Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 11 - Evidence
OTTAWA, Wednesday, March 19, 2003
The Standing Senate Committee on Foreign Affairs met this day at 3:46 p.m. to examine and report on the Canada-United States of America trade relationship and on the Canada-Mexico trade relationship.
Senator Peter A. Stollery (Chairman) in the Chair.
[English]
I should like to welcome the young people at the back of the room. They are from the Forum for Young Canadians. We are always delighted to have you here.
Mr. Waddell knows that we heard a great deal of evidence in Western Canada a few weeks ago on the softwood lumber issue. The committee learned that this has been an issue with the United States for a very long time — since the 19th century, at the very least.
Mr. Waddell, I believe, was in Washington while we were taking evidence in Western Canada for our reference, which is, as honourable senators will be aware, the Canada-United States trade relationship, primarily.
We are very happy to have you here with us, Mr. Waddell. We know that you are one of the most knowledgeable people in the country on the softwood lumber issue. I know that members of the committee will have questions. If you should like to say a few words and give us a brief description of the situation, I will then open the meeting to questions from my colleagues. Please proceed.
Mr. Doug Waddell, Assistant Deputy Minister, Trade, Economic and Environmental Policy, Department of Foreign Affairs and International Trade: Honourable senators, it is a pleasure to be with you this afternoon. Let me begin by introducing my colleague, Elaine Feldman, who is Director General, Export and Import Controls Bureau, Department of Foreign Affairs and International Trade.
I know you have had considerable discussion of lumber, so I will take up your invitation to just provide a very brief report with respect to the file, and then I would be happy to get into a discussion and respond to your particular questions.
As you know, we have been pursuing a two-track policy in response to the decision a year ago of the U.S. government to impose anti-dumping and countervailing duties on imports of softwood lumber from Canada. We are pursuing our rights under dispute settlement panels before the WTO and under the NAFTA. There are currently five panels addressing Canadian arguments that the U.S. has acted inconsistently with its trade agreement obligations in the case of the WTO in applying the anti-dumping and countervailing duties, and in its injury determination, and three panels under the NAFTA making an argument that the anti-dumping and countervailing duties have been applied in a manner inconsistent with U.S. legislation. The first decisions from the dispute settlement proceedings are anticipated this summer.
At the same time, over the last two years, we have pursued a second track of determining whether there is a possibility of a negotiated resolution of this long-standing, 100-year-old dispute, on the basis of policy changes by provincial governments that, as honourable senators are aware, have responsibility for the management of the resource.
Last summer, the Under Secretary for International Trade Administration, Grant Aldonas, indicated that he was prepared to use his authority at the Department of Commerce under U.S. legislation to review and revoke the countervailing duty orders on the basis of changed circumstance determinations. He was prepared to apply the countervailing duty on a province-specific basis. Mr. Aldonas indicated that he was prepared to exercise his authority under U.S. law to issue a policy bulletin that would describe the basis under which the Department of Commerce would make a determination that the sale of timber is at a fair market value and, therefore, it does not provide a countervail subsidy.
The Department of Commerce would look for changes in policies and practices on a province-by-province basis that, in their view, inhibit lumber producers in Canada from responding to the market. Those policies and practices include minimum cut requirements, mill closure restrictions, minimum processing requirements and long-term, non- transferable tenure. The Department of Commerce would also make a determination as to whether market-based pricing for Crown-owned timber exists, with the result that the province receives adequate remuneration for Crown- owned timber.
The substance of our discussions with the U.S. government over the last six months, on the basis of the proposal from Undersecretary Aldonas, has been to inform his drafting of the policy bulletin. That will ensure that, in drafting that bulletin, he has a clear understanding of the unique circumstances that exist within each jurisdiction in Canada and an understanding of what policy reforms the provincial governments might contemplate to undertake as a basis for a changed circumstance review, leading to revocation of the countervailing duty order.
In addition, we recognize that it may take a period of several months to three years for provinces to implement the policy changes and secure a revocation of the countervailing duty order. We have been engaged in negotiations over the potential imposition by Canada of an export tax in place of the anti-dumping and countervailing duties for the period of time that it would take for the provinces to implement a change in their provincial policies and practices and secure a revocation decision from the Department of Commerce.
The basis of Canada's participation in discussions of an export tax has been conditional on the withdrawal of the anti-dumping petition complaint by the U.S. industry and on sufficient room within the policy bulletin process to provide a clear exit for all provinces in Canada from the export tax, based on policy reforms that reflect the reality of different circumstances in each province in Canada. That is the nature of the discussions we have had. The discussions on the policy bulletin are quite advanced. The provinces, for the most part, can see a basis for initiating a changed circumstance review, at a time of their choosing.
