a member of this committee to attribute any lack of integrity or clarity to a member of the public service who is appearing here on good faith and sharing information in a constructive fashion.
When you call the notion of referring to client and counsel privilege a ``trick,'' that is an inappropriate diminution of the status of the individual appearing before us as a responsible professional doing the best job she can. If you want to withdraw that comment, I will withdraw my point of privilege.
Senator Corbin: No, I will not withdraw my comment. I live in a democracy, and I can call the shots the way I see them. This is what this place is all about. When we cannot be given proper information, I think I have the right to raise my voice. I may not be as learned in matters of law, client privilege and what have you, as some of my colleagues around the table here; however, this whole matter has been the subject of grave and serious concern right across the country, and the Canadian industry had to make sacrifices to come to this point in time. We are told that this is a solid seven-year deal, yet, as the press reported some weeks ago, here we go again.
I want to know if the points of contention — the bones of contention, call them what you want — are being resolved or not. I am especially concerned by the attitude of our friends across the border of wanting to stick their noses into programs that allow responsible, democratically elected provincial governments to help their industry, their workers and so forth. This is what most of this paper is about. How dare they? If they do dare, I want to know how you deal with those matters.
That is an honest question; is it not? Do not take it personally.
The Chairman: Of course not, and we have been doing this for many year. We are trying to get the information and it is very controversial.
Senator Di Nino: I have some sympathy with Senator Segal's intervention, only in the sense that we have seen your staff with us today, and I agree that we should always treat them with respect. I do not think these particular questions are appropriately or properly directed at the senior staff. These may be questions that we should be asking the minister rather than the staff. The staff does not make these kinds of policy decisions or the rules under which they are instructed to operate.
I would agree with my colleague, but I will use my own words to say that these kinds of questions should be properly directed to the minister as opposed to senior staff.
The Chairman: The senior staff has heard a lot worse than this; they are very senior. It is obvious that we are not in any way impugning the integrity of the witnesses, and we will hear other witnesses, so we will pursue this further.
Senator Corbin: Do you think I have finished?
The Chairman: I beg your pardon, Senator Corbin.
Senator Corbin: I have finished for now.
Senator Mahovlich: The amount of U.S. $450 million was agreed on for a foundation for meritorious initiatives in the United States, such as Habitat for Humanity. Is that a forestry foundation?
Ms. Lyon: Habitat for Humanity works in the forestry sector. They use building materials, so they were identified as being a worthy recipient of a portion of this money.
Senator Mahovlich: There are two other foundations — the United States Endowment for Forestry and Communities and the American Forest Foundation. Three Canadians are going to serve as non-voting representatives of these foundations. Are there any Canadian foundations that receive any of this money? I am sure that we have some foundations that care for our forests.
Ms. Lyon: The terms of the agreement called for the monies to be used in a specified manner: public interest projects, education, low-income housing, disaster relief and that sort of thing. We are merely executing what was required and spelled out under the terms of the agreement.
Senator Mahovlich: All in the United States?
Ms. Lyon: That is correct.
The Chairman: This has certainly been a vigorous questioning of our witnesses, and I want to thank you very much.
Senator Corbin: Before you suspend, is it your intention to call Mr. Emerson before this committee?
The Chairman: I am in the hands of the committee. There is no reason why we could not do so.
Senator Corbin: I would like answers to some questions. Lawyer-client privileges prevent us from getting information. I am not sure if the minister will invoke the same excuse, but the time for playing games is over. We have to start cracking nuts here.
The Chairman: We do have other witnesses. We have Mr. Grenier, who is waiting in Washington, and Mr. Clark, who has been very patient at the back. On behalf of the committee, I want to thank you very much for coming and opening the discussion. We are just starting, as you know. We are all aware that questions seem to have come up about the agreement and just what the situation is, but we thank you for coming before us.
As I said before, no one has the slightest question about the integrity of the public service to answer Senator Segal's question, but we are used to vigorous questions at this committee, Senator Segal.
For the next portion of our meeting, we have Mr. Peter Clark, President of Grey, Clark, Shih and Associates. Mr. Clark is a former federal civil servant and is now one of Canada's most active international trade practitioners. His clients in Canada and around the world include government, corporations and trade associations. Today he appears before us as representative of the U.S. Coalition for Fair Lumber Imports.
