Thank you very much, Mr. Chairman, and to my honourable colleagues, I hope you're all having a good summer. I haven't had a great one yet, but I hope it gets better as it goes forward. Maybe today will be the beginning of a positive new era.
I think it is important today to recognize that we are at a very important fork in the road in terms of the never-ending saga of softwood lumber. I think we all recognize that the strategy of the Government of Canada on softwood lumber has essentially always been, in the previous government and in the new government, to pursue parallel paths of litigation and negotiation as the opportunity arose.
Earlier this year the President and the Prime Minister, at a meeting in Cancun, agreed to make softwood lumber and a negotiated solution of the softwood lumber problem a key priority for both Canada and the United States. Coming out of that meeting, we embarked on a negotiating process, largely involving negotiations through Ambassador Wilson in Washington and his staff, and my staff in the Department of International Trade.
On April 27 of this year, as you know, we announced that we had reached a framework agreement, or a term sheet agreement, on softwood lumber. That agreement involved a number of key features that were attractive to Canada and it was reasonably well received by most in the industry and most provinces.
It included, as you all know, seven to nine years of dispute-free trade; it offered essentially free trade, unrestricted, when lumber markets are in good shape; it offered a choice of a supply restraint mechanism for the different producing provinces in weaker or down markets; it offered a dispute mechanism that would be relatively clean, and timely, and efficient to deal with issues involving the agreement; and it offered what I think was critically important and really beyond what I had expected we would achieve, and that was the potential recovery of something in the order of 80% of the cash deposits that had been paid, which at this time is in the order of about $5.3 billion.
In the period between April 27 and July 1 we embarked on discussions on the detail of the proposed framework agreement and the drafting of a legal text. We had extensive discussions with industry, with provincial governments, again primarily through the U.S. ambassador and his staff, and in that process we identified a number of issues that were of significant concern to industry and/or provincial governments.
One issue of paramount concern was referred to as the anti-circumvention issue. There was great concern in Canada over this clause, which prevents both the U.S. and Canada from taking actions over the life of this agreement that might in fact circumvent the basic thrust of the agreement, because it was thought that it would in fact prevent provinces from putting in place or keeping in place provincial forest management policies.
There was a particularly profound issue in northern British Columbia and in the province's interior, where the B.C. government was in the process of introducing a new stumpage system called market-based timber pricing. We were asked to try to negotiate some provision in the agreement ensuring that provincial forest policies, such as the market pricing system, would be protected over the life of the agreement.
We heard concerns about termination. In the framework agreement, we were silent on termination. When this occurs in an international agreement, by international law the default position is a 12-month termination provision.
We were asked to look at the possibility of strengthening the termination provision. Interestingly, there were different views on why we needed a termination provision. Some thought that Canada should have a termination provision in case we wanted to terminate and there would be no mechanism for us to do so.
As discussions unfolded, the focus shifted to the risk of American termination. In other words, the industry in Canada was very concerned that at any point in this agreement the U.S. industry could terminate in a tough market situation, or if the economy got bad and their industry was having problems, we might be faced with a relatively rapid termination of the agreement by the U.S. industry. So we were asked to see if we could negotiate a stronger termination provision than what silence implies, which is a 12-month notice.
There were also some technical issues of a significantly commercial nature, related to the running rules of the agreement. And as has transpired for a couple of years now, there was concern over the timely recovery and return of deposits to our producers.
On July 1, when I was in Geneva at the failing WTO talks, I initialled an agreement that essentially improved on the April 27 agreement in virtually all areas in which we were asked to try to achieve significant agreement. That initialling signalled the termination of negotiations, and we are now faced with a fundamental choice: we can choose the negotiated settlement, recognizing that as with any negotiated out-of-court settlement, there are puts and takes—there are some aspects we like and others we would probably like to improve upon, and I can certainly name several—or we can continue with litigation.
We need to ensure that in making decisions about softwood lumber and about whether we choose to embrace this negotiated agreement, we recognize that the choice is not between the negotiated agreement and some utopian model of clear, unfettered free trade. We need to spend as much time assessing the litigation option—regarding the risks, the consequences, and the timing of how the litigation option will unfold—as we do picking holes in the negotiated compromise. It's clear that all of us can pick holes in the negotiated compromise—there's no problem doing that—but what we have to compare it with is the alternative.
