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ACAH Member Letters to USTR

BEFORE THE OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE

ON BEHALF OF THE TRADE POLICY STAFF COMMITTEE

  RESPONSE TO REQUEST FOR COMMENTS REGARDING

SOFTWOOD LUMBER PRACTICES IN CANADA

AND SOFTWOOD LUMBER TRADE BETWEEN

THE UNITED STATES AND CANADA

65 Fed. Reg. 11,363 (March 2, 2000)

 

 

 

 

              American Consumers for Affordable Homes (“ACAH”) represents more than 95% of U.S. softwood lumber consumption.  It is an ad hoc alliance of organizations representing a wide variety of U.S. lumber users and consumers who share a common concern, the negative impact of managed trade between the United States and Canada in lumber products.  Our alliance includes home builders, lumber dealers, remanufacturers, affordable housing groups, retail merchants, manufactured housing producers, and advocates for U.S. consumers and for free trade who have been or will be injured by the continuation of the Softwood Lumber Agreement (“SLA”) or any other trade distorting mechanism used to restrain trade in lumber.  Our alliance members recognize that the SLA is incredibly unfair to the overwhelming majority of American stakeholders affected by this issue.  ACAH respectfully submits the following comments in response to the Trade Policy Staff Committee’s request for comments regarding softwood lumber practices and trade.[1] 

 1.         The SLA Harms Consumers, Businesses, and Taxpayers Whose Interests are Best Served Through Free Trade in Lumber, While Benefiting Only a Select Segment of U.S. Lumber Producers. 

        The housing industry produces 4.5 million jobs per year.  Lumber represents a significant cost of a new or renovated home.  Inflated lumber prices mean that houses cost more to build.  The SLA adds an average of $1000 to the price of every home built.  For every $50 increase in the price of 1,000 board feet of framing lumber, 300,000 households are priced out of the market.[2]  Many of these are first-time homebuyers, single parent families, the elderly and others with lower incomes.  The SLA is responsible for excluding an entire economically disadvantaged segment of the population from the American dream of home ownership, and this is not the only negative consequence.

When fewer people are able to afford to buy homes U.S. workers and businesses suffer.  Those affected most directly are homebuilders (more than 4,500,000 workers, compared to the 220,000 employed in U.S. softwood lumber production), including manufactured-home builders.  Manufactured homes are one of the most important products for first-time homebuyers, and even small increases in cost mean the difference in many potential buyers’ ability to own a home.  If these customers can no longer afford to buy homes, suppliers lose business and their employees suffer.  Furthermore, less remodeling is done when the cost of key materials, such as lumber, rises.  Lumber dealers who supply home builders and manufacturers are hurt; and support industries and other sectors also feel the impact of reduced residential construction.  Jobs making windows, doors and other wood products are lost.  New homes also generate the need for services of plumbers, electricians, roofers, and landscapers, as well as new appliances, furniture, curtains, carpeting, and paint.

The companies making up the U.S. lumber lobby have one goal--to limit the influx of Canadian wood in order to keep prices artificially high, boosting the value of their uncut timber.  A select segment—not all—of the U.S. lumber industry wishes to continue the LA or its equivalent in order to achieve its goal.  These companies have succeeded in distorting the landscape of U.S.-Canada lumber trade.  Trade is driven by the quota, not by demand.  Prices are much more volatile than they otherwise would be because supply cannot adjust normally to change in demand.[3]  In periods when weather permits construction, lumber prices skyrocket due to shortages.  In less busy periods, there is a surplus of lumber and prices plummet.  See the following chart showing the volatility of lumber prices.

This enormous volatility in the market has perverted the industry’s normal business practices.  In order to avoid large losses as a result of volatility, operators are forced to either maintain large inventories or risk premiums to mitigate against price escalation or change the type of materials used.

2.         Consumers Need to be Included in Discussions Regarding Lumber Trade by U.S. Government.

        The SLA causes the cost of new homes to go up, excluding hundreds of thousands of Americans from home ownership.  Those who can still afford to buy a home are forced to shoulder additional financial burdens above and beyond the increased price of the home itself.   Homeowners across the country pay more in taxes, mortgage payments, insurance, permits, and other costs which tend to rise with the cost of the house.  It has been estimated that because NAFTA free trade rules do not apply to lumber, it costs the American public and the American economy $2.7 billion unnecessary, inflationary dollars a year based on the economic impact of the lumber quota on the housing industry alone.  U.S. consumers do not approve of a few domestic lumber companies benefiting at their expense.  U.S. consumers cannot be excluded from the debate on the future of lumber trade between the United States and Canada.  We are pleased that Deputy USTR Richard Fisher has committed to U.S. consumers being at the table.  Consumers must be given at least the same status as the U.S. special interests that have been profiting from the deal.

