For three years, and possibly for three decades, most Canadians have believed that, in the end, they will have to negotiate with the United States to settle the international trade dispute over softwood lumber. ”œAt the end of the day,” discussions always run, we will be obliged to restrain trade and change the way we manage the forests.
The most recent variations on this theme, put forward by Canada’s newly appointed negotiators in early August, rejected trying to negotiate changes in the way Canadians do things in favour of a simple but effective acceptance of defeat. They argued, albeit briefly, for an abandonment of a long-term durable solution in favour of a quick-fix restraint on trade, embodied in an export tax that would transfer funds from the private sector to provincial governments. They reckoned that accumulated legal victories might cush- ion the extent of the acknowledged defeat.
Those convictions were expressed before August 10, 2005, when the United States publicly declared that it had developed a legal alternative to respecting the outcomes of dispute resolution under NAFTA and would not abide by the decision of an Extraordinary Challenge Committee. The US theory had been known to lawyers representing Canadian interests for several months, but neither the Government of Canada, nor provincial governments, nor Canadian indus- try, wanted to believe them. Surely, we all reasoned, the United States would respect its own law. The problem was not the outcome, but how long it would take and whether matters would truly be settled, or whether we would be doing battle over and over again unless we negotiated.
When the current episode of the softwood lumber dis- pute began in 2001, Canada adopted a two-track approach, Track 1 referring to litigation, and Track 2 to negotiation. They ran in parallel, but no one ever doubted the preference of the Government of Canada, nor for that matter the pref- erence of provincial governments and much of the industry: we all wanted to settle the dispute through Track 2. We believed Track 1 would enhance our negotiating position, but that Track 2 would be our salvation.
The United States has now attacked our theology ”” our belief in a deal ”” by embracing it. Prime Minister Martin asked President Bush directly, in a telephone call on October 14, to respect the law. The president expressly declined. He told the PM what his new emissary, Ambassador Wilkins, has been telling Canadians all summer: the United States will not settle this dispute according to NAFTA. It will not abide by the law. Canada must negotiate.
The Canadian belief that negotia- tions, and defeat, are inevitable is untested, for Canadians have always agreed to negotiate and have twice before made deals, in 1986 and 1996. That a deal must be made and is inevitable is more the product, then, of religion than cognition, and now addi- tionally the product of an American threat. But the American threat ”” that only a negotiation will settle the matter ”” has been inspired in no small meas- ure by the frequent Canadian requests for negotiations, and frequent unilater- al Canadian proposals for settlement. The whole theology, therefore, probably needs closer examination.
Underlying the Canadian commitment to negotiation has been an unsettling guilty conscience. Even though the law defines a subsidy, and no matter how many times the United States has changed the law and manip- ulated the definition, it has been unable to prove a subsidy in Canada during the last 25 years of trying.
I have referred to theology and religion because we Canadians seem to believe fervently in our negotiating skills and the honesty, reliability, and fairness of our negotiating partners. We believe, as a true article of faith, that, at the end of the day, we can make a fair deal.
The religion of the deal in softwood lumber is based on a single article of faith: the United States will not accept adverse legal outcomes and inter- minable litigation is inevitable without a settlement. So powerful is this article of faith that the very creation and con- tinuing existence of a free trade agree- ment between Canada and the United States cannot seem to disturb it. Religions rarely adjust very well to evi- dence contradicting articles of faith, especially when there is considerable evidence supporting the religious view. Certainly the conduct of the United States and its industry have reinforced the Canadian religion of the deal.
There can be no doubt that those advocating a deal, often at any price, could be right. The United States may never accept the rule of law, may never accept legal defeat, and may never permit free trade in softwood lumber. To his credit, Prime Minister Martin is now call- ing President Bush on it, and he has President Fox of Mexico agreeing with his view. And Martin has taken the right approach, examining the religion of the deal in a wider context, not so much of Canadian-US relations as of American foreign and commercial policy and cred- ibility around the globe.