When I look at the negotiated agreement, I see an agreement that provides for a quick return of 82% of the cash deposits. That's a very large percentage of the deposits coming back extremely quickly. It's roughly $4.3 billion, and it comes back with certainty. There is no magic here. If we enter into this agreement, that money comes back, and we will control to a large degree an accelerated flow of that money.
The agreement provides protection from trade actions for seven to nine years. I know there has been speculation or commentary in the media that because there are termination provisions in international agreements like this one, somehow it isn't a seven- to nine-year agreement.
It is a seven- to nine-year agreement. NAFTA has a six-month termination clause; we don't call NAFTA a six-month agreement. All American trade agreements save one—the free trade agreement they have with Israel—have a six-month termination provision in them. We don't call those six-month agreements. Those are trade agreements between states that are terminated only under the most exceptional circumstances, and having a termination provision is standard. We have one in all of our agreements, and the one that is now included in our softwood lumber agreement is a very strong termination provision.
We have very strong protection in this agreement for provincial forest policy regimes. The anti-circumvention clause in this agreement is far stronger than we've ever seen before; for example, in the softwood lumber agreement in the 1990s. This anti-circumvention clause allows market-based pricing. It allows timber prices to rise or fall. Back in the 1990s in the softwood lumber agreement, there was no way you could have any reduction, market-driven or otherwise, in stumpage.
In fact, British Columbia was forced to have a system called stumpage waterbedding at the demand of the United States, so that any reduction that might be contemplated in B.C. stumpage would have to be compensated by a dollar-for-dollar increase in stumpage somewhere else in the system, to hold the overall burden on the industry at the same place. There is no such provision in this agreement.
There is provision to ensure that provinces can take action to mitigate wildfires, to deal with pests such as the pine beetle, to deal with watershed protection, to take environmental measures, to deal with first nations land claims.
So the anti-circumvention provision in this agreement is very strong. And we should never forget that anti-circumvention cuts both ways: it also prevents the American industry and the Americans from pursuing trade actions against Canada for the life of the agreement. They are giving up sovereignty to attack us with trade actions; we are basically agreeing that we will not subvert the spirit and intent of this agreement with our policy changes. But we nevertheless have the flexibility to ensure that provinces can mange their forest management policies in a relatively free manner.
Again, this agreement provides for free trade in strong markets. Markets today are not strong. Markets in the next little while may not be strong. In fact, there is a serious risk of a down market in front of us, which is a further complication that members of the committee, members of the industry, and other governments are going to have to contemplate, because it has implications for the continued litigation scenario, which I'll come back to.
The agreement provides the choice for provinces of a supply restraint mechanism for down markets. It gives some flexibility, depending on the circumstances in different provinces, to deal with down markets in alternative ways.
There is an opportunity written into the agreement and a committee to explore further exemptions to the agreement. We know there are some areas we would like to have seen included to broaden the exemptions of the agreement. There is now a committee that would be struck government to government to deal with and review possible changes and exemptions to this agreement, and to do so in a timely manner.
I mentioned the termination provisions. There is complete assurance of at least three years of dispute-free operation of this agreement.
We have also negotiated into it what's called a standstill of 12 months over the life of the agreement, so that if the United States were to terminate the agreement, they could not bring a trade action within 12 months. That was a big request of the industry in Canada, and it was a big concession by the United States that provides significant comfort to Canadian industry.
We don't hear much about the third-country mechanism in this agreement and we hope we never have to use it, but there is a mechanism in the agreement that would protect Canada in some circumstances against third countries coming in and taking market share at the expense of Canada.
Let's look at the second alternative, continued litigation. There is no doubt that we've been successful in litigation to date, so you would have to say there is a high probability that we will win the critical remaining cases in this dispute. Let's be generous and give it a 90% probability. I don't think it's as high as 90%, but let's say it is 90% probable that we will win the remaining cases of this agreement. Let's assume further that we get the cash deposits back after winning our cases in two to three years. Again, depending on the appeals, the length of the legal processes, and the time it takes to unwind thousands of duty entries to get the cash flowing back to Canadian companies, it could be another three years or more. We may never see the money, but let's say we do.
