[Congressional Record (Bound Edition), Volume 147 (2001), Part 12]
[Senate]
[Pages 16544-16546]
[From the U.S. Government Publishing Office, www.gpo.gov]



                        CANADIAN SOFTWOOD LUMBER

  Mr. BAUCUS. Mr. President, I rise today to discuss the U.S.-Canadian 
dispute on softwood lumber.
  Although it might have escaped the attention of many in Washington, 
the Bush administration announced a critical trade policy decision over 
the August recess.
  After considering truck loads of evidence provided by a legion of 
lawyers, the Department of Commerce once again decided that Canadian 
provinces giving away timber at a fraction of its value was a subsidy 
to Canadian lumber production.
  Specifically, the Commerce Department issued a preliminary finding 
that these subsidies amounted to 19.3 percent of the value of Canadian 
lumber. Further, the Commerce Department took the unusual step of 
declaring critical circumstances, which back dates the duties by 90 
days. It did this because it determined Canadian producers were 
flooding the U.S. market--in an attempt to take advantage of the 
expiration of the previous U.S.-Canada agreement on this topic.
  The Commerce Department is due to issue another preliminary finding 
under another U.S. fair trade law, antidumping law, in the middle of 
October. I agree with most observers that this will likely result in a 
substantial increase in the current duty.
  But I do not rise today to discuss the intricacies of U.S. trade 
laws.
  Nor, Mr. President, do I plan to discuss the details of Canadian 
lumber programs.
  I have never understood how giving away timber at a fraction of its 
market value and allowing government-set prices instead of market 
prices could be anything but a market distortion. But that is a debate 
that we have had for 20 years and I myself have discussed on the Senate 
floor at least a dozen times.
  I see little point in repeating facts that the Commerce Department 
and independent observers on both sides of the border have long 
acknowledged. I ask unanimous consent that the forward and executive 
summary of an excellent analysis of Canadian subsidy programs in 
British Columbia, prepared by a coalition of Canadian environmental 
group--``Cutting Subsides, or Subsidized Cutting?'' be printed in the 
Record after my statement.
  The PRESIDING OFFICER. Without objection it is so ordered.
  (See Exhibit 1)
  Mr. BAUCUS. Instead I want to look to the future. I rise today to 
offer a true and lasting solution to what has become the world's 
largest bilateral trade dispute and, by far, the largest fly in the 
ointment in the U.S.-Canada relationship. Given some political changes 
on both sides of the border, I believe it is now possible to negotiate 
a lasting and real agreement on the U.S.-Canada softwood lumber 
dispute.
  In 1986, at a similar juncture in a trade case, the U.S. and Canada 
agreed to resolve the dispute by allowing Canada to collect an export 
duty--a duty the United States would have otherwise collected. At the 
same time, Canadian provincial officials agreed to a set of forestry 
program reforms to eliminate the underlying subsidies.
  This arrangement broke down when Canada unilaterally--and without 
explanation--withdrew from the arrangement. But with some adjustments, 
a similar approach could be pursued to a real solution.
  The basic concept is simple. Once the final preliminary duty is 
known, Canada would agree to collect this on its exports and thus gain 
the revenue that would otherwise go to the U.S. treasury.
  The antidumping element complicates this understanding, but it could 
be addressed through a minimum export price or a duty adjustment to 
account for the dumping.
  Once the basic export duty rate was set, both sides would agree that 
the duty would be lowered as Canadian provinces eliminated subsidies. 
For example, if Canada--or particular provinces--stopped artificially 
lowering the price of stumpage, the portion of the export duty aimed at 
offseting stumpage subsidies would be dropped.
  Unfortunately, evaluating the impact of proposed reforms in Canada's 
forestry subsidies is a complex task and, sadly, these complexities 
have been used to hide subsidies and replace old subsidies with new 
ones.
  In order to assist the trade negotiators from both countries in 
evaluating proposals for reform, I propose an ad hoc commission--made 
up of representatives of the forest industry from both countries, 
representatives of organized labor from both countries, and 
representatives of the environmental community form both countries.
  This panel would evaluate proposals for forestry reform in Canada and 
provide a non-binding evaluation of the proposed changes to relevant 
U.S. and Canadian government officials.
  I feel particularly strong that representatives from the 
environmental community be included in this group because they are the 
closest thing to truly independent observers of Canadian forestry 
practices.

