A new strategy on trade

MICHAEL ROSE December 1 1986

A new strategy on trade

MICHAEL ROSE December 1 1986

A new strategy on trade

It was a startling reversal of Ottawa’s strategy in its most important trade dispute—and it came at an unlikely time and place. After a 75minute evening meeting in Vancouver last week with the 10 provincial premiers, Prime Minister Brian Mulroney emerged with an announcement. At the end of the first day of their annual conference, Mulroney and nine of the 10 premiers—Ontario’s David Peterson excepted—had agreed on a proposal to end a simmering dispute with the United States over a punishing American duty on imports of Canadian softwood lumber.

The dispute has been a major impediment to Ottawa’s talks with Washington on free trade. But last week’s proposal ran directly counter to the Mulroney government’s previous stand on the issue. After publicly denouncing the U.S. duty for weeks as unacceptable, Canada had suddenly agreed to abandon all the avenues of appeal open to it—pending the U.S. lumber industry’s decision on whether to withdraw its complaint about what its spokesmen say are unfairly high subsidies to the Canadian industry. Instead, the leaders were ready to raise the price of Canadian softwood by an amount equivalent to the 15-per-cent U.S. duty. Declared Mulroney: “Canada has

agreed—we’re speaking for Canada.” But within hours, serious questions were being raised about Mulroney’s proposed solution. Peterson refused to go along with the other premiers; he warned that abandoning the legal fight against the U.S. tariff would set a dangerous precedent for other Canadian resource industries that might come under attack from the Americans. Adam Zimmerman, chairman of the Council of Forest Industries, which represents Canadian lumber companies, called it “horrendous.” And in Washington, there was little indication that the new proposal could settle the festering lumber dispute.

The U.S. department of commerce said that it would go along with the Canadian approach—but the crucial decision rested with the American industry, which called the Canadian initiative inadequate. Said Alan Wolff, lawyer for the Coalition for Fair Lumber Imports: “I don’t believe 15 per cent will do it.”

In Ottawa the Opposition parties charged that Mulroney’s bid to settle the softwood fight raised serious ques-

tions about his government’s ability to manage its crucial trade talks. “I just can’t understand how lily-livered this government is,” said Liberal trade critic Lloyd Axworthy. “Every time they face a necessity to show some strength they simply surrender.” Added NDP forestry critic Jim Fulton: “The government, by backing down on its own very strong position, is now so bloodied that it’s much easer for the United States to extort hundreds of millions of dollars and thousands of jobs from Canada.”

jobs from Canada.” For Mulroney, the stakes in the dispute are high. The American industry has argued for years that Canadian lumber is unfairly subsidized because the fees that the provinces charge companies for the right to harvest trees—called

stumpage fees—are much too low. On Oct. 16, the U.S. commerce department imposed an interim tariff of 15 per cent—worth $700 million a year. That angered the Canadian industry and it was used by critics of the government’s strategy as evidence that Washington is not serious about negotiating a wider deal on free trade. “It’s the most important political issue in trade that the United States has with Canada,” said Saskatchewan Premier Grant Devine. “If you fix that one, it really opens the door for a comprehensive trade agreement.”

The softwood issue was not on the agenda for the meeting. But it dominated events behind the scenes even before the first public session Thursday morning. Peterson and British Columbia Premier Bill Vander Zalm arrived with conflicting views on how the battle should be handled. Vander Zalm favored a compromise with Washington that would keep the $700 million in countervailing tariffs inside Canada. For his part, Peterson insisted that a compromise would weaken Canada’s legal position. “It’s not a question of British Columbia versus Ontario,” he said. “It’s a question of Canadian interests.”

A possible compromise emerged with the arrival of International Trade Minister Pat Carney Thursday morning.

Carney had been in New York Wednesday, where she had discussed a possible settlement with U.S. officials. From Vancouver she had a long telephone conversation with U.S. Commerce Secretary Malcolm Baldrige. According to federal officials, Carney reached a “verbal agreement” with Baldrige: he would persuade the U.S. lumber industry to withdraw its complaint about Canadian imports; in return, Canada would increase provincial stumpage fees or other taxes to compensate for the 15-per-cent duty. Carney presented that scenario to the premiers. Nine agreed to go along, but Peterson demurred. An Ontario delegation source told Maclean’s: “Peterson was torn. He recognized that decisions like that are a federal responsibility and he wanted to go along in order to create a consensus. But he was also worried about the sovereignty implications.”

But Carney said that the agreement she had reached with Baldrige would avoid some of the damage inflicted by the U.S. duty. By imposing new provincial fees or federal taxes, Canada would in effect raise the price of its lumber— both at home and in export markets. Money that otherwise would be paid to Washington as tariff duties would instead remain in Canada. At the same time, Carney conceded that such a move might force Canadian consumers to pay more for lumber. And she insisted that Canada’s offer would not go higher than the 15 per cent now being charged by the Americans. But that statement was greeted with considerable skepticism: only eight weeks ago, in an earlier attempt to resolve the issue, Carney had said Ottawa had made an offer and would go no higher. That offer, announced later, was only 10 per cent.

Baldridge endorsed Carney’s approach, but the endorsement was put in serious doubt by the swift—and negative-reaction of the American industry. Trade lawyer Wolff said that the U.S. lumber coalition was confident it would win a duty of at least 20 per cent by pursuing its complaint against Canadian imports. Under American law, the industry must approve any settlement of its complaint—no matter how Washington would like to see it handled.

Still, as as the conference ended on Friday, Mulroney and Carney appeared satisfied that their agreement would bear fruit. Said Carney: “I’m confident that Secretary Baldrige will make every effort to ensure that this matter is brought to a happy ending.” But the uncompromising language coming from the American lumbermen only underlined how difficult his task will be.