Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 3 - Evidence - Meeting of April 20, 2010
OTTAWA, Tuesday, April 20, 2010
The Standing Senate Committee on Agriculture and Forestry met this day at 5:30 p.m. to study the current state and future of Canada's forest sector.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I see that we have a quorum. I call this meeting to order.
[English]
I welcome everyone to this meeting of the Standing Senate Committee on Agriculture and Forestry. The purpose of the meeting today is to brief and educate the members about the Softwood Lumber Agreement.
[Translation]
Today we welcome representatives from two departments. From the Department of Foreign Affairs and International Trade, we have Don Stephenson, Assistant Deputy Minister, Trade Policy and Negotiations.
[English]
We also have Colin Bird, Director of the Softwood Lumber Division. From Natural Resources Canada, we have Jim Farrell, Assistant Deputy Minister, Canadian Forest Service.
[Translation]
And from the Department of Natural Resources, we have Bob Jones, Director, Industry and Trade, Policy, Economics and Industry Branch, Canadian Forest Service.
[English]
Thank you for accepting our invitation. My name is Senator Percy Mockler. I am from New Brunswick and I am the chair of the committee.
I will now invite the officials to make their presentations. They will be followed by a period of questions and answers. I am informed we will start with Mr. Stephenson.
Don Stephenson, Assistant Deputy Minister, Trade Policy and Negotiations, Foreign Affairs and International Trade Canada: We welcome this opportunity to brief the committee on the Softwood Lumber Agreement and on the softwood lumber trade between Canada and the United States. I will discuss the historical dispute and the current trade regime.
My first point is that the current Softwood Lumber Agreement has a high level of support from both industry and the provinces. That support is as high as it has ever been in the life of agreement. Provinces and industry representatives have been unanimous in their view that the agreement provides a degree of stability in an extremely uncertain market.
As you know, softwood lumber has been one of Canada's most difficult bilateral trade files with the United States. Trade frictions in this sector predate Confederation, but the modern phase of the dispute dates back to 1982 with the first U.S. trade remedy proceedings against Canadian softwood lumber.
What is the source of the dispute? You have a slide presentation that we have prepared. We are on page 2 of the slide deck. A principal source of the tensions between our two countries is the contrast in land ownership. It is primarily public in Canada and private in the United States. Crown land represents well over 90 per cent of the Canadian forest, and 70 per cent of this resource is managed by the provinces. They manage the resource by entering into tenure or other arrangements with private companies to harvest timber and implement sustainable forest management.
In contrast, the United States sold the vast majority of its public forest lands for little or no return over a hundred years ago. Approximately 70 per cent of their forests are held privately. Forest management in the United States, controlled by the private sector, does not provide for the shared approach to forest management afforded by the Canadian system.
In Canada, the price charged to harvest timber, otherwise known as stumpage, is usually set by reference to market indicators. The principal claim by U.S. industry is that provincial pricing results in subsidized stumpage fees and, in turn, unfair trade practices.
The differences in how the U.S. and Canada manage their forests, and the alleged Canadian subsidies, have been used by U.S. lumber interests for almost 30 years to restrict imports of Canadian softwood lumber through the application of U.S. trade remedy laws.
[Translation]
The U.S. government has responded to industry pressure by conducting four countervailing duty investigations and one anti-dumping investigation since 1982. When these investigations have resulted in duties, Canada has made use of all available legal challenges.
In the earlier disputes, Canada took the United States before GATT and FTA panels.
In the 2001-2006 dispute, Canada launched multiple cases at the WTO, in NAFTA proceedings and in U.S. Courts.
Historically, Canada has been very successful in litigation, but the U.S. duties remain in effect during legal challenges. Also, successful litigation in one round of trade remedy proceedings does not prevent the U.S. industry from filing new complaints and starting a new cycle of trade remedy proceedings. The unfortunate reality is that the U.S. lumber industry benefits from the protection of trade remedy measures while in place. Moreover, even if such measures are ultimately ruled illegal, the cycle can begin again with new allegations of unfair trade from the U.S. industry. In other words, even when they lose, they win.
This reality has informed Canada's decision to enter into agreements to manage the dispute. The basic bargain in these agreements is that we restrict exports in return for a U.S. commitment not to impose trade remedies.
Canada has entered into 3 such agreements over the last 25 years: the Canada-U.S. Memorandum of Understanding, 1986, which lasted until 1991; the Canada-U.S. Softwood Lumber Agreement, 1996, which lasted until 2001; and the current Canada-U.S. Softwood Lumber Agreement, 2006.
On slide 3, we have the highlights of the 2006 Softwood Lumber Agreement, which was signed September 12, 2006, and then implemented October 12 of the same year.
The United States agreed to revoke the U.S. duty orders and take no further trade action, and to return over $5 billion in duties and interest.
Canada agreed to terminate trade litigation against the United States, to disburse US$1 billion to U.S. interests, including charities such as Habitat for Humanity, and to apply export charges and export quotas, the revenue of which is transferred to the provinces.
The U.S.-Canada Softwood Lumber Committee manages the agreement, and the Bi-National Industry Council encourages industry cooperation. Canada created heads of delegation to consult provinces and a business advisory committee to consult with industry. Furthermore, Canada agreed not to provide grants or other benefits to its industry that would offset the export charges or volume restraints either directly or indirectly.
Differing interpretations of this obligation led to one of the two arbitrations under the agreement, which I will discuss shortly.
[English]
On slide 5, we can see a summary of one of the key elements of the agreement, the export measures. Exporters pay an export charge when lumber prices are below U.S. $355 per thousand board feet. Provinces have two options: option A, an export charge with the charge varying with price, or option B, an export charge plus volume constraint where both the rate and the volume constraint vary with the price.
