International Trade Committee on March 28th, 2022

[The Chair (Hon. Judy A. Sgro (Humber River—Black Creek, Lib.)), Liberal, Judy Sgro]

I call this meeting to order. This is meeting number 11 of the House of Commons Standing Committee on International Trade.

Today's meeting is taking place in a hybrid format pursuant to the House order of November 24, 2021.

Measures regarding the use of masks in the House of Commons precinct have been extended until June 23, 2022. Please note that masks must be worn in committee rooms except when members are at their place during parliamentary proceedings. However, it is strongly recommended that members wear a mask even when they are at their place during the proceedings. All those inside the committee room should follow best practices for maintaining proper hand hygiene by using the hand sanitizer provided.

As the chair, I will enforce these measures, and I thank you for your co-operation.

To ensure an orderly meeting, please note that you may speak in the official language of your choice. At the bottom of your screen, you have the choice of either floor, English or French audio. If interpretation is lost, please inform me immediately, and we will ensure that it is properly restored before resuming the proceedings.

When speaking, please speak slowly and clearly. When you're not speaking, please have your microphone on mute. Finally, I remind you that all comments go through the chair.

We are continuing our study of the Canada-United States relationship—a motion that was adopted by committee on January 31—and its impacts on the electric vehicle, softwood lumber and other sectors.

Today's meeting pertains to the softwood lumber sector.

With us today by video conference, from the Canadian Home Builders' Association, we have Kevin Lee, chief executive officer. From Meadow Lake Tribal Council Industrial Investments, we have Al Balisky, president and chief executive officer; and from Resolute Forest Products, we have Rémi Lalonde, president and chief executive officer.

Welcome to all of our witnesses. Thank you for taking the time to come before us today.

Mr. Lee, I will invite you to make opening remarks of up to five minutes, please.

[Kevin Lee, Chief Executive Officer, Canadian Home Builders' Association]

Thank you, Madam Chair.

The Canadian Home Builders' Association is the voice of Canada's residential construction industry. We represent some 9,000 member firms from coast to coast, including home builders, renovators, trade contractors, product and material manufacturers and building suppliers and services.

There's no question that the pandemic has shown the extreme exposure that Canada’s residential construction industry, and in turn consumers, have to lumber price volatility. The record price increases and product scarcity, both north and south of the border, have caused major issues for industry, homebuyers and homeowners over the past two years. The effects of those issues persist today.

CHBA’s 2021 Q4 housing market index survey showed that the national average construction cost for a 2,500-square-foot home has increased by over $34,000 due to lumber prices. This has resulted in higher prices for consumers and in some cases severe losses for builders with fixed-price contracts.

Canada already has a housing affordability crisis. Adding tens of thousands of dollars to the price of a new home due to lumber increases has contributed quite a bit to the crisis. A major contributor to rapidly escalating house prices in Canada is also a lack of housing supply, and access to more stable lumber prices is critical to building more homes—both market-rate housing and affordable housing. The crisis also impacts the ability of municipalities and not-for-profit organizations to deliver affordable housing units. Social housing budgets are fixed, so increased input costs mean fewer units coming online for those in most dire need of housing.

In addition to rapidly rising lumber costs, the lumber crisis has also meant delays in construction, as price increases have been accompanied by physical supply shortfalls as well. Home closings are now delayed about 10 weeks on average across the country due to ongoing supply chain challenges.

It's also noteworthy that there is another Canada-U.S. trade issue on the horizon for construction, and that is the gypsum board anti-dumping order from the Canadian government on U.S. drywall shipped into western Canada. This duty, which was dramatically reduced from its original intended levels five years ago due to the impact it would have on housing affordability, is set to expire or be extended. CHBA strongly recommends that the government take action to ensure that this duty is ended.

Overall, given the many challenges facing all aspects of the supply chain for construction and other industries, it is clear that all efforts should be made to address every aspect of Canada’s supply chains. Where lumber is concerned, actions are required to provide a more consistent supply and to stabilize prices. This is doubly true given that lumber for construction should be part of a sustainable construction future for Canada. Lumber is a Canadian product that is renewable and a carbon sink, but if availability and pricing volatility continue as such large issues, it may become necessary to look at replacement materials.

CHBA recommends a number of actions for the federal government.

Make it a priority to investigate all issues of lumber supply, as well as potential solutions to ensure a reliable lumber supply in Canada with less price volatility.

