The Forest and the Trees
Does the expiration of the U.S.-Canada softwood lumber agreement spell the end of Alberta’s forestry industry?
Alberta Venture, July 2016
Nestled in Alberta’s boreal forest, at the confluence of four waterways, is Whitecourt, population 9,600.
The town sits at the metaphorical centre of Alberta’s forestry sector, which anchors a network of lumber yards, pulp mills and paper plants that stretch across the nearly two-thirds of this province that is forested. Some of the country’s largest lumber companies operate here. It’s home to Millar Western’s pulp mill and lumber yard, and is a base for West Fraser and Alberta Newsprint Company, all within earshot of minor hubs like Fox Creek and Blue Ridge. Forestry in Alberta is a $4-billion-per-year industry, and the lifeblood of oft-forgotten northern towns like Kinuso and Hines Creek. The province’s sector is remarkably well-positioned, too: not far south is a nation of nearly 320 million people that has an appetite for lumber. Whitecourt should be the beating heart of a thriving sector.
But the industry is tense. The trade of lumber between Canada and the U.S. isn’t free, exactly. It’s been brokered by a succession of treaties, the most recent being the Softwood Lumber Agreement, which stood for nine years. That agreement expired last October, leaving the two countries at, as it were, loggerheads. While Canada is advocating for a new agreement in Washington, U.S. lumber producers have no such ambition. Instead, many of them want to sue us.
“Thanks for helping us with the war effort, Canada, but stick it up your pant leg.”
That’s Neil Miller’s version. Miller, an industry veteran, is brash and animated, and it doesn’t take much prodding before he’s knee-deep in a rhetorical takedown. Miller is not, as it may seem, an American forestry executive hell-bent on bringing diplomatic anarchy to two of the world’s most connected trading partners. But he’s playing one over the phone, as he dramatizes the softwood lumber disputes that began as far back as 1820. Miller says today’s predicament has deep-rooted precedent going back to 1946, when the dispute culminated with the first U.S.-imposed duty on Canadian exports.
“There’s no one active in the lumber business in Alberta or Canada who has not operated under some form of action from the U.S. side,” he says, returning to his own voice. “There’s always been some kind of duty, some kind of quota, some kind of ‘managed trade’ scenario.”
The U.S. has been waging war with Canada’s lumber industry for so long, and with such ferocity, because our markets are ideological adversaries. In Canada, producers log on Crown land and pay stumpage fees to the government. In the U.S., the timberland is privately owned and producers bid for their product at timber auctions through the U.S. Forest Service. So American firms, citing our low stumpage fees, say Canadian product is subsidized, and lobby for tariffs and duties, which, in the years between treaties, have been as high as 27 per cent. The Softwood Lumber Agreement was crucial to ensuring a stable market, but now it’s gone. What will take its place? Canada’s international trade minister, Chrystia Freeland, speaks of a “breakthrough” in negotiations, but the clock is ticking. There’s a one-year standstill provision that bars the U.S. from legal action against Canada – for which there’s voluminous historical precedent – but that expires this fall.
Canada’s dependence on these agreements means that over the course of decades, we’ve seen periods of relative stability punctuated by bouts of animus. Miller followed it from both sides of the border. In the 1970s, as a forestry graduate from the University of Alberta, he went to work at MacMillan Bloedel, which was then Canada’s largest forest products company. But by 1983, before he returned to Alberta, he ran a mill for Atlantic Forest Products in North Carolina. “When they say ‘the land of litigation,’ it’s absolutely the case,” Miller says. “When you can’t compete, litigate.”
But why can’t the U.S. compete? Miller says the U.S. sector hasn’t kept pace with the leading-edge technology that makes wood products valuable. Alberta, for example, doesn’t export logs – any growth the sector has experienced hasn’t been a result of harvesting more but of extracting more value, like creating outsized beams for office towers or engineering higher-load-bearing lumber. The U.S., Miller says, has fallen behind. One sign is the fact that Canadian companies now own a significant share of the U.S. lumber market, as much as a third in some regions. So as U.S. lumber producers lose more and more of their own market, litigation – and imposing tariffs – becomes increasingly important.