British Columbia and Alberta chose option A, and Saskatchewan, Manitoba, Ontario and Quebec chose option B. Export charge revenue is transferred to the provinces, unlike U.S. duties, which are collected by the United States. To date, an amount of $907 million has been transferred to provinces from export charge revenues.
I will now address arbitrations under the Softwood Lumber Agreement. The SLA provides for binding arbitration to resolve differences regarding any matter arising under the agreement.
The U.S. has initiated two arbitrations since the agreement came into force. On the next two slides we discuss these arbitrations. The first arbitration involves the application of something referred to as the ``adjustment factor,'' a technical provision that affects the operation of export measures. In March 2008, Canada was found to have breached the SLA in relation to option B provinces by failing to apply the adjustment factor from January to July 2007. The U.S. rejected Canada's offer of a cash settlement and imposed a 10 per cent customs duty on imports from option B regions. In September 2009, the tribunal determined that Canada's offer had not ``cured the breach'' and provided that Canada should impose an adjustment to the export charge to replace the U.S. duty. It called on both parties to act in good faith with respect to the transition between the U.S. and Canadian collection of the tax.
The government has tabled Bill C-9 with the objective of complying with the tribunal's ruling. There are ongoing discussions with the U.S. about an appropriate transition date from the U.S. duty to the Canadian charge. U.S. officials have indicated that the United States is prepared to credit Canada for the duties collected by the United States since April 15, 2009, estimated to be C$24.5 million as of April 1, 2010.
The second arbitration covers several provincial programs from Ontario and Quebec. This arbitration is still before a tribunal and covers programs listed on slide 7. A further hearing, if necessary, has been scheduled for August 24 and 25, 2010. We expect to receive the tribunal's final award late in 2010.
On the next slide, slide 8, I have a brief overview of another sensitive issue. Since 2008, the U.S. lumber industry has raised concerns over the increase in the volume of logs being harvested at administratively set low stumpage fees in British Columbia. These logs are low grade logs known as grade 4 logs. However, this increase is attributable to the mountain pine beetle epidemic and the corresponding decline in the quality of the pine stands being harvested, and not to any change in the British Columbia pricing system. The U.S. industry claims of unfairly priced timber are unfounded. The practice is grandfathered in the softwood lumber agreement.
The Department of Foreign Affairs and International Trade works continuously to counteract U.S. industry allegations of alleged Canadian violations of the SLA by maintaining strong relations with the Office of the United States Trade Representative, the Department of Commerce and the rest of the administration, via both formal and informal mechanisms. DFAIT also consults regularly with other federal government departments, notably Natural Resources Canada, regarding programs in forest-reliant communities to ensure their full conformity with international trade obligations, including the Softwood Lumber Agreement.
I will conclude my remarks by noting that our industry strongly favours free trade in softwood lumber. However, the industry recognizes that the Softwood Lumber Agreement has provided benefits to all Canadians by ending a long- standing dispute and providing stability in the lumber industry.
I look forward to your questions.
The Chair: Thank you. I believe Mr. Farrell will make comments, and then we will go to questions.
Jim Farrell, Assistant Deputy Minister, Canadian Forest Service, Natural Resources Canada: Thank you very much, chair. I believe we have left each of the members a copy of a short presentation deck that talks about Canadian wood product markets. It is a bit lengthy, so given the time, I will touch on the highlights only. The primary purpose of leaving the deck behind is to give senators a chance for more in-depth information.
I will move quickly to slide 3, which talks about Canada's exports. Forest products contribute just under 2 per cent of Canada's gross domestic product. Canada is the world's largest exporter of forest products, at about $23.6 billion based on 2009 data. Some 10 per cent of global exports are represented by Canadian forest products exports.
As you can see in the pie chart, the United States is a primary market for all Canadian forest products, not only softwood lumber.
In the next slide, we look at the destination again, specifically for softwood lumber that my colleague talked about. Once again, while the domestic market is a little over 40 per cent, the United States, again in 2009, was 44 per cent. In 2009, we could already see the effects of a downturn in the U.S. market, so in some respects, the 2009 data understates the significance of the U.S. market in that in a normal year, the pie is bigger and the share of the pie is larger.
The slice of the pie that I will talk more about is the offshore slice at 15 per cent at the bottom of the chart. To give the committee a sense as to where the distribution of forest products is across the country, in general, the bulk of wood products, particularly softwood lumber, is in Western Canada. In general, in Eastern Canada we tend to see more of a concentration of the paper, particularly the newsprint industry. The relative dependence of various regions of the country on forest products varies, although the data is a little dated, and in some respects does not take into account fully what has happened in the last two years. As the chair likely knows, as a percentage of its GDP, New Brunswick is probably the most heavily reliant of provinces in the country on the forest product sector. However, British Columbia is a little over 3 per cent, and Quebec is a little over 2 per cent. Again, the industries have evolved differently in many respects over time with a strong emphasis on the solid wood industry in Western Canada, and perhaps a stronger emphasis on the paper and newsprint industry in Eastern Canada.
Moving to the next slide, we see the wood product exports. Again, the graph on the left underscores clearly what has happened to our wood product exports into the U.S. since 2005-06. Again, the Canadian wood products industry is one of the first to see the effects of sub-prime mortgages and the collapse of the housing sector in the United States. Today, in terms of value as opposed to volume, the role of the export markets as a percentage of overall shipments has taken on a different role than it had taken on historically.
In recognizing that change, Natural Resources Canada has worked closely with the provinces and the forest products sector since early 2002 primarily to explore opportunities in Asia. Until the early 1990s, the second biggest market for Canada was Europe. That started to shift in the mid-1990s with improving U.S. and Japanese markets. At that time, Japan overtook the European Union as the second largest wood market. In the last 12 months, we have seen China eclipse Japan as the second largest market for Canadian wood product exports.
