Uncle Sam takes Canada to the

($6 billion) woodshed

On August 8, President George W. Bush went to Waco, Texas, where he picked up hammer and nails for Habitat for Humanity to help Gladys Evans‘ family build “their own modest, affordable home,” as a Habitat press release put it. Various dignitaries including federal housing secretary Mel Martinez joined the
president. Fortunately, Bush’s Commerce secretary, Don Evans (no relation to Gladys) wasn’t present. For that would have been a tad embarrassing, at least to aficionados of trade politics.

This is because while President Bush was helping the Evans family find housing, another arm of the Bush administration — Don Evans’ Commerce Department — back in Washington was working diligently to drive up the price of housing for millions of American families. The fact of the matter is that the Commerce Department has its own housing policy, which is not necessarily that of the White House or the federal Department of Housing and Urban Development. In a thought, the Commerce policy doesn’t take into consideration the interests of American home buyers.

On August 9 — conspicuously the next day after President Bush toiled in Waco —Commerce issued a preliminary determination to slap a 19.3 percent counter-vailing tariff on allegedly subsidized softwood lumber from Canada. Following up in late October, Evans’ minions announced their intention to hit Canadian lumber with an antidumping tariff of 12.9 percent.

You don’t have to have a doctorate in economics to perceive that a tax hike of more than 32 percent will drive up lumber prices. The National Association of Homebuilders protests that when the duties become final — expected next May — the tariffs could tack on some $1,500 to the cost of the average American home.

The bureaucrats in Commerce’s Import Administration have been zealous in their desire to protect the domestic timber industry from Canadian competition. But they have not been zealous about adhering to U.S. legal obligations as a signatory to the World Trade Organization. Canada has announced its intentions to challenge the U.S. subsidy calculation before a WTO dispute-resolution panel, which is expected to be established this month. Commerce’s antidumping methodology is also thought to be vulnerable to a WTO challenge. In addition, Canada’s giant Canfor Corp. announced last month that it intended to seek arbitration against the United States govern-ment under Chapter 11 of the North American Free Trade Agreement. Canfor seeks dam-ages of $250 million.

While it appears that Canada’s chances of winning this pro-tracted, expensive legal warfare are decent, the operative words are…“protracted” and “expen-sive.” The Bush administration’s game plan seems to be that the prospect of lengthy market disruption while the trade cases wend their way through the legal process will force the Canadians to cut a deal with special U.S. negotiator Marc Racicot, a former Montana governor who is close to George W. Bush. If that happens, the Commerce Department might not have to worry about the legali-ties.

Welcome to Lumber IV, the fourth round in one of Washington’s longest-running trade spats. The first round, called Lumber I, began in 1982, when the U.S. lumber industry filed the first in what would turn out to be a continuing series of petitions accusing Canada of selling subsidized lumber in the United States. To be sure, there is plenty of money to fight over, as Canada has been selling Americans more than $6 billion in lumber annually. While the American accusations of prohibited subsidizes north of the border have never quite stood up legally, for two decades this litigation has at least sent many a child of high-priced
Washington lawyers to the best private schools.

For that, D.C. advocates who represent Canadian interests can thank the U.S. Coalition for Fair Lumber Imports, and its top lawyer at Dewey Ballantine, John Ragosta. The most prominent member of the domestic coalition these days is International Paper Co., but members also include many Mom & Pop sawmills in the U.S. South. The coalition’s chairman is the aptly named W.J. “Rusty” Wood, who is president of the Tolleson Lumber Company of Perry, Georgia. Wood has expressed his members’ belief that Canada’s lumber subsidies are “destroying the U.S. lumber industry.” Former President Jimmy Carter — a man who owns woodland and knows how to watch out for his personal bottom line — helped the coalition’s cause with a column in the New York Times in March decrying Canada’s forest practices.

