U.S. and Canadian Governments Have Established Mechanisms to Monitor Compliance with the 2006 Softwood Lumber Agreement but Face Operational Challenges
Gao ID: GAO-09-764R June 18, 2009The United States and Canada have been involved in a long-standing dispute regarding the softwood lumber trade. Canada is the primary exporter of softwood lumber to the United States. In 2008, Canada exported approximately $3.2 billion worth of softwood lumber products to the United States, about 17 times the amount supplied by the next biggest exporter to the United States. After several years of litigation related to U.S. allegations of unfair Canadian subsidies, the United States and Canada signed the 2006 Softwood Lumber Agreement ("agreement"). The agreement ended ongoing litigation and requires, among other things, Canadian federal and provincial governments to establish export charges and quotas for Canadian lumber exports and for the two countries to exchange information to support monitoring compliance with the agreement. In 2008, the United States passed the Softwood Lumber Act that requires, among other things, that the U.S. government reconcile and verify softwood lumber trade data. The act also requires GAO to report on (1) whether countries that export softwood lumber or softwood lumber products to the United States are complying with international agreements entered into by those countries and the United States; and (2) the effectiveness of the U.S. government in carrying out the reconciliations and verifications mandated by the Softwood Lumber Act. This letter contains information in response to the first mandate concerning compliance with international softwood lumber agreements. In accordance with our agreement with the Senate Committee on Finance and the House Ways and Means Committee, we will issue a separate report in December 2009 that will supply additional information and findings on U.S. efforts to monitor compliance and will also address U.S. efforts to reconcile and verify softwood value data. We focused on Canada because it is the only country with which the United States has an agreement specifically related to softwood lumber and is by far the largest exporter of softwood lumber to the United States. We are not conducting a legal review of compliance with the Softwood Lumber Agreement. Our objectives in this review are to describe (1) U.S. government agency efforts to monitor compliance with the agreement, including cooperating with the Canadian government, (2) operational challenges agencies face in monitoring compliance, and (3) current compliance concerns.
Since the Softwood Lumber Agreement was adopted in 2006, both the U.S. and Canadian governments have implemented policies and procedures for administering and monitoring the agreement. Five U.S. government agencies (Commerce, CBP, DOJ, State, and USTR) have major roles in administering the agreement and in monitoring Canada's compliance. These agencies participate in an informal working group that meets several times a month. Both Canadian federal and provincial governments have roles in administering the agreement for Canada. U.S. agency officials noted that their monitoring of the agreement is dependent on information they receive from Canadian federal agencies and provincial governments, and that the agreement has facilitated increased dialogue between the two countries. In addition, as called for in the agreement, Canada and the United States have established a joint committee to supervise implementation. They have also established several technical working groups. U.S. and Canadian governments face multiple operational challenges in monitoring compliance with the agreement. These challenges include reconciling value data of the softwood lumber trade; monitoring data related to the export charge that Canada collects; and monitoring whether changes to Canadian forest policies and programs are in compliance with the agreement. U.S. and Canadian officials have identified several factors that make 100 percent reconciliation of value data challenging. For example, Canadian export prices on the export permit can be reported in either U.S. or Canadian dollars, which can lead to confusion regarding which values need to be converted to U.S. dollars when reconciling with the U.S. values. U.S. agencies have several ongoing concerns regarding compliance with the agreement. The United States and Canada have utilized the agreement's formal dispute settlement provisions to refer three cases to international arbitration. The arbitration tribunal has found one case partly in the United States' favor; judgment in the other two cases is pending. In addition, U.S. agency officials told us they are continuing to monitor other issues. One issue involves the large amount of low-grade timber being harvested in the mountain pine beetle-infested British Columbia interior region. Another relates to recently reduced fees to harvest timber in the British Columbia coast region. Although both the grading system and formula used to determine harvest fees existed prior to the agreement and were grandfathered into the agreement, U.S. agencies have some continuing questions about how these systems are now being applied.
GAO-09-764R, U.S. and Canadian Governments Have Established Mechanisms to Monitor Compliance with the 2006 Softwood Lumber Agreement but Face Operational Challenges
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GAO-09-764R:
United States Government Accountability Office:
Washington, DC 20548:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
Subject: U.S. and Canadian Governments Have Established Mechanisms to
Monitor Compliance with the 2006 Softwood Lumber Agreement but Face
Operational Challenges:
The United States and Canada have been involved in a long-standing
dispute regarding the softwood lumber trade. Canada is the primary
exporter of softwood lumber to the United States. In 2008, Canada
exported approximately $3.2 billion worth of softwood lumber products
to the United States, about 17 times the amount supplied by the next
biggest exporter to the United States. After several years of
litigation related to U.S. allegations of unfair Canadian subsidies,
the United States and Canada signed the 2006 Softwood Lumber Agreement
(’agreement“).[Footnote 1] The agreement ended ongoing litigation and
requires, among other things, Canadian federal and provincial
governments to establish export charges and quotas[Footnote 2] for
Canadian lumber exports and for the two countries to exchange
information to support monitoring compliance with the agreement.
[Footnote 3]
In 2008, the United States passed the Softwood Lumber Act that
requires, among other things, that the U.S. government reconcile and
verify softwood lumber trade data.[Footnote 4] The act also requires
GAO to report on (1) whether countries that export softwood lumber or
softwood lumber products to the United States are complying with
international agreements entered into by those countries and the United
States; and (2) the effectiveness of the U.S. government in carrying
out the reconciliations and verifications mandated by the Softwood
Lumber Act.[Footnote 5]
This letter contains information in response to the first mandate
concerning compliance with international softwood lumber agreements. In
accordance with our agreement with the Senate Committee on Finance and
the House Ways and Means Committee, we will issue a separate report in
December 2009 that will supply additional information and findings on
U.S. efforts to monitor compliance and will also address U.S. efforts
to reconcile and verify softwood value data. We focused on Canada
because it is the only country with which the United States has an
agreement specifically related to softwood lumber and is by far the
largest exporter of softwood lumber to the United States. We are not
conducting a legal review of compliance with the Softwood Lumber
Agreement. Our objectives in this review are to describe (1) U.S.
government agency efforts to monitor compliance with the agreement,
including cooperating with the Canadian government, (2) operational
challenges agencies face in monitoring compliance, and (3) current
compliance concerns.
To address these objectives, we obtained and reviewed information from
the Departments of Commerce (Commerce), Justice (DOJ), and State
(State), the Office of the U.S. Trade Representative (USTR), and
Customs and Border Protection (CBP) within the Department of Homeland
Security to identify their efforts to monitor and enforce compliance
with the agreement. We also interviewed knowledgeable officials from
these agencies. In addition, we obtained and reviewed information from
the Canadian Department of Foreign Affairs and International Trade
(DFAIT), the Canada Revenue Agency (CRA), Natural Resources Canada
(NRCan), and the British Columbia Ministry of Forests and Range. We
also traveled to Ottawa and British Columbia to interview officials
from DFAIT, CRA, NRCan, and the British Columbia Ministry of Forests
and Range to better understand Canadian efforts to comply with the
agreement and coordination between the U.S. and Canadian governments
related to the agreement. We also interviewed officials from the
Ontario Ministry of Natural Resources. In addition, we interviewed
industry representatives in both the United States and Canada to obtain
their perspective on the U.S. monitoring efforts. We determined that
the data and information used are sufficiently reliable for the
purposes of this report.
