Prepared Testimony of
Under Secretary of
Commerce for International Trade
Franklin L. Lavin
Before the
Senate Committee on Commerce, Science, and
Transportation
Subcommittee on Trade, Tourism and Economic
Development
February
14, 2006
Thank you Chairman Smith, Senator
Dorgan, and Members of the Subcommittee for inviting me to discuss the
Administration’s efforts to negotiate a settlement to the long-standing trade
dispute regarding softwood lumber from Canada. I appreciate your dedication to this issue,
and I further appreciate your giving me the opportunity to discuss the
Administration’s efforts in this regard.
With me today from the Department of Commerce is David Spooner, the
Assistant Secretary for Import Administration.
I am also honored to be here with Deputy USTR Sue Schwab and USTR
General Counsel Jim Mendenhall, with whom we have worked very closely on the
softwood lumber issue.
Where We Are Today
Before I get into the specifics of the softwood
lumber trade dispute with Canada,
I would like to mention five general principles to keep in mind when
considering this issue.
First, Canada
is a good friend and ally of the United States, and our largest
trading partner. One of our oldest and
most successful free trade agreements is with Canada. The importance of our economic relationship
is demonstrated by the fact that U.S.
exports to Canada today
equal total U.S.
exports to the entire world in 1979. Softwood lumber only accounts for some 2% of total trade. Thus, this particular
dispute should not define our relationship with Canada. However, we
view it as an important issue that merits resolution, and that can be resolved
by good faith efforts. We look forward
to working with the new Canadian government to find a solution.
Second, we believe that the Canadian lumber
industry is subsidized. Five times over
the past 20 years, the Commerce Department has formally examined this question,
and each time we found the Canadian lumber industry to be subsidized. Canadian officials acknowledge that support
for their lumber industry took place even as recently as their campaign several
weeks ago.
Third, these subsidies are not in anyone’s
interest. When interfering in market
decisions, governments misallocate their own money and limit opportunity for their
citizens. Let’s not perceive this issue
as Washington versus Ottawa.
The objective is to help everyone move toward market economics.
Fourth,
the International Trade Administration will continue to aggressively uphold the
law and vigorously defend against unfair trade laws before every judicial forum. We make no apologies for defending American
workers and businesses against unfair trade practices, and we will continue to
actively pursue those objectives.
Fifth, a negotiated solution is in the best interest of
companies and workers in both Canada
and the United States. A successful outcome will involve some
compromises on both sides, but the mutual benefits of an agreement are far
greater than the costs and risks of the ongoing litigation. We also believe that allowing workers and
industry on each side of the border to compete in a fair environment will bring
the most benefits to consumers. In
addition, free trade in lumber products should include the ability to compete
and trade in all forest products.
History of Softwood Lumber Dispute
A
brief history of the softwood lumber dispute is in order to give context to the
complexity of this dispute and to review how we have attempted to resolve it in
the past. I will first outline our past
administrative proceedings regarding softwood lumber from Canada and
their resulting bilateral agreements, and then summarize the current cases, the
accompanying litigation, and our recent efforts to date to reach a negotiated
solution.
Commerce initiated the first
softwood lumber countervailing duty (CVD) investigation in 1982 in response to
a petition filed by the U.S.
industry. However, the Department
determined that the investigated programs bestowed de minimis subsidies
and issued a negative determination finding no countervailable subsidies. This case is the only one in which no
subsidies were found.
Commerce initiated a second CVD investigation of
softwood lumber from Canada
in 1986, again in response to a petition from the domestic industry. Although Commerce issued an affirmative
preliminary determination, that proceeding ultimately settled without the
issuance of a final determination. In
December 1986, the United States
and the government of Canada
signed a Memorandum of Understanding (MOU), which required Canada to impose an export tax on softwood
lumber exports to the United
States.
In October 1991, Canada
terminated the MOU.
Commerce self-initiated its third CVD investigation
of softwood lumber products from Canada in 1991. The Department issued its affirmative final
determination in 1992. Commerce’s
determination was ultimately rescinded in connection with litigation under
NAFTA.
