Barrie McKenna

B.C. lumber expediency rotting Canada's fair-play reputation

OTTAWA — The Globe and Mail

It is the trade story that, sadly, refuses to go away.

And this week another chapter opens in the softwood lumber saga - a fight that has endured, in one form or another, through nearly two centuries of Canadian history.

The United States is expected to take Canada to court - again - because it says British Columbia is gaming a tightly monitored cross-border quota system to the tune of at least a half-billion dollars. And it wants the Canadian industry to pay it all back.

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Barring an unlikely 11th-hour settlement, Washington will officially take its case to an international arbitration panel when a mandated 40-day consultation period expires at midnight Wednesday.

It's a winner-take-all format, and Canada could be headed for a humiliating loss.

Quite justifiably, most Canadians probably thought this dispute was on the shelf. A 2006 deal between Canada and the United States imposed managed trade in softwood lumber. Under the seven-year deal, B.C. producers pays an export tax to the province that varies with the price of lumber.

But the Americans say British Columbia has been driving its lumber trucks through a gaping loophole. They allege that the province and its producers are exploiting a flawed provincial grading system to dramatically lower the cost of timber. The net result is that many B.C. mills keep running during the worst industry slump since the Great Depression, driving down prices across North America.

Blame it on the mountain pine beetle infestation, which is wiping out softwoods across the province. To prevent those trees from rotting in place, B.C. allows companies to harvest diseased timber at the cut-rate price of 25 cents per cubic metre, versus $14 or more for higher-grade timber. The low-grade stuff is generally considered unsuitable for producing quality lumber.

The deep discount wouldn't matter much, except that suddenly nearly half the harvest in the B.C. Interior is being sold as low-grade lumber, up from less than 10 per cent in 2006, according to U.S. industry figures. Almost no one believes that half the harvest is infected, least of all the Obama administration.

A lot of perfectly good quality timber is being downgraded. In some cases, lumber companies have heated sample logs in kilns just to produce cracks and get the lower price, say lawyers for the U.S. lumber industry.

The net effect is that B.C. is producing far more lumber than it normally would. Because the province accounts for half of Canada's lumber output, the practice drives down the North American price for two-by-fours.

All the cheap lumber adds up to a giveaway to B.C. producers such as Canfor and West Fraser worth at least $500-million, according to the Washington, D.C.-based Coalition for Fair Lumber Imports. The group wants higher taxes tacked on to B.C. exports until the amount is recovered.

Canada, of course, says this is all a fantasy. It blames everything on the pine beetle, and insists that every last tree has been accurately graded, and fairly priced. End of story.

B.C. isn't too interested in talking about its grading system. B.C. Forests Minister Pat Bell has dismissed the U.S. allegations as "politics," without fully addressing the substance of the complaint. The province tinkered with its grading system last summer, an apparent acknowledgment that the Americans might have a point. But the surge of low-grade timber has continued.

Here's a plausible scenario of what may be happening: The B.C. lumber industry is in crisis, mills are closing everywhere and thousands of workers are losing their jobs. So the province turns a blind eye to rampant abuses of the grading system, knowing full well it may trigger a dispute with the Americans.

It looks suspiciously like political expediency. B.C.'s Liberal government, which depends heavily on seats in the Interior, makes the calculation that jobs today are worth more than a big bill some time in the future, when the lumber industry might be booming again anyway.

The financial consequences are serious. The Americans may not get everything they're seeking, but even a couple of hundred million dollars would be a painful blow to Canadian producers.

The larger cost for Canada would be the hit to its reputation.

We like to think we're always the good guys in these trade showdowns. Not this time.

The 2006 lumber deal is a ridiculous distortion of free trade. But Canada signed the agreement, and now it looks like we're not playing by the rules.