We provided a draft of this correspondence to Commerce, CBP, DOJ,
State, and USTR. The agencies provided technical comments, which we
incorporated as appropriate. Commerce also commented formally that it
agrees with the conclusion that operational challenges exist in several
areas and that the report fairly captures the nature of the U.S. and
Canadian governments‘ positions on these issues.
We conducted this engagement from December 2008 to June 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Summary:
Since the Softwood Lumber Agreement was adopted in 2006, both the U.S.
and Canadian governments have implemented policies and procedures for
administering and monitoring the agreement. Five U.S. government
agencies (Commerce, CBP, DOJ, State, and USTR) have major roles in
administering the agreement and in monitoring Canada‘s compliance.
These agencies participate in an informal working group that meets
several times a month. Both Canadian federal and provincial governments
have roles in administering the agreement for Canada. U.S. agency
officials noted that their monitoring of the agreement is dependent on
information they receive from Canadian federal agencies and provincial
governments, and that the agreement has facilitated increased dialogue
between the two countries. In addition, as called for in the agreement,
Canada and the United States have established a joint committee to
supervise implementation. They have also established several technical
working groups.
U.S. and Canadian governments face multiple operational challenges in
monitoring compliance with the agreement. These challenges include
reconciling value data of the softwood lumber trade; monitoring data
related to the export charge that Canada collects; and monitoring
whether changes to Canadian forest policies and programs are in
compliance with the agreement. U.S. and Canadian officials have
identified several factors that make 100 percent reconciliation of
value data challenging. For example, Canadian export prices on the
export permit can be reported in either U.S. or Canadian dollars, which
can lead to confusion regarding which values need to be converted to
U.S. dollars when reconciling with the U.S. values.
U.S. agencies have several ongoing concerns regarding compliance with
the agreement. The United States and Canada have utilized the agreement‘
s formal dispute settlement provisions to refer three cases to
international arbitration. The arbitration tribunal has found one case
partly in the United States‘ favor; judgment in the other two cases is
pending. In addition, U.S. agency officials told us they are continuing
to monitor other issues. One issue involves the large amount of low-
grade timber being harvested in the mountain pine beetle-infested
British Columbia interior region. Another relates to recently reduced
fees to harvest timber in the British Columbia coast region. Although
both the grading system and formula used to determine harvest fees
existed prior to the agreement and were grandfathered into the
agreement, U.S. agencies have some continuing questions about how these
systems are now being applied.
Background:
Dispute over Softwood Lumber Is Long-Standing:
Since the 1980s, the United States and Canada have been engaged in a
trade dispute regarding softwood lumber.[Footnote 6] One of the main
causes of the dispute is differences in production costs for timber
harvested on public land in Canada versus timber from private land in
the United States. In Canada, federal and provincial governments own
approximately 90 percent of the timberlands and set harvest fees and
allocations. In contrast, in the United States, only about 40 percent
of the timberland is publicly owned, and the timber from that land is
sold through competitive auctions. The U.S. lumber industry has raised
concerns that the use of government-set fees in Canada raises the
possibility that private industry in Canada has access to timber at
less than market prices. According to a 2006 Congressional Research
Service report, comparisons between the two systems can be complicated
by factors such as differences in measurement systems, quality and type
of wood in U.S. and Canadian forests, environmental conditions and
policies, and responsibilities imposed on timber buyers (such as road
construction and reforestation).
The softwood lumber dispute has alternated between periods with a
softwood lumber trade agreement and periods of litigation without an
agreement. In 1982, Commerce investigated programs in several Canadian
provinces, and in 1983 concluded that these programs did not constitute
a subsidy sufficient to warrant the imposition of duties. In 1986,
Commerce investigated again and reversed its prior determination,
finding that Canada was providing a subsidy. On December 30, 1986, the
two countries signed a memorandum of understanding (MOU) under which
Canada agreed to impose a 15 percent export charge on certain Canadian
softwood lumber products exported to the United States. In 1991, Canada
announced it would withdraw from the MOU. The United States began
another series of investigations and determined that U.S. industry had
been materially injured. As a result, the United States imposed duties
on Canadian lumber imports. Canada appealed the findings to bi-national
panels established under the United States-Canada Free Trade Agreement.
The dispute continued until 1996, when the United States and Canada
signed another agreement effective from April 1996 through March 2001.
After that agreement expired, another 5-year period of antidumping and
countervailing duty proceedings followed, with the United States again
imposing duties on Canadian lumber imports. In 2006, the United States
and Canada ended that round of the dispute by signing the Softwood
Lumber Agreement, a 7-year agreement with an option for a 2-year
renewal.
2006 Softwood Lumber Agreement Established Framework for Managing U.S.-
Canadian Softwood Lumber Trade:
* Export measures:[Footnote 7] The agreement allows Canadian regions
[Footnote 8] to choose between two export control systems, with export
measures that vary according to the prevailing monthly price of lumber
(see table 1).[Footnote 9] All of the regions were allocated a
percentage of U.S. softwood lumber consumption based on the regions'
historic exports to the United States.[Footnote 10] That share of a
region's U.S. consumption is used by the Canadian government to
calculate quotas.
- Option A consists of an export charge but no quota.[Footnote 11]
Additionally, a region is subject to a surge penalty if the total
volume of exports for that region exceeds its trigger volume, which is
calculated, in part, by its share of U.S. consumption in a month.
[Footnote 12]
- Option B consists of an export charge and a quota.[Footnote 13]
Table 1: Export Control Options under the 2006 Softwood Lumber
Agreement:
Prevailing monthly price per thousand board feet (US$): Over $355;
Option A - export charge rate (% of export price): No export charge;
Option B - export charge plus quota: Export charge rate (% of export
price): No export charge;
Option B - export charge plus quota: Quota (based on region's share of
U.S. consumption): No quota.
Prevailing monthly price per thousand board feet (US$): $336-355;
Option A - export charge rate (% of export price): 5%;
Option B - export charge plus quota: Export charge rate (% of export
price): 2.5%;
Option B - export charge plus quota: Quota (based on region's share of
U.S. consumption): Region's share of 34% of expected U.S. consumption
for the month.
Prevailing monthly price per thousand board feet (US$): $316-335;
Option A - export charge rate (% of export price): 10%;
Option B - export charge plus quota: Export charge rate (% of export
price): 3%;
Option B - export charge plus quota: Quota (based on region's share of
U.S. consumption): Region's share of 32% of expected U.S. consumption
for the month.
Prevailing monthly price per thousand board feet (US$): $315 or under;
Option A - export charge rate (% of export price): 15%;
Option B - export charge plus quota: Export charge rate (% of export
price): 5%;
Option B - export charge plus quota: Quota (based on region's share of
U.S. consumption): Region's share of 30% of expected U.S. consumption
for the month.
Source: GAO based on 2006 Softwood Lumber Agreement.