In 1996, the United States and Canada signed the Softwood Lumber
Agreement (SLA). Under the terms of the
SLA, Canada agreed to limit
exports of softwood lumber to the United States,
and in return exports up to a certain level entered the United States
tax-free for a five-year period. Exports
above this level were subject to an export tax.
The SLA expired in April 2001.
Most Recent Cases
The day after the expiration of the SLA, the U.S. industry filed its third petition alleging
that Canada
unfairly subsidizes softwood lumber. The
U.S. industry additionally
filed a petition alleging that Canadian producers were dumping softwood lumber
into the U.S.
market at less than fair market value.
Commerce subsequently initiated its fourth CVD investigation and its
first antidumping duty (AD) investigation in 2001.
In
the CVD investigation, the Department found a subsidy rate of 18.79% for
Canadian softwood lumber. Canada challenged this result
before panels constituted under both the NAFTA and the WTO. The United States was generally
successful in defending its determination at the WTO. As a consequence of the NAFTA litigation,
however, Commerce has issued five remand determinations. The subsidy rate has decreased with each
remand, ultimately becoming de minimis in the last remand
submitted on November 22, 2005.
Although
we did not agree with the Panel’s rationale, consistent with our NAFTA
obligations, we complied with the Panel’s instructions. If the NAFTA Panel ultimately affirms
Commerce’s fifth remand determination, the United States will decide whether
to request review by an Extraordinary Challenge Committee (ECC). No decisions have yet been made on whether to
pursue review by an ECC, but all options will be considered.
The softwood lumber AD
investigation, which resulted in an order being issued in May 2002, has
likewise been challenged in both the NAFTA and the WTO. The NAFTA Panel remanded the case a third
time to Commerce in June 2005. The Panel
found that Commerce was required by law not to use “zeroing” in the context of
the comparison methodology used in that particular investigation. Last
July, Commerce subsequently filed its remand with the Panel, revising its
calculations in a manner consistent with the Panel’s analysis. Commerce is currently awaiting the NAFTA
Panel’s decision on this latest remand determination.
In
the WTO dispute, the United
States has been generally successful. However, the WTO Appellate Body determined
that Commerce’s “zeroing” methodology, as applied in the investigation, was
inconsistent with the United
States’ international obligations. Commerce accordingly modified its
methodology. A new WTO compliance panel
is now considering that determination, and we are awaiting the interim
decision.
Latest Negotiations
The Coalition for Fair Lumber
Imports Executive Committee, which represents more than 200 forest product
companies throughout the United
States, is the petitioner in the current AD
and CVD investigations. Consumer trade
groups such as the Alliance of American Consumers for Affordable Homes, the
National Home Builders Association, and others oppose the orders. Recognizing the needs of both these groups is
crucial as we continue to work toward an agreement
that is beneficial for all parties, and addresses the concerns of both
producers and consumers. However, this
concern cannot detract from the need for a negotiated solution that effectively
addresses the Canadian lumber industry’s unfair subsidization.
Since June 2002, Commerce and USTR have engaged in
discussions with Canadian government officials and U.S. and Canadian industry
representatives in an effort to identify a durable, long-term solution to the
dispute. Both sides have made proposals
for different types of interim agreements; however, further discussions will be
necessary to reach an agreement. A major
issue is the disposition of the more than $4 billion in deposits collected by
the United States since 2002
and whether any portion of it would be returned to Canada.
In mid-July 2005, U.S. and Canadian industry representatives and government
officials met to discuss the possibility of reaching a negotiated settlement
based on the imposition of an export tax by Canada. The United
States, with U.S. industry support, suggested
several new approaches. However, the
Canadian government was unable to reciprocate at that time and has not done so
at this point.
