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Cablegate: Crunch Time Coming for Softwood Lumber Agreement

DE RUEHOT #2439/01 2271748
O 151748Z AUG 06





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1. (SBU) Summary: In his vigorous efforts to garner industry
support for the July 1 softwood lumber agreement,
International Trade Minister Emerson and other senior
Ministers met with top Canadian lumber officials in Toronto
on August 9 to hear their concerns about several of the
deal's provisions, but he warned that the agreement would not
be re-negotiated. While Emerson was publicly optimistic
after the meeting that there would be significant Canadian
industry support for the deal, he sought to put pressure on
the industry to "fish or cut bait" by setting August 21 as
the deadline for announcing its support. If sufficient
support is not forthcoming, the Minister indicated that the
deal would not go forward to get Cabinet approval for
Parliamentary action in September, thus killing the
agreement. Thus, this week is probably crunch time for the
future of the July 1 softwood lumber agreement.

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2. (SBU) Because of their dominant position in Canadian
lumber, the reaction of the British Columbia companies will
be key in determining whether Emerson gets the significant
industry support he needs to recommend the agreement to Prime
Minister Harper and to Parliament. The areas of industrial
concern are pretty clear, but it is still uncertain whether
these can be addressed satisfactorily (or fudged up) in the
"clarifications" that Emerson is now discussing with the
industry, the provinces, and USTR. Despite the industry's
discontent, the Embassy believes that Emerson, with the Prime
Minister's strong support, is adamant that the industry must
choose between the July 1 agreement as written and a
continuation of trade conflict, uncertainty and litigation.

3. (SBU): Comment: The engagement, in the middle of the
summer Parliamentary recess, of the senior ministries in last
week's Toronto talks underscores the importance of the
softwood lumber issue for the Harper government. While
resolving the dispute is not on the government's formal list
of objectives, contacts have noted to us that it is crucial
both to improving Canada-U.S. relations and to demonstrating
the Harper team's ability to marshal business support behind
a major trade policy initiative. End comment and summary.

Toronto Meeting with the Industry

4. (U) On August 9, International Trade Minister David
Emerson, Industry Minister Maxime Bernier, and Finance
Minister Jim Flaherty met in Toronto for two hours with
almost two dozen Canadian lumber executives to discuss
industry concerns regarding the U.S.-Canadian softwood lumber
agreement that was concluded by Emerson and USTR Susan Schwab
on July 1. After the meeting, Emerson told the press that he
was "optimistic" that Ottawa would get "significant" industry
support for the agreement by August 21, the date he said he
would decide whether to recommend to the Prime Minister and
Cabinet that the deal should be submitted to Parliament for
its approval after the end of the summer recess on September
18. Emerson warned that he would not move the deal forward
without significant industry support. The Minister described
the Toronto meeting as constructive, adding that he would
continue to meet with the industry, the provinces as well as
USTR in coming days to "clarify" wording and definitions in
the July 1 agreement in an effort to address industry
concerns, but he remarked pointedly that the agreement would
Qconcerns, but he remarked pointedly that the agreement would
not be opened for re-negotiation as some called for.

August 21 Deadline and Next Parliamentary Hearing
--------------------------------------------- ----

5. (SBU) We understand that Minister Emerson's August 21
deadline was dictated by the amount of time the GOC needs to
draft the legislation to implement the export tax component
of the agreement in time for Parliament's review in late
September. A senior advisor in the Prime Minister's office
opined that another reason for the date is that it's time for
the industry "to fish or cut bait." Perhaps coincidentally,
August 21 is also the date of the final hearing of the House
of Commons Standing Committee on International Trade that is
reviewing the July 1 agreement. At an earlier hearing on
July 31, Emerson stressed that "negotiations have ended,"
that if the July 1 agreement is rejected, there is no chance
that another one can be renegotiated for at least three
years, and that a fresh round of the litigation cycle would
be "ugly." Expected witnesses at next Monday's hearing
include the CEO of Domtar; senior officials from Canfor and

OTTAWA 00002439 002 OF 003

Weyerhaeuser; the Presidents of the British Columbia (BC)
Lumber Trade Council; the Ontario Lumber Manufacturers'
Association, and the Quebec Forest Products Council; and
attorney Elliot Feldman. The hearing would be an opportunity
for major industry players to present their definitive views
on the July 1 agreement.

6. (SBU) In recent days, the Embassy and the Consulates have
discussed Emerson's August 9 announcement with government and
industry contacts. Policy advisors in the Prime Minister's
office expect Harper to continue to support Minister
Emerson's refusal to re-open the July 1 agreement to
amendment, despite industry dissatisfaction with some of its
provisions. However, key contacts at industry associations
were split on whether the GOC will or will not receive
sufficient industry support in coming days to go forward with
implementing the agreement.

