On October 12, the Canada-U.S. Softwood Lumber Agreement expires without a replacement. What does this mean for western Canadian softwood exporters?


Managed trade with the U.S. is over

On the plus side, the end of the SLA means Canadian softwood lumber exporters will no longer be subject to the SLA export charge that ranges from five to 15 per cent (depending on the prevailing monthly price). With high prices in the last couple years, the export charge has rarely applied. But since April, a charge has applied every month; this month the levy is 15 per cent.

A clause in the SLA prevents either country from launching trade action against the other for one year after the agreement ends. But if another agreement is not reached by October 2016, Canada will again face the threat of protectionist measures from the U.S., typically in the form of countervailing duties. While current factors indicate the U.S. has no economic reason to restrict the entry of Canadian softwood lumber, we should be realistic about the power of protectionist forces in the U.S. After all, disputes over softwood lumber have existed since the two countries began trading the commodity in the 1800s.

 

The U.S. has little interest in another agreement

The Canadian government, provinces and industry have been reiterating their desire to have another SLA under existing terms, to no effect. The U.S. has been concentrating on negotiating the Trans-Pacific Partnership (TPP) trade deal, and managing trade disputes with China. With the U.S. election cycle now in full swing and U.S. domestic lumber producers opposed to another SLA, there is little political motivation for the current U.S. administration to sign onto another SLA. It is time to take advantage of opportunities outside the U.S. Canada’s customer base for softwood lumber has diversified during the nine years the SLA has been in place. Despite these gains, the majority of our softwood exports continue to flow into the U.S.

It will take deliberate effort to make sure the current U.S. economic recovery does not nullify progress made over the last decade to gain new customers for Canadian softwood lumber. For example, since 2011, exports to the U.S. have increased at the expense of decreasing exports to China, where growth is slowing. Earlier this year, Russia surpassed B.C. as China’s largest softwood supplier.

Canada is vulnerable when we rely too heavily on the U.S. The best scenario for the future of Canada’s softwood sector is to be a preferred supplier with demand from multiple markets.

The time to further diversify our customer base is now – not in a year or two if the U.S. takes trade action against our softwood lumber.

New trade deals present opportunities

In January, Canada and South Korea signed a free trade agreement (CKFTA). The deal brings multiple opportunities for western Canada, including eliminating Korea’s five per cent tariff on imports of Canadian softwood lumber by 2017. Korea is a small but stable market, and its building and energy codes, which have a target of net zero carbon emissions by 2025, present an opportunity for Canada to increase its softwood lumber exports to the country.

Within the TPP, there are softwood exporting countries like Canada, Chile and New Zealand, as well softwood importing counties like the U.S., Mexico and Vietnam. The opportunity to increase trade to new TPP partners exists, but will require time and effort to build relationships and knowledge about Canadian softwood.

There are also countries Canada does not have free trade with that have increasing demand for softwood lumber. The map below identifies some of the markets where there are growth opportunities for Canadian softwood lumber. These exist both in markets where Canada is already established, like India, as well as emerging markets where demand for softwood is growing, like Indonesia and Thailand.

For more information, check out our latest report: Branching Out: Preparing for Life without a Softwood Lumber Agreement.

— By  Naomi Christensen, Policy analyst