International Trade Committee on Aug. 21st, 2006

[The Chair, Conservative, Leon Benoit]

Good afternoon, everyone.

For the last meeting of the afternoon we have as witnesses, from Canfor Corporation, Jim Shepherd, CEO, and Ken Higginbotham, vice-president, forestry and environment; from Federated Co-operatives Limited, William Van Bergeyk, senior vice-president, forest products; and from Weyerhaeuser Company, Paul Perkins, vice-president, policy and planning.

We'll go through the presentations in the order listed on the agenda.

We'll start with Canfor. Go ahead, please.

[Jim Shepherd, Chair, President and Chief Executive Officer, Canfor, Forest Products Association of Canada]

Thank you very much, Mr. Chair, and thank you for the opportunity to address this committee.

Canfor is a leading integrated forest products company based in Vancouver, British Columbia. The company is the largest producer of softwood lumber, and through our pulp income trust, one of the largest producers of northern softwood kraft pulp in Canada. Canfor also produces kraft paper, plywood, remanufactured lumber products, oriented strand board, hardboard panelling, and a range of specialized wood products at facilities located in British Columbia, Alberta, Quebec, Washington state, North and South Carolina.

As a company, we employ approximately 9,300 people directly and indirectly; we have operations in 16 communities in B.C., Alberta, and Quebec; we produce annually 5 billion board feet of lumber production and utilize approximately 9.4 million cubic metres of annual harvest.

Over the past 10 years Canfor has invested significantly in our supply chain management systems to target the home building and retail lumber markets in the United States. Our business strategy relies on a stable and predictable trading relationship with the U.S. to allow us to serve our customers south of the border.

The results of the strategy have led Canfor to be the largest supplier of lumber to Home Depot, Lowe's, Centex, and other large, well-established customers in the United States market. This position of preferred supplier is based on long-term relationships and being a reliable supplier. Today approximately 70% of Canfor's lumber production is exported to the U.S.

The absence of a lumber agreement with the United States hurts our industry. The uncertainty, the high cost of litigation, and the punishing impacts of duties have drained financial resources. This has limited our ability to grow and reinvest in facilities that desperately need new technology. This hurts our bottom line and makes it impossible to undertake the kind of long-term business planning that is necessary for any company to prosper.

So what is the risk of litigation? Canada has been winning the legal battles with the U.S. in softwood, in what is termed as Lumber IV. We acknowledge the expertise and hard work of our various legal teams. In all likelihood, at the end of the day our position will prevail with the NAFTA panels and in the courts. But will this give us closure on this file? The answer is no.

History has shown that despite previous legal victories, there will always be another case at our doorstep. The current case reflects decisions around specific questions and specific circumstances. Change the question, you will get a different answer.

This has been the long-standing tactic of the Coalition for Fair Lumber Imports and, to a certain extent, the U.S. government. The fact is that the courts do not address the fundamental causes of the lumber dispute.

Canfor supports the proposed settlement because we have taken seriously the threat of the next case, Lumber V. Some people will say you don't need to worry about Lumber V because you will win Lumber V. To that I say perhaps, but we are winning Lumber IV, and look at what Lumber IV has cost us. It has taken five years and we still have not prevailed. There was no injury, there was no threat of injury, but it has taken us five years to reach the Court of International Trade, and during all this time our industry has been greatly disrupted and unable to concentrate on its business.

We do not need another such victory that costs so much. It has cost us tens of millions of dollars, and we do not need yet another case to be followed by five more years of fighting to, hopefully, prevail in the end.

It is almost certain that in Lumber V the U.S. will utilize methodologies for calculating the CVD and dumping margins that will produce duties that are substantially higher than those in Lumber IV. We have to recognize that filing these trade cases is just part of the regular way of doing business for some industries in the United States. They know that even if at the end of the day they lose, still they will win years of protection during all the time it takes the foreign manufacturers to fight and win a trade case.

This procedural protectionism that the U.S. practises is very aggravating and unfair, but it is a brute fact that is not going to go away, and we have to take it into account in weighing our alternatives and where we go from here. Changing this reality is the true challenge of solving softwood.

So what role of government should we expect should we not resolve this dispute? What is your role? Governments will be asked to pick up the pieces and help struggling companies, employees, and communities cope with hardships that they will face, and tremendous public resources will be required in the event of mill closures to help communities transition to other local economies.