[Translation]
We are also pleased to welcome Mr. Carl Grenier, Executive Vice-President of the Free Trade Lumber Council of Canada, a private Canadian organization that represents forest products companies and industry associations in Canada. The council was formed in 1998 to encourage the restoration of free trade in softwood lumber between Canada and the United States.
Mr. Grenier is in Washington today and appears by videoconference. My colleagues will also remember that Mr. Grenier appeared before us on the same matter last November. Before we start, I would also like to thank our two witnesses for their patience in the face of the unavoidable last-minute cancellation of last week's session.
Without further ado, I now invite Mr. Clark to make his presentation; he will be followed by Mr. Grenier, and then we will move to questions.
[English]
Peter Clark, President, Grey, Clark, Shih and Associates: The coalition is pleased to be invited here today to speak to you and to explain its views. Mr. Van Heyningen, the executive director of the coalition, regrets that he cannot be here. He has asked me to do my best to provide you with the information you need.
I have prepared a presentation, which we filed with the clerk. It has been updated in the time period since the initial meeting was cancelled.
I will touch on a few points, Mr. Chairman, and then I would be happy to answer questions. From the pace and the intensity of the questioning in the first round, I will try to get into it as soon as possible because that is probably most valuable to you.
First, there has been a suggestion, which we would like to dismiss, that the coalition members in the United States are not competitive. That is simply a red herring. We have attached to our presentation an annex that addresses the question of competitiveness of the U.S. sawmills. They are among the most efficient in the world.
We should make it very clear that the coalition supports the softwood lumber agreement. It believes that it continues to provide the basis for avoiding renewed international trade litigation between Canada and the United States as long as the parties meet their obligations under the agreement.
The agreement is not perfect, with neither side getting all it wanted. It is worth recalling that the first Executive Secretary to the GATT, Sir Eric Wyndham White said that the best agreement is one that is mutually unsatisfactory.
The United States, notwithstanding what the United Steelworkers Union said, is not trying to renegotiate the softwood lumber agreement. It is simply engaging in consultations to ensure that a number of issues are consistent with the agreement and to draw these issues to Canada's attention, as Ambassador Schwab did, so that the Government of Canada and the provincial governments can persuade the United States that they are in fact observing their obligations under the agreement.
Consultations under trade agreements are not unusual; that is why there are consultation provisions. Dispute settlement is not unusual; that is why there is a dispute settlement provision. That is the way trade agreements work.
You have been through, with Ms. Lyon, a number of the issues that were addressed in the letter of March 30, which is also attached to my submission. It is clear that the agreement gives the United States, as it does Canada, the right to raise concerns and to seek clarifications. The coalition will urge the U.S. Office of the Trade Representative, USTR, to exercise its rights if it appears there is a need to do so.
The concern that has arisen for the coalition since the time we were supposed to appear initially is that reports coming back from the U.S. delegation indicate that Canada declined to engage specifically in addressing these issues during the consultations, and it appears unlikely that a speedy resolution, short of arbitration, is attainable in these issues.
The coalition is not the only entity concerned about the practices as ministers from British Columbia have expressed concerns about subsidy programs in Ontario and Quebec. I was at a conference in Alberta several weeks ago to review the softwood lumber agreement after six months, and these concerns were expressed. In addition, I have heard concerns by representatives of the Eastern industry about changes in stumpage and surges, and the impact on the North American market from Western producers. That is not unusual in the softwood lumber dispute because, as Gordon Ritchie once put it, trying to keep the provinces in a consensus mode on softwood lumber was akin to herding cats. I believe Mr. Ritchie has appeared before you as well.
The issues Ms. Lyon addressed were quite clearly put. I will address only one of them so that we can get into questions and answers, and that is the adjustment to option A and option B countries for surges or excessive shipments.
The Canadian government has taken the position that option A provinces are not subject to an anti-surge mechanism. It was the initial understanding of the United States, and it has been borne out subsequently in litigation, that Canada intended to adjust both option A and option B provinces. As someone who has been watching the issue for many years, and who has been involved in international trade disputes, and federal-provincial relations affecting provinces, I find it rather intriguing that anyone can suggest that option B provinces such as Quebec should or would be able to accept the absence of a similar discipline on option A provinces such as British Columbia. It boggles the mind to suggest that federal-provincial relations have evolved to that point.