And it could be devastating for Alberta’s forestry sector. The threat of litigation comes at a dangerous time for the industry, which was on the cusp of a great comeback story. When the U.S. housing market crashed, not long before the Great Recession, Canada was woefully unprepared. In 2004, most of Alberta’s wood products were exported, and the bulk of that went to the U.S. When housing starts bottomed out, it decimated the sector. From 2005-09, the value of shipped wood products from Alberta was cut in half. Forestry jobs in the Slave Lake region fell by 70 per cent, and the value of the region’s products decreased by that same amount. Across Alberta, many of the family-owned mills, once the foundation of the industry, closed.
But the sector has diversified. Even as the U.S. market recovered, Canada set its sights on Asia. By 2010, the value of Canadian exports to China had increased almost 2,300 per cent over 2002 levels. Alberta has been exporting to Japan for almost four decades, but today, exports to China make up almost one-third of Asian export values, and almost all of that growth has occurred in the last decade. Domestic demand skyrocketed, too. “Flash forward to 2015 – roughly half of Alberta’s production stays right here,” says Paul Whittaker, president and CEO of Alberta Forest Products Association (AFPA). He says about one-quarter of Albertan product now goes to the U.S. and that the other quarter goes to Asia. Miller, too, is focused on Asia with his company, Alberta Spruce Industries, which he started in 1987 after returning from North Carolina. He says one-third of his exports go to the U.S. Though Asian demand has slackened, most notably in China, the emergence of Asian markets for Albertan softwood lumber is a key plot point in the industry’s growth story. But as Albertans from all sectors know, diversification is a titanic undertaking. The industry hasn’t returned to pre-recession levels, and to be slapped with tariffs almost double the size of what was permitted under the Softwood Lumber Agreement (where they were based on volumes and commodity prices, but were relatively constant) would stall forestry’s rebound at a time when the province, reeling from a recession, needs it the most.
There’s a paradox to all this: though its loss would be significant, Canada’s forestry sector actually needs the U.S. less than it ever has before. And, conversely, America needs our lumber more than ever before, to support the recovery of its housing market. So why all the disagreement?
“When you look at strictly the economics, you’d think, ‘The U.S. needs us – why would they restrict the flow of Canadian lumber, which will actually raise prices?’” says Naomi Christenson, a policy analyst with the Canada West Foundation. “But unfortunately, when we’re dealing with the U.S., particularly on this file, it’s not only economic factors that come into play.”
Those other factors include the U.S. lumber lobby, of course – one of America’s most powerful. The most influential member within the lobby is the U.S. Lumber Coalition (USLC). For decades, its membership was secret, but in 2006 it accidentally emailed the names of its members to journalists. That leak revealed what everyone had assumed – that the coalition was funded by large, publicly traded lumber companies, whose stock prices rise whenever there’s talk of legal action against Canada. It’s no coincidence that as the Softwood Lumber Agreement expired, the USLC ramped up its rhetoric. If no new deal is reached, its website reads, “the U.S. industry will have no choice but to assert its rights under U.S. trade laws.” (The U.S. Lumber Coalition didn’t respond to repeated interview requests from Alberta Venture.)
The market may sort itself out, however. It’s no small irony that even as U.S. lumber producers lobby for duties on Canadian lumber, they lose more of their domestic market to Canada every day, as sophisticated Canadian companies set up shop, bid on American timberland and acquire American producers. The Canadian company, Interfor, recently purchased a U.S. lumber company whose CEO was chair of the U.S. Lumber Coalition. (Stick that up your pant leg.) And Canada continues to win in court. “Canada has been successful in virtually all of these disputes,” Whittaker says. “We may suffer the slings and arrows for the short term, but generally speaking, we tend to be found to be behaving correctly and appropriately. It may take a while to weave its way through trade tribunals, but we’re confident at the end of the day that we will be proven to have been acting and functioning appropriately.” In the meantime, as the clock ticks, forestry towns like Whitecourt wait with apprehension.
Reprinted with permission from Alberta Venture.