Canada - Law Firms American Trade Relations With Canada: Does It Matter? Is It Free? Should Americans Buy Canadian Lumber To Build Our New Homes?

Friday, April 1, 2005 - 01:00
Ned H. Marshak

If you were to poll the general public (or even the general practice bar) as to the most important and controversial international trade-related issues facing the United States today, most people would answer China ($196 billion in imports in 2004), the ever increasing over-all trade deficit ($731 billion in 2004), or our continuous reliance on foreign oil ($167 billion in imports of oil, gas and related mineral products in 2004).If you ask people to look closer to home, they would point south, and remember Ross Perot's mantra as to the jobs which were going to be sucked south to Mexico if the North American Free Trade Agreement ("NAFTA") was enacted into law.

Ask about Canada and people would reply that since we have a 3000 mile common border we probably have some trade with Canada, but it is not too much, or particularly controversial, since after all, Canada is part of NAFTA, and doesn't have a lot of people to buy our products or a lot of workers to take away our jobs.

Think again. As usual, most of us underestimate our friends to the North, or if you're a member of the "Coalition of Fair Lumber Imports," our most bitter enemy.

  • Import volume:Canadian exports to the U.S. totaled $255.6 billion in 2004, $58 billion more than from China, the second largest source of goods imported into the United States.
  • Trade deficit:Our trade deficit with Canada was $92.5 billion in 2004, not as large as the deficit with China ($163 billion), but still equal to 12.5% of our $733 billion deficit for last year.
  • Oil: We imported $49 billion of oil (and related products) from Canada in 2004, more than double imports from Venezuela ($21 billion), Mexico ($19 billion), Saudi Arabia ($18 billion) and Nigeria ($16 billion), four more "visible" sources of supply.
  • NAFTA: Imports from Canada ($255.6 billion) were $100 billion greater than imports from Mexico ($155 billion) in 2004, with the most significant trade between the U.S. and Canada taking place in the automotive industry ($59 billion Canada to U.S. and $39 billion U.S. to Canada).Manufacturers ship NAFTA originating automotive parts and components and finished vehicles duty free between Canada and the United States, allowing vehicles to be produced efficiently in this region.NAFTA automotive origin rules are complex, and require significant record keeping, but this integrated industry appears to have adapted to what could have been a nightmare and there have been few, if any, knock-down-drag-out trade disputes between the U.S. and Canadian governments or between vendors on either side of our Northern border.

In fact, while Canada is the United States' largest trading partner, trade relations between our two countries - for the most part and compared to trade with other countries - have been relatively free of serious controversy.

With one notable exception - softwood lumber.

Unlike the majority of North American industries, which have integrated their North American operations, the lumber industry remains sharply divided between "us" and "them." And since the NAFTA Agreement is significantly different from the true free trade agreement which exists among European Union members, and since forests are not factories, the U.S.-Canada softwood lumber dispute may soon dwarf all previous trade "wars" (e.g., consumer electronics, steel) in its impact and intensity.

The most recent chapter of the decades old trade dispute between the American and Canadian lumber industries began in April 2001, when the "Coalition for Fair Lumber Imports," through their U.S. counsel, Dewey Ballantine (the same firm which had represented the U.S. steel industry in the steel trade wars of the 1990s), filed antidumping duty ("AD") and countervailing duty ("CVD") petitions with the Department of Commerce ("DOC" or "Commerce") and the United States International Trade Commission ("USITC" or "Commission").

The initial Commerce and Commission investigations were in many respects no different from normal hard fought battles between well represented, bitter enemies in industries where there was a significant market at stake. At the end of the day, not unexpectedly, Commerce found that Canadian lumber was being dumped and subsidized and the Commission found that these unfair trade practices constituted a threat of material injury to the U.S. lumber industry. As a result, as of May 22, 2002, Canadian softwood lumber imports were subjected to a cash deposit at time of entry of 27.22 percent (8.43 percent AD and 18.79 percent CVD).

From this point forward, as a result of a "perfect storm," the softwood lumber dispute has entered uncharted waters.

In the majority of trade disputes, publication of an AD/CVD Order with a 27% cash deposit would sharply reduce import volume. These cash deposits are estimates only, and can change (either higher or lower) as a result of an Annual Review conducted by the Department, upon request of petitioners or respondents, with respect to merchandise entered during the review period.In many AD/CVD cases, especially those with high cash deposit rates - e.g., 27% -the mere fact that an Order is in place will dissuade American importers of record ("IOR") from purchasing subject merchandise.Thus, imports normally decline, sometimes dramatically, after an Order is published.

Except for lumber.Since demand for Canadian lumber in the U.S. remains high, and since the United States is the primary market for Canadian lumber, softwood lumber exports to the United States have increased to approximately $7 billion in 2004, compared to $5.9 billion in 2001, the year before the AD/CVD Orders were published.