In the other issue on which there appears to have been, — I do not want to use the word ``flip-flop'' because it is used so much in the other place — a change of position on when these adjustment mechanisms go into place. There is litigation that indicates that one of the forest products companies was suing the federal government in the Federal Court for applying the adjustments as of January of this year, and now the federal government seems to be taking the position that there are no adjustments until July.
The concern is that this is an agreement with rights and obligations. The United States has the right to seek clarification and to seek to ensure that Canada and its subsidiary governments that are covered by this agreement are respecting the agreement. That is what consultations are about. That is the normality of it, and the coalition does monitor what is happening in Canada. It does make representations to the United States government. It is the United States government that engages in consultations with Canada because the United States government is a party and the Government of Canada is a party.
From the coalition's perspective, the ball is in Ottawa's court and through good faith engagement in these consultations the matters can be resolved. I have recognized for much longer than my clients have that there are differences between the federal government and the provinces in Canada. If these differences cannot be resolved, it will force the issues into arbitration and reinforce uncertainty and questions about the agreement's durability and at least delay the opportunity for peace within the North American industry that the agreement represents and we hope will continue to represent.
I am prepared to answer your questions.
The Chairman: Thank you very much Mr. Clark.
Mr. Grenier, please proceed with your presentation.
[Translation]
Carl Grenier, Executive Vice-President, Free Trade Lumber Council of Canada: Honourable senators, most of my remarks will be in French, but I trust that that will not pose a problem for the simultaneous interpretation. I apologize for not having been able to send you a written text of the presentation, but you will understand my reasons.
I thank the committee for inviting me to make my presentation from Washington by teleconference, I appreciate it very much.
When I last appeared before the committee on November 7, I did not at all expect to be back testifying before you so quickly. The core of my remarks last fall dealt with the impact of the Softwood Lumber Agreement, which went into effect last October 12, as Ms. Lyon recalled, on NAFTA's dispute settlement provisions. We are here today because of a formal request from the United States for consultations as provided for in the accord in case of disagreement.
There is no doubt that these consultations between the two governments are nothing more than a formality. As the previous witnesses have pointed out, holding consultations is quite normal in trade agreements. Our information leads us to believe that the matters raised by the United States will be taking us directly to formal proceedings, that is to say arbitration, in no more than two or three weeks.
Members of the committee will recall that one of the key arguments made by the government last year to convince the industry to rally around this agreement was precisely to put an end to the interminable legal proceedings that we had been through in the past. I think that Ms. Lyon referred to this at the beginning of her remarks.
Scarcely six months after the agreement came into force, the United States is now putting a resounding end to this fond hope.
As for the two preconditions that we set last July 1, putting an end to all lawsuits, and the explicit support of 95 per cent of all companies for the reimbursement of amounts due through the Export Development Corporation, we have already kissed them goodbye. Now it is the greatest asset of the agreement itself, trade peace for at least seven years, that threatens to slip away from the Government of Canada, and ipso facto from the Canadian industry.
It is not my intent to make any comment at all on the merits of the American allegations contained in the hundred or so questions addressed to the federal government and to two provincial governments, Quebec and Ontario. These questions will certainly be the basis of the proceedings that three foreign arbitrators will have to come to grips with.
Instead, I would like to spend a few minutes discussing the process of arbitration itself and its consequences.
The Chairman: Mr. Grenier, would you be able to speak a little more slowly for our interpreters?
Mr. Grenier: My apologies. What everyone needs to know is that, contrary to the dispute settlement provisions of NAFTA that I discussed last November, neither the companies, nor the associations that represent them, nor the provinces have any standing to represent their own interests before this arbitration panel.
[English]
Let me say this in English because I am not sure that this concept is known to the translators. It means that we do not have standing. We, the industry and the provinces, cannot appear before this arbitration tribunal as we can of course before a NAFTA tribunal or even a U.S. court.
[Translation]
Only the two federal governments have this power. This was a political choice made by Mr. Harper's government last year. I have already expressed my outrage at the government's decision to remove softwood lumber from the normal NAFTA rules which, in spite of all the bad faith shown by American authorities, were just about to provide Canada with a decisive victory.
Mr. Grant Aldonas, the former Under Secretary for Commerce — who was also the United States' chief negotiator for softwood lumber — said as much two weeks ago at a symposium in Edmonton organized by the University of Alberta's Western Center for Economic Research.