NRCan's Canada Wood Export Program has worked with the provinces, primarily British Columbia and Quebec, and wood product firms as well as their trade associations in early market development work around codes and standards since most of these wood exports are associated in some way with residential or non-residential construction. More recently, starting in 2006-07, the department has had a similar domestic North America program to explore non- residential uses of wood in construction such as community centres, municipal infrastructure or government buildings. A number of provinces, such as British Columbia and Quebec, have adopted policies to expand the use of wood. This expansion will see more public investment directed to the use of wood in publicly funded non-residential construction.
China is an interesting example, where the market development work began around 1999 and 2000. In many respects, early results that we have seen in the last year or so have been compounded by what has happened in the United States in the last couple of years. There has been a dramatic increase in wood product exports to China. The numbers are not huge if compared to those of the U.S., but the increase in volume has been dramatic over a relatively short period of time. Currently, Canada is the largest exporter of wood products to China. This situation bodes extremely well for the opportunities presented in China.
The February 2010 shipments to China exceed what we shipped to China during 2001. The pace at which the market is improving has caught a number of firms by surprise. One and a half years ago, the interest in China was somewhat tepid. Much of the work was around developing codes and standards but now there is a high degree of interest, in particular in Western Canada. If we added up the shipments to China on an annual basis, likely they would probably be the equivalent to the lumber produced by three medium-sized sawmills working 24-7. As we go forward, we expect to see improvement the U.S. market. We have seen movement on prices recently, and China provides options for possibly more western-based companies than central or eastern companies to diversify their opportunities in wood shipments.
South Korea is a country where disposable income per capita has increased substantially. In 2009, disposable income was close to $28,000 per year, while in 1999, it was about $15,000 per year. There are growing opportunities in South Korea. The Government of Canada has a partnership office on site with the Canadian industry to promote the use of Canadian wood, primarily in residential construction, and is working with governments to eliminate the barriers imposed by codes and standards and the use of wood for construction.
Canada has participated in the Japanese market for 25 to 30 years. Japan has had and continues to have its economic challenges, so our shipments have eroded over time. However, despite the percentage of that market decline over the years, Canada's share of that market has remained consistent. It may even have increased a bit. Where that market will go during the next 10 years likely will be dictated by larger economic issues challenging Japan.
Europe has been a market primarily for Eastern Canada. We view the European market as a value market for high- end specialty products, which is particularly attractive to Ontario, Quebec and Atlantic Canada. The U.K. has a great interest in prefabricated housing, in particular, energy-efficient housing.
In China, the notion of using wood for house construction five years ago was entirely about cost and durability. In the last couple of years, the whole issue around energy efficiency has taken on a significant dimension of that marketing program. The energy demands in China required to drive China's annual rate of growth are staggering.
The Government of China is looking across the entire economy at ways to continue to enjoy growth and prosperity while at the same time either diversifying or reducing reliance on traditional energy. The notion of a Canadian-style house with Canadian-style energy, and the associated costs, is attractive in some areas of China. However, the big challenges in China tend to be around density in most, if not all, the major cities where they build up rather than out, but there are limitations on vertical building with wood. Recently in Beijing, a memorandum of understanding was signed by Canada, British Columbia and China to build a six-storey wooden residential construction in Beijing as a demonstration house. We continue to challenge the cultural tradition that has a bias against wood, some of which is related to durability and fire.
Much of the market development work relies on a government-to-government relationship that speaks to some of the technical codes and standards. As those issues are eliminated, more individual firms are doing what they need to do, which is to go in, build relationships and sell products.
Chair, if that overview is agreeable, I will end there.
The Chair: Let us move to questions and answers.
Senator Mercer: It is interesting and also disturbing. The preoccupation of this country and of both NRCan and DFAIT with softwood lumber drives me, as an easterner, crazy. The numbers provided on page 5 of the presentation show that when the pulp and paper numbers are added up for Eastern Canada — from Ontario east — the total is $21.4 billion. If we add in the pulp and paper from the West, that is another $8 billion, for a total of $29.4 billion. If my math is right on the softwood lumber, we are talking about $21.7 billion. They will still use softwood lumber in the future; they will not use pulp and paper in the future. Plants are closing in Eastern Canada and they will stay closed, because we are all avoiding using paper. Pulp and paper mills are closing, so I am a little concerned that we continue to talk about marketing softwood lumber.
I want to hear someone tell me that someone is doing something to help the pulp and paper industry. I am concerned about it in my own home province, but look at the numbers in Eastern Canada provided to us here — $21.4 billion in pulp and paper. That number is equal to the total for all Canada in softwood lumber. For anyone in pulp and paper in Western Canada, that problem is greater than the problem with softwood lumber. I have a question on the Softwood Lumber Agreement, but I want to hear your response to my concern about pulp and paper.
Mr. Farrell: I will answer the question and maybe start in a slightly different place. The newsprint industry started to decline about five or six years ago. You are absolutely correct. In many respects the Canadian newsprint industry is heavily reliant on the North American market. We have seen a secular and consistent decline in the use of newsprint and, as a result, declining prices and declining competitiveness. We have seen a lot of closures, especially in Ontario, Quebec and Atlantic Canada as a result of that decline. We have also seen an increased interest in bio-energy. We have seen jurisdictions provide incentives to move residues that were no longer used at pulp and paper facilities into the world of bio-energy.
We undertook work with the Forest Products Association of Canada and FPInnovations to try to develop a sense as to where technologies were — how close they were to commercialization — and what the real factors were in terms of dictating price in terms of residues. We concluded that if Canada were to look at a forest products industry that can take full advantage of some of the new partnerships, whether they be energy or bioproducts, what the industry needed at its heart was a solid wood industry that was profitable and competitive. That solid wood industry basically offset some of the delivery costs associated with fibre.