But significant progress has been made. We cannot lose sight of the fact that over the past six months tremendous progress has been put into this file. Granted, the deal we see before us is not perfect, but let's not follow the pursuit of perfection, because it will finally not give us an acceptable agreement. This agreement creates stability for our industry while leaving relations with our biggest customers intact.

There are no outright winners here, and this is a true indication that compromise has been made on both sides. I have a long history with softwood lumber and can tell you that the perfection of 100% support of an industry on either side of the border is unattainable.

Our industry requires certainty, and this deal will establish that. My company and its shareholders require our deposits to be returned so that we may appropriately reinvest them and provide our employees and communities a more stable employment environment. This agreement allows that.

Many have asked, how can you leave 20% of your duties behind in the United States? My answer to that is that I would rather have 80% of duties back with certainty. It is very difficult to argue for having any of the deposits flow to our competitors and antagonists in the United States, but there is no alternative to get a deal. This is a business decision made in the best interests of our employees, our communities, and our shareholders.

The foundation of a trading partnership is not built in the courts or in the halls of government, but on relationships between companies and customers. This agreement was built on this principle, and the outcome preserves our trading relationships with our customers and provides stability and a very solid base from which to grow. Let's embrace this negotiated settlement as an opportunity to build a trading relationship that prevents us from ever having to endure another softwood lumber dispute again.

Thank you for your time.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Shepherd.

Now, from the Federated Co-operatives, we'll hear Mr. Van Bergeyk.

[William Van Bergeyk, Senior Vice-President, Forest Products, Federated Co-operatives Limited]

Thank you, Mr. Chair, for this opportunity to present the views of Federated Co-operatives Limited concerning the softwood lumber agreement that is under your review.

FCL provides central wholesaling, manufacturing, marketing, and administrative services to over 285 retail cooperatives, representing 1.1 million individual cooperators across western Canada and the northern territories. I'm proud to speak on behalf of those members and some 18,000 employees--over 3,000 directly and another 15,000 at various retails in the cooperative retailing system.

FCL sales were $4.78 billion in 2005. Since 1945, the forest products division at Canoe, B.C., has provided lumber for its cooperative members. The division employs about 400 workers, plus some 230 contractors. Its annual productive capacity has grown to 120 million board feet of lumber. Sales of lumber to the United States represented 54% by volume in 2005.

For the record, the deal is bad for Canada, bad for the industry, and bad for our company, and it was ill-timed. It is encouraging that major flaws are finally being recognized. Most of the terms of the deal have been well disputed by others, and I will not repeat them. In some ways, arguing about the components of a bad deal incorrectly infers that any cleanup makes it acceptable. However, I table a more comprehensive document that does outline difficulties presented by the agreement.

Federated Co-operatives Limited is being forced to concede more than $2.5 million U.S. without recourse because of a deal not of our making. Canada is asked to distribute moneys that the U.S. is specifically prohibited by law from doing. Not only are we disappointed about that loss of more than 20% of cash deposits, to which exporters are legally entitled, but we are also concerned about the adverse impact of the deal going forward. How can absorption of a future export charge that exceeds current unwarranted illegal duties make for a good deal? Based on the current framing lumber composite price, the export charge will be 15%. Surge mechanism may find British Columbia and Alberta subject to 22.5%.

As a medium-sized producer, we are only able to compete successfully because species diversity and manufacturing flexibility enables an emphasis on specialty products. Even though we are primary producers, we add value and manufacture custom products to serve niche markets, just as do remanufacturers. Some examples of products outside the scope of previous agreements include pre-drilled tongue-and-groove decking and cedar-profiled products.

Cedar commands prices in excess of $1,000 per 1,000 board feet. That species is not even produced in the U.S. south. Higher prices attract greater duty, or export charge burden, but such products require higher input costs with the same squeeze on margin as any producer encounters.

Business is about profit margin and return on investment. Our division must also provide adequate return. Managed trade has failed to permit that. Our margins are eroded to a far greater extent than those of the producers of commodity construction lumber. For commodity producers, a $50 margin before trade levies on prices of even $300 per 1,000 board feet may cover a 15% export charge, but specialty producers achieving the same margin on products averaging $450 are no longer profitable. Also, such specialty products are not directly linked to commodity pricing, yet the framing lumber composite price is based on the weighted average of 15 structural lumber prices. Specialty species and products are noticeably absent from the list. The logic for an increasing tax as prices fall is especially incomprehensible to specialty producers.

