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What is bigger than steel, semiconductors and wheat? What has hungry bugs and grizzly bears and carries a multibillion-dollar price tag? The two-decade-old softwood lumber battle between the United States and Canada has all of those ingredients. It is America’s largest trade dispute and is with its largest trading partner. But this trade fight is not the simple complaint about the dumping of unfairly priced widgets on the U.S. market. It has tree huggers aligning with loggers. It raises questions of sovereignty and management of natural resources. And it involves just about every major international-trade law firm in Washington, D.C. “There’s no single trade case that comes anywhere close to lumber,” says John Ragosta of New York’s Dewey Ballantine, counsel to the Coalition for Fair Lumber Imports, a group of domestic lumber mills and manufacturers who charge that Canada unfairly subsidizes and dumps its softwood timber in the U.S. market. When he and his firm were hired in 1985 — three years after the industry filed its first lumber case against Canada — Ragosta recalls, “We were fighting 10 law firms on the other side.” In 2001, he says, there were 35 law firms and roughly $200 million in legal fees. Over the years, major Canadian and U.S. environmental groups have joined the fight. So have the home-building industry and Canada’s First Nations, its native tribes of hunters and gatherers. Canadian softwood lumber comprises about one-third of the U.S. lumber market, or roughly $7 billion, says Ragosta, adding, “That’s a lot of money, even today.” UNFAIRNESS DENIED Canada vigorously denies that its system of managing its forests amounts to unfair trade practices. And it is paying for its position: The United States is collecting about $1 billion a year in duties, which are being challenged by Canada before various trade bodies. “It’s the biggest trade dispute, bar none, and it’s astonishing in terms of its complexity,” says M. Jean Anderson of New York’s Weil, Gotshal & Manges, counsel to Canada’s national government. She is largely credited as the chief organizer and communicator in the wide-ranging litigation efforts by her client and Canada’s various provinces, also represented by Washington law firms. “But,” she says, “it really goes to very fundamental questions about how countries manage their resources and whether, in the guise of enforcing unfair trade laws, one country can dictate to another both their constitutional approach to resources and their judgments about economic management of those resources. It has a lot of implications for sovereignty and environmental concerns.” The legal battle also is unusual in that it has been fought in so many different forums, says Spencer S. Griffith of Akin, Gump, Strauss, Hauer & Feld, counsel to British Columbia in the dispute. The forums include the U.S. Court of International Trade, the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA). At least six appeals are now before panels of the WTO and NAFTA, he says, adding that the litigation also serves “as a test case on new U.S. and WTO rules on subsidy law.” The two nations have tried to negotiate a solution. “Negotiations failed last March,” says Ragosta. “Basically both countries went back to their bunkers and said, ‘We’ll litigate.’ There’s still this game of who is going to blink first.” The countries took tentative steps toward renewed negotiations this month, but there hasn’t been much blinking by either side historically. Since 1982, the two countries have been involved in four trade disputes — nicknamed Lumber I, Lumber II, Lumber III and Lumber IV. In 1996, they negotiated the Softwood Lumber Agreement, in which Canada agreed to export restraints, which limited the quantity of lumber entering the United States. When that agreement expired in 2001, Lumber IV began with anti-dumping and countervailing duty petitions filed by the domestic industry against Canada and its producers. “The continuing allegation by the U.S. has been that the Canadian provinces basically undercharge for the right to harvest standing timbers and therefore that gives them an advantage,” says Anderson. “We just have two different constitutional and property rights systems when it comes to forest lands. It’s fodder for all kinds of allegations.” In Canada, about 95 percent of the timberland is owned by the national and provincial governments. In the United States, about 60 percent of the timberland is privately owned. The provincial governments operate a tenure system for the harvesting of timber. They allocate long-term timber rights — often for 20 years — to forest companies without competitive bidding. In return, the companies must meet production quotas and keep the sawmills operating despite market conditions. They pay the governments a “stumpage fee” — not based on market prices and significantly below the price of timber in the United States — for the timber harvested. The U.S. lumber industry argues that the below-market stumpage fees set by the governments are actually a subsidy to the Canadian lumber industry and give the mills an unfair advantage in pricing their products. The production