U.S. and Canada Reach Tentative Agreement in Softwood Lumber Dispute

The tentative agreement reached in April will govern lumber trade policy between the two countries for the next seven years, with an option to renew the agreement for a further two years. The deal calls for the removal of all tariffs (countervailing and anti-dumping) levied on Canadian softwood lumber once a final agreement is reached. In place of duties, each Canadian province will choose one of two options, a straight export tax or a combination of an export tax and a volume restraint. However, an export tax or a volume restraint will only be imposed if the current price of lumber falls below $355 per thousand board feet, as recorded by the Random Lengths Framing Lumber Composite Price. If the composite price is between $336 and $355, than each province can either impose a 5% export tax on all lumber shipped to the United States, or they can opt for a 2.5% export tax and a volume restraint equal to the province's share of Canada's exports to the U.S. market. Currently, Canada supplies 34% of all lumber consumed in the United States. If the composite price falls between $316 and $335 per thousand board feet, a 10% export tax can be imposed, or a 3% export tax along with a volume restraint equaling 32% of the province's share of the U.S. market. In essence, the farther the composite price falls below $355, the larger an export tax and volume restraint each province can impose on the softwood lumber they export to the United States.

Today, the composite price would not warrant the implementation of any barriers to trade. In April 2006, the composite price averaged $367 per thousand board feet. It has been above $355 since November 2004 and averaged $387 during 2005, down about 4% from the year-earlier average. In the three years prior to 2004, however, the composite price had averaged less than $355. As such, once a final agreement is reached, there will likely be a greater availability of Canadian softwood lumber in the U.S. market. We do not expect lumber prices to retreat to their pre-2004 norms, although they should decline slightly in the near term. Global Insight's second-quarter forecast, completed during the first week of June, calls for modest price drops of 0.9% in 2006 and 0.4% in 2007.

In addition, the agreement calls for 80% of the $5 billion in duties collected by the United States over the last four years to be returned to Canadian producers. The rest will be retained by Washington.

Despite the progress, several issues have not been resolved. For instance, the U.S. draft of the proposal includes a clause asserting that Canadian producers were dumping softwood lumber on the U.S. market. Moreover, the draft contains anti-surge and anti-circumvention clauses, aimed at restricting the level of Canadian exports. That said, Canada's new conservative prime minister is eager to build a strong relationship with his American counterpart, making it likely that a final agreement will eventually be reached.