The negotiations with respect to a possible export tax in place of the anti-dumping and countervailing duties have not proceeded as well because there is a wide gap between the positions of the industries in the U.S. and the petitioners on what an acceptable level of such an export tax would be. It was on that issue that we took a decision to recess the discussions at the end of February.
Senator Austin: Mr. Waddell, you are an important person in British Columbia, whence I come. You and your team are much appreciated by the industry, by the people and by the economic communities in British Columbia that are affected by this important economic issue.
I should like to ask you to tell the committee where you see the basis for congressional approval of the Aldonas proposals. We have long since learned that, in Congress, the claim for control of trade policy is paramount. Unless you are living in a different system than I was when I was involved as a deputy minister, the Department of Commerce is extremely sensitive to congressional views.
How do you see the basis for approval of any arrangement — an export tax as an interim arrangement, but particularly a final arrangement, that is, effectively, free trade in softwood lumber? How do you see the role of the Congress standing behind the Department of Commerce? How effective is a declaration by 10 senators that they would like to see free trade, when you are assessing the powers plenipotentiary of Mr. Aldonas and whether he can deliver anything that he puts in his document? I will leave you to wander around in that question.
Mr. Waddell: The analysis of Senator Austin in respect of the relationship between the Department of Commerce and the U.S. Congress, in particular the Senate Finance Committee and the House Ways and Means Committee, is one that I share completely. We are of the same view with respect to your premise.
Undersecretary Aldonas is operating within the parameters of the legislation that exists and which he has responsibility to administer. The policy bulletin is not a document that, at the end of the day, will be negotiated between the U.S. government and the Canadian government in the way that we would normally negotiate a trade agreement. Mr. Aldonas has indicated that he is prepared to exercise the authority that he has under U.S. law to provide policy guidance as to how the Department of Commerce plans to interpret and apply existing law.
He is operating within the parameters of existing law and does not envisage going back to the Congress to seek a change in existing U.S. legislation with respect to this particular process.
I indicated in my opening remarks that the main purpose of the discussions that we have been having with Under Secretary Aldonas over the last six months is to inform his drafting of the policy bulletin to, from our point of view, ensure that it takes into account the reality of the management of forest resources in each jurisdiction within Canada — these discussions have been organized on a province-specific basis, reflecting the reality that the circumstances are different in each province — and to inform Undersecretary Aldonas and his drafting processes of the kinds of policy changes the provinces might be prepared to contemplate.
At the same time, it is fair to assume that a senior official in the Department of Commerce would be doing his homework, in terms of consulting with all of the right political bases in the U.S. system, including industry and the relevant congressional committees, in particular the Senate Committee on Finance and the House Ways and Means Committee. I have no reason to doubt that he has not been doing a very thorough job of being in regular contact with both Congress and U.S. industry as he has gone about drafting this policy bulletin. He will have a good appreciation of what the U.S. politics will bear, in terms of going down this road.
Senator Austin: You have answered my premise. I appreciate the answer. We are all aware here that if, for some reason, an ``agreement'' is entered into, the policy bulletin is issued. If it does not have the approval of the U.S. producers, or important elements in the Congress such as Senator Baucus and others, then the law can be changed. Therefore, the permanency we are seeking, which the industry in British Columbia is certainly seeking, is a permanent free trade agreement in softwood lumber. Therefore, the security of that permanency is one of the issues that I have been considering and asked to think about.
On a separate issue, I wanted to ask you about the WTO decision on the Byrd amendment, which has been rendered as not in accordance with the obligations of the United States under WTO agreements. Is there any action being taken in the U.S. congressional system to remove it? If there is no action being taken, can you tell us the reasons why nothing is obvious to us, particularly given that, as I understand current U.S. law, some time in November the distribution of the funds collected is authorized by the Byrd amendment? Is that a part of the concerns that Canadian lumber producers have or you might have in terms of engaging in these various issues?
Mr. Waddell: It is early days, in terms of U.S. action to implement the results of the WTO dispute settlement proceedings with respect to the Byrd amendment. The most significant action to date is a clear indication from the U.S. administration of their intent to act on the results of the WTO dispute settlement procedure and to indicate to Congress the wish of the administration to see the law amended.
That view of the administration was reflected in a communication to Congress, I believe at the end of January, as part of the budget process that was initiated with the resumption of the current Congress. I am not aware of any action on the legislative front by Congress to follow through on the desires of the administration.
The WTO dispute settlement procedures envisage a reasonable period of time for countries to comply with the results of the dispute settlement proceeding, particularly in circumstances where a legislative change is required. It recognizes that the process does take a period of time. The reasonable period of time is generally defined on a case- specific basis, but the jurisprudence that has developed in the WTO normally provides about 15 months as being a reasonable time to secure the necessary changes in legislation.