While formal negotiations have been
at a standstill since July 2005, it is our hope that serious discussions will
resume soon. In recent negotiations,
several components of a possible agreement guided the discussions. The first was a border measure, imposed on
the Canadian side of the border, to manage the impact of Canadian lumber
imports until market forces play a greater role in setting Canadian stumpage
prices. A second was a prohibition
against the filing of more trade complaints during the life of the
agreement. A third involved the
disposition of the more than $4 billion in duty deposits currently being held
by U.S. Customs and Border Protection.
In addition, some formula would need to be developed through which
individual provinces (or Canada
as a whole) could export to the United
States free of the border measure (for
example if they went to truly market-based pricing of government timber). Finally, a possible aspect of an agreement
would be to identify and eliminate other obstacles (besides subsidized timber
and corresponding border measures) to free and open trade of all forest
products between the United States
and Canada.
Our negotiations are complex because management
of forestry resources in Canada
falls under provincial jurisdiction.
Thus, any agreement will need the consent of all relevant
provinces. The Federal government is
constitutionally responsible for foreign policy (including international trade
negotiations), which adds a complex inter-governmental component to
resource-related negotiations.
The softwood lumber negotiations must also take into
consideration the environmental and economic political diversity among Canadian
provinces and provincial forest products industries. Only six of Canada’s
10 provincial forest management regimes (Ontario,
Quebec, British Colombia, Alberta,
Manitoba, and Saskatchewan) are currently at issue in the
Softwood Lumber dispute, and many differences exist among them. Nonetheless, U.S. negotiators are limited in
their ability to enter into international agreements with sub-national
governments, thus eliminating the option of purely regional or
province-specific solutions.
The Changing U.S. Industry
In
considering how to approach achieving a long-term durable solution, we need to
take into account certain significant industry developments. Two of the most important developments are
the recent changes in industry structure, and the transfer of forestland from
forest products companies to Real Estate Investment Trusts (REITs).
Our American lumber workers and
industry are among the most competitive in the
world. Like many other sectors of our
economy, the industry has been going through consolidation since the early
1980s that have further increased its efficiency. Independent of the trade issue, we are likely
to see additional consolidation and strong competitive pressures in this
industry through the near term.
Currently, the 10 largest companies account for nearly 40% of North
American production. There have been two
significant recent mergers. One involved
Koch Industries purchasing Georgia-Pacific, a large U.S. producer. The other involved Canada’s
largest forest products company, Canfor, purchasing New South Company, a
significant U.S.
producer.
Further, in fall 2005,
International Paper (IP) announced that it was considering selling off a
significant portion of its 6 million acres of forestland. IP is the second largest private landowner in
the United States.
The transfer of forestland to REITs
has become increasingly common. From
1998 to 2004, about 25 million acres of timberlands changed hands, from forest
products companies to other types of ownership.
Roughly one-half of this land has gone to REITs or a similar entity
called Timber Investment Management Organizations (TIMOs). John Hancock Timber Resources Group and
Grantham Mayo are prime examples of major TIMOs – i.e., investment firms, pension
funds and insurance-based companies that are looking for long-term assets. Plum Creek, a major U.S. producer, member of the Coalition, and the
largest private landowner in the United States is now a REIT.
These developments will impact the U.S. approach
to a long-term solution. Previously,
forest product companies used logs from their own forestland. Now, these same producers are purchasing a
larger portion of their log supply from the new forestland owners (i.e., REITS
and TIMOS) changing the market dynamics around supply and demand of logs, and
requiring us to explore new areas in our negotiations.
Next Steps
The Administration remains
committed to bringing this dispute to a close.
We pledge to work with our Canadian counterparts to find a solution that
is
fair to all parties, and addresses the concerns of both producers and
consumers. A deal can be reached. This is not the place for me to speculate on
the specifics of such a negotiated solution, but I can say that these
negotiations should take place with a spirit of accommodation, avoiding
rhetoric and public posturing.
Hopefully, now we have the opportunity to do so. It is important to note that it was in this
spirit that we were able to resolve similarly vexing disputes regarding
textiles from China and cement
from Mexico.
Thank
you for giving me this opportunity to testify on this important topic. I appreciate your support for our efforts and
welcome your questions.