        The elected representatives of U.S. consumers have already begun to recognize and advance the needs of taxpayers and consumers in their districts through their support of H. Con. Res. 252.  This measure has the support of a broad, bipartisan cross-section of members of Congress who want to end the SLA, create a competitive market for lumber products, and ensure that the needs of U.S. consumers are fully taken into account.

3.         It is Inappropriate for the United States to Use the SLA as a “Remedy” for Alleged Subsidies to the Canadian Lumber Industry, Especially When Established Procedures Under Domestic and International Law Already Exist.

        The U.S. lumber lobby’s claims for protection are based on an assumption that Canada’s stumpage practices and log export restrictions constitute countervailable subsidies.  This assumption does not withstand analysis.  Even assuming, arguendo, that subsidies might exist, there are established procedures in both U.S. and international law to investigate claims that there are subsidies whose effect cause injury to the U.S. lumber industry. 

        Under normal circumstances, the local industry is obligated to prove that another country has granted subsidies causing injury before the U.S. government may impose a measure upon incoming goods from another country.  There are two established procedures for doing so:  through the World Trade Organization (“WTO”) and United States countervailing duty (“CVD”) law.

        The WTO procedures for challenges to another country’s subsidies are established by the Agreement on Subsidies and Countervailing Measures.  If one Member state believes that another Member is subsidizing a particular industry, this agreement prescribes that the countries must engage in consultations.  If consultations do not result in a mutually agreeable outcome, a panel may be requested under the Dispute Settlement Understanding.  Recent subsidy cases in the WTO have included:  Canada—Measures Affecting the Importation of Milk and the Exportation of Dairy Products,[4] which addressed the U.S. challenge of Canadian subsidies to the dairy industry, and Australia—Subsidies Provided to Producers and Exporters of Automotive Leather,[5] which addressed the U.S. challenge of Australian subsidies to the leather industry.  In each case, the WTO found in favor of the United States.

        Another existing procedure for examining the U.S. lumber lobby’s claims is found in U.S. countervailing duty law.  The domestic lumber producers who so wish can avail themselves of this procedure and have done so in the past.  Of course, complainants must be able to show that they are representative of the domestic industry by demonstrating that 50 percent of the domestic industry supports a countervailing duty action.  Moreover, before a remedy in the form of countervailing duties may be assessed by the Department of Commerce, the complainant must prove:  a) that subsidies exist, b) that the domestic industry has suffered injury, and c) that the effects of the subsidies were the cause of the material injury to the domestic industry. 

        In all its previous attempts, the domestic lumber lobby has lost its case that either stumpage practices or log export restrictions constituted countervailable subsidies.  In 1982, U.S. lumber companies brought a countervailing duty case against allegedly subsidized Canadian imports of lumber.  Commerce found subsidies to be de minimis and found no subsidies at all from either stumpage practices or log export restrictions (which no one even argued could be considered a subsidy).  U.S. producers challenged this decision in the U.S. Court of International Trade, but the court upheld Commerce’s ruling.  This case came to be known as Softwood Lumber I. 

        In 1986, the U.S. initiated another countervailing duty case.  While Commerce preliminarily determined stumpage practices provided a subsidy, that preliminary determination was based on assumptions adverse to Canada, not on verified evidence.  There was no final determination because the United States and Canada entered into a Memorandum of Understanding (“MOU”) on softwood lumber trade. 

        The MOU contained a provision permitting either country to terminate it.  Canada exercised this option in 1991.  At that point, Commerce self-initiated a countervailing duty action against Canadian lumber imports, thereby commencing Softwood Lumber III.  In that investigation, the Department found countervailable subsidies existed with respect to stumpage and to log export restraints, but this ruling was challenged under the appropriate provisions of the Canada—United States Free Trade Agreement.  A binational panel determined that Commerce’s determination had not been grounded in the facts.  Nevertheless, Canada and the United States entered into the SLA, an agreement that did not take the needs of U.S. consumers into account.

        Thus, the U.S. lumber lobby has never been able to prove its loud claims of subsidies in a neutral forum.  There is no reason to believe that petitioners are more likely to prove the existence of countervailable subsidies or injury today.  Indeed, neither practice falls within the internationally agreed definitions of a subsidy (a definition repeated in U.S. law). 

        The SLA, therefore, is unnecessary and inappropriate as a tool to “remedy” alleged subsidization of the Canadian lumber industry.  Furthermore, both domestic and international law provide appropriate avenues of redress, should U.S. timberland owners want to try again to prove that Canadian programs provide injurious subsidies. 

 

4.         Even Assuming It was Appropriate to Seek a Remedy to “Level the Playing Field,” the SLA Tilts that Playing Field Solely in Favor of the Few Large Companies that Seek to Avoid Market-Based Competition.