Redouble efforts to resolve the present softwood lumber dispute with the United States.

Wherever possible, include end-users in trade tribunals so that final arbiters can appreciate the real and human impact that prolonged trade disputes have, especially in home construction and affordability. This was the case with the drywall dispute five years ago. It may need to be the case again this year.

Work with the domestic lumber producers to increase capacity to ramp up production, including by working with other levels of government to ensure more responsive and certain access to raw materials.

Consider all action possible to support the construction products and materials supply chain, including supporting the domestic manufacturing capacity of construction products and materials.

Finally, deal swiftly with transportation disruptions within Canada, whether they be import issues with respect to shipping and receiving, work stoppages by rail or other interruptions caused by infrastructure issues.

As the country recovers from the COVID-19 pandemic, we have a chance to build a housing continuum that supports all Canadians, from social housing to aspiring first-time buyers to seniors wishing to age in place. From new Canadians looking to establish roots in their chosen communities, to those looking to expand their homes as their families’ needs evolve, to new Canadians joining our communities—all have housing needs. Canadian lumber should be a big part of that solution.

On behalf of CHBA, I thank you for undertaking this study. I look forward to answering any questions the members of the committee may have.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Lee.

We'll now go to Mr. Balisky.

[Al Balisky, President and Chief Executive Officer, Meadow Lake Tribal Council Industrial Investments]

Thank you.

Good afternoon, Madam Chair, members of the committee and fellow witnesses, as well as other staff. I'm here to provide a perspective on indigenous participation in the lumber sector in North America.

Briefly, the 2006 softwood lumber agreement provided stability and predictability until its expiry in 2015, which triggered the latest round in the softwood lumber dispute. There remains no successor to the 2006 softwood lumber agreement, and its provisions are no longer in force.

The U.S. was originally petitioned to impose countervailing and anti-dumping duties on Canadian softwood lumber suppliers by American lumber advocates alleging that Canadian lumber is unfairly subsidized and dumped onto the U.S. market. The U.S. Department of Commerce initiated an investigation into these imports and concluded that softwood lumber imports from Canada have materially injured the U.S. domestic lumber industry. This resulted in both CVD and AD orders being initiated in 2018, so we're well into year number five.

The Meadow Lake Tribal Council is an organization of nine first nations located in the province of Saskatchewan. MLTC is the owner of NorSask Forest Products, a softwood lumber producer operating on first nations lands. NorSask is the largest wholly owned indigenous sawmill in Canada, and it produces approximately 150 million board feet of lumber each year, with approximately 60% of this lumber headed to the U.S.

On the softwood lumber that it exports to the United States, NorSask is obligated to pay these duties. Since the initiation of these trade penalties, NorSask and, in turn, nine first nation communities, have an excess of $20 million held on deposit with the U.S. government.

As far as the Meadow Lake Tribal Council knows, NorSask is the only Canadian wholly indigenous-owned softwood lumber producer, with significant exports to the United States, but in no way is Canada's sole indigenous lumber producer a threat to softwood lumber producers in the United States.

Firstly, on July 1, 2020, the new Canada-United States-Mexico Agreement entered into force. CUSMA generally applies to the softwood lumber trade and, in general, allows for tariff-free exports of softwood lumber to the United States. For example, the preamble of CUSMA specifically mentions that one of the intentions of the agreement is to “Recognize the importance of increased engagement by indigenous peoples in trade and investment”. This inclusion indicates the parties' intention to advance reconciliation with indigenous peoples through economic sovereignty.

Secondly, CUSMA includes a specific protection for indigenous peoples. This exception states that legal obligations to indigenous peoples cannot be trumped or interfered with by commitments made under the trade rules. Article 32.5 states that “this Agreement does not preclude a Party from adopting or maintaining a measure it deems necessary to fulfill its legal obligations to indigenous peoples.”

Thirdly, chapter 25 of CUSMA is dedicated to small and medium-sized enterprises, with the parties to the agreement recognizing the important role these entities play in the economy. Each party has specifically agreed to “strengthen its collaboration with the other Parties on activities to promote SMEs owned by under-represented groups including women, indigenous peoples, youth and minorities, as well as start-ups....”

In summary, MLTC reminds the Government of Canada of its commitment and the opportunities under CUSMA to support and protect small and medium-sized businesses and indigenous peoples who are exporting products to the U.S., such as softwood lumber.