[End of table]
* Information exchange: The United States and Canada are required to
exchange information to:
- identify changes in Canadian federal and provincial forest management
and timber pricing policies.[Footnote 14] Canada is required to notify
the United States of changes made to certain timber pricing or forest
management systems and, among other information, provide evidence of
how these changes improve statistical accuracy and reliability of a
timber pricing or forest management system or maintain and improve the
extent to which stumpage charges[Footnote 15] reflect market
conditions.[Footnote 16] The agreement requires each party to respond
to requests from the other for information relevant to the operation of
the agreement.[Footnote 17]
- reconcile value and volume data on a region-specific basis.[Footnote
18] If the two countries are unable to reconcile region-specific
aggregated data, the agreement requires the two countries to compare
more specific data, including comparing information on the Canadian
export permit with that on the U.S. entry summary form.[Footnote 19]
The agreement calls for ’complete reconciliation“ within 9 months of
each quarter where the parties cannot reconcile region-specific data.
[Footnote 20]
* Anti-circumvention: The agreement prohibits parties from undertaking
actions to circumvent or offset commitments under the agreement
including any actions that have the effect of reducing or offsetting
the export measures.[Footnote 21] Any governmental grant or benefit
provided to any producer or exporter of Canadian softwood lumber is
deemed to circumvent the export measures, subject to certain enumerated
exceptions. Some of these exceptions include provincial timber pricing
or forest management systems as they existed on July 1, 2006, and other
government programs that provide benefits on a non-discretionary basis
in the form and total aggregate amount in which they existed and were
administered on July 1, 2006.
* Dispute settlement: The agreement has mechanisms to resolve disputes
over compliance, which includes arbitration under the auspices of the
LCIA (formerly the London Court of International Arbitration).
In addition, the agreement ended existing U.S. trade remedy
investigations. It also established the Softwood Lumber Committee, with
joint Canadian-U.S. representation, and several technical working
groups to oversee implementation of the agreement.
Demand and Prices for Softwood Lumber Have Declined:
Canada has historically been the largest exporter of softwood lumber to
the United States, but its share of the U.S. market has declined in
recent years. Market share can be affected by a number of factors. In
addition to trade measures such as the Softwood Lumber Agreement, these
factors could include, for example, changes in transportation costs and
exchange rates. According to U.S. softwood lumber consumption and
market share data from Commerce, in 2008, while all other countries
combined accounted for about 3 percent of the U.S. softwood lumber
consumption, Canada supplied about 29 percent. This percentage is down
from about 34 percent when the agreement was signed in 2006 (see figure
1).
Figure 1: Levels and Composition of U.S. Consumption of Softwood
Lumber, 2005 through 2008A (thousand board feet (MBF)):
[Refer to PDF for image: stacked vertical bar graph]
Year: 2005;
U.S. Domestic Supply: 39,913 (61.8%);
Imports from Canada: 21,507 (33.3%);
Imports from Other countries: 3,167 (4.9%).
Total: 64,587.
Year: 2006;
U.S. Domestic Supply: 37,115 (61.91%);
Imports from Canada: 20,187 (33.63%);
Imports from Other countries: 2,649 (4.42%).
Total:
Year: 2007;
U.S. Domestic Supply: 32,008 (63.03%);
Imports from Canada: 17,081 (33.63%);
Imports from Other countries: 1,697 (3.34%).
Total:
Year: 2008;
U.S. Domestic Supply: 27,226 (68.28%);
Imports from Canada: 11,593 (29.07%);
Imports from Other countries: 1,055 (2.65%).
Total:
Source: GAO based on Commerce data. December 2008 numbers are estimated
using the median year-to-date percentage change for January through
November.
[A] Percentages shown reflect share of the U.S. market in the given
year.
[End of figure]
The recent decline in U.S. housing construction has contributed to the
reduced demand for softwood lumber.[Footnote 19] (See figure 2.)
Figure 2: U.S. Housing Starts and U.S. Softwood Lumber Imports from
Canada (1999 through 2008):
[Refer to PDF for image: combined vertical bar and line graph]
Year: 1999;
Housing Units start (in thousands): 1,641;
Imports from Canada: $6.8 billion.
Year: 2000;
Housing Units start (in thousands): 1,569;
Imports from Canada: $5.9 billion.
Year: 2001;
Housing Units start (in thousands): 1,603;
Imports from Canada: $5.7 billion.
Year: 2002;
Housing Units start (in thousands): 1,705;
Imports from Canada: $5.2 billion.
Year: 2003;
Housing Units start (in thousands): 1,848;
Imports from Canada: $4.6 billion.
Year: 2004;
Housing Units start (in thousands): 1,956;
Imports from Canada: $6.7 billion.
Year: 2005;
Housing Units start (in thousands): 2,068;
Imports from Canada: $6.6 billion.
Year: 2006;
Housing Units start (in thousands): 1,801;
Imports from Canada: $6.0 billion.
Year: 2007;
Housing Units start (in thousands): 1,355;
Imports from Canada: $4.9 billion.
Year: 2008;
Housing Units start (in thousands): 906;
Imports from Canada: $3.2 billion.
Source: GAO based on USDA, FAS, and U.S. Census data.
[End of figure]
In addition, because of low softwood lumber prices, the Canadian
softwood lumber industry has been paying the highest export charge
rates mandated by the agreement since the enactment of the agreement.
(See figure 3.)
Figure 3: Lumber Price and Export Charge Rates, January 2005 through
January 2009:
[Refer to PDF for image: line graph]
U.S. prices per thousand board feet:
Month: January 2005;
Prevailing monthly prices of softwood lumber products: $382.
Month: February 2005;
Prevailing monthly prices of softwood lumber products: $420.
Month: March 2005;
Prevailing monthly prices of softwood lumber products: $422.
Month: April 2005;
Prevailing monthly prices of softwood lumber products: $404.
Month: May 2005;
Prevailing monthly prices of softwood lumber products: $386.
Month: June 2005;
Prevailing monthly prices of softwood lumber products: $401.
Month: July 2005;
Prevailing monthly prices of softwood lumber products: $380.
Month: August 2005;
Prevailing monthly prices of softwood lumber products: $360.
Month: September 2005;
Prevailing monthly prices of softwood lumber products: $396.
Month: October 2005;
Prevailing monthly prices of softwood lumber products: $366.
Month: November 2005;
Prevailing monthly prices of softwood lumber products: $359.
Month: December 2005;
Prevailing monthly prices of softwood lumber products: $365.
Month: January 2006;
Prevailing monthly prices of softwood lumber products: $382.
Month: February 2006;
Prevailing monthly prices of softwood lumber products: $379.
Month: March 2006;
Prevailing monthly prices of softwood lumber products: $369.
Month: April 2006;
Prevailing monthly prices of softwood lumber products: $367.
Month: May 2006;
Prevailing monthly prices of softwood lumber products: $354.
Month: June 2006;
Prevailing monthly prices of softwood lumber products: $326.
Month: July 2006;
Prevailing monthly prices of softwood lumber products: $313.
Month: August 2006;
Prevailing monthly prices of softwood lumber products: $296.
Month: September 2006;
Prevailing monthly prices of softwood lumber products: $292.
Month: October 2006 (Softwood Lumber Agreement);
Prevailing monthly prices of softwood lumber products: $278.
Month: November 2006;
Prevailing monthly prices of softwood lumber products: $275.