Optimists Versus Pessimists

7. (SBU) The "optimistic" view of industry observers is:
"The deal is absolutely essential not just for the industry,
but for Canada-U.S. relations and in order to demonstrate
that this government has the ability to complete an
international treaty. It won't be easy and there will be
lots of acrimony, but the stakes are high enough that many
parties will sign on to work the backrooms, persuade the
companies, and ensure that the Parliamentary vote on the
agreement is based on national interests rather than on party
lines." On the other hand, the "pessimistic" view believes:
"It will only take one company to scuttle this deal and there
are several that can do it. Some of those firms have an
interest in dragging out the dispute so that they can pick up
distressed assets from their failed competitors. This
industry has repeatedly shown that it just cannot speak with
one voice - the regional and business diversity is just too
great for that to be possible." There also seems to be a
split on the agreement depending on company size. Large
companies with interests in both the U.S. and Canada (e,g.,
Weyerhaeuser and Canfor) favor the agreement whereas some
smaller Canadian only companies do not.

The View From Quebec

8. (SBU) In an August 14 conversation with our Consul
General in Quebec City, Guy Chevrette, President of the
Quebec Forest Industry Council, commented on the state of

-- the Quebec lumber industry believes that it could reach an
agreement with the U.S. without much difficulty, but that the
BC industry is the real problem.
-- What Quebec is looking for is "souplesse" or flexibility
in three areas: 1) "circumvention" - the existing agreement
says that any changes to the "forest industry regime" under
the agreement are an infraction. In Chevrette's view, this
is an overly broad provision as there are some changes that
Quebec may need to execute that would have nothing to do with
softwood lumber, and such adjustments should not be seen as
an "infraction" of the July 1 agreement. He cited as an
example that the GOQ will need to address how it handles poor
quality lumber within the province. The Quebec industry does
not want needed changes in the province to be held hostage to
the softwood lumber agreement.
2) interpretive annexes - the Quebec industry feels that
adding interpretive annexes would give it the flexibility it
needs to sign off on the agreement. 3) the Quebec industry
Qneeds to sign off on the agreement. 3) the Quebec industry
wants a mechanism that would extend the 23 month limit of the
agreement for some additional months. For example, if one
side wanted to withdraw from the agreement, then it would
give that party 2-3 months to announce who would be members
of its delegation that would discuss the intention to
withdraw; then a few more months to file an intention to
withdraw; and so forth. The idea would be to draw out the
disengagement process by several months: "giving up a billion
dollars is a lot for an agreement that only lasts 23 months."

9. (SBU) Chevrette thought that BC in fact doesn't want an
agreement at all. They've got their pine beetle infestation
disease ravaging their wood, so they would prefer not to have
an agreement, and to flood the U.S. market with their
softwood instead. The Quebec industry will meet on August 18
to come to agreement on its position.

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10. (SBU) According to Consulate General Toronto soundings,
the language on running rules - prospective versus
retrospective - and monthly quotas are problematic in the
July 1 agreement. Ontario's lumber producers are quite
concerned about the agreement's provision to divide Canada's
export quota into monthly allotments. Under the present
agreement text, if companies do not fulfill their share of
the monthly quota, the unused quota is lost and cannot be
carried forward. An Ontario Ministry of Natural Resources
official said that province's industry would prefer a rolling
quota over three months, for example, so that any lost
production in a given month could be made up in subsequent

11. (SBU) While many contacts have either been silent about
what happened at the August 9 meeting or have been
unreachable, the Vice President at Abitibi said that
Emerson's meeting was "very productive, honest, and open."
Ontario Premier McGuinty told the Ambassador on August 14
that the BC industry's position will be key to determining
the Canadian industry's support of the July 1 agreement.

The Prairies

12. (SBU) There has been little reaction to Emerson's
meeting from industry leaders in Manitoba, Alberta, and
Saskatchewan. The lumber industry in these provinces is an
important sector, but relatively small in the big picture.
In the past, these observers have said that they have no
choice but to "go with the flow" and support the positions of
the bigger players in BC, Ontario and Quebec. However, a
Conservative Alberta MP had a different take on the current
situation. He told the DCM that he heard that the lumber
industry in his province favored the status quo of endless
litigation over the July 1 agreement.

British Columbia

13. (SBU) A key Consulate Vancouver contact was pessimistic
about the outcome of the Emerson meeting. The industry in
the west is not on board with the July 1 agreement and
believes that the GOC is maneuvering the BC companies to kill
the deal and then have them take the blame. This outcome
would also avoid the deal becoming the subject of a
Parliamentary vote of confidence in the fall, which could
force a new election if the Conservatives lost. The BC
industry was told that their list of demands for
modifications in the July 1 agreement was too long and should
be shortened. At the August 9 meeting with Emerson, the BC
industry said it wanted: 1) a 12 month standstill; 2) running
rules (i.e., the border tax calculation on the date a lumber
order is placed versus when it actually crosses the border)
should be prospective rather than retrospective; 3) border
tax adjustments should be reviewed quarterly rather than
monthly; and 4) BC's coastal logging should not be subject to
a duty (in concert with the rest of the province).

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