"You want gas, you want oil, and you don't want wood. It's too bad, but if you have free trade, you have free trade," said former Canadian Prime Minister to U.S. President George W. Bush. And that pretty much sums up the prevailing feelings on both side of the softwood lumber trade issue between the United States and Canada.

On the surface, one might wonder why trade in a single commodity that makes up such a small percent of the total exchange in goods and services between the two otherwise friendly allies is so contentious. Indeed, "Ninety-six percent of all U.S.-Canada trade is dispute-free, and of the remaining 4 percent, softwood lumber comprises 3 percent," notes Jim Phillips, president and chief executive of the Canadian/American Border Trade Alliance. Furthermore, while modern history traces the start of the dispute back to 1982, Phillips says that the first U.S. levy on softwood lumber was actually in 1792.

Not only then has trade in softwood lumber been a simmering issue for decades, closer examination gives clues to why there hasn't yet been a resolution.

First, some facts

In October 1982, the U.S. Department of Commerce opened an investigation into the stumpage programs of British Columbia, Alberta, Ontario, and Quebec. The investigation concluded in May 1983, with the agency deciding there was not enough evidence to assess countervailing duties on imports of Canadian softwood lumber.

Under U.S. trade law, a countervailing duty case is an investigation of an alleged subsidy that provides an importer with an advantage in the U.S. market. With lumber, the U.S. contends that provincial stumpage (and more recently, British Columbia's log export restrictions), provide a subsidy to Canadian lumber producers. Also, in order to impose a countervailing duty, the U.S. must prove that the imported goods are subsidized and that they are hurting the U.S. industry.

The Department of Commerce began another investigation in 1986, and this time ended with a preliminary determination that there was sufficient reason to implement a 15 percent countervailing duty. A final determination was never reached, however, and the case ended when Canada and the U.S. agreed, in December 1986, to a memorandum of understanding (MOU) whereby Canada would impose a 15 percent export charge on lumber destined for the United States.

Since the early 1980s, the issue has gone back and forth, and the U.S. is now sitting on roughly $5 billion collected from Canadian lumber companies. Over the past few months, however, the dispute has really heated up, and that long simmering trade issue has reached a boiling point, which is being further compounded by opposing decisions by such powerful trade bodies as the WTO, U.S. Court of International Trade, and NAFTA.

On August 10 of this year, a NAFTA panel ruled in Ottawa's favor that Canadian practices did not threaten U.S. lumber producers. Washington ignored that finding. A few short weeks later, on August 29, the WTO found in favor of the U.S., which prompted Canada to enter an appeal with the U.S. Court of International Trade, which functions to settle discrepancies between NAFTA and WTO rulings.

"The reason it has yet to be settled is that there are two diametrically opposed systems and I think they're both misunderstood," says Phillips. For example, in the U.S., most harvesting of timber is done on privately owned land, but in Canada, 90 percent of the cutting takes place on public land. American companies argue that Canadian provinces subsidize their lumber producers by charging artificially low cutting fees.

The underlying emotions

To most Americans, even those in the international trade community, the issue may seem like a tempest in a teapot. But in Canada, even the general public has strong feelings about this issue. Why?

According to Michael A. Weinstein, Professor of Political Science at Purdue University: "Traditionally dependent on the export of primary products for their prosperity, Canadians place trade issues high on their political agenda and their politicians respond to that priority. Washington's refusal to honor the NAFTA panel's decision fueled growing anti-U.S. sentiment in the Canadian public and its political class, with parties across the ideological spectrum backing a hard line from Ottawa." Already there have been calls for retaliatory tariffs on California wine and Florida orange juice, as well as an imposition of a tax on energy exports to the U.S. that would recoup the $5 billion paid to the U.S. in countervailing and antidumping duties, and if that's not enough, an outright Canadian withdrawal from NAFTA, he explains. Additionally, "In Canada, there is a predictable unanimous judgment that there should be no restrictions on trade in lumber since there are no [divergent] interests to contest that view. The picture is different in the U.S., where lumber importers, retailers, and home builders form a coalition in favor of unrestricted trade, [while] higher cost U.S. lumber companies fight for continued protection."

But in recent weeks, even some Canadians are starting to question their government's policy and cautioning about the impact and potential damage it could unleash on the larger bilateral trade relationship between the two countries.

In early October, the head of the New Brunswick Forest Products Association, Yvon Poitras, said lumber producers in Canada's Atlantic region don't want federal money, but rather an end to the dispute. "There is a reason why the U.S. keeps on rebuffing. It takes two to tango," he said. The Atlantic region opted out of one Canadian government program three years ago, saying it would maintain its tradition of refusing any semblance of a government subsidy, which has effectively kept it from being hit directly with the U.S. trade action. In addition, most of the forests in Canada's Atlantic region are privately held, which creates a market-based stumpage system that the U.S. finds little fault with.

Deputy federal Tory leader Peter MacKay, who will represent Canada at an October 17 conference in London to discuss U.S.-Canada relations, also shared some differing views recently. He said in an interview with the Free Press Reporter that the relationship between the two countries is too tense and acrimonious. "We need to get back to what's important between the two countries in a respectful business-like manner. Instead of acting as America's best friend and most important trading partner, Ottawa has sent mixed messages sprinkled with a dash of insults," he said. Things reached an all-time low when former Prime Minister Jean Chretien's communications director publicly called U.S. President George W. Bush a "moron" and when then-Liberal MP Carolyn Parrish stomped on a Bush doll in a TV satire, told MacKay. "We have to rise above the [anti-U.S.] rhetoric," he concluded.

Both sides need each other

Cleary, no one really wants an all-out trade war, despite the present logjam. And, both sides need each other-Canada is the largest producer of softwood lumber in the world and the U.S. is the largest consumer.

Moreover, there's an entire global market that beckons, says Jim Phillips. "The U.S. and Canada should be working together. If the lumber industries worked together they could make both countries' products more globally competitive. There's a big demand for building materials, and threatening one another is not the answer. Furthermore, trying to link the softwood lumber issue to other traded products, like energy, would backfire. If that were to happen, the U.S. would react strongly and Canada would not like that reaction-there'd be more hurt than just the softwood lumber industry."

According to Phillips, "Both sides are a little bit right and both sides are a little bit wrong." He believes that neither side has all the facts, and that if they could remove the climate of distrust and self-interest groups, a permanent solution could be reached.

Sidebar: Not All the News is Bad...

For an example of what's 'always worked' between the U.S. and Canada, you needn't look much further than the cooperation that exists between the customs agencies. As testament, consider the daily flow of goods that crosses the shared border-thousands of trucks going both directions and combined trade of goods and services of over $1 billion.

The events of 9/11 temporarily shut down the border and newly enacted security regulations slowed things down a bit in the ensuing years; but by most accounts trade is flowing more securely and faster than ever before.

At the same time, the U.S. and Canada are working together to bolster U.S. Customs and Border Protection's Container Security Initiative (CSI). The plan is to share resources so that Canadian officials posted overseas can help screen containers bound for the U.S. and visa versa. Customs officials from both countries want to push more risk-assessment of freight overseas rather than waiting to screen the freight after it arrives in either the U.S. or Canada.