Month: December 2006;
Prevailing monthly prices of softwood lumber products: $288.
Month: January 2007;
Prevailing monthly prices of softwood lumber products: $295.
Month: February 2007;
Prevailing monthly prices of softwood lumber products: $287.
Month: March 2007;
Prevailing monthly prices of softwood lumber products: $282.
Month: April 2007;
Prevailing monthly prices of softwood lumber products: $287.
Month: May 2007;
Prevailing monthly prices of softwood lumber products: $287.
Month: June 2007;
Prevailing monthly prices of softwood lumber products: $306.
Month: July 2007;
Prevailing monthly prices of softwood lumber products: $302.
Month: August 2007;
Prevailing monthly prices of softwood lumber products: $289.
Month: September 2007;
Prevailing monthly prices of softwood lumber products: $276.
Month: October 2007;
Prevailing monthly prices of softwood lumber products: $263.
Month: November 2007;
Prevailing monthly prices of softwood lumber products: $262.
Month: December 2007;
Prevailing monthly prices of softwood lumber products: $267.
Month: January 2008;
Prevailing monthly prices of softwood lumber products: $249.
Month: February 2008;
Prevailing monthly prices of softwood lumber products: $244.
Month: March 2008;
Prevailing monthly prices of softwood lumber products: $239.
Month: April 2008;
Prevailing monthly prices of softwood lumber products: $251.
Month: May 2008;
Prevailing monthly prices of softwood lumber products: $279.
Month: June 2008;
Prevailing monthly prices of softwood lumber products: $268.
Month: July 2008;
Prevailing monthly prices of softwood lumber products: $267.
Month: August 2008;
Prevailing monthly prices of softwood lumber products: $282.
Month: September 2008;
Prevailing monthly prices of softwood lumber products: $272.
Month: October 2008;
Prevailing monthly prices of softwood lumber products: $234.
Month: November 2008;
Prevailing monthly prices of softwood lumber products: $224.
Month: December 2008;
Prevailing monthly prices of softwood lumber products: $213.
Month: January 2009;
Prevailing monthly prices of softwood lumber products: $198.
Month: February 2009;
Prevailing monthly prices of softwood lumber products: $199.
Month: March 2009;
Prevailing monthly prices of softwood lumber products: $195.
In addition to the data above, the graph also depicts the following
export charge rates:
Option A provinces:
0% export charge rate;
5% export charge rate;
10% export charge rate;
15% export charge rate.
Option B provinces:
0% export charge rate and no quota;
2.5% export charge rate and quota[A];
3% export charge rate and quota[B];
5% export charge rate and quota[C].
Source: GAO based on Department of Commerce and 2006 Softwood Lumber
Agreement data.
[A] Region's share of 34% of expected U.S. consumption for the month.
[B] Region's share of 32% of expected U.S. consumption for the month.
[C] Region's share of 30% of expected U.S. consumption for the month.
U.S. and Canadian Government Agencies Have Developed Policies and
Procedures to Administer the Agreement and Monitor Compliance:
[End of figure]
U.S. and Canadian Government Agencies Have Developed Policies and
Procedures to Administer the Agreement and Monitor Compliance:
Since the agreement was adopted, both the U.S. and Canadian governments
have implemented policies and procedures and passed legislation to aid
in administering and monitoring the agreement. The agreement sets out
some roles and responsibilities for the U.S. and Canadian governments
and requires the establishment of bi-national workgroups to, among
other duties, supervise the implementation of the agreement. In some
cases the agreement prescribes functions for a government or specific
government agency, while in other cases governments have tasked
specific agencies to perform needed functions. The agreement requires
substantial information to be collected and exchanged between the
countries. Some U.S. agencies noted that their monitoring of the
agreement is heavily dependent on information they receive from
Canadian federal and provincial governments. Enclosure I illustrates
some of the key U.S. and Canadian government responsibilities at
selected steps in the Canadian lumber exporting process.
Roles of U.S. Agencies:
Table 2: U.S. Department and Agency Roles in Administering the 2006
Softwood Lumber Agreement:
Department/agency: All agencies;
Role in administering the agreement:
* Review notifications provided by the Canadian government on changes
to forest policy/practices to identify and address whether these
changes potentially circumvent the agreement.
Department/agency: USTR;
Role in administering the agreement:
* Acts as lead U.S. agency on international trade issues;
* Acts as U.S. co-chair on the Softwood Lumber Committee and technical
working groups under the agreement.
Department/agency: Commerce;
Role in administering the agreement:
* Monitors the value and volume of softwood imports to obtain a level
of assurance that Canada is collecting appropriate export charges;
* Monitors the U.S. softwood lumber market to determine the share of
Canadian and other third country imports.
Department/agency: CBP;
Role in administering the agreement:
* Reconciles volume and value of softwood lumber entering the U.S. by
comparing CBP 7501 entry summary data to Canadian export permit data.
Department/agency: State;
Role in administering the agreement:
* Manages diplomatic concerns related to Canadian softwood lumber
issues;
* U.S. embassy and consulates in Canada provide U.S. agencies with
information on news and events in Canada.
Department/agency: DOJ;
Role in administering the agreement:
* At the request of USTR, represents the United States in arbitrations
brought before the LCIA- the commercial tribunal designated in the
agreement for dispute settlement;
* Represents the U.S. government in any domestic litigation related to
the agreement.
Source: GAO analysis of U.S. agency information.
[End of table]
To aid in implementing the agreement and ensure compliance, these five
agencies participate in an informal working group that meets several
times a month. Agency officials noted that the informal working group
analyzes technical issues regarding scope of the agreement, Canadian
policies and programs related to its lumber industry, and issues
related to lumber remanufacturers.[Footnote 24]
Canadian Government Roles:
Canadian federal and provincial governments have roles in administering
the Softwood Lumber Agreement for Canada. The Canadian Department of
Foreign Affairs and International Trade (DFAIT), Canada Revenue Agency
(CRA), Natural Resources Canada (NRCan) and the provincial governments
in British Columbia and Ontario provided examples of roles they perform
in administering the agreement, as shown in table 3.
Table 3: Canadian Government Roles in Administering the 2006 Softwood
Lumber Agreement:
Department/agency: Department of Foreign Affairs and International
Trade (DFAIT);
Role in administering the agreement:
* Issues softwood lumber export permits;
* Sends notifications to the United States of any new or amended
measure[Footnote 25] governing timber pricing or forest management
systems related to softwood lumber products[Footnote 26];
* Reconciles volume and value of softwood lumber entering the U.S. by
comparing CBP 7501 entry summary data to Canadian export permit data;
* Provides information to the United States on export permits,
aggregate value, aggregate volume and other information required by the
agreement.
Department/agency: Canada Revenue Agency (CRA);
Role in administering the agreement:
* Collects and audits export charges for Canadian softwood lumber
exports;
* Provides information on aggregate export charges collected;
* Certifies independent softwood lumber remanufacturers[Footnote 27].
Department/agency: Natural Resources Canada (NRCan);
Role in administering the agreement:
* Calculates expected U.S. consumption which is used for determining
the quota volume for option B provinces and the trigger for option A
surge levels.