The contrast between softwood lumber from Canada and other products subject to AD/CVD Orders is striking.Each year Customs and Border Protection publishes an Annual Report regarding its administration of the "Continued Dumping and Subsidy Offset Act," commonly known as the "Byrd Amendment." Pursuant to this Act, each fiscal year Customs distributes to qualified members of a domestic industry allocated shares of AD/CVD duties actually collected (i.e., AD/CVD duties attributable to entries whose liquidation is final).In FY 2004, Customs distributed $284 million in AD/CVD duties and identified $260 million AD/CVD duties which are final but remain uncollected.While significant, these "liquidated" duties pale in comparison to the $3.958 billion of AD/CVD cash deposits which have not been finalized. And most remarkably, over 70 percent of this total - $2.87 billion - is attributable to softwood lumber from Canada.

Given the amount of money at stake, the Canadian respondents are attacking the 27% rate on all fronts and are facing fierce opposition from the U.S. industry, which wants to ultimately collect every penny of the $2.87 billion in duty deposited as of September 30, 2004, and which continues to increase every day.

First, the Canadians challenged the Commission's underlying threat of material injury determination before a NAFTA Binational Panel, and by decision dated October 24, 2004, the Panel reversed the Commission, finding that there was no threat. The United States has filed a request for an Extraordinary Challenge Committee ("ECC") to review the Panel's decision, and a final ECC decision is scheduled to be issued by the end of July 2005.If the ECC affirms the Panel, the Canadian respondents will argue that the $2.87 billion duty deposits should be refunded to the importers of record (with interest).Petitioners presumably will claim that revocation is prospective only and, alternatively, that the NAFTA Binational Panel Review process is unconstitutional.

Second, the Canadian respondents challenged the Department's underlying determinations of subsidization and dumping before Dispute Settlement Bodies ("DSB") of the World Trade Organization ("WTO"). These DSB decisions were appealed to the WTO Appellate Body, which found that certain aspects of the Department's determinations were contrary to United States' international obligations. In accordance with Section 129 of the Uruguay Round Agreements Act, the Department, upon request of the United States Trade Representative, issued "revised determinations not inconsistent with the findings of the Appellate Body." With respect to CVD, the Department, by decision dated December 16, 2004, determined that the rate should be 18.62 percent, rather than the 18.79 initial rate. With respect to AD, the Appellate Body found that the Department's "zeroing" practice violated the International Antidumping Agreement, which led the Department, in a Section 129 Preliminary Determination, dated January 31, 2005, to turn around and, in what can best be characterized as a diabolical end run, calculate margins based on a normally ignored provision of U.S. law, comparing individual U.S. sales prices with individual sales prices in the Canadian home market.As a result, the 8.43 margin - which would have been significantly reduced with zeroing eliminated - was increased to 11.38 percent.

The Canadians also challenged the Department's initial AD/CVD determinations before NAFTA Binational panels. By decision dated January 24, 2005, the DOC, applying a methodology mandated by the CVD Panel, reduced the Canadian country wide CVD rate to 1.88, while on April 24, 2004, the Department responded to the AD Panel by finding that the AD rate in the initial investigation should have been 8.85 percent.

Finally, the Canadian respondents requested that the Department conduct Annual Administrative Reviews of the AD and CVD rates, thereby effectively rendering moot, for most Canadian softwood lumber exporters, the NAFTA and WTO decisions discussed above (with the significant exception of the Panel decision reversing the Commission's threat determination, which remains in force).On January 24, 2005, the Department issued amended final result in its AD review, finding that the weighted average "all other" rate for the period May 22, 2002- April 30, 2003 was 3.78 percent. The Final Results of the CVD review for this period were published one month later, on February 24, 2005, with the DOC finding a country wide CVD rate of 17.18 percent. Not surprisingly, these results are now being challenged before a NAFTA Binational Panel (CVD) and in the Court of International Trade (AD). At the same time, the second round of reviews have commenced before the DOC.

When will this all end? With over $3 billion on the table, with both the Canadian and U.S. governments involved in the administrative process, with a myriad of forums available for the Canadians to seek relief, with Canada threatening to retaliate against the United States because the WTO has decided that the "Byrd Amendment" conflicts with the International Antidumping Code, and with the possibility that the Supreme Court ultimately will be asked to decide whether the Binational Panel process passes constitutional muster, softwood lumber promises to keep the North American international trade bar busy far into the future.

Ned H. Marshak is Of Counsel to Grunfeld Desiderio Lebowitz Silverman & Klestadt, LLP, a law firm specializing in customs and international trade law. GDLSK is one of the largest law firms in theUnited States specializing in this field. Mr. Marshak has been practicing customs and trade law for 30 years, and represents foreign manufacturers and U.S. importers in a wide range of industries, including lumber.

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