MLTC encourages the Government of Canada to provide two things. Number one is indigenous exemption from current punitive trade actions and any future softwood lumber agreement. Indigenous-owned forest product businesses make up an insignificant component of Canada's total softwood lumber exports, yet indigenous companies like NorSask continue to face unfair, punishing trade action despite the collective commitment by Canada, the U.S. and Mexico to a general exception and protection for indigenous peoples. Canada should take immediate action to protect indigenous-owned softwood lumber manufacturers and exporters from the current U.S. lumber countervailing and anti-dumping tariffs, and from any future softwood lumber agreement.

Number two is the return of all countervailing and anti-dumping duties to indigenous softwood lumber producers. The Canadian government is responsible for matters related to international trade and has a special duty of care with respect to the interaction of international trade disputes and their impact on indigenous communities. These self-generated funds that have been unfairly paid as duties to the U.S. represent forgone revenue to MLTC's first nation communities, which could be used for significant social benefit and promote economic sovereignty.

The Meadow Lake Tribal Council encourages the Government of Canada to support and assist all indigenous lumber producers and exporters for whom these deposits have been paid, so that these are returned to the indigenous communities from which they remain absent.

Thank you very much, Madam Chair. I look forward to questions.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Balisky.

We'll go on to Mr. Lalonde, please, for five minutes.

[Rémi Lalonde, President and Chief Executive Officer, Resolute Forest Products]

Thank you, Madam Chair.

I'd like to thank the members of the committee for the opportunity to speak to them this afternoon.

The United States is Canada's largest trading partner, and for the majority of the U.S. states, Canada is also their largest trade partner.

With somewhere around 18% of the U.S. GDP associated with the housing sector, it is fair to say softwood lumber trade is an important component of North American economic prosperity. The first trade action goes back to 1982. In the 40 years since, Resolute and our peers across Canada have been through many iterations of the softwood lumber dispute. These issues have been the subject of debate for decades, and now into our seventh presidential administration.

Five years into the current iteration of the dispute, which started in 2017, Canadian producers have deposited over $6.5 billion Canadian, and growing, of duty deposits at the border, pending a resolution.

We know trade barriers inflate prices and slow economic recovery. Often it is low- and middle-income families who suffer the heaviest burden.

I would like to recognize the continuing efforts of Minister Ng, the legal team and others in government, for their tenacity and steadfast support.

We remain confident that with these efforts, Canadian exporters will ultimately prevail before international dispute resolution panels, as they have consistently done in the past. While some in the U.S. continue to recycle the same arguments, decades of litigation have rejected the notion that Canada competes unfairly just because it's different.

To that point, Canada secured a major victory before the World Trade Organization in August 2020, in a decision that undercut almost all of the U.S. Department of Commerce’s arguments. Unfortunately, the U.S. has delayed the implementation of that ruling, opting to appeal the decision with an appellate body to which it refuses to appoint members.

Canada should continue to emphasize to the Biden administration that this is not how friends should behave toward one another, and that our relationship ought to be based on good faith and respect for the rule of law and treaty frameworks for dispute resolution.

We recognize that the path to a durable solution to this long-standing problem will more likely come through a consensus-based agreement based on fair and equitable negotiations.

To that end, Resolute joins others in the forest products industry in offering support for good faith engagement between our two governments. To be sure, an agreement must be in Canada’s best interests, and it should not come at any cost. Resolute is committed to being a practical and pragmatic player.

Today we’re fortunate, I believe, to have significant alignment among Canadian producers, which is a valuable opportunity and basis upon which to make progress.

Over the past months, the Biden administration and European Union have amicably resolved issues, even dropping cases before the WTO in favour of bilateral talks.

The U.S. is working to strengthen and to improve their trans‑Atlantic relationship, as demonstrated in an Airbus/Boeing dispute, as well as a case involving Spanish olives. And just last week, the U.S. and U.K. reached a settlement on steel and aluminum.

Canada should receive no less treatment than the U.K., Spain or the broader European Union. Together, we must restore the special relationship between Canada and the U.S.

Canadian softwood lumber producers have important allies in the U.S. Recently, about 100 bipartisan members of Congress from all over the U.S. sent a letter to the Biden administration, calling for a resolution of the softwood lumber dispute. Just last week, the influential U.S. National Association of Home Builders [Technical difficulty—Editor] yet another call for swift action toward an agreement with Canada to eliminate softwood lumber tariffs.