As reported in the Edmonton Journal on April 12, Mr. Aldonas stated, and I quote in English:
[English]
. . . the Bush government was desperate to negotiate a solution to the lumber standoff after losing five international trade rulings in Canada's favour. It was clear the U.S. was on the losing end of the litigation.
[Translation]
This is Mr. Aldonas, the United States' chief negotiator, saying this.
So rules, NAFTA rules, that were supporting Canada, were intentionally abandoned by the Canadian government. In their place, the general arbitration rules of the London Court of International Arbitration will apply, but also the provisions of the 2006 Softwood Lumber Agreement, signed last year and which came into effect on October 12. Those are the provisions by which the arbitrators are going to be guided.
Canada's former negotiator, Mr. Doug Waddell, speaking at the same podium in Edmonton, described the agreement in the following terms. I will also quote him in English.
[English]
. . . it is overly complex, has needless punitive measures built in against Canada, and left too many loose ends that are open to interpretation and review by the U.S.
This is the Canadian negotiator, I should say former negotiator because he did not stay on until the end. He retired and was retained, I believe, as a consultant.
[Translation]
Everyone in their right mind should begin to be very seriously worried about the eventual outcome of the arbitration process, which, if the timelines are observed, should end in mid-January 2008. Without considering the merits of the American allegations at all, we are quite justified in fearing a negative outcome for Canada from this process which will start somewhere around May 9.
The reason for the fear is blindingly obvious. The 2006 Softwood Lumber Agreement is the result of the Harper government's complete collapse in the face of American claims, claims which were well on the way to being rejected out of hand by the NAFTA tribunal and by American courts.
This agreement is the new Canadian government's attempt to improve its relations with the United States. Once more, I quote from the Edmonton Journal article, which read as follows:
[English]
. . . Prime Minister Harper is the main reason that the agreement, earlier rejected by the previous Liberal government, was never signed. Harper brought the matter up directly with Bush.
[Translation]
So Mr. Harper did Mr. Bush a favour on the backs of Canadian industry. We can now see the consequences of the Prime Minister's decision. I will list them for the record: the outright loss of $1 billion, an unprecedented gift to our American competitors and to the White House, $1 billion that rightfully belonged to Canadian industry; a brutal increase in border tariffs, which went from 10.8 per cent to 15 per cent overnight as a direct consequence of the agreement.
Of course there are external factors that have contributed to the catastrophic situation in which the Canadian industry presently finds itself. Let me mention two of them. The chairman himself, I believe, has alluded to the bursting of the speculative mortgage bubble in the United States, which is causing a slowdown in residential construction and a collapse in the price of softwood lumber.
Another factor was briefly mentioned by one of your colleagues. This is the 40 per cent rise in the Canadian dollar against the American dollar in the past two years; this is hitting exports of a commodity like softwood lumber very hard.
These factors were known or foreseeable at the very moment that the agreement was signed last year, which makes the blow dealt by the government to its own industry even more incomprehensible. In Quebec, plant closures have multiplied, with the result that 40 per cent of production capacity is no longer in operation. In Ontario, the figure is 25 per cent, with the thousands of jobs that represents. And in British Columbia, only the need to hasten the harvesting of the trees killed by the huge infestation of the mountain pine beetle has kept plants afloat, but without any real profits.
What has the Government of Canada done in the face of this major disaster? To express the general feeling of those in the industry, I can do no better than to repeat the words of two representatives of major companies who also participated in the Western Center for Economic Research forum in Edmonton two weeks ago. Mr. Paul Perkins, a vice president of Weyerhaeuser, a company that has always preferred a negotiated settlement to the conflict, stated:
[English]
I guess the biggest frustration from our perspective is that the federal government views the signing of the agreement as the end of the process. It was just the beginning. The government has offered minimal help to industry in interpreting the agreement, resolving tax issues. In the six months since the pact was signed, they went to ground, they disappeared.
[Translation]
Mr. Ken Higginbotham, vice-president of Canfor, the biggest producer of softwood lumber and a company that publicly supported the agreement last year, said the following:
[English]
. . .there are continuing industry concerns about how the federal government is playing politics with the agreement.
[Translation]
These are people who supported the government's action last year while I and several of my colleagues were expressing a number of criticisms about it. I am telling you that the Canadian softwood lumber industry is now in disarray.
