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Canada US Debate Over Trade Disputes on Free Trade Agreements

D.

The trade disputes between Canada and US have pit the two warring parties in a debate over trade policy.  This review assesses its impacts.

In this review, we look at two significant issues related to trade policies of both parties; the first being a dispute over a commodity, and the second; a trade policy manufactured by the US which has been branded as a form of protectionism against Canadian sellers.

 

Debates over Trade Policies

The following are two examples of trade controversies between Canada and US;

  1. Softwood Lumber dispute
  2. Buy American Provision

 

 

Softwood Lumber Trade Dispute

As noted in part 1 of this series, this trade dispute mainly centers on the policy of stumpage and restrictions on log exports.

Stumpage refers to the price that private firms have to pay in order to gain the right to harvest lumber.

The difference between how stumpage is charged in Canada and in the US. is the underlying cause of the Softwood lumber debate.

In Canada, stumpage fees are based on the amount of trees that are harvested, and are generally paid to the provincial governments since they own the majority of the land in their respective regions.

In contrast, the U.S. determines stumpage charges through open market auctions by private firms which then pay stumpage fees to private landowners.

The first time this trade debate occurred was in 1982, and this was known as the Lumber I dispute.

 

Lumber I

During this dispute the U.S. lumber industry pressured the U.S. Department of Commerce (DoC) to impose a countervailing tariff on Canadian lumber exports in order to balance Canada’s alleged trade advantage.

A countervailing tariff represents a tariff on Canadian goods which are supposed to “counter” the alleged benefits lumber producers are receiving.

Fortunately for Canada, the DoC ultimately found no evidence that Canada’s stumpage system provided subsidies to Canadian lumber producers.

 

Lumber II

Later on in 1986, the U.S. lumber industry again petitioned the Department of Commerce to impose a countervailing tariff on Canadian softwood lumber imports.

This time, the DoC found that Canada was subsidizing lumber production through low stumpage fees and set a tariff of 15%.

Before this duty was imposed however, the American and Canadian governments agreed to a Memorandum of Understanding that called for a 15% ad valorem tariff on Canadian softwood lumber.

Memorandum of Understanding is a document which describes a non-binding bilateral (between two parties) or multilateral agreement (between many nations).

Ad valorem tariff refers to a tax based on the value of real estate or personal property but can also refer to a tax on imported items.

 

Lumber III

Lumber III occurred in October of 1991 when Canada terminated the Memorandum of Understanding. Canada terminated it on the grounds that their new stumpage policies no longer constituted a subsidy to the Canadian softwood lumber industry.

By 1996, Canada and US reached an agreement known as the Softwood Lumber Agreement. The agreement stated that Canadian lumber exports were tariff free as long as less than than 14.7 billion board feet were exported per year.

 

Lumber IV

In the Lumber IV dispute, the London Court of International Arbitration (LCIA) found Canada in breach of the Softwood lumber agreement.

As a result, the LCIA ordered the Eastern Canadian provinces to pay an additional 10% export charge on softwood lumber exports, up to $68.26 million.

This extra 10% export charge has harmed Canadian workers and industry and serves to demonstrate the social and human costs associated with free trade on the local level. More information on the implications of the free trade deals on the local level is covered in-depth in part 4 of this series.

 

Lumber V

In the most recent dispute, the U.S. lumber industry has yet again accused Canada of violating the Softwood Lumber agreement.

The accusation is based on  B.C. exporting large quantities of pine-beetle infested lumber at very low prices.

On July 18, 2012 the LCIA arbitration board dismissed the charge and “saved” Canadians a potential $380 million in financial penalties.

The debate surrounding the softwood lumber dispute has garnered attention from a wide variety of academics and intellectuals.

The executive director of the Canadian Centre for Policy Alternatives (CCPA), Bruce Campbell, notes that the softwood lumber dispute reveals two fundamental issues of the  NAFTA trade deal.

Campbell outlines these issues in his paper titled Time to Draw a Line in the Sand: NAFTA and the Softwood Lumber Dispute, where he writes,

The softwood lumber dispute highlights two fundamental truths about NAFTA: the deeply flawed FTA/NAFTA dispute system, and the pressure of NAFTA driven integration to harmonize Canadian laws and regulations.

Campbell highlights a fundamental issue about the harmonization of Canadian laws and regulations with those of the U.S.

Signs of this harmonization have already taken place as recently as December 7, 2011, when Prime Minister Harper and President Barack Obama signed the Canada – US border action plan.

This plan allows the US to play an active role over issues surrounding Canada’s border security, immigration controls, and information sharing with American law enforcement agencies.

In addition, the plan also established to ensure greater cooperation and information sharing, improving productivity, and reducing the costs of trade between Canada and the US.

One way the plan achieves this, is by implementing a new cross-border energy infrastructure, e.g., a single Canada-U.S. regime for permitting oil and gas pipelines.

As described above, the Canada – US action plan seeks to further harmonize Canada and the US.
However, as Canada integrates more and more with the US, disputes are bound to arise.

Trade disputes between Canada and the US also spill out on political lines such as the Buy American provision in 2009.

 

Trade Dispute over “Buy American” Policy

The Buy American provision has been seen as a type of protectionist measure employed by the US, and legislated into law with the American Recovery and Reinvestment Act (ARRA) of 2009.