                The SLA should not be used to circumvent the procedures set down by law.  In addition, the U.S. is inviting a challenge to its own beneficial subsidies to the U.S. forest industry.  The United States provides extensive assistance in the form of subsidies to its own lumber industry, including the same companies that sought the SLA in the first place.  Examples of the more than $600 million a year in U.S. federal subsidies to the domestic lumber industry, as reported by USTR to the WTO (attached as Tab A), include: 

·        Expensing of Multiperiod Timber Growing Costs:  This measure is an industry-specific income tax concession, which allows timber owners to expense, rather than capitalize, certain deductions from taxable income.  The estimated annual revenue loss to the U.S. is $500 million.

·        Capital Gains Treatment of Certain Timber Income:  U.S. provides another income tax concession whereby some non-corporate owners of timber property receive income tax concessions in the form of a reduction in the rate of tax from 39.6 percent to 20 percent, or from 15 percent to 10 percent.  The estimated loss in revenue to the government from this subsidy is $50 million per year.

·        Special Investment Credit and Seven-Year Amortization for Reforestation Expenses:  This income tax concession allows for a 10 percent investment tax credit for up to $10,000 invested annually in clearing land and planting trees for the ultimate production of timber.  The same amount of forestation investment may also be amortized over a seven-year period, where normally the amount would have to be capitalized and could be deducted only when the trees were sold or harvested (over 20 years later).

·        Exemption from the Deficit Reduction Component of Motor Fuel Excise Tax for Helicopters in Logging Operations and Other Timber-Related Activities:  Under this exemption, otherwise taxable aviation fuel may be sold tax-free for use in helicopters involved in timber-related activities, allowing a savings of 4.3 cents per gallon in fuel.

Finally, as the GAO/U.S. Forest Service has frequently reported, the U.S. Government does not come close to even covering the costs of its timber sales, having lost $42 million between 1995 and 1997.[6]

        Subsidies are also provided to U.S. forest product companies by state, local and county governments, even though USTR reports almost none of these programs to the WTO.  In the hopes of stimulating their economies and creating jobs, numerous states, such as Maine, North Carolina and Georgia (just to name a few) offer subsidies in order to encourage timber operators to locate in their states.  These subsidies take the form of tax credits, assistance in building facilities, provision of roads and infrastructure, abatement incentives, and training and economic development programs.  Maine has instituted tax increment financing.  Georgia provides financial assistance for site preparation and tree planting, timber stand improvement and crop tree release.  North Carolina gives lumber producers investment and training tax credits through the William S. Lee Quality Jobs and Business Expansion Act.  A summary of programs in 13 states is attached at Tab B.

        Many of these programs play important roles assisting local communities, workers, and companies, but they are exactly the type of programs that the U.S. Department of Commerce investigates and frequently countervails, even if they are general programs used by many different businesses, or environmental or worker training programs.  It would be very imprudent for USTR to expose these useful American programs to attack in order to benefit a few powerful lumber companies at the expense of millions of U.S. consumers. 

5.         The Question of Whether to Renew the SLA is an Issue of Housing Affordability—Not an Environmental Issue.

        Some groups argue that removal of the quotas will have an adverse impact on biodiversity, sustainability of forests and conservation of old growth and primary forests in Canada.  They do not mention that the SLA quotas put ecological pressure on domestic forest resources, particularly in the Pacific Northwest and on certain privately held lands. 

        We believe that the Softwood Lumber Agreement or the absence of an agreement essentially has a neutral environmental impact.  The Government of Canada, the provincial governments in Canada, Canadian lumber producers and environmental advocates are engaged in a debate and are making decisions on forestry and species conservation policy as are their counterpart groups in the United States. 

        To the extent issues of conservation have transboundary implications there are mechanisms through which they can be addressed.  Not only are there ongoing discussions involving U.S. and Canadian environmental and conservation agencies, but there is also the North American Commission on Environmental Cooperation (“CEC”).  The CEC was established by the North American Agreement on Environmental Cooperation to complement NAFTA and addressed forest conservation issues as early as 1995.  This organization is particularly well-suited to the role of creating a cohesive North American environmental framework and designed to deal with environmental disputes: 

The North American Commission on Environmental Cooperation is uniquely positioned to perform a catalytic as well as a value-added function of integrating outputs from diverse activities into a cohesive North American environmental framework.  It can also play a bridging role among diverse interests.[7]

        Should there be forest conservation or biodiversity issues which USTR believes need to be examined in the context of free trade in lumber, it would be appropriate to refer those issues to CEC.