Department/agency: Canadian provincial governments;
Role in administering the agreement:
* Choose between option A and option B for the export charges and
quotas applied to softwood lumber products in their province;
* Set and collect stumpage fees;
* Notify the United States, via DFAIT, of any new or amended measure
governing timber pricing or forest management systems related to
softwood lumber products.
Source: GAO analysis of Canadian government information.
[End of table]
Joint Committee and Informal Communication:
As called for in the agreement, Canada and the United States have
established the Softwood Lumber Committee to supervise implementation.
The committee is composed of Canadian and U.S. government officials
with a USTR official and a Canadian DFAIT official serving as co-
chairs. The committee facilitates the exchange of information between
governments and provides a forum to discuss implementation issues.
[Footnote 28] The committee has been meeting twice annually.[Footnote
29] The agreement also provides for the establishment of technical
working groups, in matters relating to the implementation and operation
of the agreement.[Footnote 30] For example, a technical working group
provided the Softwood Lumber Committee with recommendations on the
methodology to be used in establishing the prevailing softwood lumber
price and determining expected U.S. consumption. The Softwood Lumber
Committee reviews the recommendations of the technical working groups
and makes decisions regarding implementation of these recommendations.
Under the agreement, the countries have established several technical
working groups.[Footnote 31] USTR described the responsibilities of
three of these groups as follows:
* Data and reconciliation: Reconciles softwood lumber volume and value
data collected by the United States and Canada.
* Scope and methodologies: Addresses questions with certain
methodologies used in carrying out the agreement, such as expected U.S.
consumption, as well as questions related to product coverage and
certification of independent lumber remanufacturers.
* Permits and customs: Addresses issues related to export permits,
volume restraints, and data exchange between the United States and
Canada.
U.S. and Canadian agencies have noted that the agreement has
facilitated improved communication between the governments on softwood
lumber issues, helping both parties administer and monitor the
agreement. State officials in Washington, D.C., noted that one of the
benefits of the agreement is that it facilitates more interaction
between the two governments regarding softwood lumber than they had
previously without the agreement. Commerce officials noted that the
agreement provided an opportunity for them to monitor changes to
provincial forest programs. DFAIT officials stated that information
exchanged between the two countries goes beyond what is required in the
agreement. For example, DFAIT officials noted that it had executed a
side letter with CBP for information exchanges and that it is unusual
to provide this level of information to another country.
U.S. and Canadian Governments Face Operational Challenges in Monitoring
Compliance with Softwood Lumber Agreement:
U.S. and Canadian government officials have identified multiple
operational challenges in monitoring compliance with the Softwood
Lumber Agreement. These challenges include (1) reconciling value data;
(2) monitoring export charge data; and (3) monitoring anti-
circumvention. In addition, the Canadian government faces challenges in
administering the export charge and quota system.
Challenges Shared by the U.S. and Canadian Governments:
Challenges in reconciling value data:
CBP and DFAIT officials stated they face challenges in reconciling
entered value and export price data but have had success in reconciling
volume data. Under the agreement, the United States and Canada are
required to reconcile region-specific volume and value data on a
quarterly basis.[Footnote 32] As of June 2009, the two countries have
reconciled 6 quarters of volume data but have not been able to fully
reconcile the value data for any quarter since the agreement went into
effect. Officials told us that the differences between the U.S. and
Canadian values have become smaller over time at the country level,
with the differences between the two values now about 2 percent.
However, the differences in value for some regions remain significant
with no clear trends. The direction of the differences, whether U.S.
values are greater or less than Canadian values, varies over time and
by region.
U.S. and Canadian officials have identified several factors that make
100 percent reconciliation of entered value and export price data
challenging (see figure 4). The Canadian value data on the Canadian
export permits uses an approximate value determined at the time of
shipment based on the export price definition in the agreement[Footnote
33] while the U.S. entered value on the U.S. entry summary forms is
defined by statute[Footnote 34] and is expected to be higher. Both
governments have conducted outreach efforts to improve the accuracy and
consistency of the information when completing forms. Factors that may
cause the U.S. values to be different from the Canadian values include:
* Inconsistent units of measurement: Canadian export prices on the
export permit can be reported in either U.S. or Canadian dollars, which
can lead to confusion regarding which values need to be converted to
U.S. dollars when reconciling with the U.S. values. The Canadian export
permit allows exporters to report in either U.S. or Canadian dollars,
while the U.S. entry summary form requires the importer to report the
value in U.S. dollars.
* Estimated vs. actual values: The values on the Canadian export
permits are estimated values and are subject to change. For example,
the importer could offer the exporters incentives for early delivery,
causing the actual value on the U.S. entry summary form to be higher
than the estimated value on the Canadian export permit.
* Export charges: There is a lack of consistency in the inclusion of
export charges in the export and entry documents. According to CBP
officials, the estimated value declared on Canadian export permits
should not include export charges, while the value on the U.S. entry
summary forms should include the charge.
* Remanufactured goods: The U.S. value reported on the U.S. entry
summary form should, as defined by statute, be the transaction value of
the good while the Canadian value on the export permit should not
include the value-added by the remanufacturer, as provided for in the
agreement.
* $500 cap: Under the agreement, the export price is capped at $500 per
thousand board feet for the purpose of assessing export charges.
[Footnote 35] This price cap is reflected in the value declared on the
Canadian export permit, but not on the U.S. entry summary form. Thus,
if the actual price is over $500 per thousand board feet, the value on
the U.S. entry summary form would be different from the value declared
on the Canadian export permit.
* Dates: The Canadian export permit is issued on the date of shipment,
which is defined in the agreement as the date on which the product is
last loaded for export and, in the case of products exported by rail,
the date when the railcar that contains the products is assembled to
form part of the train for export. However, the date on the U.S. form
is based on the date of entry into the United States, which is
generally later than the date of shipment.
Figure 4: Factors Complicating Reconciliation of U.S. and Canadian
Value Data:
[Refer to PDF for image: illustration]
This figure is an illustration of the U.S. entry summary form and the
Canadian export permit, indicating that the value on the U.S. form does
not agree with the value on the Canadian permit.
Factors contributing to price differences between U.S. and Canadian
forms:
U.S. entry summary form: U.S. dollars;
Canadian export permit: U.S. or Canadian dollars.
U.S. entry summary form: Actual price;
Canadian export permit: Estimated price.
U.S. entry summary form: Includes export charges;
Canadian export permit: Does not include export charges.
U.S. entry summary form: Includes full remanufacturing value;
Canadian export permit: Does not include full remanufacturing value.
U.S. entry summary form: Declared price could be over $500 per thousand
board feet;
Canadian export permit: Declared price capped at $500 per thousand
board feet.
Volume reconciliation: CBP and DFAIT reconciled volume for 6 quarters
under the Agreement.
Value reconciliation: CBP and DFAIT have not been able to reconcile
value under the Agreement.
Source: GAO analysis of Department of Homeland Security and Canadian
government data.
[End of figure]
Challenges in monitoring export charge data:
Canada is responsible for collecting the export charge and conducts
audits of the export charge returns filed by exporters of Canadian
softwood lumber. Every month, Canada provides Commerce and USTR with
the assessed charges data on a regional aggregate basis. Commerce faces
challenges in its efforts to monitor whether Canada is collecting the
appropriate amount of export charge because the U.S. government does
not have access to individual export charge returns filed with the CRA.
