Subsidy
Canada Repeatedly Proves Lumber is
NOT Subsidized!
U.S. Governments Provide
Significant Subsidies to Forest Industry
U.S.
Government Reports its Subsidy of Lumber Industry to WTO
Canada:
A Strong Record of Achievement For
Environmental Protection
Canada Repeatedly Proves Lumber Industry is Not Subsidized
The Myth of Canadian Subsidy.
What is a Subsidy?
How Does Timber Pricing Differ Between Canada and the U.S.?
Why the Canadian Lumber Industry is Not Subsidized.
Canadian
Lumber Subsidies are a Myth
Lobbyists representing a few U.S. lumber producers have long claimed that the Canadian softwood lumber industry is subsidized by the Canadian government. Despite continuously losing this argument in legal fora, and despite the U.S.-Canada Free Trade Agreement (the “FTA”) which is supposed to recognize each country’s competitive advantages, this powerful lobby group has been very effective in ensuring that Canadian imports of lumber into the U.S. have been restricted. The result: higher prices for lumber products benefiting U.S. lumber producers to the detriment of American homebuilders and homeowners.
What
is a Subsidy?
Ø
Under
the Subsidies Agreement of the World Trade Organization (“WTO”) (to which
the U.S. is a party), a subsidy is a financial
contribution from a government or a public body which confers
a benefit upon a targeted group or company.
Ø
Where
a government provides goods or services, a benefit is conferred if the authority
does not receive adequate remuneration for the provision of such goods or
services. Factors considered in
determining what is fair remuneration include price, quality, availability,
marketability, and transportation.
Ø
“Domestic”
subsidies (those not contingent on export performance) are only illegal if they
are “specific” to a particular industry or group of industries.
Ø
Where
an illegal subsidy is found to cause injury, the injured country may apply a
countervailing duty (“CVD”) to offset the subsidy.
How Does Timber Pricing Differ
Between Canada and the U.S.?
Ø
At
present, about 80% of U.S. lumber comes from privately owned land.
Ø
In
Canada, 90% lumber comes from so-called “Crown lands” which are owned and
managed by the government. The
license fee charged to companies by Canadian provincial governments for the
right to cut timber on Crown lands is known as “stumpage”.
Ø
Each
Canadian province or territory has its own method of determining a fair stumpage
rate to be applied to the volume of timber cut.
In many provinces, stumpage rates are determined according to a process
which assesses the estimated value of the products which can be generated from
each stand of trees that will be harvested and the cost of producing those
products. In other provinces, stumpage rates are derived from private forest
timber prices. In addition, provinces charge fees for service and other taxes
that more than recover the full market value of the trees cut and the cost of
replanting.
Why
The Canadian Lumber Industry is Not Subsidized.
Ø
Comparing
the Canadian timber pricing system to the U.S. system is like comparing apples
to oranges; just because they are different doesn’t mean one is necessarily
better or more fair than the other.
Ø
If
Canadian producers receive an unfair advantage, that should reveal itself in
higher returns on capital (i.e. higher share prices).; however, there
is no evidence that the stock of Canada’s large lumber producers has performed
any better than that of the large U.S. producers.
Ø
The
U.S. government has itself engaged in practices which could be considered
subsidization of the U.S. industry. For
example, in the 1970s, the U.S. industry bid up timber values on harvesting
rights on federal land. When lumber
prices then crashed in the late 1970s, many companies faced financial
difficulties until legislation was enacted excusing them from their contractual
commitments. In November 1998, the
U.S. government reported to the WTO that it gave annual subsidies in excess of
$600 million to U.S. forest products companies.
Ø
Even
before many of the provincial stumpage rates were changed in the late 1980s to
significantly
Ø In 1973, the Report of the U.S. President’s Advisory Panel on Timber and the Environment noted that increased imports of lumber from British Columbia could be explained by a number of factors including transportation cost advantages, stumpage rates and lower labour costs, but it concluded that stumpage rates did not create a significant cost advantage for Canadian lumber producers.
