AGFO - Standing Committee

Agriculture and Forestry

Past Session: Past Session:
37-1 37th Parliament, 1st Session (January 29, 2001 - September 16, 2002)
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REPORT ON FORESTRY

The Standing Senate Committee on Agriculture and Forestry

Chair: The Honourable Leonard J. Gustafson

Deputy Chair: The Honourable John Wiebe 

June 2001

 THE STANDING SENATE COMMITTEE ON AGRICULTURE AND FORESTRY

The Honourable Leonard J. Gustafson, Chair
The Honourable John Wiebe, Deputy Chair

and

The Honourable Senators

* Sharon Carstairs, P.C. (or Fernand Robichaud, P.C.)
Thelma Chalifoux
Joyce Fairbairn, P.C.
Aurélien Gill
Elizabeth Hubley
Marjory LeBreton
* John Lynch-Staunton, P.C. (or Noël Kinsella)
Donald Oliver
Terry Stratton
David Tkachuk
Jim Tunney

 * Ex Officio Members

June Dewetering
Research Officer

Parliamentary Research Branch

Daniel Charbonneau
Clerk of the Committee

 ORDER OF REFERENCE

Extract of the Journals of the Senate, Tuesday, March 20, 2001:

That the Standing Senate Committee on Agriculture and Forestry be authorized to receive, examine and report on the papers and evidence received and the work accomplished by the Standing Senate Committee on Agriculture and Forestry during its consideration of the present and future state of forestry during the second session of the Thirty-sixth Parliament; and

That the committee submit its report no later than June 30, 2001.

The question being put on the motion, it was adopted.

Paul C. Bélisle
Clerk of the Senate

 FACT-FINDING MISSION TO BRITISH COLUMBIA, ALBERTA AND WASHINGTON STATE

INTRODUCTION

From 25 September 2000 to 28 September 2000, some members of the Sub-Committee on Forestry of the Standing Senate Committee on Agriculture and Forestry conducted a fact-finding mission in British Columbia, Alberta and the State of Washington to gather information on Canada’s softwood lumber industry in the areas of corporate consolidation and globalization, value-added processing, marketing and the Softwood Lumber Agreement. Discussions were held with government officials, industry associations, academics, lumber producers, an Aboriginal group and a trade union. Most groups and individuals stressed the importance of the softwood lumber industry as a contributor to gross domestic product, employment (both direct and indirect, and particularly in forest-dependent communities) and the balance of trade in Canada. From this perspective, they identified various actions that the federal government could take to assist the industry. They lacked a consensus position on what should occur once the Softwood Lumber Agreement expires in March 2001.

A. Corporate Consolidation and Globalization

  • some noted that the purchase of Canadian companies by U.S. firms (MacMillan Bloedel by Weyerhaeuser, Weldwood by International Paper, etc.) leads to an increased incentive on the part of international companies to find a solution to trade problems and avoid countervailing duty and anti-dumping actions; it also promotes a greater understanding of the different systems in the two countries
  • one individual noted that while there has been significant consolidation in Eastern Canada in the pulp and paper sector and in newsprint, some Canadian companies on the west coast (such as Fletcher Challenge) are divesting themselves of their softwood lumber interests
  • it was noted that, although the federal government plays a role in consolidation through the Competition Bureau review process, provincial governments can curb merger activity by refusing to grant harvesting rights, although this right of refusal generally is not exercised; provinces may also engage in a public hearing process prior to any merger or acquisition
  • while some groups suggested that this decade will see the emergence of a North American market in softwood lumber and continued global consolidation, one individual argued that North American consolidation in the softwood lumber industry is unlikely to continue since the industry has few economies of scale; in his view, however, if a company needs pulp, then it may be easier to also own the lumber mill

 

B. Value-added Processing

  • one group noted that growth in value-added processing is limited by its vulnerability to international competition and international trade challenges; consider, for example, U.S. attempts to reclassify drilled studs and rougher-headed lumber so as to include these products within the Softwood Lumber Agreement
  • other challenges to value-added processing were identified as including regional and sectoral fragmentation, and a lack of economies of scale
  • one group noted that the Softwood Lumber Agreement left some value-added firms with insufficient quota, thereby impairing their ability to develop markets; in its view, public policy generally does not support value-added development, given Crown ownership of land and tenure allocation, as well as taxes and regulations that erode investments made in technology, training and market development
  • some groups identified Forest Renewal BC as a useful mechanism to enable industry to increase value-added production