There is in the US Congress growing anger over free trade. Such anger, which rises and falls, reflects a weak economy and constituent anxiety over jobs and security. Notwithstanding that Americans are closer to full employment than the working popula- tion in most, if not all, other advanced industrial countries, the spotlight on outsourcing has induced a fear that jobs will be exported. And although President Bush has acknowledged that the social security ”œcrisis” will not befall Americans before 2037, he has managed to stimulate a widespread con- cern that many Americans will have to depend on their own savings and skills, without help from govern- ment, to retire. Such uncer- tainty ”” whether there will be jobs, and whether there will be pensions ”” overlays a broken medical system that can only make most Americans afraid for their future.
Although a near-cliché, it is never- theless important to remember how much the American world changed on 9/11. That event licensed the president to assume greater powers, and to pre- sume greater leadership of allies. He said he would act with or without the support of friends, and he has done so, whether in Iraq or Guantanamo, whether in currency valuation or in trade negotiations. All follow a pattern, not of American strength, but of fear and weakness.
American foreign and commercial policy has never featured compromise, and Canada is understood in the United States as a foreign country. Deal-making with the United States is an exercise in trading off uncompro- mised positions according to different priorities, not a process of resolving dis- agreements through compromise one item at a time. A central frustration in the softwood lumber negotiations is that the US industry has a core set of objectives that will not be compro- mised. Those objectives overlap with items that Canadians cannot compro- mise. The lists are finite, preventing creative solutions: the US industry wants less Canadian lumber, at higher prices, in the US market. They have never cared how those objectives might be accomplished.
The American political system makes the problem of negotiation very nearly intractable. The Senate Finance Committee controls the trade agenda. It is populated now, as it has always been, by senators from states with lots of trees, the consequence of a tax sys- tem that benefits the large landhold- ings that great forests typify. After all, there is a reason it is called the Finance Committee. It is all about taxes, as is much of international trade. Senators keen to protect the tax advantages of their states find their way onto that committee, whether it is Robert Packwood of Oregon, the committee chair during ”œLumber II” and ”œLumber III,” or Max Baucus of Montana, the ranking member and former chair today. Canadian trade interests will always be competing with the Senate Finance Committee, and the president of the United States will always listen to that committee, although some- times more (as in this administration) than at other times.
Track 2 was doomed to fail, not because we Canadians would not com- promise, but because Americans believed we would and never had any intention of compromising them- selves. We thus prolonged the agony of Track 1 by letting Americans believe that the promised land of a deal was within reach. Track 1 only needed to be made agonizing enough, so Americans have believed since ”œLumber IV” began, to bring us back to the table.
We now know, because Bush has told Martin that he cannot abide by the law, and that any deal will give Canadians considerably less than the law now provides. So, we can choose to have faith in the law ”” although at con- siderable cost and pain ”” or continue to worship at the altar of deal-making, where self-denial is the permanent order of the day. Martin seems to have cho- sen. He understands that the rule of law is being tested definitively, and if lost, Canadian exporters will always be subordinated to an aggressive and uncom- promising American will. But he has not committed full resources to Track 1, which is the next step he must take. Giving up a religion is not easy, and it comes at a price. Canadians need to give up the religion of the deal and be pre- pared to pay the price. The alternative price is more than self-respect and dig- nity. In a continental economy with a hugely dominant partner, it is sover- eignty itself ”” which, by the way, is not a religion, but an expression of interna- tional law. We can have the prosperous continental economy the Macdonald Commission foresaw, and our sovereignty, but we must fight, and fight hard, we must commit real resources, in order to have both.
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The question Canadians must answer is whether this convergence of forces ”” 9/11; the assertion of presiden- tial powers; the American presumption that Canadians in due course will cave; the Canadian view that, in due course, they must cave ”” is destiny.