If we go forward from that point to look at the kinds of investments the Department of Natural Resources has made, for example, in the pulp and paper green transformation, the department has invested a billion dollars in the pulp infrastructure across the country. In addition, we have a $40-million demonstration program, again, at the pulp and paper industry, to give incentives to new technologies to produce more than pulp only but maybe variations of bio- energy, for example, through pyrolosis. We are looking at pilot projects of new nanotechnology such as nanocrystalline cellulose, which is, again, a high value-added product that can be produced in a pulp stream, in sort of a rejigged pulp mill, like a bio-refinery.
Over the last number of years, we have paid a lot of attention to investing in research and development to move to pilot projects, to move to commercialization, and to exploit the opportunities that are available out there to make better use of Canada's wood fibre. At the heart of this work is to be able to have a solid wood sector that makes the first transformation. The second transformation is based on the residues.
Mr. Stephenson: From the trade policy perspective, it may be fair to say that we spent a lot of time on the Softwood Lumber Agreement. It is the bane of our existence, but this is not to say that we ignore other issues of interest apart from the pulp and paper sector. Last year, there were the black liquor subsidies in the U.S. Pulp and paper firms accessed these massive subsidies intended to promote the use of alternative energy sources in the U.S.
Senator Mercer: We are familiar with them.
Mr. Stephenson: The subsidies were the subject of a lot of controversy by the Minister of International Trade and the Prime Minister. Black liquor was not renewed as an eligible candidate for those subsidies.
Senator Mercer: Black liquor is something that we have talked about here. I have always said the black liquor I am familiar with is rum, and usually Coke goes with it.
Every time we hear people from the Department of Foreign Affairs and International Trade and people from Natural Resources Canada, every time there is a demonstration project or a trade mission, we are talking about softwood lumber. Softwood lumber will continue to be used in North America, and, when the economy comes around, our neighbours will have to come to us and we will have our market there. However, jobs are being lost in pulp and paper that are not coming back. We need projects that demonstrate to Canadians who have lost their jobs in Liverpool, Pictou or Port Hawkesbury, Nova Scotia, that we are doing something.
I will switch to softwood lumber for a moment, though. My least favourite topic on softwood lumber is the return of the $5 billion in duties and interest. Everyone thought that amount was wonderful until they read the next line. We left $1 billion on the table. In your presentation, you said that Canada agreed to disburse US$1 billion to U.S. interests.
Are some of those interests people who will come back again and mount another challenge under the free trade agreement on softwood lumber? Will the issue cycle around so that we will pay for the lawyers who will come back and try to move us back into the same situation where there is duty? Will some future government strike a deal where we will give back $6 billion and we will leave $2 billion on the table?
Mr. Stephenson: The disbursement of the $1 billion did not benefit any individual U.S. firms; that is, competitors. The money was distributed to a number of organizations that perform various forms of good works in the industry, including a new organization established as part of the agreement, the Binational Softwood Lumber Council. The council, with representatives from both the Canadian and the U.S. industries, promotes the kinds of projects that, together, look for expanding third-party markets, foreign markets for wood products for both countries and innovative uses of softwood, essentially developing new markets.
The answer is, directly, no; perhaps indirectly for both sides.
Colin Bird, Director, Softwood Lumber Division, Foreign Affairs and International Trade Canada: Of the $1 billion that stayed behind, $500 million went to the Coalition for Fair Lumber Imports, which is an industry association in the U.S. that has been involved in all the trade litigation to date. That $1 billion was left behind, but if we continued the litigation cycle for another year, the change in the Canadian currency over that period of time would have essentially wiped out that amount. If we had managed to have it all returned, the change in the currency would have wiped out any difference.
Senator Mercer: That is history, but the $500 million will still come back to bite us.
I want to talk about the Maritime Lumber Bureau and the exemption that exists on softwood lumber in Atlantic Canada. Has there been any indication that our neighbours to the south are anxious to change that agreement? We have had this agreement for a while.
The industry is huge. That part of the forestry industry is not as big in Atlantic Canada, but we have seen some efficient and productive plants, particularly in northern New Brunswick, which are exporting to the United States.
Mr. Stephenson: The U.S. coalition keeps a close eye on all activities north of the border in this industry, including when the governments provide subsidies to the industry, whether direct or indirect. There have been comments by the coalition on subsidies provided in the Atlantic provinces but there have been no indications from the U.S. administration that they have concerns or will challenge the exemption of the Atlantic provinces under the agreement.
Senator Eaton: I have never understood the Softwood Lumber Agreement. However, reading all the materials I have, I am feeling more comfortable with it.
Several witnesses over the last year have said, we cannot do X because of softwood lumber. As you know, this committee is looking at ways the forestry industry in Canada can reinvent itself, away from so much dependence on pulp and paper and rudimentary products like two-by-fours. We have been looking at value-added wood products such as cross- laminated lumber and glulam.
When we talked about prefabricated housing, I think one of the witnesses was quick to say, we cannot do that because of the Softwood Lumber Agreement. Is there anything that stops us from having a market basket full of value- added products that are used in various forms of construction? Will they fall under the Softwood Lumber Agreement?
Mr. Bird: The scope of the Softwood Lumber Agreement is set out in specific detail. A number of re-manufactured or value-added projects fall within the scope and others do not. When we look at the trade implications of support for a particular product or company, one of the main issues is whether it is within scope or not. That issue can involve taking the product back to DFAIT and assessing it based on the scope of the agreement.
Senator Eaton: Can you give me examples of products that fall under the amount we are allowed to export, if those products are manufactured in Canada, products that fall under the guidelines of what we are allowed to export?
Mr. Bird: Annex 1A, paragraph 4 of the agreement lists a number of items that are explicitly excluded from the scope. The list includes ``stringers (pallet components used for runners),'' ``box-spring frame kits'' —
Senator Eaton: Excuse me, when you say frame kits, does that item belong to prefabrication of living quarters or houses?