The framework of the ARRA is based on New-Keynesian ideology in that it encourages stimulus spending during recessionary periods in order to facilitate growth.

Additional information on this mainstream branch of Keynesian economics can be found in the article titled: Keynesian Economics – Mainstream Economics

The Buy American provision essentially encourages businesses to buy and use American-made iron, steel and other supplies in the construction of new bridges and roads in order to spur economic growth.

The provision has initially been proposed by current Democrat President Barack Obama, as part of a stimulus plan in order to protect U.S.  jobs.

The Buy American provision has generated much criticism from Canada and other parts of the world.

Many Canadian leaders have argued that the provision is in violation of the NAFTA trade deal.

Former Liberal Party leader Michael Ignatieff criticized the Buy American provision when he said,

We don’t need to talk about threats, but (Americans) need to understand, and this will be the message I pass to the president, that we’re a force to be reckoned with…We’re the United States’ largest energy supplier — not just oil, but also hydro — and they’ve got to understand that if they want energy security, they shouldn’t start putting up barriers to our goods and services.

Mayors within the Federation of Canadian Municipalities have also outwardly attacked the Buy American provision claiming that it adversely affects the Canadian economy.

The Mayor of Sherbooke, Quebec, Jean Perrault argues,

This U.S. protectionist policy is hurting Canadian firms, costing Canadian jobs and damaging Canadian efforts to grow our economy in the midst of a worldwide recession

The Mayor of Brampton, Ontario, Susan Fennell, also attacked the Buy American provision saying,

It’s Canadians saying on behalf of Canadians that the fair and free trade that’s been in existence for so many years is the way to remain.

In addition to the above mentioned leaders, several think-tank and policy research organizations have brought forth recommendations to address the trade inequities caused by the FTA and NAFTA trade agreements.

These proposals range from withdrawing from the NAFTA trade deal altogether (CCPA), to increase further integration with the U.S (Fraser Institute).

Note: Many of these trade recommendations involve protecting Canada from the various trading clauses mentioned in Part 3 of this series.

Trade Policy Recommendations

Senior economist from the Canadian Centre for Policy Alternatives (CCPA), Bruce Campbell, notes that the NAFTA Trade agreement allows the U.S. to gain the most from the agreement, while also being able to push protectionist principles leaving a sour deal for Canada.

Campbell criticizes NAFTA’s Chapter 11 provision and the National Treatment provisions which allows the U.S. and other foreign investors to undermine Canadian legislation and provide them with cheap access to Canadian resources while at the expense of the Canadian people.

In order to mitigate the above mentioned trading issues, Campbell recommends that Canada should simply withdraw from the NAFTA trade deal.

Campbell outlines his recommendations later in his paper, where he adds,

… Canada should invoke a little-known, but powerful and as yet unused NAFTA provision: Article 1905. Article 1905 would allow Canada to trigger a bilateral consultation process on the grounds that the US is violating the Agreement. A win, which is likely, would give Canada the right to actually withdraw benefits it has extended the United States under NAFTA. The most obvious candidates for the withdrawal of benefits are the investment provisions— for example, national treatment for US investors or Chapter 11 investor-state privileges for US corporations…

Campbell argues that this course of action would effectively end the softwood lumber disputes altogether.

In addition, he argues that this would free Canada from the trade issues caused by the Chapter 11 clause and the National treatment clause as well.

Meanwhile, the Director of the Parkland Research Institute, Gordon Laxer targets another fatal provision of the NAFTA trade deal; the Proportionality clause.

He argues that Canada should withdraw from the NAFTA deal so that it can regain control over its own exports and natural resources.

Laxer outlines his solutions in his article titled Bitten by the deal that once fed us, where he writes

Canada can no longer afford to export its remaining supplies of deliverable oil. We should take the opportunity offered by the prospect of an Obama presidency and exit from NAFTA’s proportional, mandatory-exporting clause.

In contrast to both Campbell and Laxer, Fraser Institute economist, Csaba Hajdu, argues that Canada should reform their current taxation system in order to settle the various NAFTA related disputes.

Hajdu outlines his recommendations in his paper titled The Canada-U.S. Softwood Lumber dispute where he writes,

First, Canada should seek to emulate the mostly privately owned resource forest industry in the United States and elsewhere in the world. Canadians should establish private- like area-based long-term tenures of forest land as a second-best solution since outright privatization is legally and politically impractical in Canada. Second, the Canadian taxation system should be reformed to ensure that it is competitive with that of the United States. That means local and municipal governments should be less dependent on the forest industry for revenues, recognizing that the industry can no longer be viewed as a “cash cow.”

Here, Hajdu argues that Canada should implement some form of land privatization so that the Canadian system is more closely integrated with the U.S. system.

He argues that this would avoid future reiterations of the Lumber dispute.

As noted above, there has been extensive debate over the free trade deals and the economic disadvantages that they pose to Canada.

One of the most notable disadvantages of the double standard’s created by the above mentioned issues is that it undermines Canadian regulation and reduces the cash flow for municipal and provincial governments who require these in order to implement social programs for the local population.

Pt 5 discusses the “human cost” that these trade deals cause to the Canadian population.

Contents:

How Free Trade Costs Canada it’s Sovereignty – Pt 1

Fundamentals of the International Trading System – Pt 2

Binding Clauses and the Hidden Cost of Free Trade – Pt 3

The Social Cost of Free Trade Agreements – Pt 5

 

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