Softwood saga

It's not over yet

May 4, 2017

The latest development in the softwood lumber controversy is the most recent episode in an economic soap opera that started in the 1820s. It will not soon end.

John Geddes, writing in Maclean’s (April 25, 2017) opened a hard-hitting piece on the softwood lumber dispute like this:

‘A good indication of when a dispute has established itself as a tradition is when they start using Roman numerals, like they do for Super Bowls and Olympics, to distinguish among its past iterations. So it is with Canada-U.S. battles over softwood lumber, which trade lawyers and bureaucrats routinely allude to as Lumber I, II, III, IV and, starting today, V.’

The Canada – U.S. softwood lumber dispute is one of the most enduring trade disputes between both nations, going back to the Maine – New Brunswick lumber dispute in the 1820s. The most recent iteration of this conflict arose in 1982 and its effects are still seen today. British Columbia, the major Canadian exporter of softwood lumber to the United States, was most affected, reporting losses of 9,494 direct and indirect jobs between 2004 and 2009.

Some legal and technical background

According to Harry Nelson, an economist in the University of British Columbia’s forestry faculty, the softwood lumber dispute refuses to die for two main reasons.

First, most Canadian lumber is sawn from trees felled on Crown land, whereas most U.S. commercial logging is in privately controlled forests. Americans tend to assume Canadian governments are bound to set royalties for trees cut on public land so low as to amount to an unfair subsidy. ‘That provides fertile ground where [the U.S. lumber industry] can sow these seeds of doubt,’ Nelson contends.

Second, the dispute lumbers on, and on, because its history proves ‘protectionism works.’ Even though Ottawa has repeatedly prevailed over Washington in key softwood cases brought to the World Trade organization and NAFTA dispute-settlement panels, those victories haven’t stopped the U.S. wood business from harassing its Canadian competitors. What we are witnessing now is the latest instalment in an ongoing saga.

Enter President Donald Trump

The softwood lumber dispute – which fits neatly into Trump’s America First protectionist agenda, and is also a central plank in the larger controversy about the future of NAFTA – appears to have found some kind of interim resolution, in the form of a 20% tariff on Canadian softwood lumber exports to the U.S.

Investors have been anticipating something more punitive than 20%. The possibility of a tariff as high as 40% was kicked around last year, a factor that impacted Canadian forestry stocks. West Fraser shares declined 8% in 2016, and Canfor nosedived 24%.

It’s not over yet!

Now that investors know what duties lumber producers confront, they are putting their game face on – sending share prices and valuations upward. Political analyst Mark Steyn, writing on Fox News observed: ‘Taxes on Canadian imports are expected to increase the cost of lumber for home builders, thus weakening profits.’

In other words, U.S. tariffs may end up hitting the wrong target: U.S. consumers and businesses. The U.S. construction industry, in the middle of a major expansion, still needs access to Canadian lumber. Now, they will have to pay more for it. Do investors mind? So far, not in the least. But, rest assured, there is more to come.

Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721.