Mr. Bird: There is an exclusion of single-family home packages or kits.
Senator Eaton: Are things like cross-laminated lumber excluded?
Mr. Bird: Though I would not want to be quoted, I think that item falls within scope, but I will check.
Senator Eaton: That item falls within the scope of the agreement?
Mr. Bird: Yes.
Senator Eaton: We have a softwood lumber agreement only with the U.S. What we export to China or Japan has no bearing on our Softwood Lumber Agreement with the U.S., correct?
Mr. Stephenson: Yes, that is correct.
Senator Eaton: Then we should think about exporting to other countries.
Mr. Stephenson: There is another reason we might wish to export to other countries: the collapse of the housing construction market.
Senator Eaton: Absolutely.
Mr. Stephenson: Yes.
Senator Eaton: Thank you. I will come back again.
[Translation]
Senator Robichaud: Mr. Stephenson, you said that the industry preferred free trade but that the agreements had brought some stability. Am I right in saying that your entire presentation focused on the instability and the series of challenges by the United States?
Mr. Stephenson: I maintain what I said. Since I started working on the file about a year and a half ago, everyone has been unanimous, even in Quebec, on the agreement; in other words, even those who were unhappy with it when it was signed prefer having the agreement today than not having it.
As for stability, there are arbitrations that have been under way for more than two years, under the agreement. We set aside a fund, managed by the bi-national council, to pay for the costs of those arbitrations. Obviously, it was expected, but I would say that overall it brings a certain stability.
Senator Robichaud: An unstable stability! Listen, I accept your answer nevertheless.
Mr. Farrell, in the Chinese, South Korean and Japanese markets, who is Canada competing with in terms of its wood products?
[English]
Bob Jones, Director, Industry and Trade, Policy, Economics and Industry Branch, Canadian Forest Service, Natural Resources Canada: Canada is the big player in China for wood products. There are other interests there. New Zealand is also coming into China. Many Russian logs go into China, the main wood product there from Russia. Scandinavia is a bit of a player in China, as well.
As Mr. Farrell mentioned, we have tried to work at the ground stage of developing building codes, which are good for wood as a whole. We have worked closely with those countries such as China at the grassroots stage to develop common building codes.
In Korea, the Americans had a good presence until about four or five years ago, but they have been slowly moving away from the market. Canada is starting to become one of the bigger players in Korea. The U.S. is a good competitor in Japan.
[Translation]
Senator Robichaud: Do the other countries wanting to sell their wood products to China, South Korea and Japan have programs similar to what Canada put in place to market its products?
[English]
Mr. Jones: No, Canada is by far and large the biggest exporting country into these emerging markets that have defined programs. As I mentioned, the Americans through one of their wood product associations used to have an office in Korea. They have since pulled out of there.
The Americans used to be involved more than they are now, but they have closed many of their operations in China. Canada is one of the major players that have programs in these offshore markets. The Americans still have funding that goes into offshore markets but not to the degree that Canada does.
Senator Robichaud: I cannot help but ask whether the $500 million or whatever that stayed there is used to promote their products offshore.
Mr. Jones: Which $500 million?
Senator Robichaud: When we settled with the Americans and they kept the $500 million of the $1 billion, has any of that money been used to compete in international markets?
Mr. Jones: On our work that is taking place in the non-residential market, the binational council also funds some of the work of both associations in Canada and the U.S. to grow the non-residential market in North America. The binational council funds some of that work as well.
Senator Robichaud: Do you want to add anything?
Mr. Bird: Other meritorious initiatives funded through the Softwood Lumber Agreement include the American Forest Foundation and the U.S. Endowment for Forestry and Communities. These groups look at cross-border collaborations in forest management. The primary work in terms of developing a unified North American market is through the binational council, which received $50 million under the agreement, $40 million of which was for joint marketing, essentially.
Senator Eaton: I want to clear up something, Mr. Jones, from a question Senator Robichaud asked. Are our exports to China primarily prefabricated housing units?
Mr. Jones: Right now, our exports are dimensional lumber, two-by-fours, predominantly produced in the interior of British Columbia. They are the lower grade products that are going for concrete forms for construction. However, in the last couple of years there has been an increased market in the higher-grade type of lumber going into China. The predominant wood product that goes into China is lumber; two-by-fours, two-by-sixes.
Senator Mercer: I want to go back to a question that Senator Robichaud asked about China, and your response about our competitors. You casually mentioned New Zealand, but New Zealand has recently signed a free trade agreement with China that will have an effect. They are obviously anxious about their ability to market their agricultural products. Dairy products are their biggest export.
I was in New Zealand in December so I have been exposed to some of their information. Will New Zealand's exports to China become a larger problem because they have a free trade agreement with China and we do not?
Mr. Farrell: Senator, I am not sure if I can speculate as to what the next five years might hold for that situation, but in many respects New Zealand faces the same challenges we do, and that is around gaining acceptance from a building code perspective, whether it is at the city level, the provincial level or the national level. In many respects at the working level, as Mr. Jones pointed out, we are working together.
In terms of a presence, the total staff that we, the Province of British Columbia and the industry support is close to 25 or 30 people. Over there, we basically provide quality assurance and quality control in terms of proving that the use of wood in their applications can work. It is much more involved than marketing only. We have been successful to establish a reputation that we will be there for the long haul. The first couple of years were not easy in that China was only beginning to take off. Many people wanted to sell their product. Our real advantage is that we have a physical presence there, and we have experts that understand residential and non-residential construction, engineering and specifying design; all the things involved in putting together a structure.
Senator Mercer: In New Zealand, construction is not dissimilar to ours and they are a little closer to the market.
Mr. Farrell: Yes.
Senator Duffy: We appreciate all the efforts you have made. As someone who has been saddled with this file — some people say they are tired of it — can you imagine having been there since day one covering it? The only thing worse would be to be involved in those negotiations.