Wood’s coalition has long maintained that subsidies — particularly in British Columbia — are costing thousands of American jobs. The Canadians are now accusing the pending U.S. trade litigation of costing them thousands of jobs. But the broader truth about current weak timber market in North America is probably more complicated. On November 14, Weyerhaeuser announced from its headquarters in Federal Way, Washington, that it will close three sawmills in Arkansas, Canada, and also Mexico by year’s end. As the Seattle Times editorialized last month, “For Americans to block Canadian lumber makes little sense, because we need the lumber. U.S. producers supply only two-thirds of our needs.”

Whether lumber is sold from Toronto to Toledo, or from Alberta to Arkansas, there is really just one North American lumber market. But U.S. trade laws are crafted to represent political, not economic, realities. As if to illustrate that, one of the respondents in the current trade actions against Canada is Weyerhaeuser, an American multinational which has extensive lumber operations on both sides of the border.

Canada acquitted itself well regarding the subsidy accusations back in Lumber I in 1982- 83. That case marked the end of the days when Commerce had a reputation for impartial interpretation of U.S. trade laws, even if that meant determining that a domestic lobby’s gripes about foreigners lacked sufficient merit.

Since Lumber II came along in 1985, the general consensus in Washington’s international trade bar has been that the Reagan administration put the fix in on behalf of the U.S. lumber lobby. The Import Administration jiggered the numbers to make sure that Canada lost the case. Ever since, the Import Administration has been perceived as essentially a place where foreigners are regularly taken to the woodshed. (The ferocious Washington politics associated with Lumber II pressured Canada to cut a temporary deal to stave off prohibitively high tariffs; but when Commerce then pulled the same tricks in Lumber III in the early 1990s, Canada ultimately was vindicated before a Nafta dispute-resolution panel).

Lumber IV was filed in April just two days after a quota arrangement on Canadian lumber dating to 1995 lapsed. For anyone who grasps fundamental economics, it is somewhat of a mystery how Canada could have been dumping during a quota regime that was designed to prop up prices. And certainly, many trees have been cut down this year for the lawyers to argue such points. The petitioning U.S. lumber coalition’s initial filing by Dewey Ballantine’s John Ragosta ran to six volumes and umpteen exhibits. The Canadian government’s initial response ran to some 250,000 pages. Eight months later, there are millions of pieces of legal paper fluttering around Washington.

Despite the paper litter, it’s not all that difficult to see what’s going on — and to see why it appears that Commerce hasn’t been particularly careful about its legal methodologies. To come up with that 19-plus percent countervailing duty tariff, for example, Commerce looked to Canada’s system of charging “stumpage fees.” These are fees that Canadian provincial governments — which own most of the forests — charge to loggers. The Americans charge that stumpage fees (particularly in British Columbia) are artificially low and thus amount to WTO-illegal subsidies.

In agreeing, Commerce came up with the 19 percent subsidy rate by comparing the alleged subsidy benefits with prices in the United States as well as Canada. The Canadians protest vehemently that it is WTO illegal for the U.S. to use such “cross border” calculations.

“Commerce’s decision to compare stumpage rates in Canada with stumpage rates in the United States is contrary to their own decision in all three prior lumber cases,” says Spencer Griffith, a partner in Akin, Gump, Strauss, Hauer & Feld who represents British Columbia. “As a legal matter, the language in the WTO subsidies agreement specifically says that you need to measure the amount of any subsidy by reference to prevailing market conditions in the country in question, in this case, Canada.”

The U.S. coalition responds by saying that Commerce regulations “expressly state that import prices or world market prices must be used to measure a subsidy if a government has so distorted its own market that purely domestic transactions do not represent fair market value.” Of course, the coalition itself lobbied in 1995 for changes in the U.S. regulations that were supposed to faithfully implement the Uruguay Round’s subsidies agreement that went into effect that year. Now, the WTO will be asked to determine whether the U.S. regulations were consistent with what American negotiators agreed to in the Uruguay Round.