        Certain groups, apparently working with the large U.S. companies that profit from the SLA at the expense of U.S. consumers, have sought to justify the continuation of softwood lumber quotas based on alleged environmental damage caused by Canadian lumber industry practices.  They claim that relatively low stumpage prices result in overexploitation of Canadian lumber causing environmental damage in Canada. 

        To the contrary, the Canadian federal and provincial governments and the Canadian lumber industry have embraced the goal of sustainable forestry.  In 1998, members of the Canadian forest community adopted the Canada Forest Accord, a pact to work towards the maintenance and enhancement of the long-term health of Canadian forest ecosystems, while providing environmental, economic, social, and cultural opportunities for the benefit of present and future generations.  The signatories to the Accord included Canadian Federal and Provincial Ministers responsible for forests as well as individuals from environmental groups, such as the National Aboriginal Forestry Association, Wildlife Habitat Canada, the Prince Edward Island Nature Trust, the Forest Alliance of British Columbia, and Ducks Unlimited Canada.  Numerous provincial programs have also been initiated.  For example, Ontario has conducted an exhaustive environmental assessment of its Crown lands, passed the Crown Lands Sustainability Act in 1994, and produced a Forestry Accord between industry and key environmental players.  That accord was supported by members of environmental organizations, including the World Wildlife Fund, the Federation of Ontario Naturalists, and the Wildlands League. 

        If the U.S. complains about Canadian forest practices on environmental grounds, it may face challenges to its own practices, such as the U.S. failure to charge the full cost/value of its own stumpage,[8] and the fact that removal of trees by the U.S. forest industry was 21 percent greater than growth.

United States Forest Industry Land

Timber Harvests and Growth 1996[9]

 

 

        If an environmental issue is to be raised, it should be the negative impact of the SLA on the U.S. environment.  Restraints on imports from Canada lead to pressure to increase harvesting in the United States or elsewhere.  At a time when the U.S. industry is already removing more stock from privately-held forest industry lands than it grows, the U.S. government should be wary of import restraints such as the SLA.

6.         The SLA Has Been Illegally Expanded.

        The SLA should not be renewed because of the potential for abuse as demonstrated by the repeated attempts at unilateral expansion of the agreement.  U.S. Customs reclassification of wood-products has been used as a tool for expansion of the SLA.  In order to further restrict the flow of lumber products coming into the U.S. from Canada, a small coalition of U.S. producers sought to extend the SLA to value-added wood products, specifically pre-drilled studs. This product had previously been exempt from the SLA agreement; however, by reclassifying the goods into item 4407 of the HTSUS, a classification that was subject to the quota, the U.S. Customs Service expanded the scope of products subject to the SLA without raising the quota level.  This reclassification was challenged at the Court of International Trade (“CIT”) and upheld in American Bayridge Corp. v. United States, 35 F. Supp. 2d 922 (CIT 1998).  Having received a favorable ruling, U.S. Customs Service next sought to use the Bayridge holding as a pretext to bring additional value-added wood products, notched and rougher headed lumber, under the SLA through reclassification.  The claim was that the CIT precedent in Bayridge obligated Customs to do so.  One might then ask why the reclassification still stands when the CIT opinion in Bayridge upholding the reclassification has been vacated by the Court of Appeals for the Federal Circuit and the U.S. Customs Service’s “obligation” to reclassify the additional value-added wood products under item 4407 of the HTSUS has been removed.

        Moreover, after the World Customs Organization (“WCO”), whose standards are used by more than 170 countries around the world including the United States, voted against Customs’ actions, stating that it was incorrect to reclassify the pre-drilled lumber as part of a tariff category subject to the Softwood Lumber Agreement, Customs continues to classify pre-drilled (and notched and rougher headed lumber) within the SLA.  The WCO stated that Customs’ initial classification (i.e., outside the quota) was the correct one.  The only reasonable conclusion to be drawn is that U.S. Customs has been used by the powerful U.S. lumber interests to restrict competition from Canadian lumber beyond what could be negotiated or approved under law to the detriment of U.S. consumer choice.

Competition has been further restricted by a recent agreement between the United States and the province of British Columbia to raise the fee level on lumber coming to the United States from that province.  The agreement raises the maximum export fee on lumber from $106 to $146 per 1,000 board feet.  This further shows the apparently irresistible tendency of government control of the lumber trade to extend itself further and further, at the expense of the American public.

7.         Conclusion

    For the reasons stated above, ACAH, on behalf of American consumers, taxpayers, and homebuyers, requests that the SLA not be renewed.

AMERICAN CONSUMERS FOR AFFORDABLE HOMES

Citizens for a Sound Economy

Consumers for World Trade

Donohue

Free Trade Lumber Council

The Home Depot

Manufactured Housing Institute

National American Indian Housing Council

National Association of Home Builders

National Retail Federation

Retail Industry Leaders Association

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