I have three or four quick questions. I have high admiration for the dedication of the public service dealing with a complex and intractable problem.
Mr. Stephenson, you talk about DFAIT educating officials of the United States Trade Representative. As someone who has been on this file for 20 some-odd years, in my situation — and I know you have not been there that long — how would you compare the attitude of the USTR under the current American administration to previous ones? Did you have to re-educate the newcomers, or was there some institutional memory established at the staff level, as opposed to the appointee level?
Mr. Stephenson: That is an interesting question, because in respect of trade policy generally, I would say they are more aggressive in respect of the enforcement of their existing trade agreements. Strangely, with respect to the Softwood Lumber Agreement, they are less aggressive at the moment. They are not pursuing the agenda aggressively. They feel that the management of the agreement is working reasonably well, including all the transparency that we give on our side of the border of measures that are taken.
Senator Duffy: That is good. They have not yet succumbed to the pressure from the American industry.
Mr. Farrell, we talk about China. One of the things we have heard here from people like kitchen cabinet manufacturers is that some of the laminated products coming from China do not meet our standards. I am not sure if we have standards, but manufacturers feel that the cabinets are an inferior product and they are worried about off- gassing, not only in kitchen cabinets but also as a corollary in granite countertops from China, which pose a potential health hazard. Are you aware of that situation, and do we have legislation to regulate it yet?
Mr. Farrell: Senator, I am aware of the issue generally in organic products. The issue specifically as it relates to concerns about imports and off-gassing issues is not an area of expertise of the department, but I can say that we will look into it and see if we can provide the committee with what information we might have on it. I do not have the information off the top of my head.
Senator Duffy: Is this more of a product safety issue?
Mr. Farrell: Yes, I suspect so.
Senator Duffy: It is something for the protection of consumers.
Finally, Mr. Bird, one thing my colleague Senator Eaton was asking about was an innovative product we heard about here from the forest industry; what they call a house in a box. I am sure you are aware of that product.
From what you tell us, it looks like there should not be an impediment to that product. There is value-added; we put all the components for a single family home, not necessarily these prefab deals, in a container here and send it to Alabama where they take the pieces and put it together there. We would think that would be a way for us to provide value-added at this end rather than having all the sawing, chopping and hammering done there.
Mr. Bird: I do not claim to be an expert on custom houses, but there are provisions for these ``houses in a box.'' There are significant descriptive elements to what is required. All the doors, glue, wood and nails must be included in the house in a box.
Senator Duffy: It sounds like a non-tariff barrier to me. That is enlightening.
Senator Mahovlich: Slide number 8 on China shows Canada-BC Wenchuan Earthquake Reconstruction Projects. How does wood fare in an earthquake? Some of the houses in China seem to collapse in earthquakes. Every time we pick up a paper, we read that 2,000 people have died in an earthquake. I have a boathouse in Muskoka that is attacked by the lake ice every year. It shifts a bit but it does not collapse. It is strong and can hold 10 feet of snow on its roof and not collapse. Does wood fare better than a clay and cement mix in an earthquake situation?
Mr. Jones: Canada's forest research institute, FPInnovations, has conducted a number of studies on various structures. We have been able to demonstrate scientifically that a properly constructed wood frame house is more durable in an earthquake than any other building material. After the 2008 earthquake in China, we learned that a number of the houses that collapsed were not built of wood. We have interesting photographs that show there are few wood frame buildings in that part of the country but they withstood the impact of the earthquake, while the other buildings collapsed.
We instituted the program in the Szechuan area, and rebuilt a school that had collapsed completely, killing several children. The rebuild is entirely of wood. We also have a couple of other demonstration buildings, some for the elderly and some hospitals, all made of wood.
Being able to show that wood frame construction is safer in an earthquake has been a strong selling point in China. Is your boathouse made of wood?
Senator Mahovlich: Yes.
Senator Robichaud: Is it wood from New Brunswick?
Senator Mahovlich: No, the wood is from Muskoka.
[Translation]
Senator Rivard: Has your department calculated the impact of the strong Canadian dollar against the weak American dollar?
Did the global economic crisis, especially the one that hit the U.S. and resulted in a significantly lower level of lumber exports, have as big an impact as the strong Canadian dollar, which used to be at 60 cents against the American dollar and which has hovered around 80 cents in recent years? Do you have any figures on that? Were you able to determine what the ideal value of the Canadian dollar would have to be in order to return to the years when lumber exports were at a good level?
[English]
Mr. Farrell: The value of the Canadian dollar is a challenge for all exporters, not the least of which is the forest products sector in Canada that is reliant on U.S. markets. In many respects, as my industry colleagues have indicated, the value of the dollar vis-à-vis the U.S. dollar was problematic given the rate of the change and the ability of the industry to retool, recapitalize and adjust its cost of production in the wake of the change. In many respects, that was one of the industry's biggest concerns. I am not sure what other industry witnesses might have said before this committee on the issue but suffice it to say that much of the Canadian industry was built at a time when the Canadian dollar was worth as little as US$0.65. The industry is now trying to compete in a world where the Canadian dollar is close to par with the American dollar. It is a different game and a great challenge.
Senator Eaton: We have talked about China and Asia. Going back to value-added products, perhaps they were thinking about sending houses to Chile after the earthquake. Do we have any trade in wood with South America, or does Brazil have that market?
Mr. Farrell: Historically, South America has not been a big market for Canadian wood products. As a matter of fact, Central America and South America are global competitors in market pulp. They have capacity for sawn lumber, much of which is used domestically. In terms of that issue again, my colleague, Mr. Jones, talked about the Szechuan earthquake and Canada's response. It worked well in many respects because of the climate in the immediate Szechuan area as well as the willingness at the provincial and national levels of governments in China to react quickly to put the infrastructure in place, such as sewers, water supply and electricity, et cetera, before the building could begin. The governments were extremely responsive and were able to deliver so that Canada could bring forward the construction.