The vast majority of Resolute’s manufacturing assets operate in Canada. Most of our production is export-focused. Today, we pay a combined anti-dumping and countervailing duty rate of around 30% on the value of softwood lumber shipments exported to the U.S. We currently have about $430 million U.S. in duty deposits trapped at the border.

For a company of our size, this is a lot of money. And it's money that we cannot invest to grow our business, support our transformation and drive economic activity in the communities of our 4,700 employees in Quebec and Ontario.

Members of the committee, I thank you for your attention.

[The Chair, Liberal, Judy Sgro]

Thank you very much, Mr. Lalonde.

We will move on to committee members, beginning with Mr. Hoback, for six minutes, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

Thank you, witnesses, for being here this afternoon to shed some light on this important study and to help us hopefully get to a point where we can see a conclusion to the softwood lumber duties and move beyond this. There's definitely some more work the government needs to do in regard to that.

I'm going to start off with you, Mr. Balisky, from Meadow Lake. I come out of Shellbrook, so I'm very familiar with the Meadow Lake Tribal Council and the great work you guys do. You said you had some $20 million in tariffs sitting there on hold. What would the impact be to your nine communities if that money were actually reinvested and not sitting there, at the border?

[Al Balisky]

That's a tremendous question, and this is a unique difference between the Meadow Lake Tribal Council ownership of the sawmill asset and, say, a corporation. These are communities that own this lumber producer, and any revenues that come from their business interests end up right back in the nine communities.

For example, I just spoke with the chief this morning, and the community is in the process of building some new homes, so any revenues they're able to generate go right back to the community and building new homes in Waterhen Lake First Nation. There's been a movement toward small homes up at Buffalo River Dene Nation, for example, and a new water treatment plant at another first nation.

These are essential services. When they don't see these benefits coming back to them, it really sets them back, and the community members pay. There are very clear social benefits that accrue right back to individual first nations, not to a corporation but to first nations communities in Canada.

[Randy Hoback, Conservative, Prince Albert, SK]

You talked about the indigenous exemption and looking at a way to make yourself exempt so that you wouldn't have to pay these duties. Is there no headway with that? Is there no way of getting that recognized at the border, or is that something that's a non-starter?

[Al Balisky]

We like to think that we're caught up in some collateral damage here. We're part of the Canadian economy, and there's a broad brush, as Mr. Lalonde spoke of here. Everybody that exports into the U.S. is faced with the same issue. We think that there's an opportunity for Canada to take some action under CUSMA. There is a special exemption for indigenous peoples, and we encourage the government to explore that.

[Randy Hoback, Conservative, Prince Albert, SK]

Mr. Lee, with the home builders, I just want to talk to you a bit. Would it be fair to say that softwood lumber prices are very volatile and that it's having an impact on how your home builders are actually pricing in the builds of new houses?

[Kevin Lee]

Yes, they absolutely are, when they can. Sometimes it's so volatile that you couldn't have foreseen it, which was definitely part of the issue early on in the pandemic.

[Randy Hoback, Conservative, Prince Albert, SK]

Is it fair to say that you have to—and this isn't meant to be negative—pad that price in order to face unpredicted increases in costs of lumber and other goods? Is that fair to say?

[Kevin Lee]

Yes, it definitely is. You're always trying to do your best job to estimate the price of all input costs—labour, materials, etc.—so, yes, if you see escalating lumber prices, then you have to price your products accordingly.

[Randy Hoback, Conservative, Prince Albert, SK]

Of course, lumber cycles, just like any other commodity. When the price goes down, that cost is still there for that homebuyer when the home builder delivers the keys at the end of the build, so if he has managed to save an extra $20,000 or $30,000 because all of a sudden the lumber price at that point in time took a dip, does that not lead to increases or the overall reason we have more inflation in our housing market than we've seen before?

[Kevin Lee]

I think there are a few things that get impacted there. First, we know that when prices go up, they go up fast, and that gets passed on to the user very quickly. We also know that as prices come down, that price stays higher for both builders and consumers, so it's a much slower descent than it is on the way up. That's part one of it.

The other thing is, yes, depending on where prices go, you might be ahead of the game or behind the game, depending on when you signed your deals, the price you priced within your contract and how everything works its way through the system.

