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Cablegate: Softwood Lumber: A Modest Proposal

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 OTTAWA 001927

SIPDIS

SENSITIVE

STATE PASS USTR FOR MELLE AND CHANDLER
USDOC FOR UNDERSECRETARY ALDONA AND ITA/IA/JTERPSTRA
USDA FOR FAS - PAULINE SIMMONS

E.O. 12958: N/A
TAGS: ETRD EAGR SENV CA
SUBJECT: SOFTWOOD LUMBER: A MODEST PROPOSAL

This message is sensitive but unclassified; please treat
accordingly.

1. (SBU) Summary: We appear to be moving toward yet another
trade-restrictive, time-limited softwood lumber agreement. If
so, it might be useful to think now about what we could do to
come up with a more durable solution while the temporary
measures are in place. The fact that current trade law
forces us to focus almost exclusively on Canadian subsidies
makes it difficult for either the USG or the GOC to address
adequately the broad range of interests affected by the issue
(e.g., U.S. producers more concerned by the quantity of
Canadian lumber entering the U.S. market than by its price).
Post proposes that a non-binding assessment by the
International Joint Commission (IJC) of forest practices,
state of the lumber industry and related issues could provide
a broader range of options for resolving the dispute than
would be possible from a purely trade law perspective. This
cable also outlines a notional scope of work for an IJC
study. End Summary.

Trade Law Inadequate To Meet Producer Concerns
--------------------------------------------- -

2. (SBU) Twenty years of trade litigation, export taxes
and/or import volume restrictions have yet to resolve the
U.S.-Canada softwood lumber dispute. Post believes this is
because existing trade law is too narrowly focused to deal
with the broad range of concerns and long-term industry
trends underlying the dispute. Trade law forces us to look
almost exclusively at identifying and countervailing Canadian
forest management practices that directly or indirectly
subsidize Canadian lumber manufacturers. U.S. producers
often argue publicly that all they want is a level playing
field, with Canadian timber (and hence,
lumber) prices "set by the market." Post firmly believes,
and the recent WTO panel decision on the countervail case
appears to confirm, that subsidies exist and threaten
material injury to U.S. producers. But even if we assume
that establishing fairness in price competition can be
achieved through trade litigation, would that be enough to
satisfy U.S. producer interests? Four years of intensive
discussion, debate and economic analysis convince us that
even if Canadian provinces were to eliminate all subsidies
and adopt the U.S. public lands model (an unlikely prospect),
competitive pressure from Canadian imports would be virtually
unabated for most U.S. softwood lumber firms. We have seen
no credible economic studies to the contrary. In fact, the
shake-out of poor performers such as BC-based Doman due to
current U.S. tariffs may actually be strengthening long-term
Canadian competitiveness.

3. (SBU) Some U.S. producers have proposed quantitative
import restrictions, combined with punitive tariffs for
import volumes exceeding those restrictions. Their interest
seems to be in limiting Canada's share of the U.S. market in
order to raise prices and increase profit margins for U.S.
producers. This might work were it not for the fact that
substitute suppliers (New Zealand being the latest to join
the ranks) and alternative products (structural steel) are
readily available to fill the gap, keeping lumber prices
below the level at which some U.S. producers can successfully
compete. In short, trade litigation might bring the
Canadians to the negotiating table, and trade negotiations
might result in import quotas for Canadian lumber, but
neither will ensure a healthy U.S. lumber industry over the
long haul.

4. (SBU) Other U.S. producers (and some Canadians) say the
root of the problem is that there is too much lumber flooding
the market, regardless of source. They claim that reducing
annual North American production by ten billion board feet
would raise prices enough to ensure the long-term health of
the lumber industry. They note that such a reduction will
inevitably happen as the North American industry continues to
consolidate and integrate. If this view is correct, the role
of government would seem to be limited to appropriate
antitrust surveillance and social safety net support for
displaced sawmill
workers, since positive measures to reduce production --
e.g., through changes in forestry or environmental policies
-- risk a strong negative reaction from consumers. In any
case, if this "industry in transition" argument is correct,
Post does not see how current trade law or policy tools could
be used to make the transition smoother or less painful.

A Role for the International Joint Commission?
--------------------------------------------- -

5. (SBU) The International Joint Commission has an enviable
record of success in resolving bilateral disputes, going back
ninety years. While its remit has been largely limited to
environmental matters, its success in resolving sensitive
boundary water resource management disputes make it a
reasonable venue for assessment of a dispute over long-term
management of North America's forest resources. In order for
such a study to be done under IJC auspices, both the USG and
GOC would have to finance it and agree on its scope of work.
When one considers the amount of taxpayer money both
governments have spent over the past 20 years on litigation,
discussion and negotiation, a study that broadens the scope
of interests covered beyond those usually addressed under
trade law, within limits set by both governments, without
prejudice to any existing policy, litigation or negotiation
seems like a bargain. Further, we believe an IJC study with
an appropriate scope of work could provide a more creative
and comprehensive roadmap to resolving the dispute than has
been
possible heretofore.

6. (SBU) The IJC could, as directed by both governments,
contract with independent experts for studies on any or all
of the following elements:

-- The current state of the lumber industry (binational,
national, regional); industry trends (binational, national
and regional); the degree of cross-border integration and
prospects for further integration or industry consolidation;
socio-economic impact of integration/consolidation
(binational, national, regional); global industry trends and
their impact on the industry (binational, national,
regional); industry trends in substitute products (global,
binational, national, regional).

-- Current forest management practices and principles
(state/province and federal); recommendations for regional or
species-based best practices; economic impact of current
practices and recommended best practices by region, nation
and binationally; environmental impact of current practices
and recommended best practices by region, nation and
binationally; species-specific recommendations and
economic/environmental assessments; economic and
environmenatl assessments of alternative or complementary
economic activities
on forest lands, public and private.

-- Prospects for development of employment alternatives in
regions identified as most likely to be negatively affected
by any of the above-mentioned trends or recommendations.

7. (SBU) We recognize that this would be an ambitious
undertaking, even for the IJC. However, faced with the
prospect of anothe 20 years of doing what we have always done
and getting the same results over and over again, we believe
it would be worth doing. It would certainly show greater
concern for the interests of the average taxpayer than what
we have managed to do to date. Post would welcome comments
from interested Washington agencies on the feasibility and
utility of a non-binding IJC study.
CELLUCCI

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