The surrender of direct claims to Canada or to escrow importers under a separate purchase and sale agreement creates immediate additional encumbrance. Canada export reporting and monitoring is in addition to U.S. Customs documentation and monitoring. Details of reimbursement remain unclear, and extensions can be granted to the U.S. for entry liquidation.

Canada doesn't guarantee payment, and 10% would not be paid until all moneys are recovered. Protracted payments are likely. Export Development Canada also requires reimbursement for expenses in connection with the amendment of documents, preservation of rights, or enforcement of the purchase and sale agreement.

The agreement has a 34% U.S. market cap, based on surge mechanism clause language, notwithstanding two export charge options.

The agreement provides more uncertainty for our operation. Individual companies are subject to regional choices on export measures. How can that be fair? The proposed monthly system is unworkable, and retroactive penalties deny producers rational business choices. Retroactive penalties for regional over-shipment will be applied to all the shippers. Why should the actions of competitors directly impact our operations?

The obscurity and complexity of the deal present more restrictions than currently exist. Instead of a reduced bureaucracy, the agreement calls for more data collection. A softwood lumber committee and technical working groups are prescribed but would lack authority.

Lastly, the fact that past agreements have failed reminds us that the matter needs to find more permanent resolution through third parties. The omission of previously included objectives is logical, because the deal doesn't meet them. The agreement contains no aids for interpretation or measurability. Rather than fostering stability, it has simply relocated the skirmish from U.S. to Canadian territory. Now it is Canadian regions disputing policies and market share allocation, industry versus government, and companies pitted against one another. We have become enemies within our own land.

Managed trade is market interference. Market interference is not freedom. In a statement on world trade, Robert Zellick, the U.S. trade representative, wrote:

The United States will continue to advance the values that define this nation--openness, opportunity, democracy and compassion. Trade reinforces these values, serving as an engine of growth and a source of hope for workers and families in the United States and the world.

The U.S. has equated freedom with free trade; we should too.

FCL opposes this deal and urges refocusing attention to achieving the original objectives, involvement of our industry, and pursuit of free trade.

Thank you. I'm also prepared to respond to questions.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Van Bergeyk.

Now, from Weyerhaeuser Company, we have Paul Perkins, vice-president, policy and planning.

[Paul Perkins, Vice-President, Policy and Planning, Weyerhaeuser Company]

Thank you, Mr. Chair, for the opportunity to address this committee.

I'd like to do three things today with my time: briefly introduce myself and the company I represent so that I can put my comments into context for you; explain why we support this agreement; and lastly, look forward to how the government can help us establish principles to break this circle and create a North American lumber industry.

My career with the lumber industry spans over 40 years, the majority of that spent in wood product sales and marketing. The last 24 years have to one degree or another been involved with the Canada-U.S. lumber dispute, and that was from the perspective of a Canadian producer selling into the U.S. market, but a Canadian producer that is owned by a U.S. parent that does not support the coalition.

Weyerhaeuser is the largest lumber company in North America, with production in all three of the primary lumber-producing regions of the continent--the Pacific northwest, which is Washington and Oregon, primarily; the southern U.S.; and Canada. Within Canada we have had a presence since 1965. We have lumber operations in B.C., Alberta, Saskatchewan, and Ontario.

Because of the structure and the position of the company, we have always had a rather unique perspective on this dispute. We have tried to use our involvement on both sides of the border to search for a realistic, long-term solution to this issue.

There are a number of key principles that have been fundamental to our position. We believe that litigation will never be able to resolve this issue. We believe that the root cause of the dispute arises from the differences between the drivers of a predominantly public land supply chain in Canada and a predominantly private land supply chain in the U.S.

In saying this, I want to be absolutely clear that this does not mean we are saying the Canadian producers are subsidized by a public land system. We are simply saying that there are significant differences in the value chain of a system that increasingly relies on plantation timber versus one that relies on extensive natural forests.

In fact, our analysis would indicate that if you could find comparable sawmills across any of these three regions, through a business cycle the return on investment would be relatively similar. We believe that the symptoms of these differences are really evident in low-demand markets, when Canadian timber supply remains more constant and adjusts more quickly to lower lumber prices than U.S. private timberlands.

We believe that lumber is an international commodity and the increase in cost competitiveness of European production needs to be recognized. We believe in free trade, but for lumber in North America we have accepted that managed trade is the only way to avoid endless litigation, given U.S. trade laws and the right and determination of the coalition to use these laws to protect their market position.