There is nothing that obliges legislatures to act on the result of WTO dispute settlement. That is the prerogative of, in this case, the Congress. If it were a finding directed at Canadian legislation, it would be the department that would have the final say on the determination, laws notwithstanding.
Failure to act on a finding does have consequences. There is an integral part of the procedure that allows complaining parties, which in this case include Canada and nine or ten of our trading partners, to go back and seek the authority to take retaliatory action in circumstances where, in the case of the Byrd amendment, for example, the U.S. has failed to act on the result. It has some way to go.
In terms of the timing issue as it applies to lumber, the U.S. law provides for the initiation of administrative review of the finding that was announced last March, and that review will begin in May 2003. In a case as complex as lumber, it would be normal to expect that the Department of Commerce would not conclude that administrative review until the fall of 2004. The results of that administrative review in 2004 are confirming that the duties imposed last March were at the right level, in terms of the amount of the countervailing duty and the anti-dumping. In effect, it confirms, in the fall of 2004, the duties that have already been in place for this first year of the finding.
It is only at that point, under the existing Byrd amendment, that the U.S. petitioners would have a claim on the duties that have been collected for the first year that the finding has been in effect. It is some way down the road.
The Chairman: Mr. Waddell, could you give a brief description of the Byrd amendment, so that we have it on our record. I know what it is, as do some members; however, some do not.
I would ask you to briefly describe what happens with that, please.
Mr. Waddell: It is a relatively new provision of U.S. law that takes the view that anti-dumping and countervailing duties collected under U.S. legislation should be passed through to the U.S. industry that petitioned for the initiation of the investigation. In effect, it is a subsidy, a transfer of revenues from the U.S. treasury directly to the U.S. industry that petitioned for the initiation of an investigation.
The Chairman: A WTO panel struck it down.
Mr. Waddell: That is right. It has been determined to be inconsistent with U.S. obligations under the WTO. Only Congress could strike it down.
Senator Austin: I want to make it clear that the Byrd amendment does not fall under Mr. Waddell's responsibilities for trade, economic and environmental policy.
If the process takes us to the point where the industry is entitled to a distribution under U.S. domestic law, does the Department of Commerce have the ability not to distribute the proceeds of the Bird amendment under its own legislation?
Mr. Waddell: The Department of Commerce would be bound to follow U.S. law and distribute the amount of the duties subject to the criteria spelled out in U.S. legislation.
Senator Austin: My last question is with respect to the proposed export tax. It is my understanding that Canada's response to that has been to consider it for discussion on the basis that the objective of all of these negotiations is to remove all barriers to trade and softwood lumber. Is that your understanding of your mandate?
Mr. Waddell: That is the mandate. More specifically, in the discussions we have made clear that the conditions under which we are prepared to discuss an export tax are, first, that the anti-dumping action be terminated and, second, that under the changed circumstance bulletin process that I have described earlier there be what I would describe as a clear exit available to every jurisdiction in Canada to have the opportunity to see the countervailing duty revoked on the basis of the policy reforms.
Senator Austin: Is it requested that the actions taken under Chapter 11 by certain Canadian companies, such as Canfor, be discontinued, or are they not on the agenda of your negotiations?
Mr. Waddell: In addition to the export tax, there are two other major issues on the agenda for the negotiations. One is the disposition of the duties that have been collected to date, which are significant — about $1 billion. The second is a determination on whether the WTO and NAFTA litigation should be suspended or terminated. The U.S. has indicated quite clearly that they see Chapter 11 complaints initiated by three Canadian companies as encompassed under that heading.
Senator Austin: Which comes first, the agreed suspension or the agreement on an appropriate tax regime?
Mr. Waddell: It is all part of a complicated negotiation. These pieces are not unrelated. At the end of the day, if you are coming to a deal, I could see them all coming together, recognizing that nothing is agreed until everything is agreed.
Senator Grafstein: Having followed this issue for lo these many years now, I want to congratulate Mr. Waddell and the department for their invisible but important job in maintaining a strong and consistent Canadian policy, notwithstanding that there are different players involved on our side of the border. One of the unsung heroes of this ongoing dispute has been the minister and his department, who have done a great job in keeping the Canadian position consistent, which has been very helpful. I know the Americans are always seeking to put wedges within us. So far, the department and the minister have done a great job and it is important that the record note that.
It is important for us to stress for our records that this is a unique action in the sense that it is not based on the American government. This was instigated as a private action by private industry, enlisting congressional support to pursue this private action, utilizing the mechanisms of the American government for this purpose. This makes it much more difficult for the government to deal with this matter. It is not a government-to-government matter; it is essentially privately instigated and private remedies. They are seeking private remedies with a public authority.
I take it you agree, Mr. Waddell, that this is different in that sense.