The one thing I didn't say in my opening statement is that our average price has gone up $34,000 just from lumber alone, but everything else is going up too, so it's about another $34,000 on average for that same house from the increase of other things. Overall prices have been going up on all products.

[Randy Hoback, Conservative, Prince Albert, SK]

You're seeing rapid inflation in the housing sector, not just because of softwood lumber, but because of supply chain issues that are sitting there.

Mr. Lalonde, I'm just kind of curious. Coming out of Quebec, how do you forecast your production cycles if you have this sitting in front of you? How do you say that you're going to cut so many board feet per year based on that? Is the market just so strong right now that it doesn't really matter?

[Rémi Lalonde]

The market has been strong for a while now. To build on that, I'd say that we try to operate our assets to their maximum capacity, because that's the more efficient way to do it.

However, to the discussion and your questions from a bit earlier, the price of lumber is volatile. It adjusts very quickly. Lumber is a very liquid market. It's a very deep market that allows for almost immediate price discovery, but there are three key things that I think we should keep in mind.

The first is that a supply gap was created after the pandemic started. This goes to your question. A number of producers reduced their production because we all thought that we were going back to the days of 2008-09. There was a reduction in production capacity. It took a long time for that supply gap to close. That drove up prices.

The second thing is—and this is part of what we're living through now—there are tremendous logistic constraints. I'm sure you've heard about this. The B.C. floods, the current significant jamming of rails and railcars, and the lack of truckers are causing some significant flow issues that are limiting supply distribution.

The third thing is that in the last couple of years, the cost of fibre in Canada has been increasing. From our perspective, duties play into that factor, because they raise the cost of benchmark production.

[Randy Hoback, Conservative, Prince Albert, SK]

Is it not fair to say, though, that we had a situation...because the softwood lumber duties came into play in 2015 and we lost a lot of the small producers that would have been filling in and maybe providing more constant pricing in the market?

[The Chair, Liberal, Judy Sgro]

Give a brief answer, please.

[Rémi Lalonde]

Yes. It raises the marginal cost of production for producers. The ones with the higher cost of production will be the first ones to close.

[The Chair, Liberal, Judy Sgro]

Thank you very much.

Mr. Sheehan, you have six minutes, please.

[Terry Sheehan, Liberal, Sault Ste. Marie, ON]

Thank you very much, Madam Chair.

I want to thank all the presenters for their important information today. I am going to start with Resolute and Mr. Lalonde.

You have a significant operation in northwestern Ontario. We appreciate that. I used to work for the Ministry of Training, Colleges and Universities out of the Soo, but we had our head office in Thunder Bay. I know how many tradespeople you employ. I've been there through the ups and downs in the forest sector, with community adjustment, labour adjustment and such. All of the forest companies in northern Ontario have been great partners and really care about their employees. I just wanted to begin with that.

On January 31, 2022, the DOC released the preliminary results of its third administrative review of the AD/CVD orders, which applied on U.S. imports of certain Canadian softwood lumber products. The calculated average AD and CVD rates are 4.76% and 6.8% respectively. According to the Government of Canada, preliminary results may serve as an indication of the final duty rates that the DOC is expected to issue in the summer of 2022.

Mr. Lalonde, do you believe that these rates may in fact serve as an indication of the final duty rates? Can you speak to the degree to which these rates are detrimental to the Canadian softwood lumber industry?

[Rémi Lalonde]

Thank you for your comments. In fact, I spent two and a half years living in Thunder Bay, operating the pulp and paper facility. I'm very grateful for the time I've spent in northwestern Ontario.

Those duties are averages. In Resolute's case, the combined rate that we pay is 30%. That's what we're paying now. I'm happy to get into the details, but it is significantly higher than the average.

Typically, the distance between the preliminary rates and the final rates tends to be fairly close, but I should point out that the rates are reset every year. The way the Department of Commerce works is that sales, and therefore prices, are the denominator. Therefore, when prices increase from one year over the other, it makes for a lower duty rate, and the opposite is also true.

Based on the year of assessment—we're talking about 2019—they concluded that the smaller sales for lower prices created a higher rate.

One would expect that should prices adjust, the rates could come down. For example, last year our rate was 20%. We've gone from 17%, to 20% to 30%. For this year, the rates announced for Resolute are going to be 20%, based, as you pointed out, on the preliminary.

We'll see what the Department of Commerce concludes. I wouldn't expect them to stray too far from their preliminary AR assessment.