 

C. Marketing

  • there are many marketing challenges for the softwood lumber industry, given competition from other countries (including the Scandinavian countries) and from non-wood substitutes (such as steel, aluminum and concrete); it was suggested that as Canada and the United States have been "fighting" over their respective "share of the pie," the size of the pie has been shrinking
  • several groups and individuals mentioned the importance of the Japanese market for Canadian softwood lumber producers (particularly coastal British Columbia producers), since residents of that country build a significant number of single-detached family homes from wood
  • the Japanese market may be declining, however, with demographic changes, a flat economy, competition from other nations, and improved construction standards and more durable housing (in accordance with the 1999 Housing Quality Assurance Law) leading to reduced demand; there has also been a shift from the use of green lumber to kiln-dried or engineered lumber
  • a number of groups mentioned that the Forest Renewal BC initiative has invested in market knowledge and development
  • some groups and individuals noted the competition from such substitutes as steel and concrete, and mentioned what they consider to be several highly effective television advertisements highlighting the strength of steel; they identified the need for a "wood is good" campaign
  • it was noted that the public and environmentalists continue to press for conservation and set-asides; such environmental initiatives, and the development of standards for certification, may be used as a marketing tool; however, their impact on the costs of production must be recognized
  • many identified a role for the federal government in defending existing markets and in assisting in new product, market and technology development, and in skills upgrading and training; one group noted that although the U.S. could find such government activities "countervailable," it might be worth it from a cost-benefit perspective, in the sense that the benefits of development could outweigh the cost of any duty paid
  • it was also noted that federal assistance is needed with respect to international boycotts and misinformation, and the use by some countries of tariff and non-tariff barriers (including environmental issues); in the view of some, governments are a more credible "messenger" than is industry, and are the greatest benefactors of a healthy industry
  • some groups noted that one area to be marketed to a greater extent is the fact that lumber companies are the stewards of the resource, with a vested interest in its renewability; as well, our highly-skilled workforce and high-quality Canadian fibre must be stressed, and note should be made of the role played by forests as a carbon sink and a habitat for wildlife
  • some groups and individuals identified the lack of coordination among federal departments and agencies, including the Department of Foreign Affairs and International Trade, Natural Resources Canada, Industry Canada, the Canada Mortgage and Housing Corporation, and the Export Development Corporation
  • mention was made of forest practice codes, land and resource management plans, and various certification systems and standards; benefits of certification are thought to include: increased market access, improved practices and operational efficiencies, enhanced employee morale, and public and customer acceptance; in the view of some, the federal government could be a vehicle where different groups espousing different standards could meet in an attempt at equivalency and a level playing field

 