Mr. Waddell: The senator is correct, in that the U.S. industry has availed itself of remedies available under U.S. law to petition for the initiation of an anti-dumping investigation and a countervailing duty investigation. The effort to find a negotiated resolution to this dispute provides the coalition, in effect, with a seat at the table, because at the end of the day, if there is going to be a solution, they have to agree to withdraw the anti-dumping petition, there being no other way out of that part of the problem short of pursuing the legal routes that I described at the outset.
Senator Grafstein: That obviously complicates the ability to come to a state-to-state solution. Is there a political will, either in the executive or in Congress, that you or our administration has detected that could spur senators and the government wing to move more rapidly toward a settlement? I note the Aldonas interjection and the bulletin, but I am trying to see whether you have detected any leverage that we have not yet been able to uncover that could bring this to a more speedy conclusion, because every month that goes by seriously damages Canadian interests.
Are there any stones that we have left unturned to which we might be able to address ourselves that might bring some pressure on the Senate or Congress and, indirectly, on the private interest, or, vice versa, on the private interests that are involved?
Mr. Waddell: I believe that the administration, the executive branch, is committed to finding a solution to this long- standing trade dispute and the policy bulletin process is Exhibit A in support of that view. I am not aware of any stone that has been left unturned. However, I am always open to advice, if someone has a good idea that has not been pursued.
Senator Grafstein: I will conclude by raising this as an issue. It has been my view for some time that one of the stones unturned is a private action launched in the United States against the industry and against those who have interfered with the judicial process when it came to a determination with respect to the quantum dumping, and so on — in other words, a private action properly claiming, based on what I have heard, that there has been an interference with due process in the United States, but using the American courts for that purpose.
Has the department considered this as a suggestion to the private sector to pursue that course of action?
Mr. Waddell: Not to my knowledge, senator, although in some respects the Chapter 11 process that you referred to earlier, the complaints that had been initiated by three Canadian companies, constitute a private action that goes to the heart of the application by the Department of Commerce of the duties in this case. In a sense, that has already been done by the three Canadian companies.
Senator Grafstein: I will say this one more time for the record. Again, it has been my view that the industry affected here has not utilized the remedies in the American courts. I know they are costly and difficult, but there are remedies within the American courts to suggest that due process was not followed in the determination of the various agencies and to suggest interference with due process. That is under the American Constitution.
I have raised this with the minister. I raised it with you. I raised it with the private sector. I would hope that someone might explore this. It strikes me that this might be a stone that we could turn in a positive way and might accelerate what I consider to be a just and fair and equitable settlement for interests on both sides of the border.
Senator Di Nino: Mr. Waddell, I was in attendance at the conference of the Canadian Institute of International Affairs where you also participated. I learned a lot that day. Thank you for that, as well.
I have three short questions. First, we have heard evidence more than once that Canada may not be fully taking advantage or understanding the political system in the U.S. Particularly, the question has arisen from more than one witness as to whether we fully understand local politics in the U.S., particularly as they deal with senators. It has been suggested that some of our resources would be better used addressing those folks in their local constituencies as opposed to centralizing as much as we do in Washington. Would you comment on that?
Mr. Waddell: From my own experience in Washington, senator, certainly all politics are local. From my own experience, the most effective way of advancing a Canadian interest on a particular issue is to identify U.S. allies who share the same objective, perhaps for different reasons. The U.S. voters and those who contribute to U.S. political campaigns have an access that a foreign government or an official of a foreign government obviously does not have with respect to the U.S. political process.
You can always do more in terms of mobilizing U.S. allies. In my own view, in the last few years we have been much more successful in mobilizing U.S. allies than we have at any point in the past in terms of the long history of this trade dispute. The coalition of homebuilders has been quite visible and active. I believe Senator Austin, in his opening comment, referred to the fact that 20 senators have sponsored a resolution, and it reflects the results of those efforts.
In the final analysis, though, again, based on my own experience, and this is a personal view, the U.S. industry that is pursuing a protectionist agenda is, at the end of the day, more coordinated and more effective in terms of mobilizing its congressional allies than the consumer interest, which is more diffuse. This is a big challenge.
I also understand that at one of your earlier hearings you were briefed on the advocacy efforts that have been organized in the U.S., the advertising campaigns that make the case for finding a negotiated resolution to the lumber dispute, reflecting the fact that Canada is the largest market for 39, I believe, U.S. states. There has been targeted advertising in each state that highlights the fact that we are their largest secure supplier of energy. Again, these are advocacy initiatives that are geared to that local politics that you have described that we have not done before but have successfully pursued in the last year.
Senator Di Nino: As you probably know, in the near future, we will be taking a trip to Washington. Are there any thoughts that you would have or suggestions as to the points that we should raise or specific areas, particularly in the areas of dispute, that we should be addressing, and with whom?