It is not unreasonable to interpret recent developments in Washington as the stunning and rapid withering of the Bush administration. All the military leadership insists that withdrawal from Iraq must begin by next spring, regard- less what the president and his secretary of defence may say. Key advisers to both the president and the vice-president, Karl Rove and Scooter Libby, may soon be indicted in the Valerie Plame affair. The leading Republican lights on Capitol Hill are in legal trouble, House majority leader Tom DeLay already indicted, and Senate majority leader Bill Frist under investigation for insider trading by the Securities and Exchange Commission. The top priority of Bush’s second term, social security reform, has effectively dis- appeared. The Chinese are refusing to accept the administration’s demands on textiles and on currency exchange; the Doha Round appears stalled; and no one even mentions the Free Trade Area of the Americas that was supposed to be signed this year.
Can Bush really afford to have his North American partners effectively calling him an outlaw? Can he really sell more trade deals around the world when the world is being told he does not abide by them? As painful and difficult as it may be now for Canada, and especial- ly for the lumber industry, to stare down the demand for a deal and to insist upon the rule of law, the promise of success has never been more likely. And I don’t ask you to believe me ”” that would take religion. I ask only that you consider the facts, the develop- ments, and the American need, in the end, for partners and allies.
Let me now turn from the descriptive and analytical to the prescriptive and public policy part of this article. It should be clear at this point that the softwood lumber dispute is no longer about whether Canada is doing some- thing wrong: that has been adjudicated in Canada’s favour for the fourth time in twenty years. Now the question is really ”œHow do we get the US off our backs?” Let me be clear: I am not talking about any form of retaliation. Saber- rattling makes some people feel good, especially when directed against the US, but I am not a saber-rattler. The histori- cal record of international trade or eco- nomic retaliations is not encouraging, to say the least. It rarely works, and when it doesn’t, it can lead to debilitat- ing escalation. The European Union used it successfully two years ago to force the US to abandon steel safeguards found illegal by the WTO, but for a country like Canada, whose economy is so tightly intertwined with the US econ- omy while being a mere one-tenth the size, it inevitably means shooting our- selves in the foot. Retaliation is like comfort food: it feels good, but there is often no nutrition. Retaliation, there- fore, is not in my book of tricks to settle trade disputes with the US.
How about looking for new mar- kets, not only for our lumber, but for more strategic resources such as oil and gas, a possibility invoked by Martin in his October 6 speech in New York, which was quickly followed by John McCallum’s trade foray to China? I think I understand what Martin was trying to say by establishing a link between the US reneging on its princi- pal FTA commitment to Canada, chapter 19, and Canada’s principal FTA commitment to the US, chapter 6, the energy chapter. Martin was not threat- ening to reduce the flow of oil and gas to the US, something we have com- mitted not to do unless we reduce our own domestic consumption, but he was pointing out that other customers are lining up at the pump, for addi- tional supplies slated to come on stream in the future.
While that market diversification strategy may be worth pursuing for its own sake, we should remember that the basic impetus for seek- ing better and more secure access to the US market came from the failure of the 1972 Third Option diversification strategy of Messrs Trudeau and Sharp. The Macdonald Commission put a rather large stake through the heart of that particular idea back in 1985. Newly emerging markets may indeed have changed the world as we saw it then, and we should certainly be alert to new oppor- tunities, but for the foreseeable future, most of our trade eggs will stay firmly in the US basket. We should not be mesmerized by the allure of China and India. They are important, they are growing fast, they are hungry and eager ”” and they are far away, relatively poor and under- developed, and some years away from conspicuous consumption.
I have already noted that, while he understands that the rule of law is being tested, the PM has not committed full resources to Track I, which is the next step he must take. Martin fully recognizes that since August 10, the dispute is no longer just a softwood lumber dispute, but a dispute about NAFTA. The US refusal to comply with the ECC decision means that Canadian parties need to take their case before US courts, a course of action that chapter 19 itself was designed to replace. This is already happening. It will take at least a year, and probably two, before the relevant issues are finally adju- dicated, and we anticipate that the US gambit in the injury case is about to be repeated in the subsidies case, where, in case you have not been following the news on these developments closely every day, Canada just won again. We do not realistically expect the United States to do what the law requires ”” acknowl- edge that Canada again has proven that there is no subsidy, stop collecting our money and give back what is rightfully ours. Those outcomes we believe eventu- ally to be inevitable, but we are still in for a fight to get them.
