Canada’s softwood lumber trade agreement with the U.S. expires one week before the Oct. 19 federal election, yet almost no one seems to be talking this long-contentious issue. We ignore it at Western Canada’s peril.
Not having a softwood lumber agreement leaves Canada vulnerable to punishing tariffs at the whim of the protectionist U.S. industry.
In spite of this risk, there is little alarm as the end of the current SLA nears, because Canada will not immediately feel the effects of living without the pact. A clause in the agreement prevents the U.S. from legally slapping tariffs on Canadian lumber imports for a year, as it has done off and on for more than 120 years.
Competitive dynamics have also shifted. High lumber prices have exempted Canadian exporters from SLA duties, which means we have been operating as if we have free trade in softwood lumber for 24 of the last 32 months. This works well when U.S. housing starts are on the rise (as they are now) because the U.S. relies on imports of Canadian softwood lumber to help meet domestic demand.
U.S. producers should also feel less threatened because Canadian timber supply is decreasing. Mountain pine beetle damage has taken its toll, leaving Canada without the capacity to increase market share in the U.S. What may work well for Canada now, however, does not eliminate risk if the U.S. recovery slows or our dollar continues to fall against the U.S. dollar.
The U.S. lumber lobby remains hostile to Canada, and the U.S. administration has been focusing on other priorities, such as the as-yet unfinished Trans-Pacific Partnership Agreement. Canada must act now to diversify our customer base to mitigate future trade risks to the softwood industry.
Although exports to China have grown tremendously in the past decade, 66 per cent (2014 figures) of our softwood exports are to the U.S. We know from experience — not only in softwood lumber but in other commodities, as well — that being captive to one major customer leaves us vulnerable. In spite of such experience, export data show that Canadian softwood lumber exports to the U.S. are increasing while exports to China are losing ground to a new competitor, Russia.
Canada cannot afford to fall back into the comfortable pattern of heavy reliance on the U.S. market. Nor should we be discouraged about the slumping Chinese market. There are new market opportunities for Canadian softwood lumber to explore, as we explain in Branching Out, the Canada West Foundation’s analysis of preparing for life without the SLA.
Korea is one. Within two years, the Canada-Korea Free Trade Agreement will eliminate Korea’s five-per cent import tariff on Canadian lumber. Although small, Korea’s market is stable, and wood is becoming a more attractive building material as a result of the country’s net-zero emissions building policy.
Mexico is another. While the U.S. is its main source of imports, the Mexican market is highly accessible to Western Canada.
Demand for softwood in Vietnam, Thailand, Indonesia and the Philippines is on the rise, mainly because of expansion in the furniture and packaging sectors. Competitors such as Chile and New Zealand are targeting this region, but outside the Philippines — where Canada has the largest market share — knowledge about Canadian softwood lumber is limited.
Our experience in China shows how to build knowledge about our product and brand Canada as a preferred supplier. The more customers we have, the better equipped we are to find more, which is better than watching our industry pay heavy financial penalties when the U.S. launches trade action once again, as it almost certainly will.
Given the continuing importance of the U.S. market, it is in Canada’s interests to pursue a new SLA. We must, however, be realistic about the power of protectionist forces there. We must also be more adept at reacting to protectionism elsewhere. When Japan implemented a program promoting the use of domestic wood products in home construction, for example, the U.S. was able to gain exemptions for several of its softwood species, while Canadian products remain shut out.
Canada would be wise to hedge its bets by pursuing international markets. It is our best chance at ensuring our softwood lumber industry thrives under the riskier trade environment that is about to become the norm, again.