Commerce indirectly monitors the collection of the export charge by
estimating and comparing the average unit value from three sources:
DFAIT, CRA, and Random Lengths, a private company.
Various factors can cause the average unit value based on these
different sources to differ. For example, the average unit value based
on CRA‘s data is constantly updated because of the lag between the date
of export and the date exporters pay the export charge, since exporters
have until the end of the following month to pay. In addition, the
information provided by DFAIT is based on estimated values, while CRA‘s
reports are based on actual values. Commerce officials acknowledge the
challenges but state that it provides a way to identify potential
problems. For example, in February 2007, Commerce discovered a large
discrepancy between the average unit value based on CRA and DFAIT
numbers. Upon further investigation, the officials found that the
difference was largely caused by companies in British Columbia
mistakenly including the 15 percent export charge in the price they
listed on the DFAIT export permit.
Challenges in monitoring anti-circumvention:
U.S. agencies depend on information from Canada to monitor changes to
Canadian forest policies and programs and often need to request
additional information to determine whether these changes are in
compliance with the agreement.
U.S. agencies monitor a variety of sources, including notifications
from Canada that are required under the agreement, news reports, and
provincial and federal government websites for announcements of changes
to forest policies and programs. Since the agreement entered into
force, Canada has sent over 200 notifications to the United States
regarding the operation of forest management and timber pricing
policies and programs. Some of the measures in the notifications can be
technical and complex. According to U.S. officials, they have spent
substantial resources to determine whether these programs represent a
new or substantial change to existing programs that might be excepted
from the anticircumvention provision of the agreement.[Footnote 36] In
addition, U.S. officials told us that because politicians sometimes
make statements about assistance to their communities to reassure their
constituents in difficult economic circumstances, determining whether
these announcements reflect circumvention of the agreement is a
challenge. USTR and Commerce officials said that the Canadian
government supplies information required by the agreement.[Footnote 37]
However, they also stated that it has been difficult to obtain
additional information that they have requested from Canada on certain
issues to monitor compliance with the agreement.
Challenges Faced by the Canadian Government in Administration of the
Agreement:
In addition to the challenges in monitoring compliance, Canadian
government officials also report facing some challenges in
administering the quota and export charge systems.
Challenges in calculating quota:
The Canadian government calculates the monthly quota volume for each
option B region. Under the agreement, the quota is based in part on the
calculation of monthly expected U.S. consumption from data published by
Statistics Canada, the U.S. Census Bureau, and the Lumber Track
publication by the Western Wood Products Association (WWPA), a private
industry group.[Footnote 38] Canadian government officials told us
their analysis indicates that the WWPA‘s consumption data are biased
and, thus, have a downward impact on provinces‘ allowable quota volume
and surge trigger levels. The agreement requires the United States to
certify to Canada each month that, to the best of its knowledge and
ability, the WWPA data are an unbiased estimate of actual shipments
used to determine U.S. consumption.[Footnote 39] According to U.S.
officials, the United States certified 8 months of WWPA data, but
stopped providing certifications because Canada asserted they did not
meet requirements; however, U.S. officials stated that the agreement
does not specify what certification requires. The United States and
Canada are currently working through the process provided by the
agreement to resolve concerns over WWPA data.[Footnote 40]
Challenges in managing surge risks:
Canadian government officials stated they also face challenges in
managing the risks of surge penalties if exports from an option A
region exceed its region‘s share of U.S. consumption in a month by more
than 1 percent. If exports exceed this amount, additional retroactive
export charges will be applied. According to Canadian officials,
exporters face uncertainties and risks because they do not know if they
have to pay additional charges in the future. Canadian government
officials stated that they closely monitor exports when they approach
the surge level; however, the Canadian government has not always been
successful in preventing surge penalties. In March 2007 and October and
November 2008, Alberta exceeded its share of U.S. consumption and was
forced to pay the retroactive charge. The March 2007 surge was
discovered by CBP and DFAIT through the reconciliation process several
months after the fact.
The U.S. Government Has Ongoing Concerns Regarding Compliance with the
Agreement:
The United States and Canada Have Utilized the Agreement's Formal
Dispute Settlement Provisions:
Tribunals composed under the auspices of the LCIA (formerly the London
Court of International Arbitration), a commercial court specified in
the agreement, have found one softwood lumber case partly in the United
States‘ favor, and judgment in two other cases is pending.
* LCIA Case No. 7941: The first arbitration regarding Canada's
calculation of volume measures began in August 2007. The Canadian
government contended that adjusting U.S. consumption only applied to
provinces under the quota provision and that the adjustment mechanism
only applied beginning in July 2007. The United States contended that
the adjustment mechanism applied to calculating expected U.S.
consumption for all provinces and should have been used beginning the
first quarter of 2007. The arbitration tribunal found that, although
the adjustment of expected U.S. consumption did not apply to the
provinces without a quota, Canada should have begun applying the
adjustment mechanism to the provinces with quotas in January 2007.
The arbitration tribunal determined that 30 days from the remedy award
was a reasonable time for Canada to cure its breach of the agreement.
Pursuant to the agreement, the arbitration tribunal determined that if
Canada failed to cure the breach within the 30 days, as compensation
for the breach, Canada shall be required to collect an additional 10
percent export charge on softwood lumber products exported to the
United States from the option B regions until they had collected
CDN$68.26 million (US$54.8 million).[Footnote 41]
* LCIA Case No. 91312: On April 2, 2009, the Canadian government
requested arbitration to determine whether its proposed payment of
US$34 million plus interest to the United States has cured the breach
found in LCIA Case No. 7941. The U.S. government does not consider
Canada's offer to make a payment as having cured the breach. In
addition, because the United States considers that Canada failed to
either cure its breach or impose the compensatory measures determined
by the arbitration tribunal, on April 15, 2009, pursuant to the
agreement, the United States imposed a 10 percent customs duty on
imports of softwood lumber products from Ontario, Quebec, Manitoba, and
Saskatchewan.[Footnote 42] The arbitration tribunal held hearings on
this issue starting on June 11, 2009.
* LCIA Case No. 81010: In January 2008, the United States requested
arbitration to determine if six provincial programs or other measures
in Ontario and Quebec circumvent the agreement. The U.S. government
contends that these measures include a number of grants, loans, loan
guarantees, tax credits, and programs to promote wood production that
circumvent the commitments made by Canada in the agreement. Canada
maintains that these measures are in full compliance with the
agreement. A decision on this case is expected in late 2009.
U.S. Agencies Are Monitoring Additional Issues of Concern:
U.S. agencies continue to monitor other issues, including two issues
related to the pricing of logs in British Columbia. The first issue
involves the large amount of lumber that is produced from low-grade
timber from the mountain pine beetle-infested British Columbia interior
region, according to U.S. agency officials. Lumber producers pay the
minimum harvest fee of 25 cents (Canadian dollars) per cubic meter for
this low-grade wood. The other issue, according to U.S. agency
officials, stems from the British Columbia coast region, which recently
reduced its fees for harvesting timber. Although both the grading
system and formula used to determine harvest fees existed prior to the
agreement, and were grandfathered into the agreement,[Footnote 43] U.S.
agencies have questions about how these systems are now being applied.