Mr. Waddell: It is worth emphasizing the fact that for perhaps the first time in the long history of this dispute the provincial governments that have responsibility for management of the resource have signalled an interest in policy changes with the objective of finding a long-term, durable solution to the dispute and free trade in lumber.
I draw the attention of honourable senators to the Speech from the Throne in British Columbia a few weeks ago where the B.C. government spelled out its agenda in terms of policy change for management of the forestry resource in B.C. This is hugely significant. The Americans have long argued that the root cause of the dispute is that Canadian policies distort the operation of the market as they define it. We are at a point where, in the case of British Columbia, they are contemplating significant policy changes to ensure that the price for timber in British Columbia is a market price. In many respects, it is calling the bluff of the protectionists in the U.S. system and calling the bluff as to whether the issue is a perceived subsidy in terms of the effects of Canadian policies or whether this is, at the end of the day, really all about the volume of imports and the price of lumber in the U.S. market. It is worth highlighting what is in prospect in terms of policy changes in each of the provinces.
Senator Di Nino: I was going to raise the question of this pan-Canadian position that sometimes does not seem to exist. How much of a challenge is that for you, given that you must balance the interests of the different parts of the country where there may be conflicting positions on how to deal with the U.S.? Is that a big challenge?
Mr. Waddell: It takes a good amount of time. I sometimes describe it as ``herding cats.'' It has worked well. The credit in large measure goes to the commitment on the part of the provincial governments over the last few years to pursue a resolution of this dispute on the basis of a national, coordinated Team Canada approach. In my view, most of the credit needs to go to my provincial counterparts who have been working with us over the last few years on this file.
Senator Di Nino: I do not think we can ignore the reality of what is happening today. We may be in a situation of severe conflict very soon. It may be early times yet, but, in your opinion, will this affect our relationship with the U.S.? Have you seen any of it at this time, particularly because of Canada's position vis-à-vis its support of the U.S. and the Iraq issue?
Mr. Waddell: The Prime Minister and ministers have spoken to that question in the last few days. I certainly do not have anything to add to what they have said. Certainly, I have seen no evidence in the last few days of any play into the lumber file. At the end of the day, the U.S. will be driven by its economic interests on lumber, and it will be U.S. economics and U.S. politics that will dictate their position with respect to this particular dispute.
Senator Setlakwe: Mr. Waddell, this committee has been to British Columbia, Alberta and Manitoba. In British Columbia we heard about softwood lumber; in Alberta, we heard about cattle and canola; in Manitoba, we heard about barley and wheat; and, if we had gone into Quebec, we probably would have heard about eggs and poultry.
One witness told us that the free trade agreement with the U.S. is not entirely responsible for the volume of business that has been generated with the U.S., but has more to do with the currency than with free trade.
To what extent are countervailing duties, anti-dumping and other remedial actions by the United States distorting the free trade agreement? Is it distorted to the extent that we do not have a free trade agreement?
We do not seem to have problems with the Americans in the area of energy and that is because we export it and they want it. When I asked the petroleum producers if they would consider linkage with their Canadian compatriots who have more difficulties than they have with the Americans, they said that it is not an issue for them and so they are not interested. To what extent does the department consider the possibility of such a linkage?
Mr. Waddell: The free trade agreement has been an enormous success from the point of view of Canadian economic statistics. The overall trade performance speaks for itself in terms of demonstrating the economic benefits that Canada has derived since the negotiation of the original, bilateral free trade agreement. That said, it is not a perfect agreement and there is an unfinished agenda with respect to the free trade agreement.
It is worth recalling that the free trade agreement provides for the application of anti-dumping and countervailing duties. That was a Canadian objective at the time of the time of the negotiations of the original bilateral agreement when we had to settle for something less than our full ambition, as is often the case in negotiations. An ambitious objective is set and then you see what you can negotiate in respect of achieving that objective.
The U.S. at that time was not prepared to contemplate the removal of the anti-dumping or the countervailing duty remedy within the Canada-U.S. Free Trade Agreement. We had areas of sensitivity on our side such that we were not prepared to contemplate a fully integrated North American market and we insisted that, as part of the original deal, we wanted to maintain the right to maintain high levels of import protection with respect to supply-managed products, for example.
The politics of anti-dumping and countervail have not changed in the U.S. The American Congress is still not prepared to contemplate amending U.S. legislation to remove the possibility of applying those remedies within the free trade area. At the time of the negotiation of the original agreement, we settled for the dispute settlement process that was intended to take some of the politics out of the decisions by the Department of Commerce in applying these decisions. At that time, we had lumber very much in mind and, as Senator Austin pointed out, the commerce department is pretty sensitive to the congressional view in terms of how it applies the law.