quotas, the industry argues, allow the Canadian industry to flood the U.S. lumber market when it’s weak. In response to the U.S. industry’s complaints, the Department of Commerce last year found that Canadian companies sold lumber in this country below their subsidized cost of production and imposed an 8.43 percent countervailing duty. The department also found that the Canadian government’s stumpage fees were subsidies and imposed an 18.79 percent countervailing duty to offset them. Anderson says that what the United States has done, “shockingly in this case,” is to compare apples and oranges. The government took a small percentage of timberland in the hands of states and the U.S. Forest Service and held auctions for the timber, she says. It decided that whatever price was obtained at the auctions would be compared to the stumpage fees for purposes of determining a subsidy. “There is no way that is a logical or rational approach to determining whether the Canadian provinces are charging accurately,” Anderson insists. “There are so many variables: distance of trees from mills to market; the basic economic conditions in the two countries differ; the state is auctioning for a lump sum — a short-term harvesting right — which is a very different thing from this kind of long-term tenure granted by the provinces which involves a whole set of costs and responsibilities on the companies to manage the forest lands.” But Ragosta says his U.S. clients do not believe that the 27 percent duties imposed on Canada fully reflect the subsidy. “The only way to find out is to sell the timber competitively,” he says. “We think prices in Canada would skyrocket. You also would have a system that works over time and without lawyers and litigation.” In Lumber I, Griffith notes, the U.S. government found no subsidy. Its subsequent change in position, he adds, has not been fully supported by NAFTA and other reviewing panels. “Both the NAFTA and WTO panels will hopefully once again reach the conclusion there is no subsidy” after hearing Canada’s appeals, he says. GREEN ALLIES In Lumber IV, the U.S. industry has unusual allies in major environmental organizations such as Defenders of Wildlife and the Natural Resources Defense Council. Those groups recently filed an amicus brief before the WTO, arguing that the Canadian industry not only enjoys an economic subsidy but an environmental one as well because Canada’s forestry laws are so poor and so poorly enforced. “The lack of strong laws and lack of enforcement has led Canada to harvest trees — primarily old growth forests — at a speed and in places they otherwise would not,” says Bill Snape, an attorney with Defenders. The Boreal Forest, the “great lung” of North America, covering about 35 percent of Canada, is threatened, he says. And Canadian cutting practices have an impact on U.S. environmental interests, he adds, since three species of animals that range and travel across the U.S.-Canada border — grizzly bears, bull trout and mountain caribou — are harmed by cutting to the border. The Bush Commerce Department, relying on U.S. countervailing trade law, rejected the environmentalists’ subsidy argument. The industry has been silent on it, Ragosta says. “We appreciate what they’re doing and the logic of it, but they don’t have a strong legal argument,” he says. But Snape says, “If the Canadian timber industry can simply implement their subsidy through the guise of environmental regulation, I read nothing in WTO and NAFTA rules that says that’s not actionable. That’s why we’re submitting these briefs.” The environmentalists also threaten to sue if any negotiated solutions are not filtered through the lens of the National Environmental Policy Act, which directs the U.S. to recognize the worldwide character of environmental laws and to maximize cooperation. “The Bush administration hasn’t shut us out, but, to be honest, they’ve been blowing us off,” says Snape. “I’m convinced companies like Weyerhaeuser, which is very politically powerful with operations on both sides of border, they’re sick and tired of U.S. environmental regulations and sure as hell don’t want to deal with that in Canada.” BRITISH COLUMBIA If there is a negotiated end to the dispute, it is likely to be with British Columbia — Canada’s largest lumber exporter — say some experts watching the battle. “There’s a new government in B.C., and that may present a different dynamic than is present in other provinces,” says Griffith, British Columbia’s counsel. The lumber battle with Canada is one of a few “deeply rooted” trade conflicts with the United States, says Dr. Robert Z. Lawrence of Harvard’s Kennedy School of Government. “It’s really where free trade conflicts with the desire of a country to protect an important political constituency,” he says. “With Canada, it’s foresters. Either we change their domestic policies or we need a mechanism to respond in the trading arena. You’ve got two railway coaches and you have to find mechanisms to somehow link the two. “We go through these perennial battles and then we come to some kind of a band-aid solution. If history is any guide, we’ll have another.”

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