Ø In a 1983 report, the U.S. International Trade Commission (“ITC”) explained that prices of timber harvested on U.S. national forest lands were higher than prices of timber harvested on Canadian public lands because there was intense competition under the U.S. auction system for limited amounts of high quality old-growth timber, whereas Canada had an abundant supply of timber which was more than sufficient to meet the capacity of license holders. Simply put, Canada – with its vast forests – has an advantage in timber.
Ø In 1983, the U.S. Commerce Department dismissed the first CVD case launched against Canada, finding that Canadian softwood products industries did benefit from various government programs, but the amount of subsidization was so small as to be insignificant. The Commerce Department’s decision found that “stumpage” programs were available to everyone and thus not “specific”. It went on to state that, in any event, there was no subsidy:
“Even if stumpage programs were being provided to a “specific group....of industries,” we determine that they would not confer a domestic subsidy. In this regard, we determine that Canadian stumpage programs, except for certain aspects of those of Ontario and Quebec, do not confer a domestic subsidy, because they do not provide goods at preferential rates to the producers of the products under investigation...
...the Canadian governments do not relieve the producers of any pre-existing statutory or contractual obligations. To the contrary, the governments impose a cost for the stumpage, which they have owned themselves for well over a century. These imposed costs include not only cash payments for stumpage, but also one or more other costs, such as ground rents, forest management plans, silviculture and road building...
We believe that a comparison of Canadian stumpage prices with U.S. prices would be arbitrary and capricious in view of (1) The wide differences between species composition; size, quality, and density of timber; terrain and accessibility of the standing timber throughout the United States and Canada; (2) the additional payments which are required in many provinces in Canada, but not generally in the United States; (3) the fact that in recent years, prices in national forests in the United States have been bid anywhere between two to five years in advance of cut, without taking into account the fluctuations in demand for lumber; and (4) the fact that in recent years the U.S. Forest Service has restricted the supply of timber in certain national forests due to budgetary and environmental restraints.
Alternatively, even if one believes that there is a rational basis for comparing U.S. and Canadian stumpage prices, the record of these investigations includes studies showing that once appropriate adjustments are made to take into account the differences in quality, accessibility, as well as additional cash payments and in-kind services, Canadian prices for standing timber do not vary significantly from U.S. prices. Indeed, in some cases the Canadian price may be higher.” (emphasis added)
Ø In 1986, the U.S. Federal Trace Commission filed a brief with the ITC arguing that Canadian stumpage programs did not confer any subsidy;
Ø
In
1986, only
three years after the first CVD case, U.S. lobbyists convinced the Department of
Commerce to launch another investigation based on the same facts.
When the Commerce Department overturned its own previous ruling, Canada
decided to enter a Memorandum of Understanding (“MOU”) with the U.S. to
settle the lumber dispute. The
Canadian government did not want this issue – which had become the biggest
trade dispute in the history of Canada-U.S. relations – to upset the
negotiations for a free trade agreement which were then on-going between the two
countries. Under the MOU, Canadian
exports faced a 15% tax – equal to the amount of subsidy alleged by the
Commerce Department in the second case.
Ø
In the
late 1980s, British Columbia and Quebec - Canada’s two largest lumber
producing provinces - made changes to their stumpage regimes, imposing higher
stumpage rates and requiring licensees to absorb new costs. These “replacement
measures” were negotiated with and agreed to by the U.S. government and
resulted in a complete removal of the 15% tax from B.C. and a substantial
reduction for Quebec.
Ø
Thus,
even if producers had benefited from stumpage policies (questionable given the
original 1983 Commerce decision), the increased stumpage rates in Quebec and
British Columbia substantially increased the financial burden on the vast
majority of Canadian lumber producers to the point of offsetting any subsidy
alleged by the Commerce Department. In
fact, in 1991, a Commerce Department official testified before a congressional
committee that Canada’s “replacement
measures” were “sufficient to offset” any alleged subsidies.
Ø
In
1991, Canada terminated the MOU. In
response, the Commerce Department self-initiated a third CVD case, claiming that
U.S. producers were denied the offset of the export tax charges against alleged
Canadian subsidies. In addition, a
USTR investigation was initiated under section 301 of the Trade Act of 1974,
claiming that Canada’s act, policies and practices regarding the exportation
of softwood lumber to the U.S. were unreasonable and burdened or restricted U.S.
commerce. These proceedings
completely ignored the replacement measures which had been negotiated and
accepted by the Department.