In the negotiation of the free trade agreement we achieved the ability to appeal these decisions to binational panels comprised of Canadians and Americans to make an independent judgment as to whether the law had been properly applied, rather than having those decisions applied to the U.S. courts.
It is not so many years ago that a group of independent petroleum producers in the United States petitioned for the initiation of investigation with respect to imports of oil from Canada. My memory is a bit faulty on this but I think it was as recent as seven years ago. Memories in the energy sector in Canada are a bit short if they believe that they have seen the last of the application of anti-dumping and countervailing duties. In fact, perhaps this is a good window of opportunity, given the importance that the U.S. government attaches to the security of supply from Canada, to test whether, in the case of the energy sector at least, they are prepared to contemplate amendments to U.S. law to exclude the energy sector from the application of anti-dumping and countervailing duties.
Senator Graham: Senator Di Nino spoke in general terms about the effect that a pending war with Iraq may have on Canada-U.S. relations. Will the U.S. preoccupation with the possibility of war have an effect on the resumption of negotiations on softwood lumber?
Mr. Waddell: No, their position on the lumber dispute will be determined by their economic and political interests with respect to lumber. I do not see their preoccupation with the war will not affect a resumption of discussions. The discussions on the policy bulletin are quite advanced and are continuing. They are continuing this week with a view, on Mr. Aldonas' part, to being in a position to publish that policy bulletin in their system for public comment soon. I have no reason to expect that timetable has been in any way delayed by developments in the last few days. The decision to take a recess in the negotiation of an interim border measure reflected the reality that the gap was so wide that we could not see a deal. Again, the question is whether the two industries, in particular the U.S. industry, conclude that a deal is preferable to the consequences of the anti-dumping measure.
What that has meant, in terms of lumber prices in the U.S. market, is that Canadian companies are increasing production to keep unit costs down, in order to have some prospect of getting out of the anti-dumping duties when they have their administrative review. The consequence is relatively low prices, rather than what one would normally expect when a 27 per cent tax is imposed on imports.
Senator Graham: With all of these disputes, the legal fraternity will be enhancing their coffers. I say that with the greatest respect to my friends in the room.
Do you have estimate of the cost of legal fees paid by both the private sector and the governments, since the major disputes of the 1980s and the 1990s? Is the provision of loan guarantees by a body such as Export Development Corporation considered a subsidy?
Mr. Waddell: I cannot hazard a guess as to what the total legal bills would represent, but it is huge. A whole generation of American children has been put through college on this file alone.
The Chairman: Senator Graham, we have had estimates that, since the 1980s, the cost has been in the region of $1 billion. This causes questions to be asked about the original Free Trade Agreement. I was present when this committee discussed legal fees and one of the original reasons for the Free Trade Agreement was to avoid legal challenges, because of the cost of legal fees in the 1970s and 1980s. We also have been told that the WTO legal fees cost us $200 million.
Senator Graham: What about the second part of my question? I hope that Senator Grafstein, who is a noted lawyer in Ontario, did not leave the room because I asked that particular question.
Senator Di Nino: He does not practice trade law.
Mr. Waddell: I do not have a number so I will not even put an estimate on record. However, I think you are making a very relevant point and the message that both the Canadian government and the U.S. government have been delivering to our respective industries is that it is only the lawyers who become wealthy as a result of this long-standing trade dispute. From the point of view of both federal governments, the industry on both sides of the border might better invest those resources in growing the lumber market through shared joint initiatives to develop offshore markets for lumber, and promote wood products in North America as alternatives to competing products.
I think that is an important point. To go back to the question that was raised earlier, in terms of the kinds of messages to emphasize when you are in Washington, I believe that is a good message to be emphasizing as well.
The Department of Commerce has demonstrated, over the course of four investigations over the last 20 years, an enormous capacity to be creative in determining that there is a subsidy. Therefore, in terms of this particular question, my best advice would be to assume that they would determine that it represents a subsidy, at least to the extent that there is a differential between the rate that a company might be paying to EDC, if that is where the loan is coming from, to what it would be paying in securing that credit from a normal bank. That would certainly be the argument that would be debated should this issue be investigated by the commerce department. How big that subsidy would be in the total scheme of things is also a relevant consideration.
Senator Andreychuk: We keep hearing about the costs and the time involved in these disputes as a result of our agreements. However, taking into account the increased volume and looking back, were there not costs and were there not disputes before NAFTA and the Free Trade Agreement? Do you believe we are in a better position to focus on these disputes than we did before?