This industry must henceforth rely entirely on the Canadian government to defend its interests against this new American attack. But this is a government that has betrayed its campaign promise to give loan guarantees to industry in order to counter the delaying tactics of the United Sates. This is the government that gave in to American demands and committed us to the worst trade agreement that Canada has ever signed.
It is the custom to end this kind of presentation on a more positive note, pointing the way to solutions for the problems that beset us. I very much regret not being able to follow this custom. Here and now, the ``solution'' that the government has imposed on its own industry is beginning to become our biggest problem.
Senator Corbin: You do not mince words; I noticed that when you appeared before us last fall. I greatly appreciate your candour and I share it.
Are you aware of the letter from the office of the President of the United States and his trade representative? Are you familiar with the content of this letter from Ms. Schwab?
Mr. Grenier: Yes, senator, I am.
Senator Corbin: Could you comment on the various objections raised by Ms. Schwab in regard to their significance, the consequences they will have, and, if you like, how frivolous they are? Are they even unaware of the way in which governments and Canadian industry operate?
Mr. Grenier: I mentioned in my remarks that I did not want to pass judgment on the merits of the American allegations. But there is absolutely nothing frivolous in the American approach.
Just now, Mr. Clark emphasized that the coalition watches what happens in Canada, and clearly makes representations to its government, the American government; that is quite normal.
You can be assured that the hundred or so questions raised by American authorities with the Canadian government are very detailed. They deal with federal and provincial programs.
I do not believe that the answers given at the consultations will satisfy American authorities. It is not American authorities that we have to satisfy, it is the American coalition that is acting through its government. I do not want to assume anything, but it would be very surprising if these consultations succeeded in putting out the fire at this early stage.
I suspect that even Mr. Clark is quite doubtful that these matters can be settled simply by consultation. I have the distinct impression that we are going to have to go to arbitration to answer these very tough questions.
You also raised the question on the impact that these measures would have if Canada ever lost at arbitration. The impact could be major. For example, the adjustment factor represents about an additional 7.5 per cent on top of the present 15 per cent. So the tax could go to 22.5 per cent. That is the impact.
This could be an additional levy for Canadian exporters; it is now at 15 per cent for provinces like British Columbia that have chosen the 50 per cent export tax.
So we are talking about several hundred million dollars if Canada ever loses this arbitration.
Senator Corbin: Thank you for your comments, Mr. Grenier.
[English]
Since Mr. Grenier raised the matter of comments made by Mr. Clark, I want to make absolutely sure I understand Mr. Clark correctly. I hope I am not misinterpreting your words, sir, but did you not say that the government will have to go to arbitration, that there is no other possible solution than arbitration to settle these differences? Did I hear you correctly? Did Mr. Grenier hear you correctly?
Mr. Clark: Let me restate what I said so that it is totally clear for you. I indicated that the reports that have come back from the USTR to the coalition have suggested that the Canadian officials in the consultations did not address the issues in sufficient detail or in detail. It would appear that because these consultations are unlikely to be fruitful on that basis, then it would make it more likely that they will proceed to arbitration. Yes, that is what I said, sir.
Senator Corbin: All right.
Mr. Clark: That is a decision to be made by the United States government and not the coalition, sir.
Senator Corbin: I understand that. Thank you for the precision. That is all for now, chair.
The Chairman: When we went into the agreement, one of the conditions was that we gave up the fact that we had won the cases. I know there were the WTO and the NAFTA, and I cannot remember on which panels the Canadian lumber industry had won the cases. In order to go into the agreement, those are dead now, as I understand it. When you start talking about arbitration to someone like me, that sounds awfully like you are back to where you started, only you have given up what you had gained.
Would you like to correct me if I have misunderstood that? Am I right or am I wrong?
Mr. Grenier: You are absolutely right and Ms. Lyon was quite clear when she said that there is still some housekeeping to do regarding some of those cases. This is why I included in my presentation the fact that contrary to what we were told back in April and July when the agreement was formally signed by the two ministers, these cases were not dealt with completely. A few cases need to be cleared up.
Your main point is well taken. We are quite far from trade peace because these questions and the arbitration that will follow will put the industry in the same position they were in before this agreement was implemented. Unfortunately, again referring to the testimony of Ms. Lyon and the questioning by Senator Corbin, the industry has had to hire legal counsel again; otherwise, the federal government cannot share information with us. I think we are in the soup again.