We have had discussion with our colleague government agencies, such as the Canadian International Development Agency, about Haiti and Chile and how they go forward vis-à-vis Canadian investments. For details, I defer to CIDA but, historically, many of those priorities are set by the recipient country.
Senator Eaton: I suppose we are trying to have a free trade agreement with them as well.
Mr. Jones, when we market our products to Chile and Asia, do we tell them how green wood is?
Mr. Jones: We portray the message that the wood comes from a sustainable resource and, with carbon footprint discussions, we talk about the environmental benefits of wood. That message is all part of our branding story behind Canadian wood products.
Senator Eaton: Do you see a market there for biomass?
Mr. Jones: I do not see one immediately but possibly in the future. You asked about South America. I have the top 30 destinations for Canadian exports of wood products for 2009 but no South American country is in the top 30.
Senator Eaton: That answers my question.
Mr. Farrell: Returning to biomass, in the interior of British Columbia, as a result of the mountain pine beetle infestation, there is a large amount of dead material that is steadily increasing. Some firms are pelletizing the dead ponderosa and lodgepole pine and shipping it to Europe. Some parts of Europe are paying high prices for pelletized wood.
Senator Eaton: I spent yesterday at the University of Guelph where they are conducting many experiments on biomass with willow, grasses and switch grass. The next five or six years may be interesting in this area.
Senator Plett: I have one quick question and then a comment. Mr. Jones, you suggested that most of the lumber that is sold to China is lower grade lumber, namely, two-by-fours and two-by-sixes used for forming. Obviously, for forming for concrete, a lot of plywood is used as well. Are we selling them plywood? If not, why not?
Mr. Jones: Some plywood is going to China. I do not have the numbers off the top of my head, but it is not a great amount. It is mainly framing materials that are going into China right now.
Senator Plett: Do they have their own plywood? Is that the reason?
Mr. Jones: Some plywood is produced in China, yes.
Senator Plett: Other than that, I will echo what Senator Duffy said earlier. I commend all the people who were involved in the difficult negotiations on the Softwood Lumber Agreement. Maybe the deal was not as good as we could have gotten if we had held out until now, who knows? However, a deal had to be made. I commend everyone who worked hard on behalf of the Canadian people to negotiate that deal.
[Translation]
Senator Robichaud: You are aware that the committee is in the process of looking at how we can market our wood products, both domestically and internationally. Where would you recommend that we focus most of our efforts in terms of marketing commodities? We talked about two by fours and two by sixes, but you also have joists and bladed-glued beams; are we focusing at all on those areas, and if so, should we focus on them more?
Mr. Stephenson: I will let my colleagues answer that because they have the marketing programs. But my department does do some promotion of trade exports. You may have to ask the person in charge of the programs, Assistant Deputy Minister Ian Burney, among others, to come and talk about Canada's efforts on that front.
[English]
Mr. Farrell: If I had to give advice, if we look at the Canadian forest, its physical dimension and size, it is more or less the same size as it was 100 years ago. What has changed is what is inside the forest — the size of the trees, the accessibility of the trees and the kinds of restrictions that are legitimate in terms of the environment. The fundamental nature of the forest in terms of whether there are a lot of trees out there is more or less the same. It is the economics of the forest vis-à- vis the rest of the world. The new competitors are well financed, large-scale, and do not face the same kinds of input costs and environmental hurdles that we face here.
I think our way forward is with technology and innovation. The world makes a specialty product, a commodity, only for a short period of time, unless the producer is able to carve out a niche that will give the producer a competitive advantage for five, if not 10, years. Within Canada, not only the Government of Canada but also the provinces and firms have been exploring ways to secure that advantage, X number of years out, moving beyond the kind of commodities that the entire forest products sector has been built on.
Having said that, I think solid wood products, whether they are softwood lumber or other wood products, will be part of that way forward. Without wood products, I do not think we will have the value chain in terms of making residues available for a whole host of different products. The way forward is about technology and innovation to create options — to have options for firms as to what product they want to produce and where they market that product. It does not take long to turn a value-added product into a commodity if the market is flooded overnight or if only one firm is involved in the product because the market is that small.
The idea is to look at what kind of existing products today can be replaced by organic products that grow on trees.
Senator Fairbairn: My ears popped up a minute or so ago when you mentioned the words pine beetle. Can you give us any thoughts about how, where and when that beetle is still working away? I am from Southern Alberta, and there was a great deal of anxiety at one point that the beetle was going to cross from the south of British Columbia into the Crow's Nest pass and devour everything. The beetle did come into Alberta, but they did not like our trees. They brought their army outfits together and marched down into Montana, where there was a long, upset attitude.
How do you cover every corner of these things? Is that issue still ongoing? If so, to what degree is it affecting our efforts in other countries?
Mr. Stephenson: Before Mr. Farrell answers, I will give you an interesting fact. When we signed the Softwood Lumber Agreement and the practice of establishing the low stumpage fee for these dead trees because of the pine beetle kill, the amount of dead wood coming out of the forest at that point was something less than 10 per cent; today, it is in the 40s. That is a lot of wood. The producers of lumber have become better and better of producing at least a board or two out of those logs. A good deal of volume has reached the American market and the eastern market, which has the predictable reaction.
As to when the infestation is over, perhaps Mr. Farrell can speak to that question.
Mr. Farrell: The pine beetle is what they call an endemic pest. It has always lived in North America. The population in the U.S. is a different population genetically, but the pest is the same. The U.S. did not acquire the pest from us; they have had it. The same kinds of conditions that allowed the population to explode in Canada provide more or less the same challenge in the U.S.
