US embassy cable - 03OTTAWA1927

UNCLAS SECTION 01 OF 02 OTTAWA 001927 
 
SIPDIS 
 
SENSITIVE 
 
STATE PASS USTR FOR MELLE AND CHANDLER 
USDOC FOR UNDERSECRETARY ALDONA AND ITA/IA/JTERPSTRA 
USDA FOR FAS - PAULINE SIMMONS 
 
E.O. 12958: N/A 
TAGS: ETRD, EAGR, SENV, CA, Softwood lumber 
SUBJECT: SOFTWOOD LUMBER: A MODEST PROPOSAL 
 
This message is sensitive but unclassified; please treat 
accordingly. 
 
1. (SBU) Summary: We appear to be moving toward yet another 
trade-restrictive, time-limited softwood lumber agreement. If 
so, it might be useful to think now about what we could do to 
come up with a more durable solution while the temporary 
measures are in place.  The fact that current trade law 
forces us to focus almost exclusively on Canadian subsidies 
makes it difficult for either the USG or the GOC to address 
adequately the broad range of interests affected by the issue 
(e.g., U.S. producers more concerned by the quantity of 
Canadian lumber entering the U.S. market than by its price). 
Post proposes that a non-binding assessment by the 
International Joint Commission (IJC) of forest practices, 
state of the lumber industry and related issues could provide 
a broader range of options for resolving the dispute than 
would be possible from a purely trade law perspective.  This 
cable also outlines a notional scope of work for an IJC 
study.  End Summary. 
 
Trade Law Inadequate To Meet Producer Concerns 
--------------------------------------------- - 
 
2. (SBU) Twenty years of trade litigation, export taxes 
and/or import volume restrictions have yet to resolve the 
U.S.-Canada softwood lumber dispute.  Post believes this is 
because existing trade law is too narrowly focused to deal 
with the broad range of concerns and long-term industry 
trends underlying the dispute.  Trade law forces us to look 
almost exclusively at identifying and countervailing Canadian 
forest management practices that directly or indirectly 
subsidize Canadian lumber manufacturers.  U.S. producers 
often argue publicly that all they want is a level playing 
field, with Canadian timber (and hence, 
lumber) prices "set by the market."  Post firmly believes, 
and the recent WTO panel decision on the countervail case 
appears to confirm, that subsidies exist and threaten 
material injury to U.S. producers.  But even if we assume 
that establishing fairness in price competition can be 
achieved through trade litigation, would that be enough to 
satisfy U.S. producer interests?  Four years of intensive 
discussion, debate and economic analysis convince us that 
even if Canadian provinces were to eliminate all subsidies 
and adopt the U.S. public lands model (an unlikely prospect), 
competitive pressure from Canadian imports would be virtually 
unabated for most U.S. softwood lumber firms.  We have seen 
no credible economic studies to the contrary.  In fact, the 
shake-out of poor performers such as BC-based Doman due to 
current U.S. tariffs may actually be strengthening long-term 
Canadian competitiveness. 
 
3. (SBU)  Some U.S. producers have proposed quantitative 
import restrictions, combined with punitive tariffs for 
import volumes exceeding those restrictions.  Their interest 
seems to be in limiting Canada's share of the U.S. market in 
order to raise prices and increase profit margins for U.S. 
producers.  This might work were it not for the fact that 
substitute suppliers (New Zealand being the latest to join 
the ranks) and alternative products (structural steel) are 
readily available to fill the gap, keeping lumber prices 
below the level at which some U.S. producers can successfully 
compete.  In short, trade litigation might bring the 
Canadians to the negotiating table, and trade negotiations 
might result in import quotas for Canadian lumber, but 
neither will ensure a healthy U.S. lumber industry over the 
long haul. 
 
4. (SBU)  Other U.S. producers (and some Canadians) say the 
root of the problem is that there is too much lumber flooding 
the market, regardless of source.  They claim that reducing 
annual North American production by ten billion board feet 
would raise prices enough to ensure the long-term health of 
the lumber industry.  They note that such a reduction will 
inevitably happen as the North American industry continues to 
consolidate and integrate.  If this view is correct, the role 
of government would seem to be limited to appropriate 
antitrust surveillance and social safety net support for 
displaced sawmill 
workers, since positive measures to reduce production -- 
e.g., through changes in forestry or environmental policies 
-- risk a strong negative reaction from consumers.  In any 
case, if this "industry in transition" argument is correct, 
Post does not see how current trade law or policy tools could 
be used to make the transition smoother or less painful. 
 
A Role for the International Joint Commission? 
--------------------------------------------- - 
 
5. (SBU) The International Joint Commission has an enviable 
record of success in resolving bilateral disputes, going back 
ninety years.  While its remit has been largely limited to 
environmental matters, its success in resolving sensitive 
boundary water resource management disputes make it a 
reasonable venue for assessment of a dispute over long-term 
management of North America's forest resources.  In order for 
such a study to be done under IJC auspices, both the USG and 
GOC would have to finance it and agree on its scope of work. 
When one considers the amount of taxpayer money both 
governments have spent over the past 20 years on litigation, 
discussion and negotiation, a study that broadens the scope 
of interests covered beyond those usually addressed under 
trade law, within limits set by both governments, without 
prejudice to any existing policy, litigation or negotiation 
seems like a bargain.  Further, we believe an IJC study with 
an appropriate scope of work could provide a more creative 
and comprehensive roadmap to resolving the dispute than has 
been 
possible heretofore. 
 
6. (SBU) The IJC could, as directed by both governments, 
contract with independent experts for studies on any or all 
of the following elements: 
 
-- The current state of the lumber industry (binational, 
national, regional); industry trends (binational, national 
and regional); the degree of cross-border integration and 
prospects for further integration or industry consolidation; 
socio-economic impact of integration/consolidation 
(binational, national, regional); global industry trends and 
their impact on the industry (binational, national, 
regional); industry trends in substitute products (global, 
binational, national, regional). 
 
-- Current forest management practices and principles 
(state/province and federal); recommendations for regional or 
species-based best practices; economic impact of current 
practices and recommended best practices by region, nation 
and binationally; environmental impact of current practices 
and recommended best practices by region, nation and 
binationally; species-specific recommendations and 
economic/environmental assessments; economic and 
environmenatl assessments of alternative or complementary 
economic activities 
on forest lands, public and private. 
 
-- Prospects for development of employment alternatives in 
regions identified as most likely to be negatively affected 
by any of the above-mentioned trends or recommendations. 
 
7. (SBU)  We recognize that this would be an ambitious 
undertaking, even for the IJC.  However, faced with the 
prospect of anothe 20 years of doing what we have always done 
and getting the same results over and over again, we believe 
it would be worth doing.  It would certainly show greater 
concern for the interests of the average taxpayer than what 
we have managed to do to date.  Post would welcome comments 
from interested Washington agencies on the feasibility and 
utility of a non-binding IJC study. 
CELLUCCI