With these beliefs, why do we support this particular deal? First, we believe that the two governments ultimately needed the direct leadership of the President and the Prime Minister to drive a deal. Left on its own, neither the Canadian industry nor the U.S. industry could agree on compromises, as evidenced by what has happened since the last agreement expired in 2001.

We believe that it was very important that when the opportunity presented itself, senior political leadership on both sides of the border had the responsibility to do everything in their power to focus everyone's attention on a negotiated solution. Canada and the U.S. brought their very best negotiators to the table to strike a balanced agreement, keeping in mind that both have challenging and diverse constituencies to satisfy.

Secondly, we believe that the fundamentals of this agreement meet key objectives that we had for any deal. It is a longer-term deal--seven years, with the potential of nine. Some say it's shorter because of the termination clause. We do not accept this logic. We believe that unless extraordinary or unforeseen events occur, neither government will want to terminate this agreement.

It is essentially a bottom-of-the-market restriction that will not penalize our customers with higher costs when the markets are good. It recognizes the concern about growth of third company imports and establishes this as a principle. It sets up structures for the two industries and the governments to work together over the course of the agreement to improve understanding and trust and work side by side on issues of importance to the North American forest products industry.

Thirdly, if you look back two years at the deal we were then considering, you'll see it's clear that the current agreement is a substantial improvement in a number of key areas. Some key examples of improvement include a definition of what constitutes the bottom of the market, the market share entitlement for Canada, the deposit allocation, the management of the agreement, and dispute resolution.

We believe these improvements are the direct result of the ability of the Canadian negotiators to leverage Canada's legal victories. So in our view, Canada effectively used the legal process to drive a better outcome at the negotiating table.

We know there are some who will say that if we'd only waited longer for more legal victories this deal could have been even better. In many ways, your acceptance or rejection of this deal hinges on what you see as the alternative. The alternative for us is continued litigation during what will be a down market, with an eventual negotiated deal probably under changed political conditions in the U.S., which could play into the coalition's political strengths and result in an agreement much less favourable to Canada.

The transition to Lumber V could be very quick if this deal is rejected. Repeating the litigation cycle of the last four years with initial high deposit rates and supported by a weak market, the ability of the U.S. to show injury would be much greater than it was during Lumber IV. For us, it's a pragmatic and relatively easy choice. There's an old saying: perfection is the enemy of the good. We have the best deal that could be achieved through tough negotiations in front of us, and now is the time to move ahead with implementation.

In this regard, and optimistically looking forward to implementation, I would like to ask this committee to help the government to work toward making this a stepping stone to developing a truly functional North American market for lumber. We believe that the committee structure that is proposed can work to help break this cycle of controversy and distrust. Governments need to continue to work together to ensure that the operating principles and structure for the working committees are designed to be constructive and focus on satisfying our mutual customers, the lumber users.

I believe the lumber industry truly should be a part of a sustainable solution for a vibrant North American economy, and working together from both sides of the border, we can achieve this goal. We don't have to fight over dividing the pie. We can in fact make the pie bigger.

Thank you for listening.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Perkins.

Thank you all, gentlemen.

We'll go directly to questions now, to the official opposition, Mr. Maloney for seven minutes.

[John Maloney, Liberal, Welland, ON]

Mr. Higginbotham and Mr. Perkins, you have come out in support of this agreement basically because of your desire to ensure stability in the industry. You've downplayed the termination clause, which would see everything fall apart in a maximum of three years.

Looking at the organization or politicians, or whatever, in the lumber industry, of the coalition, how confident are you really that we're looking at seven to nine years as opposed to something less, a three-year maximum? Knowing the history that Mr. Perkins has gone on at length about, concerning who is on the other side and the difficulties you've had with them over the years, why are you so assured and why do you not feel that Lumber V is not that far away in any event?

[Paul Perkins]

I believe there are significant disincentives for both sides to terminate, the way the agreement is structured.

For the U.S., with a 12-month standstill on termination, they would really not want to go to free trade, which this would imply, so there's a disincentive there.

For Canada, there is also a disincentive to terminate in that we don't have a standstill clause. If in fact we are in a situation where there are border taxes, it would not be to our advantage to terminate, because we would in fact find ourselves with almost automatically high anti-dumping rates. Both sides have serious reasons not to terminate.