Canada also protests that the Commerce officials jiggered the numbers to come up with an artificially high antidumping margin. This particular game — and it sure seems like the kind of numbers game that Import Administration bureaucrats are fond of playing when they want to accuse foreigners of dumping — is called “zeroing.”

Zeroing is a simple game. To simplify it, let’s pretend that you compare all the sales of the same 2 x 4 pieces of lumber and 2x6’s sold in Canada and in the United States. Here’s how it would work:

First, you look at the first half of the exports. You look at the prices of the same pieces of 2 x 4’s that were sold in the United States and Canada. Let’s say you find a “dumping” margin of $10, the value on lumber that was sold at lower prices in the United States.

Then you look at the 2 x 6’s, the other half of the lumber market. Let’s say Commerce finds that the Canadians were selling at higher prices in the U.S. than in Canada, and thus were not “dumping.” Assume you have here a negative margin of $20.

Now all you have to do is balance the two halves. To do that, Commerce throws out the negative margin of $20, which is treated as “zero.” So the bureaucrats measure zero against 10, and come out with a 5 percent antidumping margin. If Commerce would have not zeroed in our example, the measure would have been negative 20 against 10, and would have come out with a minus 5 — or no “dumping.”

In a recent case involving bed linens brought by India against the European Union, the WTO determined that the EU was using a zeroing methodology that was WTO illegal. “The WTO decision in the Bed Linen case clearly calls into question the practice of zeroing in the context of comparisons based on identi-cal product types,” says Simon Lester, a former WTO legal official who is now president of WorldTradeLaw.net. Lester adds that he can’t say for sure what would happen in a softwood lumber challenge, as such legal cases tend to be fact specific.

Whatever the legalities, anyone who reads the Import Administration’s notice in the October 30 Federal Register, which was signed by the assistant secretary for Import Administration, Faryar Shirzad, can see a process that might be perfectly within the scope of U.S. trade laws — but is still obviously unfair. This helps explain why the U.S. antidumping regime is so deeply resented by our trading
partners.

For example, Commerce found that not all pieces of lumber sold in the United States were identical to lumber sold in Canada. So officials used “constructed value” instead of the real export price to determine if the U.S. sales were below the cost of production. Basically, “constructed value” is an artificial game that is played by looking at the books, and then making various adjustments, recalculations, and revisions of revenues. As part of this process, the bureaucrats “deducted an amount of profit allocated to the expenses deducted under sections 772(d)(1) and (2) of the [Tariff Act of 1930, as amended] Act.” In other words, if the Cana-dians were guilty of dumping their lumber at “unfair” low prices, if they didn’t make a high enough profit as defined by federal employees at the Import Administration. The relationship between U.S. antidumping laws and the real business world is tenuous, at best.

But even the Import Administration found, when calculating costs of production in Canada, that “a very large number of home market sales” in Canada were made below costs. Normal people would quickly say that here is evidence that the Canadians weren’t dumping at all. But the Import Administration bureaucrats simply “disregarded the below-cost sales and used the remaining sales as the basis for determining normal value” in accordance with U.S. law. Disregarding such evidence is done all the time.

There is a lot more. When several Canadian companies, including Weldwood of Canada Ltd., asked that Commerce look at their books, officials refused on grounds that they couldn’t handle the workload. Weldwood and the other companies were assigned a 12.9 percent country average antidumping margin anyway — illustrating once again that to the U.S. Department of Commerce, due process is defined as ignoring evidence. A further irony is that International Paper — the driving force behind the U.S. fair lumber coalition — has acquired Weldwood.

But for the rare exceptions where a federal court, a Nafta panel, or the WTO holds Commerce accountable and over-turns the mischief, Import Administration officials get away with these stunts, year after year.

On August 8, the president of the United States helped one family in Waco in its search for affordable housing. Since that day, the Bush administration has turned a blind eye to suggestions it do the same for the rest of us.