D. The Softwood Lumber Agreement

  • many groups and individuals noted that trade friction between Canada and the United States on the issue of softwood lumber has existed for over 100 years; however, friction has been heightened during the last 20 years, with many trade actions being launched by the United States against Canada; in the view of some, it is the largest trade irritant in the bilateral relationship, and is significant in terms of volume, value and duties paid
  • most industry stakeholders had expected the 1996 signing of the Softwood Lumber Agreement to result in a measure of trade certainty and a period of "trade peace;" however, this has not been the case, and the United States has expressed concerns about the classification of products (such as drilled studs and rougher-headed lumber) and changes to British Columbia’s stumpage system; there appears to be a lack of consensus among industry stakeholders within Canada about what should happen when the Agreement expires in March 2001, with some advocating free trade in softwood lumber and others supporting some type of managed trade
  • nevertheless, Canadians have consistently argued that the domestic softwood lumber industry is not being subsidized, but rather that the systems in Canada and the United States are different; the fact that land may be owned by the Crown doesn’t imply that timber is not competitively-priced
  • the classification of value-added products in light of the Softwood Lumber Agreement was identified as perhaps being particularly important for producers that lack adequate quota; a lack of adequate quota also has implications for employees affected by layoffs and closures; moreover, for those with quota, line speedups associated with the need to fill the quota may increase accident rates
  • while there has been friction between Canada and the United States, there has also been discontent within Canada, particularly regarding the allocation of the quota in 1996; the allocation locked in historic trade patterns to the United States, with the result that coastal British Columbia (once Asian markets dried up), small, new, expanding, value-added and Aboriginal producers felt disadvantaged; it was noted that the lumber quota was allocated, unlike other sectors where quota is auctioned; as stated by one group: "quota allocation is always a problem with a pie of a fixed size"
  • one group noted that, in the event another agreement is signed, even with a higher quota problems would remain; difficulties would arise with respect to the allocation of quota among provinces and producers
  • many groups and individuals indicated a preference for unencumbered free trade in softwood lumber (free of artificial restraints, quotas, fees, etc.), rather than a quota-type system, recognizing the vulnerability to U.S. countervailing duty and anti-dumping actions that would be created; in their view, renewal of the Agreement is not an option and while a countervailing duty (and possibly an anti-dumping) action would be time-consuming and expensive, most believe that Canada would win, as has been the case in the past
  • one individual pointed out that these types of agreements lead people to avoid (such as with drilled studs) and evade (for example, harvest in Quebec, transport to New Brunswick and export from New Brunswick to the United States); in his view, "quota haves" and "quota have-nots" are created
  • a number of groups and individuals noted the shared interests between Canadian and U.S. softwood lumber producers, rather than the differences between them, with a focus on such common challenges as environmental concerns, a lower return on investment, and the need to increase the size of the wood products market, among others; also noted was the increasing integration on both sides of the border, with speculation that by the end of this decade we will have a fully integrated North American softwood lumber market; the emergence of a North American market highlights the need for a long-term North American strategy
  • some stakeholders in British Columbia indicated a willingness to consider policy changes to address U.S. concerns, provided that true negotiations, with give and take on both sides, occur and that they make sense domestically; that is, something like guaranteed trade peace must be gained in exchange for policy changes (such as increasing the amount of timber put up for competitive bidding, with the price in that market used to set stumpage rates); others indicated that forest policy should not be "driven" by trade; some see the need for the policy foundation to achieve free trade, with appropriate policies in the areas of timber pricing, log exports, forest tenure, land use and investment
  • while the United States and some Canadian stakeholders appear to have limited support for a market-based pricing system for lumber, some groups identified certain obstacles to be overcome before such a system could be implemented; for example, the parties could have difficulty moving to an auction-based price system "overnight" since leases have been signed, and some regulatory mechanisms (such as cut controls) would require modification
  • many of the groups expressed a desire to engage in discussions with the United States as early as possible, and one suggested that delays in getting the dialogue going were the result of U.S. reluctance
  • some suggested that the U.S. industry wants to increase the cost structure of Canadian producers to make them less competitive and thereby reduce their global market share; it was also argued that U.S. producers do not want to give up their market share and want to limit Canadian exports to the United States to increase the price of US timber
  • an argument was made that Aboriginal firms should receive an exemption from any countervailing duty case, and should not be subject to any quota limitation; it was noted that private woodlots have had an exemption in previous duty cases; also suggested was the inclusion of an Aboriginal representative at any negotiations; unrestricted access to the U.S. market may be particularly important as Aboriginal firms access more timber resources through treaty land claims; Aboriginal firms want their own quota, rather than accessing it through joint-venture relationships with non-Aboriginal quota-holding companies
  • one group expressed the view that Canada would "do better" and would win under the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO), since US investigations are undertaken by the U.S. Department of Commerce and the U.S. International Trade Commission, with the result that U.S. laws are changed whenever Canada wins; it noted that an action under the WTO would likely not be resolved until 2005, while action under the NAFTA would probably be resolved by 2003.

CONCLUSIONS

The forestry industry – both primary and value-added and across the country – is critically important to Canada, contributing significantly to employment and to the nation’s gross domestic product and balance of trade. It is for this reason that the Sub-Committee on Forestry of the Standing Senate Committee on Agriculture and Forestry initiated its study, with a focus on corporate consolidation and globalization, value-added processing, marketing and the Softwood Lumber Agreement.

The Sub-Committee remains committed to examining this important industry, and intends to revisit these topic areas and perhaps others as the forestry industry continues to evolve and face both challenges and opportunities.