Ø
During
this CVD case, the Canadian industry was evaluated by U.S. experts using the
U.S. accounting system for assessing timber pricing on U.S. federal lands. When adjusted for Canadian conditions, it was found that,
even assessed conservatively, every
Canadian provincial government more than recovers the costs of its timber sales.
Ø
A
study performed by Dr. William Nordhaus, an expert economist from Yale
University, concluded that stumpage rates
had a negligible impact on timber pricing in Canada.
Dr. Nordhaus’ study found that even a 100% increase in stumpage rates
would only result in a 2.8% decline in output from Canadian producers.
Ø
In
this case, however, the Commerce Department expanded the
inquiry to consider Canadian log export restrictions which allegedly
resulted in lower domestic prices and, therefore, subsidization.
This argument was made despite the fact that (1) this program does
not amount to a “financial contribution” from a government and, therefore,
does not meet the WTO Subsidies Agreement definition, and (2) the U.S. has
similar restrictions on log exports from federal lands and state lands in the
Pacific Northwest. The Canadian
restrictions had existed for decades and had never been challenged before.
Essentially, this new allegation was necessary for the Commerce
Department to find that even a small subsidy existed.
Ø
Commerce’s
subsidy determination was appealed to a bi-national panel formed under the FTA.
The panel was unanimous in remanding the decision back to the Department
for reconsideration. A majority of the bi-national panel ultimately determined
that there was no evidence of any subsidization of the Canadian lumber industry
and ordered the Department to reverse its subsidy finding.
The panel’s determination was upheld by an Extraordinary Challenge
Committee, also formed under the FTA.
Ø
Another
bi-national FTA panel unanimously found the ITC’s determination that Canadian
imports injured the U.S. industry to be unfounded and remanded that
determination back to the ITC – twice – for reconsideration.
Ø
As a
result of the FTA panel decisions, Commerce revoked the CVD order and the ITC
investigation was terminated. Not
to be deterred, U.S. lumber producers then filed a complaint with the U.S. Court
of Appeals challenging the constitutionality of the decision and the dispute
resolution process under the FTA. The
industry also proceeded to effectively lobby for changes to U.S. trade
legislation which would make their arguments more likely to win in any future
CVD case.
Ø
Once
again, Canada decided to “finally” settle the dispute by entering into
negotiations with the U.S. government and other interested parties.
The result was the Softwood Lumber Agreement, which requires Canada to
assess fees on softwood lumber shipped from its four leading lumber-producing
provinces in excess of 14.7 billion board feet per year.
Ø
The
Agreement, which came into effect April 1, 1996 for a period of five years, was
entered into by Canada to put an end to the expensive and disruptive dispute
which had been on-going for over a decade.
It in no way signified Canada’s agreement with the long-standing (but
still unproven) U.S. subsidy allegations.
Ø
Despite
the Agreement, softwood lumber has continued to be a contentious trade matter
between Canada and the U.S., in particular due to a series of recent
reclassifications by the U.S. Customs Service which have resulted in new
products being added to the scope of the Agreement.
Please see The Government Report on Subsidy following this article.
U.S. Governments Provide Significant
Subsidies to Forest Industry
- Subsidies in the form of federal, local, county and state economic incentives add-up to hundreds millions of dollars
- U.S. officially reports to The World Trade Organization more than $600 million in Federal subsidies to U.S. forest industry
Business incentives, or subsidies, have been a traditional way to encourage companies and industries in countries throughout the world, including the United States. They are designed to strengthen economies, assist local communities, and provide companies a helping hand in adverse conditions.
The United States provides little discussed subsidies to its timber industry. Some come from the Federal Government, others are provided through state and local funds. While these subsidies may accomplish many admirable goals, U.S. companies that complain about subsidies in other countries should be more forthcoming about the types and amounts of subsidies they receive as well.