The other reason I would give is both countries' governments--and only the governments can terminate this. I know I will sound naive, because everyone believes the coalition runs the U.S. government. The reality is that there's a huge amount of sweat equity on the part of both governments to resolve what has been a really sore issue for both of them over the last 20 years. Knowing that, I don't believe they would want to terminate unless they had really good reasons and something had gone radically wrong with the way it was working.

[Jim Shepherd]

In many ways, I support what Mr. Perkins has stated. My belief is that governments are tired of this dispute and have put a lot of their energy into finding a solution that's a compromise between two industries that are fighting over a market share.

I would also say that even though two industries have built a relationship around mistrust, there are relationships that have been built through this dispute. With strong government support, dispute resolution built into the framework of the deal, and two industries that just want to move on and grow markets, my bet is that this deal will run its full course. I'm not concerned about the early termination and its possibility.

[John Maloney, Liberal, Welland, ON]

Mr. Van Bergeyk has pointed out what he considers flaws in the agreement--the surge mechanism and the possibility of 22.5% tariffs, a 34% market cap, retroactive penalties, and the concern about stability, which we just canvassed. Are you not concerned about those aspects of the agreement as well?

[The Chair, Conservative, Leon Benoit]

To whom is the question directed, Mr. Maloney?

[John Maloney, Liberal, Welland, ON]

It's to Mr. Shepherd and Mr. Perkins.

[Jim Shepherd]

Oh, I took it to be a question addressed to my colleague. Can I ask that the question be repeated, please?

[John Maloney, Liberal, Welland, ON]

Mr. Van Bergeyk has pointed out examples of what he considers flaws in the agreement. Some of these are the 34% market cap, the surge mechanism possibility and 22.5% duties, retroactive penalties. Are you not concerned about those possibilities as well, and why?

[Jim Shepherd]

I have stated that there are risks with this deal. When you look at the market share, the Canadians will have access to 34%, which is higher than the Canadian market share today. This provides a full volume into the U.S. market, assuming lumber markets stay at their current volume. There are risks in terms of the management of the volume over the border on a timeframe. When I compare these to the risks and the rules we have to work with in lumber in our business every day, I'm confident we'll find the protocols, the discipline, the ways of working around the issues.

Certainly for me this is not a case for an attitude of why it cannot work, but what we can do to make it work. I have weighed the risks of this particular deal with the alternative and feel we'll find a way to make it work.

[John Maloney, Liberal, Welland, ON]

Mr. Perkins.

[Paul Perkins]

I think I'd echo what Mr. Shepherd has said. We understand those risks that Bill has pointed out. They are real. The retrospectivity is in the running rules. Perhaps we're naive, but we think the working committees and the technical committees that are proposed can in fact work positively to overcome some of those.

This is a negotiated settlement. It was never going to be perfect. In fact, we have often said that in some ways it had to be a lose-lose for both sides for it to be accepted, so it was not going to be perfection from a Canadian perspective or a U.S. perspective.

[John Maloney, Liberal, Welland, ON]

Mr. Van Bergeyk, do you have any further comment on that? You're shaking your head.

[William Van Bergeyk]

The running rules are not clear. The technical group has not been given a specific mandate; that mandate is going to evolve. We have no guarantee that they're in fact going to touch on this issue of how the retroactivity.... There's no provision for the retroactivity to change from what's already in the agreement. So the retroactivity is going to apply.

[John Maloney, Liberal, Welland, ON]

Mr. Van Bergeyk, this morning we heard from our ambassador to the United States that today is the final day, when the Canadian forestry must buy into this deal. I'll be very blunt: where do you stand on buying into this deal? Is your company going to support it?

[William Van Bergeyk]

Our company has not been given a specific letter requesting that we identify our position; however, we have heard that the minister was asking for that. We have gone on record reiterating what we already told him just shortly after the July signing: that we are opposed to the deal. So we will not support the deal.

[John Maloney, Liberal, Welland, ON]

Do you have a concept of how many in our forest industry are of like mind to you here today?

[William Van Bergeyk]

No, that's one of the things that are going to be very.... I'm very curious to find that out. There is no guarantee we'll ever know. What I heard was that 95% was going to be required. Today I heard even from Mr. Wilson that maybe the number doesn't need to be 95%, that it could be substantially lower. So if the government doesn't know how many, then surely I don't know how many.

[John Maloney, Liberal, Welland, ON]

My feeling on flexibility is that whatever number they get will be the number they say they will need. I may be a little bit--