The softwood lumber industry has borne the lion’s share of the litigation costs so far, but what we have spent on legal fees is a small fraction of the $5 billion we have had to disburse with US Customs in order to keep exporting to the US since May 2002. That sum of money is more than three times the net income for the twelve largest forest companies in Canada for the last three years, accord- ing to Price Waterhouse Coopers figures. The money legally belongs to the importers of record, that is, it belongs to Canadian exporters, until the cases are fully adjudicated or a settlement is reached. With the ECC decision of August 10, the most likely outcome is that it will be returned to Canadians, and with interest. However, another $2 billion may yet be collected before the courts finally order the US government to disgorge.
Tying up $7 billion is significant. While US competitors are salivating over getting hold of that money through the perversity of the so-called Byrd Amendment (which the Government of Canada and Canadian industry are now challenging jointly in the US Court of International Trade), Canadian companies are facing finan- cial hardship, and industry associations have asked the government to provide loan guarantees to those creditworthy companies who can afford them. Martin can provide no better expression of conviction and sincerity in sup- port of his New York speech, or to his conversation with Bush, than by allow- ing the EDC to treat the cash deposits as accounts receivable, and to provide loan guarantees to eligible companies. Not only would such a measure pro- vide much needed relief to exporters, it would also be a strong signal to the US government that Canada is prepared to put its money where its mouth is.
The industry itself needs to overhaul its approach to a long-term durable solu- tion to the softwood lumber dispute. Many of us have known for a long time that in order to avoid future episodes, a political strategy will have to be deployed in the US political arena. Tom Stephens, now with Boise Cascade, a co- founder of the Free Trade Lumber Council when he was CEO at MacMillan Bloedel, was fond of saying that unless we transform what has been a fight between US producers and Canadian producers of softwood lumber, into a fight between US producers and US con- sumers of softwood lumber, there would be no hope of a permanent solution.
On this matter, as on many other issues, it has been hard for the industry to act in concert. Yet, with very limited resources, we of the FTLC have been able to work with a number of US allies, who have mustered some 150 members of Congress to oppose any restriction on imports of Canadian lumber and urge the US administration to follow due process. We have demonstrated a viable political strategy: what’s needed now is more resources, and long-term vigi- lance. We do not vote in US elections and cannot contribute money to the US electoral process, but our US allies can, and do. The Canadian embassy has to work closely with these groups, which, under Ambassador Frank McKenna’s leadership, it has begun to do. The Canadian industry as a whole must have a permanent presence in Washington, for this is not a matter that will go away in a couple of years. In order to realize the promise of a real continental market, we need a true part- nership of government and industry, to anticipate and defeat any and all chal- lenges that may arise, no matter how the current dispute finally fades.
Let me sum up: unlike many who would protect Canadian sovereignty by urging disengagement from the United States, I am pleading for greater direct involvement in the American political process. Unlike those who say we must parlay, I am saying we must prevail, according to signed and sealed interna- tional agreements, according to law. President Kennedy was right that geog- raphy and history have made us neigh- bours and friends, but the United States will never cease to remind us of its own strength and our relative weakness. So, we must embrace the law, insist upon it, find ways to enforce it, and endure the slow and difficult process it often represents. Industry and government must partner in this enterprise, and government must move concretely now to give lasting meaning to the bold, courageous words we have heard in recent days from Martin. The US will respect us more, and we will enjoy both our sovereignty and our friend- ship more, when the United States knows that we have the dignity to live by the rule of law, and expect the same of our friend and neighbour.
This article is adapted from a speech given to the Economic Club of Toronto on October 19, 2005.
