Fraser Forum

Softwood lumber tariffs—another hostile trade salvo from Trump administration

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The Trump administration this week announced that it will impose new tariffs on Canadian softwood lumber imports. Specifically, the U.S. Commerce Department will apply countervailing duties, ranging from 3 per cent to 24 per cent, against five major Canadian lumber exporters. For other Canadian lumber companies, it set a tariff of 20 per cent.

The duties were imposed to counter what the U.S. government claims are illegal subsidies provided by provincial governments to Canadian lumber producers and that are prohibited under relevant trade treaties. Indeed, claims that the lumber-pricing policies of Canadian provincial governments subsidize Canadian lumber mills by charging so-called stumpage fees—that are below prices that would be obtained under competitive market pricing—have been at the centre of a decades-long bilateral dispute about Canadian softwood lumber exports.

The Canadian government and Canada’s lumber companies continue to deny that softwood lumber exports are subsidized by government stumpage policies, and both Jim Carr, Canada’s natural resource minister and Chrystia Freeland, Canada’s foreign affairs minister, have said Canada will litigate the U.S. action, although their hope is that a negotiated settlement can be reached. While the U.S. International Trade Commission must first determine that U.S. lumber producers are being injured by Canadian lumber exports before the action goes into effect, the tariffs are retroactive to the date of the Commerce Department ruling.

Both the U.S. action and the timing of the action should not come as a surprise to Canadian officials, notwithstanding the seeming goodwill generated by Prime Minister Trudeau’s visit to the White House in February. The Coalition of U.S. Lumber Producers, the U.S. industry’s lobby group in Washington, has signalled ever since the expiration in October 2016 of the Softwood Lumber Agreement that it would not support a renewal of the terms of that agreement, which included safeguards against duties being levied on southbound shipments of lumber.

The tariff announcement also quickly followed President Trump’s complaint about pricing policies by milk marketing boards in Canada. In short, the Trump administration was looking for an opportunity to show its base that it will implement its “America first” trade policies, and Canada, rather than China or Mexico, became the opportunistic first target of this protectionist attitude.

If there’s any good news for Canada, it’s the recognition on the part of many U.S. media and policy experts that U.S. protectionist actions also hurt U.S. consumers.

In the case of softwood lumber tariffs, media reports have cited how they will raise new home prices in the U.S. by around 4 per cent (or approximately US$12,000) based on the current median price for a new house in the U.S. While concentrated producer interest groups can usually outmaneuver dispersed consumer interest groups in the political lobbying arena, the business groups that directly sell to consumers can potentially be an effective voice against producers who lobby for higher input prices that must be passed on to consumers.

The bad news is that U.S. homebuilders have, at best, been weak voices in the softwood lumber dispute in the past, and that the current administration does not seem to understand or care that the cost of “America first” policies will be borne in large measure by U.S. consumers. In the case of softwood lumber, costly and protracted litigation seems the likely outcome yet again, with further indirect damage done to the NAFTA dispute resolution process.

In the case of China, the Trump administration seems willing to modify its threatened trade actions against that country in return for China’s geopolitical cooperation on security matters such as dealing with North Korea’s nuclear weapons threat. It’s unclear that Canada has such strong geopolitical cards of its own to play in a more expansive deliberation with the U.S. about bilateral economic relations.

In short, the optimism Canadian government officials felt about the outlook for bilateral trade relations after the recent Trudeau-Trump meeting seems undue, and the relatively discrete treatment given to the Trump administration’s trade threats by the Trudeau government seems to have proven ineffective.

Notwithstanding the soothing rhetoric from Trump officials that Canada is not a major target of U.S. trade retaliation, Canada might be seen as a “soft” target. Future actions against Canadian dairy industry policies are clearly on the cards and actions against Canadian sales of steel, commercial airplanes and even, possibly, oil and gas in the U.S. might eventually emanate from Washington.

Much as the Canadian government might have wanted to maintain a business-as-usual relationship with the U.S. government, an unpredictable presidential administration is making this an untenable position. While the political reality for Canada is a hard one, the time may have come for a fundamental rethinking of the bilateral relationship.