However, U.S. agencies have not yet reached a conclusion on whether to
formally engage Canada under the dispute settlement procedures of the
agreement regarding these issues.
Large amount of low-grade timber harvested in Central British Columbia:
Since the mid-1990s, large sections of central British Columbia have
been infested with the mountain pine beetle, a bark beetle that attacks
and kills mature lodgepole pine trees. Natural Resources Canada, a
federal agency, anticipates that the beetle will kill 80 percent of
British Columbia‘s mature pine forests by 2013. As a result of the
beetle, lumber companies in the British Columbia interior region are
currently harvesting a large volume of dead trees. Dead trees lose
moisture content and are prone to developing cracks in the timber. The
presence of cracks is one factor that affects whether timber is given a
low grade and thus it affects the fee the British Columbia Ministry of
Forests and Range charges the lumber producer for harvesting the
timber.[Footnote 44] Lumber companies have begun what Canadian industry
and government officials describe as the practice of heating the wood
to reveal any pre-existing cracks so that the timber can be graded
correctly.[Footnote 45] U.S. industry argues that this process is
inflating the amount of low-grade timber and, because the timber costs
so little, reduces the material costs for British Columbia lumber
producers.
U.S. agency officials visited British Columbia in summer 2008 to
investigate the grading of beetle-killed timber. Subsequently, the
United States sent Canada a number of technical questions, including
questions on the British Columbia log grading system. In addition,
former USTR Ambassador Susan Schwab sent the Canadian government a
letter regarding the log grading system. To date, the Canadian
government has not provided certain specific information requested in
the written questions from the United States, according to U.S.
officials. Instead, in spring 2009, a delegation from British Columbia
traveled to Washington, D.C., and briefed U.S. agency officials on the
grading and mountain pine beetle issues. U.S. officials told us the
briefings and other discussions have been helpful, but do not fully
address the specific questions they had sent. The United States and
Canada continue to engage in a dialogue on the issue, according to USTR
officials.
Reduced fees for harvesting timber in coastal British Columbia:
U.S. government officials have questions about the January 2009
reduction in the fees charged for harvesting timber in the British
Columbia coast. U.S. officials are determining whether this reduction
warrants formal engagement with Canada under the dispute settlement
procedures of the agreement. The British Columbia Ministry of Forests
and Range uses an equation to determine the fees charged for harvesting
timber from public land. The equation is updated annually to account
for new factors, such as the cost of road construction or replanting
trees, as well as quarterly to reflect changes in the market. The
equation was grandfathered into the agreement; however, U.S. officials
are concerned with how British Columbia has adjusted the equation.
According to British Columbia officials, the January 2009 fee reduction
was the result of the confluence of the annual and quarterly updates of
the timber fee equation. U.S. agency officials have sent Canada
questions to clarify this issue and when officials from British
Columbia visited Washington, D.C., to discuss the mountain pine beetle,
they also briefed U.S. officials on the change in the timber fee in the
British Columbia coast region.
We are sending copies of this report to interested congressional
committees; the Secretaries of the Departments of Commerce, Homeland
Security, and State; the Attorney General; and the U.S. Trade
Representative. This report will also be available at no charge on
GAO‘s Web site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-4347 or yagerl@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Other GAO staff who made key
contributions to this report are Celia Thomas (Assistant Director),
Ming Chen, Karen Deans, David Dornisch, Martin de Alteriis, Tim
Fairbanks, Etana Finkler, Rachel Girshick, Grace Lui, Jeremy Sebest,
and Christina Werth.
Signed by:
Loren Yager:
Director, International Affairs and Trade:
Enclosures:
[End of section]
Enclosure I: Overview of Process, Responsibilities, and Key Issues
under the Softwood Lumber Agreement:
Figure 5: Selected Lumber Process Steps, Government Responsibilities,
and Key Issues under the Softwood Lumber Agreement:
[Refer to PDF for image: table]
U.S. government responsibilities:
* USTR acts as the lead agency for the Softwood Lumber Agreement.
* Commerce uses Canadian government and other data to obtain assurance
that Canada is collecting appropriate export charges.
* CBP reconciles information on entry summary form with export permit.
* State manages diplomatic concerns.
* DOJ, at the request of USTR, represents the United States in
arbitration.
* U.S. agencies also review changes in Canada‘s timber pricing and
forest management policies to ascertain whether they are in compliance
with the Softwood Lumber Agreement.
Industry responsibilities:
* Cutting trees: Payments go to provincial governments to harvest the
trees (stumpage fees).
* Processing at first mill: Amount of export tax paid to Canadian
government is determined by the first mill price; the export tax
depends on the market price and share of U.S. market.
* Transporting across the Canada–U.S. border: Exporter obtains export
permit from Canadian government; Customs broker files entry summary
with CBP.
Canadian government responsibilities:
* Provincial governments set and collect stumpage fees, and report
policy and operational changes related to the softwood lumber industry.
* Canada Department of Foreign Affairs and International Trade issues
export permit and provides data to U.S. government.
* Canada Revenue Agency collects export charges and provides aggregate
data to the U.S. government.
* Natural Resources Canada calculates expected U.S. consumption for
determining quota volumes and surge trigger levels.
Examples of issues:
* Policy changes: Provincial assistance programs: Do provincial
assistance programs constitute a benefit program in violation of the
agreement? Low grade timber: Does the increased volume of timber sold
for 25 cents per cubic meter circumvent the agreement?
* Export charge: There is a lag in available data, making it difficult
for Commerce to estimate the export tax and quota every month; the lag
is due, in part, to the time period in which producers are allowed to
pay the tax.
* Value reconciliation: Reconciling the value on the export permit with
that on the entry form is difficult due to differences in definition of
value.
Source: GAO analysis of U.S. government and Canadian government data.
[End of figure]
[End of enclosure]
Enclosure II: Comments from the U.S. Department of Commerce:
United States Department Of Commerce:
The Under Secretary for International Trade:
Washington, DC, 20230:
June 12, 2009:
Dr. Loren Yager:
Director:
International Affairs and Trade:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Dr. Yager:
Thank you for providing us with the draft report "U.S. and Canadian
Governments Have Established Mechanisms to Monitor Compliance with the
2006 Softwood Lumber Agreement but Face Operational Challenges." We
carefully reviewed the draft report, and agree with the overall
conclusion that operational challenges exist with respect to
reconciling value data, monitoring export charge data, and identifying
potential circumvention. The GAO report fairly captures the nature of
the U.S. and Canadian Governments' positions in addressing these
issues. We have no other comments.
Thank you again for the opportunity to comment on the draft report.
Sincerely,
Signed by:
Michelle O'Neill, Acting:
[End of enclosure]
Footnotes:
[1] Softwood Lumber Agreement Between the Government of Canada and the
Government of the United States of America, September 12, 2006 ("SLA
2006").
[2] The agreement uses the term "volume restraint." However, for the
purposes of this report, the term "quota" will be used as an equivalent
for the term "volume restraint."
[3] SLA 2006, art. VI and VII.
[4] Softwood Lumber Act of 2008, Pub. L. No. 110-246, § 3301, 122 Stat.
