Canada Fails to Comply With the Softwood Lumber Agreement
April 14, 2009

The United States is imposing 10 percent ad valorem customs duties on imports of softwood lumber products from four Canadian provinces (Ontario, Quebec, Manitoba and Saskatchewan). The United States is exercising its right to take this action in response to Canada's failure to cure a breach of the 2006 Softwood Lumber Agreement (SLA) between the United States and Canada and failure to impose the compensatory measures determined by the tribunal operating under the auspices of the LCIA (formerly the London Court of International Arbitration). These duties will remain in place until such time as the United States has collected $54.8 million.

On February 26, 2009, the tribunal issued its decision on a remedy in the softwood lumber arbitration in which Canada was found to have breached the SLA by failing to calculate quotas properly during the first six months of 2007. In that decision, the tribunal determined that Canada must cure the breach by March 28, 2009.

"The United States is taking this action … to enforce our rights under the Softwood Lumber Agreement," said U.S. trade representative Ronald Kirk. "We regret that Canada has chosen not to meet its commitments and has made this action necessary. The Softwood Lumber Agreement brought more stability and certainty to an industry that sorely needed it. Current conditions - extremely weak demand and severely depressed prices for the softwood lumber industry - only make it clearer that Canada needs to fulfill its obligations under the Agreement and not continue to avoid the market consequences of its earlier breach."

The LCIA tribunal determined that, as an appropriate adjustment to compensate for its breach, Canada must collect an additional 10 percent ad valorem export charge on softwood lumber shipments from Eastern Canadian provinces until CDN $68.26 million has been collected. (Based on the exchange rate at the time of the award, the U.S. dollar equivalent is $54.8 million). Canada has not imposed the compensatory measures determined by the tribunal.

On March 27, 2009, Canada offered instead to tender a payment of US $36.66 million to the United States Government. The United States does not consider that such an offer cures the breach identified by the tribunal, and the United States formally rejected Canada's offer on April 2, 2009. That matter is the subject of separate proceedings under the LCIA.

The SLA provides that if Canada fails to cure its breach within the time prescribed by the tribunal and does not make the compensatory adjustments determined by the tribunal, the United States may impose customs duties in an amount not to exceed the additional export charges that the tribunal has specified as compensation for the breach.

Under the SLA, Canada agreed to impose export measures on Canadian exports of softwood lumber products to the United States. When the prevailing monthly price of lumber, determined per the Agreement, is above US$355 per thousand board feet (MBF), Canadian lumber exports are unrestricted. When prices are at or below US$355 per MBF, each Canadian exporting region has chosen to be subject to either an export tax with a soft volume cap or a lower export tax with a hard volume cap. The measures become more stringent as the market price of lumber declines. This month, the prevailing monthly price of lumber is US$195 per MBF. Therefore, the Western Canadian provinces (referred to in the SLA as Option A Regions (including British Columbia and Alberta)) are subject to the maximum export charge of 15 percent and the Eastern provinces (referred to in the SLA as Option B Regions (including Ontario, Quebec, Manitoba, and Saskatchewan) face the most stringent volume restraints provided under the Agreement in addition to an export charge of 5 percent (the maximum possible for those provinces).

The SLA includes an adjustment mechanism to ensure that the export volume caps are calculated appropriately under rapidly changing market conditions. The tribunal decided in March 2008 that Canada breached the SLA by failing to make downward adjustments for the Eastern provinces during the first half of 2007. Canada's failure to make the downward adjustments resulted in greater levels of shipments from Canada than were allowed under the Agreement, which exacerbated already difficult market conditions. In its decision, the tribunal agreed with the United States that, because Canada failed to make the required downward adjustments in the first half of 2007, Canada must provide a compensatory remedy in order to cure the breach. The tribunal rejected Canada's argument that it cured the breach simply by virtue of making the adjustment beginning in July 2007. The tribunal ordered Canada to cure its breach within 30 days, the maximum period permitted under the SLA, and determined that the SLA requires Canada to impose compensatory measures if it fails to cure the breach within the 30 days...

As permitted by the SLA, the United States is imposing the import duties pursuant to Section 301 of the Trade Act of 1974, as amended. The details are contained in a notice sent to the Federal Register today for publication. The duties will be effective for products entered, or withdrawn from warehouse for consumption, beginning five days after the date of publication. The provinces whose lumber is subject to the duties are Ontario, Quebec, Manitoba, and Saskatchewan.

The SLA entered into force on October 12, 2006, and is expected to remain in force for seven years, with the possibility of extension for an additional two years. The SLA provides for binding arbitration to resolve disputes between the United States and Canada regarding interpretation and implementation of the Agreement. Under the SLA, arbitration is conducted under the rules of the LCIA, and there is no appeal from the decision of the tribunal.

On January 18, 2008, the United States requested, through the Department of Justice, a second arbitration on a separate issue. Under the SLA, the United States and Canada committed not to take action to circumvent the commitments made in the Agreement. The SLA expressly states that providing certain grants or other benefits to Canadian softwood lumber producers circumvents the Agreement. Quebec and Ontario have put in place several assistance programs that provide grants or other benefits to softwood lumber producers that violate the SLA's anti-circumvention provisions. These include a number of grant, loan, loan guarantee, and tax credit programs, as well as so-called "forest management" programs and programs that promote wood production. A decision is expected in the second arbitration later in 2009.

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