The Chairman: Before I call on Senator Downe, could you refresh my memory on the amount of money involved with the legal costs over the past few years? In Geneva, a few years ago, I recall the then president of the WTO talking about $300 million, which was one of the most expensive trade cases in history. Are we going to do that again?
Mr. Grenier: It would be hard for me to estimate how much this will cost.
The Chairman: How much has it cost?
Mr. Grenier: It should be much less costly. The $300 million estimate is on the high side. I do not think it cost that much. However, the figure of $200 million was evoked by many people on both sides of the border for this, the biggest trade dispute in the world. Now, because only the federal government is involved, we have to hire counsel; but clearly this dispute should not cost us as much. Unfortunately, the results will not be as interesting as the NAFTA and the WTO results.
Senator Downe: To follow up on the point that I made earlier, now that arbitration will start on or about May 9 and other steps that I outlined earlier, it leads to the situation where this agreement could be terminated by mid-December of this year. That will be very unfortunate if it happens.
Senator Segal: Would I be correct in typifying your position, or would I be unfair in suggesting that your group — the group you so ably and competently represent — would have preferred the litigious process to continue? Would you have preferred to go to CITT and various other organizations, keep on winning cases, have the Americans keep on appealing in a process where we had a series of moral victories, trade victories, policy victories but no actual net benefit because the litigious process, by definition, facilitates ongoing and constructive appeal?
Is it your judgment that would have been — and we have had other views expressed at this committee that would support that judgment, to be fair — a far better way of pursuing the public interest than trying to come to an agreement on softwood lumber with the Americans?
Mr. Grenier: Thank you very much for that question, Senator Segal. You are not far from being right in typifying our position as supporting litigation, but that changed a lot as of August 10, 2005.
Why did it change then? Because at that point, the litigation was basically over. If President Bush had acted as his predecessor did back in 1994 when he was faced with exactly the same situation — Canada had won an extraordinary challenge under the NAFTA agreement — two weeks later basically, they wrapped up the case and gave us back our money. We were scot-free for about two years and then we entered into the softwood lumber agreement of 1996.
Mr. Bush, back in August 2005, decided not to obey the law. Let me also remind you that we are talking about U.S. law now. This is why Canada reacted so strongly. You will recall that Prime Minister Martin basically characterized the U.S. position as absurd and called on the President to reverse it — of course, without success.
At that point, we knew that the U.S. government was behaving as an outlaw. There was nothing that we could do except go into the U.S. court, which we were in the process of doing and which we were in the process of winning.
If you win this type of case in a U.S. court rather than in a NAFTA court, then officials, if they refuse to implement a decision by a U.S. court, have the choice of going to jail or implementing the decision. I am not suggesting that the President himself would have been called upon to serve time, but certainly some officials would have. Of course, that would have ended the thing right then and there.
Indeed, we had been pressing for litigation. The reason for this is simple: We have been doing this for well over 25 years now. We know that as soon as we sit down at the table, 80 per cent of the whole issue is going the U.S. way. As Mr. Aldonas reminded everyone two weeks ago in Edmonton, the U.S. was losing and they knew they were losing. That is why they were so desperate for an agreement. Why Canada signed an agreement at the very last moment and the way they did it, I do not think anyone really understands.
Senator Segal: Could I ask Mr. Clark, who represents the Coalition for Fair Lumber Imports, our American friends and competitors, could you honestly envision a circumstance where the result of a successfully won litigation on the part of Canada would be for the American side to end the fight?
Mr. Clark: Given the market dynamics at the time this agreement was being negotiated and going through the House and the Senate, it was fairly clear that the dumping margins, in particular, would have been significantly increased under an administrative review, and would have been very significant on what people would call Lumber 5.
This is a long-term dispute, senator. There was a provision in the Elgin-Marcy treaty, which was 1854 — before Canada — which precluded Canada from imposing export taxes on logs passing through New Brunswick into Maine. It has been there a long time. No, I do not think that it would have disappeared. The only thing preventing further trade actions and trade remedy cases in the United States is this agreement.
Senator Segal: I wish to return to Mr. Grenier. There were a series of companies and provinces that agreed with the SLA. I understand the narrative; they felt they had been backed into a corner and had no choice. We have seen all of that, which is part of the narrative of the era.