Every two years the governments which are members of the World Trade Organization file an official report on the subsidies they provide to their industries. That official report by the U.S. for 1998 (the latest one available) reports that the U.S. subsidizes the forest industry by more than $600 million: $50 million in the form of income tax concessions through reduced rates under a program that has an indefinite duration; $500 million under a program that allows expensing of multi-period timber growing costs rather than capitalizing certain deductions from taxable income (a program with an indefinite duration) and $45 million is subsidized through providing an investment credit and seven-year amortization for reforestation expenses, also with indefinite duration. The U.S. also reported that there are other programs at the Federal level that are not quantified, such as motor fuel excise tax exemptions for helicopters used in logging and other timber related activities.
State and local governments provide incentive subsidies
A recent survey of only 13 of the 50 states found that all offer incentive packages for the timber industry to locate manufacturing operations in their states, to upgrade and expand existing facilities, and to generate jobs. Many states have developed technical assistance teams to help timber firms with many environmental regulations they must meet. Tax credits against income and sales taxes are also popular subsidies for the timber industry.
There are examples aplenty of state and local subsidies in the U.S. provided to the timber industry (and others), ranging from issuing development bonds to build facilities that are then leased back to the company, building roads and infrastructure at taxpayer expense for new or existing facilities, abatement incentives, training and economic development programs.
North Carolina is one of many states that provide tax credits for industries, including timber, that create new jobs. Through the William S. Lee Quality Jobs and Business Expansion Act, the state offers investment and training tax credits that range from $500 to $12,000 per job created. Wisconsin Tissue recently announced it would build a new paper recycling plant in Halifax County. That county qualifies for the highest level of incentives, and the plant will bring more than 150 new jobs into North Carolina. The state provided more than $35 million in tax incentives to Wisconsin Tissue, with $31 million coming from tax credits based on the value of the new equipment.
Another state where the timber industry can find government support is Montana. Here, both direct and indirect general fund support is provided. Montana’s Department of Natural Resources (DNR) manages a significant Forest Stewardship program, administers an insect and disease management program, offers forestland owners resources to comply with water quality rules, and maintains a consultant director for forest services. Additionally, the state’s general fund supports all fire-fighting operations within Montana, an annual cost of nearly $12 million.
The Montana Division of Forestry offers programs designed to encourage lumber companies to reforest after harvest. Activities include tree planting, seedling cost and worked needed to prepare the land for planting. Montana also has been providing technical assistance, interpreting laws and regulatory procedure to ease the permitting process.
Significant tax credits are also available to the timber industry in Montana. Tax credits for training new employees are available against corporate income tax to offset 50 percent of the total training costs per employee for the first six months of training.
Companies benefit from incentives, development subsidies
Tax credits for capital investments have brought significant benefits to the timber industry in Maine. Through Tax Increment Financing (TIF), any business making significant capital investments within a municipality may garner some of its property taxes to assist in the project’s funding. Among recent examples of this kind of subsidy are:
Georgia Pacific, paper and pulp products and oriented strand board facility, Baileyville, ME, $89 million;
International Paper, paper products facility (three projects), Jay, ME, $53 million, $140 million, and $140 million, totaling $333 million; and
Great Northern Paper, paper products facility, East Millinocket, ME, $185 million;
Champion International, coated paper and dimensional lumber facility, Bucksport, ME, $121 million.
Georgia also has a number of subsidies available to the timber industry. Its Forestry Commission provides financial assistance to forest landowners wishing to install various types of forest practices on their land, including site preparation and tree planting, timber stand improvement, and crop tree release. Among these are:
Forestry Incentives Program—a federally-funded program through the Natural Resource Conservation Service; and
Stewardship Incentive Program—a federally-funded program through the U.S. Forest Service in partnership with the Farm Service Agency and the Georgia Forestry Commission.
Among state subsidies, one Georgia subsidy assists the forest industry by removing annual stumpage taxation. This was initiated several years ago when the legislature separated the stumpage tax from the ad valorem land tax.
While subsidies provide benefits to the national and local economies, one thing is clear—the U.S. timber industry receives considerable subsidies in the United States.
U.S. Government Reports Its Subsidy of the Lumber Industry to WTO
To
request a hard copy of this report (by FAX or mail), please click here.
