British Columbia lumber companies woke up Tuesday morning with Martin Luther King Jr.’s words echoing in their ears: “Let freedom ring.”
As in free trade with the U.S. The best-of-a-bad-situation Softwood Lumber Agreement expired Monday, so all the quotas and export taxes that Canada agreed to in 2006 have fallen off the table. B.C. companies — which make up about half the Canadian export market to the U.S. — can sell there as they see fit. They won’t have to pay extra taxes. U.S. consumers could see lower prices.
But there was a noticeable lack of celebration. Premier Christy Clark has served notice that renewing the agreement is a top B.C. priority, and the government is mobilizing to play a big role in helping the federal government recommit to a deal that restores duties and/or limits.
The original deal includes a “stand still” provision that neither country can take action for a year after it expires. So the free trade era will last precisely one year, which isn’t long enough to get excited about. The bigger issue is what could happen when the year expires. The 2006 agreement was a long truce in a series of border wars that stretch back decades as U.S. lumber producers continually pushed the U.S. government to curb Canadian imports on grounds they were unfairly subsidized. B.C.’s position is that restarting those hostilities is a bigger risk than signing up for another hitch.
The U.S. slammed Canadian producers with $5 billion in duties over several years leading up to the agreement. Signing the deal brought all but $1 billion of it back to Canada.
Nine years has made a huge difference in the lumber trade between the two countries.
B.C.’s total harvest has dropped significantly, and softwood production in particular has dropped from 35 million cubic metres to 26.6 million.
U.S. housing starts are just over half what they were in 2006. U.S. mills now are supplying 71 per cent of the market, up from 62 per cent.
B.C. sales to the U.S. are three-quarters what they were in 2006, and B.C.’s share of the U.S. market has dropped from about 20 per cent to 14.6 per cent over the years. By contrast, B.C. sold China $82 million worth of lumber in 2006 and that rocketed up to $1.4 billion last year.
The story in the numbers is that the U.S. market was ravaged by the real-estate meltdown just as the mountain pine-beetle disaster in B.C. was peaking. The province responded by diversifying its market in a big way, to the point where reliance on the U.S. has declined significantly.
B.C. used to sell 75 per cent of its softwood — the vast majority from the Interior — to the U.S. Now it’s about 55 per cent. But Canada is still a long way from being able to say “drop dead” when it comes to selling lumber through insistent U.S. demands for punitive duties.
Also in play is the trend of B.C.-based firms buying into the U.S. industry in a significant way. Canadian firms now own about 15 per cent of U.S. production, which makes for some complicated relationships on both sides of the border.
As far as B.C. is concerned, the exact impact of the agreement is an export tax that is triggered when a benchmark price falls below a certain level. From January 2014 to March 2015, that tax didn’t apply, as prices stayed above the trigger. From April to the present, exports have been taxed as much as 15 per cent.
The deal was routinely renewed in 2013 for two years, but this time around there’s been no movement yet on renewal. There’s a lot more trepidation in free trade than inspiration.
A year from now, an assortment of U.S. hammers could come down that would take countless lawyer-years to deal with. There’s a feeling in the industry that several more mills will have to close in the Interior due to the beetle-kill after-effect. Renewing the softwood deal in some fashion might extend their lifespans slightly.