Mr. Waddell: There were disputes before the free trade agreements, which was a significant consideration in the decision to proceed with the negotiations. The volume of trade that is subject to disputes is relatively small, given the overall Canada-U.S. trade. If you step back and look at where we continue to have disputes in Canada-U.S. trade, they are almost always either in sectors or with respect to issues where, at the time we negotiated the original Free Trade Agreement, one or both of the governments was not prepared to contemplate a fully integrated North American market. These include sectors like dairy and poultry, the supply-managed sectors on the Canadian side, sugar and peanuts for the United States, as well as issues such as the application of anti-dumping and countervailing duty law where the Congress, then and now, were not prepared to contemplate changes in U.S. legislation. On the Canadian side, there was preoccupation with respect to cultural industries. The politics were such that, one or both governments was not prepared to contemplate an integrated Canada-U.S. market and it is interesting that those are the sectors where we continue to have periodic disagreements.
Senator Day: Mr. Waddell, your comment about a fully integrated market being unachievable with respect to peanuts is an interesting point. Do we have a peanut industry that we are trying to protect?
Mr. Waddell: No, they are protecting their peanut industry, which has affected our access to the U.S. market for products like peanut butter.
Senator Day: We should have been able to reach a fully integrated market with respect to that particular industry.
My question is from the perspective of the forest industry in New Brunswick. You spoke earlier about looking at these issues province-by-province. In relation to countervailing and subsidization the Province of New Brunswick has been able in the past and in this particular instance to avoid being caught up in the trap. There is a history of dealing province-by-province from the point of view of countervail.
The problem from the New Brunswick industry point of view is the dumping issue. Even though dumping might have taken place in Saskatchewan, for example, we in the East Coast have gotten caught up in the issue as well. There is already a history with respect to part of this to deal with it on a province-by-province basis. There have been countless thousands of dollars spent independently by various eastern provinces in an effort to distance themselves from other parts of the country in relation to countervail. For example the costing for timber in our area is closer to market driven, and we have been successful in dealing with that issue.
These challenges seem to keep coming back at us. We are successful at the WTO and then there is a new imposition of some trade remedy based in the U.S. We have to go back to the WTO and wait for it to be finalized. It seems to me that, if this is policy driven, we will have to change the way we do things.
Hopefully, by introducing auctions for timber or whatever has to be done, we can negotiate and try to get the U.S. to agree to exclude, at least in some sectors, their national trade remedies, if they are policy driven. If it is driven, as Senator Grafstein suggested, by individuals or organizations, then it is not so much policy driven as economically driven.
Is this latest round of forest industry problems a fundamental policy issue or does the policy come after the economically driven challenge?
Mr. Waddell: I agree with your analysis, senator. As you know, over the last 20 years we have had two short-term agreements that were based on border measures and neither agreement proved to be durable in terms of a resolution of the 100-year trade dispute with the United States.
The current round of negotiations is, for the first time, attempting to get at what some quarters have perceived as the root cause, that is, the policies. The negotiations are attempting to address U.S. concerns that the owners of the public resource in Canada are not getting a fair market price for the timber harvested on public lands, and that is what the policy bulletin will provide. It will not oblige any provincial jurisdiction in Canada to change the way it manages the policy resource within its own jurisdiction. However, in the event that a province wants to proceed on the basis of eliminating policies and practices that impede lumber producers from responding to market forces and is prepared to introduce a system that is transparent and demonstrates that the price charged for publicly owned timber is a market price, then there is the potential to have the countervailing duty order revoked. Then we will have the prospect that we can finally put this recurring dispute behind us based on a durable policy based solution.
The fact that timber in Canada is for the most part publicly owned has been an easy sound bite for the U.S. industry to give to their decision makers to argue for border measures. They claim that this issue is about the volume and price of timber in the U.S. We can call their bluff.
Senator Day: They will be right back with another challenge unless we can get rid of the trade remedies.
I think the final solution is to negotiate away the local and national trade remedies, sector-by-sector if necessary.
Has the U.S. agreed with any other countries to negotiate away some of their trade remedies generally or sector-by- sector?
Mr. Waddell: No.
Senator Day: They have never done it?
Mr. Waddell: No.
Senator Day: So we would be establishing new ground to do it in even one sector?
Mr. Waddell: Yes.
Senator Austin: Mr. Waddell, in answering an earlier question you referred to the WTO remedy called ``trade retaliation.'' I have always held that this was of no use to Canada in terms of its dealings with the United States. Our trade is so integrated that it would be virtually impossible, for any number of economic and political reasons, to use a retaliatory sanction.
Do you share my bias or do you have another view on that subject?
Mr. Waddell: I share the view that it is a blunt instrument and extraordinarily difficult to use in a practical matter. It is a course that we have seldom followed. I recall that in the mid-1980s Canada resorted to retaliation in a dispute in the steel sector. We imposed retaliatory measures and it caused a lot of grief for the government of the day as Canadians felt that their ox had been gored.