1651, 1844-1853 (codified at 19 U.S.C. §§ 1683-1683g). The act named
Treasury to implement these requirements, which Treasury delegated to
the Department of Homeland Security's Customs and Border Protection
(CBP).
[5] 19 U.S.C. § 1683g.
[6] Softwood lumber is obtained primarily from evergreen, coniferous
trees, mainly from the spruce, pine, and fir families. The main use of
softwood lumber products is for new home and building construction and
remodeling.
[7] SLA 2006, art. VII. The export measures do not apply to certain
softwood lumber products that are first produced in the Maritimes from
logs originating in the Maritimes. (See SLA 2006, art. X(1) for more
details on excluded products from the Maritimes.) The export measures
also do not apply to softwood lumber products first produced in and
from logs originating in the Yukon, Northwest Territories, or Nunavut.
SLA 2006, art. X. The agreement also excludes certain companies from
the export measures. SLA 2006, annex 10.
[8] The agreement defines "region" as Alberta, the B.C. Interior, the
B.C. Coast, Manitoba, Ontario, Saskatchewan, or Quebec. SLA 2006, art.
XXI(45).
[9] The prevailing monthly price is defined by annex 7A of the
agreement. In January 2010, the provinces will have their first
opportunity to change which export control option they implement. SLA
2006, art. VII(9).
[10] The regions' shares of U.S. consumption are set forth in table 1
of annex 7B of the agreement.
[11] Option A was chosen by Alberta, the British Columbia interior, and
British Columbia coast regions. (The agreement divides British Columbia
into two regions.)
[12] Under Article VIII of the agreement, if the volume of exports from
a region exceeds its trigger volume by 1 percent or less in a month,
Canada shall reduce the applicable trigger volume for that region
during the next month equal to the overage. Furthermore, if the volume
of exports from a region exceeds the region's trigger volume by more
than 1 percent in a month, Canada shall retroactively apply to all
exports to the U.S. from that region an additional export charge equal
to 50 percent of the applicable export charge for that month. Trigger
volume is calculated in annex 8 of the agreement.
[13] The quota for option B is calculated in annex 7B of the agreement.
Option B was chosen by Saskatchewan, Manitoba, Ontario, and Quebec.
[14] SLA 2006, art. XV(13).
[15] According to a Congressional Research Service report, stumpage
charges are fees for the right to harvest timber from province-owned
timberlands.
[16] SLA 2006, art. XV(14).
[17] SLA 2006, art. XV(B)(13).
[18] SLA 2006, art. XV(6).
[19] SLA 2006, art. XV(8).
[20] SLA 2006, art. XV(8).
[21] SLA 2006, art. XVII(1).
[22] Global Insight projects housing construction in the United States
will remain weak in 2009.
[23] In addition to these actions undertaken in accordance with the
agreement, CBP performs reconciliation of export volume and value data
under the 2008 Softwood Lumber Act
[24] An export charge is applied to the price at primary processing,
rather than after it has undergone additional processing by a
remanufacturer. The agreement defines remanufactured softwood lumber
products as softwood lumber that has been processed to produce
components, semi-finished and/or finished softwood lumber products.
Article XXI of the agreement states: "Remanufactured Softwood Lumber
Products" means Softwood Lumber Products that are produced by
reprocessing lumber inputs by subjecting such inputs to one or more of
the following: a change in thickness; a change in width; a change in
length; a change in profile; a change in texture; a change in moisture;
a change in grading; joining together by finger joisting; turning; or
other processes that produce components, semi-finished and/or finished
Softwood Lumber Products.
[25] A measure could include, among others, any new or amended
provincial law, regulation, and order-in-council. SLA 2006, art.
XV(B)(13).
[26] As defined in SLA 2006, annex 1A.
[27] Independent remanufacturers are those that do not hold Crown
tenure rights. SLA 2006, art. XXI(31). According to DFAIT officials,
Crown tenure rights give the holder an exclusive legal right to use or
occupy publicly-owned land. The rights are defined by the specific
terms of the tenure contract and can include logging rights.
[28] Specifically, the agreement calls for the committee to (1)
supervise the implementation of the agreement, (2) oversee its further
elaboration, (3) supervise the working groups established under the
agreement, and (4) consider any other matter that may affect the
operation of the agreement. SLA 2006, art. XIII(B)(2).
[29] Article XIII of the agreement requires that the Softwood Lumber
Committee meet at least once a year.
[30] SLA 2006, art. XIII(C).
[31] Two additional technical working groups relate to (1) regional
exemptions (determining criteria for exemptions from export measures
for certain regions) and (2) private land logs (addressing exclusions
for products from U.S.-origin logs and logs from private land in
Canada). According to USTR, the United States has not yet agreed to
undertake work with respect to these groups.
[32] SLA 2006, art. XV(6).
[33] SLA 2006, art. XXI (25).
[34] 19 USC 1401a et. seq.
[35] SLA 2006, art. VII(6).
[36] Any governmental grant or benefit provided to any producer or
exporter of Canadian softwood lumber is deemed to circumvent the export
measures, subject to certain enumerated exceptions. Some of these
exceptions include provincial timber pricing or forest management
systems as they existed on July 1, 2006, and other government programs
that provide benefits on a non-discretionary basis in the form and
total aggregate amount in which they existed and were administered on
July 1, 2006. For an elaboration of the programs please see SLA 2006,
art. XVII(2).
[37] USTR officials also noted that there have been occasional delays
in the delivery of some reports.
[328] SLA 2006, annex 7B and 7D.
[39] SLA 2006, art. XV(18).
[40] The agreement provides for either the United States or Canada to
request an independent audit of the outside data sources, or have a
technical working group verify the data. For an elaboration of the
process, please see SLA 2006, art. XV(19).
[41] The tribunal ruling is in Canadian dollars. U.S. dollar amount is
based on exchange rate at time of the award.
[42] In the federal register notice announcing the imposition of the
duty, USTR stated that the SLA provides that in the event the
complaining party finds that the defending party has failed to cure the
breach or impose the compensatory adjustments determined by the
Tribunal within 30 days of an award, the complaining party is entitled
to impose the compensatory measures itself. Accordingly, with regard to
Canada's 2007 breach of the SLA, the SLA authorizes the United States
to impose duties in an amount not to exceed the additional export
charges that the tribunal has specified as compensation for the breach.
74 Fed. Reg. 16436 (Apr. 10, 2009).
[43] Under Article XVII of the agreement, any governmental grant or
benefit provided to any producer or exporter of Canadian softwood
lumber is deemed to circumvent the export measures, subject to certain
enumerated exceptions Some of these exceptions include provincial
timber pricing or forest management systems as they existed on July 1,
2006, and other government programs that provide benefits on a non-
discretionary basis in the form and total aggregate amount in which
they existed and were administered on July 1, 2006.
[44] In British Columbia grading of timber is done using statistical
sampling. Once the grade is determined, the information is sent
electronically to the British Columbia Ministry of Forests and Range,
which charges the company the appropriate fee for harvesting that grade
of timber.
[45] The mountain pine beetle carries a fungus that can cause timber to
absorb moisture; according to Canadian government and industry
officials, in response to this problem, lumber companies are heating,
to around 80 degrees Fahrenheit, some timber in order to reveal cracks
that may have closed.
[End of section]
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