Is it your judgment that everyone who agreed to it — the provincial governments and the companies who came onside — were fundamentally wrong in their conclusion and that your side was absolutely right? It is not an unreasonable conclusion; people have those kinds of conclusions all the time. I just want to make sure whether there was any water possible at all in your wine on this; or are you certain that everyone else was wrong and your own circumstance is so sustained by fact and justice that they have to come around to your position?
Mr. Grenier: First, Senator Segal, let me tell you that with the money we lost to the Americans through this deal, very few people can afford wine anymore. I think we are drinking water now.
First, for those companies that did express public support — and there were very few of those — the vast majority of companies were hurting badly. You know, $5.5 billion is more than the total profit of the Canadian industry for those years. Some companies were hurting worse than others were, and I am referring particularly to Eastern Canadian companies. The provinces did agree; of course, the federal government sought their agreement. They are not parties to the agreement, but their agreement was sought and was politically given.
I am sorry to have to refer to this fact, but you also know, Senator Segal, that the proceeds of the 15 per cent export tax are reverting to the provinces because of our Constitution. They are interested parties in an unfortunate way.
Senator Segal: I want to be clear. You are not suggesting that the fact that the constitutional provisions with respect to the distribution of resource revenues would have operated in a context that meant that they put the public interest aside because of some narrow pecuniary fiscal interest. I want to be clear that you are not saying that.
Mr. Grenier: Of course I am not saying that. I think you understood what I said very well. They were saying that this has gone on a long time. They could see that the federal government was not keeping its promise of loan guarantees to the industry. They knew that some companies were failing rapidly. They canvassed their companies and their companies told them the same thing they were telling the federal government: Without government support, we cannot fight this. We can fight the coalition, but we cannot fight the U.S. government and the Canadian government at the same time.
Senator Corbin: On a point of clarification, you quoted a law on the passage of logs from Northern Maine down the Saint John River.
Mr. Clark: That was the Elgin-Marcy treaty, which was the reciprocity treaty between the United States and the British colonies of North American. It was rescinded after the Civil War in the United States.
Senator Corbin: What year was that?
Mr. Clark: It was 1854. Hamilton Fish was the person who rescinded it.
Senator Corbin: The Webster-Ashburton treaty of 1842 guarantees the free passage of logs from Northern Maine down the Saint John River to the harbour in Saint John. It always has, although the Americans have ceased exercising their privilege. Did the Elgin-Marcy treaty supersede the Webster-Ashburton treaty?
Mr. Clark: Sir, this was simply a provision in the reciprocity treaty that provided broad free trade between the British colonies in North America and the United States, which indicated that Canada could not impose export taxes on the logs going to the United States through New Brunswick.
The Chairman: I was in Washington with Senator MacEachen and this committee asking questions about the Free Trade Agreement that we were about to sign. I recall very well that one of congressional representatives, a member of the subcommittee on trade was Hamilton Fish IV or V or VI, whose antecedent, Hamilton Fish I, was the Secretary of State who cancelled the free trade agreement after the Civil War. I think I was the only one there who saw the humour in that ancestry.
Senator Segal: I do not doubt that for a moment, Mr. Chairman.
Senator Mahovlich: You mentioned the pine beetle. We have quite a problem with that insect. Will the pine beetle be brought into the equation?
Mr. Grenier: There is a matter of volume being raised by the U.S. concerns over the adjustment factor. If I understand the concerns correctly, that is one of the concerns raised by the U.S. I do not think the pine beetle itself was mentioned, but the effect of the volume of harvesting that must be done is behind the U.S. concern.
Mr. Clark: I was not involved with the coalition while the agreement was being negotiated by the two governments, but I understand that the base levels did reflect the accelerated harvesting of logs in British Columbia due to the pine beetle. In fact, Alberta and Saskatchewan ministers have been quite vocal on the fact that there is a better deal for British Columbia because of that.
The Chairman: Honourable senators, I want to thank our witnesses. We are just starting our rerun at the softwood lumber deal with which the committee has had some experience.
[Translation]
Thank you, Mr. Grenier. It is always very interesting to discuss things with someone like yourself who knows the subject so well.
[English]
I would also like to thank Mr. Clark on behalf of the committee.
This has been an interesting reopening of this subject which, as Mr. Clark says, has been around for a very long time, and I am sure it will not go away.
The committee adjourned.