The forecasts for British Columbia are that the pest will have eaten pretty much what it will eat by 2014 and 2015. As you mentioned, senator, over the last three or four years, we have seen the pest move into Northwestern Alberta and Northeastern B.C. Alberta has been extremely aggressive in trying to slow the spread down, whether through harvesting or a prescribed burn. The preoccupation that our scientists have is the threat to the rest of the boreal forest.
Senator Fairbairn: Yes; it is a threat to the North.
Mr. Farrell: That is right. The bug cannot eat jack pine in laboratory settings. However, it is not clear whether they will thrive in the boreal forest, where the trees are more distributed, and the winters are that much colder even in a changing climate scenario. It is still a watching scenario each winter. An early cold snap is usually what sets the population back. There have not been a lot of those cold snaps in Central Alberta or Southern Alberta for the last dozen years or so. It has been a watching brief. As Mr. Stephenson pointed out, it has had an impact on fibre supply.
It is important to note that, in the interior of British Columbia, there are other species. In some parts of B.C., pine is a predominant species. However, there is a lot of spruce, particularly in the southern interior that will pick up some of the slack. Undoubtedly, there will be a period of time where the volumes will dip. I know British Columbia and Alberta are both preoccupied with how one makes that period as short as possible.
Senator Duffy: The forest industry people were proud to come before us and say they are the largest employer in, I think, 60,000 communities from coast to coast. That number is huge.
We are trying to find answers to problems. However, when you look at the industry overall and look down the road, do you see a day when we will be able to go back to the kind of employment levels we had in the past, or will people in those areas and the next generation need to look to other things, given the state of the world in which we all live and operate?
Mr. Farrell: Personally, I am an optimist. One thing we are starting to see, and will continue to see, is what I call a blurring of the sector. When we think of the forest products sector, we think about the traditional lumber, pulp and paper and what we call the forestry workers, which are harvesters, planters and truck drivers.
The sector is starting to move. We are starting to see lines move between the traditional forest products sector and the energy sector. We are already seeing that movement now, whether it be in the fledgling bio-energy sector all across Canada. As that sector becomes more technology driven, it is not that far out of line to see an input stream derived from squeezing ``the juice out of trees'' that one can put into a refinery, which will be a green fuel. The technology and the economics are not there yet, but it is not nearly as far away as it was even a few years ago.
How does that movement relate to the small, rural communities? It will be a scale issue. How much of the work can be done on a smaller scale, in terms of technology? How much must be done on a big scale? That answer is hard to predict.
Another factor is provincial utilities. We have seen a number of provinces with feed-in tariffs that provide incentives for green power. British Columbia and Ontario both have systems for those incentives. In many respects, that system is starting to incent investments on the supply side, and I think many smaller communities are closer to the supply side than the manufacturer side. That side might provide more durable employment.
If I had to hazard a guess, it will be difficult in the future to see the same kind of a national industry, and it has been a truly national industry. That industry will be difficult to maintain across the country. If the numbers stay the same, I think they will shift from various regions and will be driven by investment, especially around technologies that move us beyond the commodity business.
We will always produce a certain level of commodities in the country. However, in the globally traded commodities, like market pulp, we also see firms trying to build on their natural advantages. The competitors we see in Central America and South America have cost us a big advantage; they have trees that can grow in seven or eight years and the trees grow within 30 kilometres of the mill.
We have a globally competitive fibre that grows uniquely in the country. Our challenge is to produce a product where that fibre is truly competitive and for which people will pay, one that will have an advantage over, say, a hardwood eucalyptus fibre. The advantage is there, but it is about investment in technology and innovation, and better stratification of the fibrous resource.
[Translation]
Senator Rivard: Senator Fairbairn spoke to us about the pine beetle problems affecting forests in western Canada. Quebec, New Brunswick and a small part of Northern Ontario have all experienced the ravages of the spruce budworm. Can we now say that the problem is gone or on its way out? Where do things stand?
[English]
Mr. Farrell: Both the jack pine beetle and the spruce budworm have been resident in central and eastern Manitoba and Saskatchewan, to some extent. However, the problem has been a recurring one in Ontario and Quebec. Both are somewhat cyclical, although the spruce budworm is probably more predictable in terms of cycles. The current forecast is that we are on an up cycle in Eastern Canada with spruce budworm, particularly in Quebec and Ontario.
Unlike the pine beetle though, there are accepted low-environmental-impact controls; there are aerial applications of biological controls that are actively used. I think the science on it is well refined, so there are things that can mitigate the infestation. However, the forecast shows it is on its way up.
The Chair: Before we leave, I have one question, and it is in respect to your non-residential market information to reduce the bias against wood to be used. Can you provide us with a report card of the targeted markets. Can you tell us whether we do, and did, have impacts on encouraging those markets we have now as well as emerging markets to use wood in non-residential construction? We will appreciate you providing the clerk with that information.
Last but not least, I want to inform the committee and the officials that I participated last night in a meeting on forestry. Many associations were present. I will share with the committee and officials that there is a special mission in the shuttle, as we are speaking. You are nodding.
Canada is demonstrating that we are the best. We are looking at research and development, not only here on Earth but the space shuttle presently has a special mission to conduct intensive research on seedlings like we planted, senators, when we were in New Brunswick.
Senator Mercer: Have you checked on the seedlings?
The Chair: They are growing.
Senator Plett: I have not received my four and a half cents.
The Chair: When they told me about the mission last night, I said I wanted to volunteer to be a tree planter in space.
To conclude, one Canadian company has 18 seedlings in the shuttle as we speak. They will conduct special research to find out effects on growth and texture, and also to look at better quality seedlings here.
Senator Mercer: Senator Plett is volunteering to go up for harvesting.
The Chair: That said, Mr. Stephenson, Mr. Farrell, Mr. Bird and Mr. Jones, thank you for your presentations. They were enlightening. If we have additional questions, we will communicate with you.
(The committee adjourned.)