Senator Austin: Were those retaliatory measures within the same sector?
Mr. Waddell: No.
Senator Austin: They were external to the sector?
Mr. Waddell: Yes, some of them were, but as the government looked for ways to implement retaliatory tariffs without adversely affecting Canadian economic interests they had to go outside the sector and there was much unhappiness.
Senator Austin: The Minister of Natural Resources, Minister Dhaliwal, said at one time that he thought we should link energy with softwood lumber. He is a political minister for British Columbia, and even in British Columbia, there was not much support for the idea of that kind of linkage.
My other question relates to a discussion that I had in Washington more than a year ago with congressional people who were suggesting that what they really were looking for was a market managed solution, a solution in which, in low-price regimes in the domestic market, there would be a sufficiently high tariff to prevent depressing the price further. As the U.S. price rose, they would be delighted to have more Canadian lumber in order to prevent the price from capping out too high.
Is that kind of idea still in play in your discussions, that the export tax, if ever to be put in place as an interim measure, would be on a formula basis with respect to the price and volume being absorbed by the U.S. market?
Mr. Waddell: When discussions were recessed at the end of February, the Canadian proposal that was on the table envisaged a tax that was geared to the price of lumber in the U.S. and would have been high when prices were low and would have gone to zero at some point on the spectrum when prices were higher. That is the construct that we were attempting to find a deal within.
Senator Austin: Were they responding with interest to that particular proposal?
Mr. Waddell: Yes. In terms of the concept and the principle, the U.S. industry had indicated that it was prepared to work with a proposal that envisaged a high tax when prices were at the bottom of the market. I do not know that they ever got to the point that they could acknowledge it actually going to zero at some point, regardless of how high the price got, but I suspect that would be negotiable.
Senator Austin: It is within the concept of an interim step leading to fully free trade when the various provincial regimes meet the policy tests.
Mr. Waddell: Exactly.
Senator Austin: I recall your answer that it will be interesting to see whether that is what they were really negotiating to achieve.
The Chairman: Mr. Waddell, we have heard a great deal of testimony on the softwood lumber issue. We understand that the softwood issue is involved in a cycle. When prices are low, in other areas as well, the Americans object and the coalition becomes more vocal. When prices are high then possibly our proposal or one of the proposals would be that the duties would be less. The irony is that this dispute is actually ruining the U.S. lumber producers. Instead of the prices rising, they are actually being driven down because of increased production in Canada. Is that not correct?
Mr. Waddell: That is correct.
The Chairman: In Winnipeg we heard about the Wheat Board and that a similar complaint had been brought before them 11 times. Seemingly, the situation gets sorted out and a few months later the complaint resurfaces and the legal fee costs rise. The last round of legal disputes cost them $5 million.
That makes the point that Senator Day was making, that this is an economic issue.
They do not want you to share their market, particularly when the prices are down and that makes sense to an American lumber producer. British Columbia can do whatever it likes in forest management. If the American producers think that Canada is exporting too much to them and lowering the price, they will come back with some other kind of challenge, as they have done in the grain business. The irony is that the dispute is actually ruining them.
What response does their industry have to the fact that their own challenges are actually ruining them?
Mr. Waddell: Well, they might not be prepared to acknowledge that the anti-dumping action in particular has been counterproductive.
The Chairman: It is lowering prices, is it not?
Mr. Waddell: The result is that Canadian companies have been increasing production in order to keep their average per-unit cost down, with the objective of getting a lower anti-dumping margin in an administrative review. The U.S. industry has indicated that their preference is for a negotiated resolution. However, we have not seen the flexibility, in particular with the kind of interim border measure that we have had under discussion that demonstrates that a deal is possible at this point in time.
The Chairman: Mr. Waddell, we have been waiting to hear from you to answer some of the questions that have come out of our hearings in western Canada and here in Ottawa with the various lumber interests. Thank you very much for coming.
I remind honourable senators that we have the meeting at 5:30 with the Russian delegation.
As well, our clerk has been in touch with everyone about our Washington trip. We will be discussing it more in length next Wednesday. Because of the time, we have had to put off the Washington trip that was to take place on April 7, and we are planning to go at the end of April for reasons that I do not need to go into here. I want to tell honourable senators that we are looking at the last week of April and the first few days in May, primarily the Wednesday, Thursday and Friday at the end of April.
We must do this quickly, which is why I am doing this on the record. As you know, the budget year ends on March 31.
Senator Di Nino: Mr. Chairman, can we dismiss the witnesses ? They do not have to be here.
The Chairman: The witnesses may leave whenever they like. Thank you. We will all leave here in about one minute. I just wanted to get everyone on the same wavelength. We are working on the budget, and we will be in touch.
The committee adjourned.