In that scenario, the expected present value of a successful litigation strategy of that sort is under $4.3 billion, right off the top. There's time value of the money that is tied up with the U.S. Treasury. That money could be invested in treasuries or in capital and equipment in the industry, and nobody in the industry makes capital investments these days for a return on capital employed of less than 15% to 30%. So there is a huge forgone opportunity cost on having the money tied up for a significant period of time. So add that into the mix, and add the fact that duties would continue for a certain period of time--we don't know how long. We know there's been another administrative review conducted, so duty rates would rise from approximately 10.8% today to 14% as of December 1. So there's another cost. There are litigation costs and the cost of lawyers. There are costs in terms of the management resources in companies that are unproductively dedicated to dealing with the intense administration of dumping and countervailing duty investigations.
But let's look at the bigger cost, the bigger risk, and that is the risk of Lumber V. Anybody who says that we're one win away from free trade has simply not followed the softwood lumber industry and the trade issues around it in Canada for the past several decades. There is no doubt that if we walk away from this agreement, the industry in the United States would launch another action against Canada. Think of launching an action now where we have won the case of threat of injury, we've largely won the allegations of subsidy, and we've been doing okay on the dumping cases, but that's a mug's game. Think of a world where the markets are going into the ditch, which is what we're experiencing today. There's tremendous fear out there in the industry. In every company that's dependent on the housing market and the lumber business, their stocks are falling, prices are falling, and confidence is plummeting.
If you think that the U.S. industry is not going to take this opportunity to come at Canada again with another trade action, think again. They will. There is no doubt about that. We will see dumping again as a primary method of attack. Remember that dumping is not that hard a game to play, because it simply requires that you establish one of two things: that you're selling into the U.S. market at lower than you're selling into Canada--not likely; and that you're losing money on products you're selling into the U.S. market.
Anybody who knows the dumping file and who has seen how the Department of Commerce in the United States calculates dumping margins will know that they will have no problem establishing a substantial dumping margin. It will be spurious and fictional, but it will be sufficient to allow them, once again, to bring interim duties. And once again, we will be into the litigation cycle that has characterized this industry for a couple of decades.
The litigation cycle is this: you have a flimsy case of injury or threat of injury, as we had with Lumber IV, where we proved in all the appeals and the legal processes that there was no injury or threat of injury. We won those cases, but we've been through five years of duties that started at a combined rate of 27% and have now dropped to 10%. If anybody in this room, or in the Canadian industry, thinks we're going to avoid another litigation cycle, then I say, all right, make your decision, be accountable for it, but I'm here to tell you that I think a litigation cycle will be coming our way and it will be ugly. There will be job losses, there will be company failures, and communities will be in very difficult situations.
And that's not all. Don't think for a second that we can walk away from this agreement and, when we feel like it, negotiate another one. That is not going to happen, I can assure you. If anyone thinks the President is going to come back and negotiate softwood lumber after the Prime Minister and the President have put so much capital on the table to deal with this issue, I suggest that you give your head a shake. It is not going to happen. We're going to have a Congress that will be as protectionist or more protectionist than ever. I assure you that negotiations, as an option, will be gone for a minimum of three years.
In wrapping up, I would like to say, let's make a decision. I will respect the decision that everybody involved in this file has to make, but let's make a decision that's based on objective fact, analysis, and what we think the consequences are. Recognize the uncertainties, recognize the two choices we have, and stop playing games about there being some utopian free trade option that we will all benefit from in a few short months if we just have one more legal victory. That is not on the table.
What is on the table is continued litigation and a negotiated agreement that I think is the best softwood lumber settlement we've ever seen in this country. Let's make a decision. Let's take responsibility for our decisions. Let's make sure the companies take responsibility for their decisions with their shareholders, with their employees. Let's ensure that governments make a decision. Stand up, be counted, and let's accept the consequences. I will clearly respect those who are prepared to do that.
Thank you, Mr. Chairman.
