Forest industry hit hard by border tax

By James Neeley


United States officials are calling for an additional 10 per cent border tax on softwood lumber however, the Ontario forest industry says the duty will chop another one of their legs off.

"Obviously we are in an environment, a period of significant challenge throughout the global economy, relative to lumber this is a particularly challenging period driven primarily by the incredibly low level of housing starts and other residential construction activity in the United States," said John Valley, Tembec's (TSX:TMB) executive vice president, business development and corporate affairs.

Housing starts have fallen from over the roof levels of about 2.1 million -- 24 months ago -- to a basement level of less than 400,000 on an annualized basis.

The yearly average for U.S. housing starts is about 1.6 million a year.
On April 7, the Untied States decided to impose an additional 10 per cent border tax on some imports of Canadian softwood lumber from Ontario, Quebec, Saskatchewan and Manitoba.

"Clearly the imposition of an additional duty, on top of all these other challenges, aggravates these problems further," Valley said.

The Ontario forest industry represents about 70,000 direct employees and about 200,000 spin off workers, said Jamie Lim, president and CEO of the Ontario Forest Industries Association (OFIA).

"We weren't making money before the 10 per cent (border tax), obviously we're not going to be making money with an additional 10 per cent tax," she said.

"I don't know any business that stays open when they are losing money," Lim said, explaining the 10 per cent duty puts those 70,000 jobs at much greater risk.

"Whether it's a family business or a multinational corporation, everyone has to make money."

According to the office of The United States Trade Representative (USTR), the 10 per cent border tax increase was in response to Canada's failure to cure a breach of the 2006 Softwood Lumber Agreement.

On Feb. 26, the London Court of International Arbitration (LCIA) found that Canada improperly calculated quotas on softwood exports during the first half of 2007. Canada was ordered to pay the U.S. roughly (Cdn) $68 million in settlement by March 28 of this year.

The Canadian government accepted they were in violation of the agreement, said Donna Cansfield, the Ontario Minister of Natural Resources.

"The government saw some opportunity to work with the United States to find a resolution," she said explaining the Canadian government, within their rights, asked the LCIA for clarification.

"And the federal government put forth the dollar amount that was quoted as the difference," Cansfield said.

Trade Minister Stockwell Day offered a payment of US $36.7 million.
"The U.S. said, 'the hell with them' and slapped them with a 10 per cent surcharge," Cansfield said.

"It seems the wrong thing to do at the wrong time, when in fact we are looking for understanding and resolution."

The United States doesn't see it that way.

"The United States is taking action ... to enforce our rights under the Softwood Lumber Agreement," said Ronald Kirk, U.S. Trade Representative, explaining the U.S. rejected Canada's offer on April 2.

"We regret that Canada has chosen not to meet its commitments and has made this action necessary."

The USTR office said the duties will remain in place until they have collected the US $54.8 million they believe is owed to the U.S.

"Our initial reaction was that we were disappointed, but frankly not surprised," Valley said of the LCIA's Feb. 26 decision."This decision was consistent with the heavy-handed approach taken by the U.S. government on behalf of the lumber coalition throughout this entire dispute," he said.

"It is particularly disappointing to see this action, given the positive settlement option proposed earlier by the Government of Canada," Valley said.

Canada has asked the LCIA to confirm the payment cures the breach, a process that will take some 60 days, Lim said.

"Rather than waiting 60 days for the Tribunal’s decision, the U.S. decided to take the law into their own hands by taking this extremely punitive action against their largest trading partner. This is a solid example of protectionism on the part of the United States."

The Ontario MNR continues talks with the federal government and all the lawyers involved, Cansfield said.

"This is the latest chapter in the softwood lumber saga ... The whole idea was to be able to work out the differences and if anything it just created more. We seem to be forever in court," she said.

"But we must continue working with our industry, they need to be viable and sustainable as they transition into what going to happen over the next year or so."


www.ustr.gov
www.tembec.com
www.ofia.com