[[Page 16545]]

  In addition to providing a fair and thorough evaluation of proposals 
for change, this group could be a watchdog against backsliding. And it 
could provide a forum to discuss cross-border cooperation on 
sustainable forestry practices, joint positions for international 
negotiations on trade and forestry issues, and joint approaches to 
problems, such as protection of endangered species.
  I believe such non-binding oversight could ensure real progress 
toward a final and lasting solution to this difficult trade problem.
  I have read in the Canadian press some statements that Canadian 
officials--or perhaps the U.S. lawyers that represent them--that Canada 
should pursue no such deal until after the issue is fully litigated 
before the World Trade Organization and perhaps the NAFTA.
  But the central fallacy of this position is that the U.S. would 
negotiate after it has turned back challenges. And there is no reason 
to believe that Canada would succeed in such litigation. Despite the 
rhetoric of some, Canada's record in past complaints is mixed, and U.S. 
law and practice has been refined to avoid past problems. If 
challenged, I believe the U.S. actions on softwood lumber will survive 
international scrutiny.
  Obviously, Canadian officials will choose whatever strategy they see 
fit, but such a litigate-at-all-costs strategy would result in the duty 
being in place for most of a year--at minimum.
  The bottom line is this: Out-of-court settlements are struck when 
neither party is certain of the outcome of litigation; no one settles 
after they have won the final appeal.
  If the U.S. duties survive Canadian challenges, I would then oppose 
any effort to settle the dispute along the lines I have laid out. If 
the U.S. is forced to litigate and succeeds, there will be no domestic 
support for a settlement, no export duty, and no compromise. A 
compromise is possible now, not later.
  Again, I congratulate the Commerce Department--and particularly the 
hard work of Secretary Don Evans, Undersecretary Grant Aldonas, and 
Assistant Secretary Faryar Shirzad--for decisive action in this case.
  Lumber mills and their workers in Montana and across the country have 
suffered because of Canadian lumber subsidies. I plan to work with the 
Commerce Department to ensure that the suffering is over so that 
efficient, environmentally sound U.S. mills can compete on a level 
playing field--one way or another.

                               Exhibit 1

               Cutting Subsidies, or Subsidized Cutting?

Report Commissioned by BC Coalition for Sustainable Forestry Solutions, 
                             July 12, 2001.

 Prepared by: Tom L. Green, M.A., Ecological Economist; Lisa Matthaus, 
               MSc, Resource Economist, Sierra Club of BC


                                Foreward

                       (By Dr. Michael M'Gonigle)

       Textiles, dairy products, newsmagazines, steel, airplanes, 
     fish plants, forest products--throughout the world, subsidies 
     exist for every industry imaginable. Talk of reducing these 
     subsidies dominates for daily news with seemingly endless 
     rounds of bilateral and multilateral trade talks. But despite 
     the hype, and the rhetoric, the topic is rarely treated in 
     the thoughtful manner it deserves.
       There are, of course, many good reasons for government 
     subsidies. In today's increasingly homogenized mass-market 
     world, it makes sense to protect a nation's ballet and local 
     newspapers. So too it is important to keep the rural base 
     vital by maintaining support for family farms,and even 
     encouraging new organic producers. Indeed, subsidies are most 
     useful in helping fledging industries make inroads against 
     the predatory behaviour of much larger, and often 
     inefficient, older industries.
       But subsidies are all too frequently destructive and 
     unsustainable. Such subsidies can be the most difficult to 
     undo because they are deeply embedded, hidden from view, and 
     reward the most powerful interests in society.
       As Tom Green and Lisa Matthaus demonstrate in this paper, 
     such is the case with the BC forest industry. Here is an 
     industry that from its inception to the present day is 
     supported by a raft of subsidies. Once designed as a way to 
     develop the province, many of these subsidies are today 
     almost completely invisible, propping up an industry against 
     all economic and social logic, and determining the potential 
     for good public policy. This paper only addresses this 
     situation in British Columbia, but many of their arguments 
     apply to the industry worldwide.
       The phrase ``perverse subsidies'' captures the situation 
     admirably, perverse because government is spending money, or 
     not collecting rents in a fashion that undermines economic as 
     well as social (and environmental) interests. Take, for 
     example, the hundreds of millions of dollars that have gone 
     to prop up outdated mills in northern BC. These subsidies 
     seemingly respond to the social need of keeping remote 
     communities afloat. In fact, this money undercuts other, more 
     efficient communities by artificially depressing their 
     markets, while it robs even the host communities of the 
     opportunity to direct that money, and the local industry, 
     into creating new value-added industries that would foster 
     more stable, longer-term, employment.
       Many subsidies are not so high profile, however. 
     Undoubtedly, the most pernicious subsidy exists in the lax 
     environmental standards that have long existed in BC. This 
     situation permits the industry as a whole to shift a vast 
     array of costs out of its own production processes, and 
     impose them instead on logged out salmon streams, disrupted 
     caribou habitat, and clearcut coastal watersheds. In such 
     cases, the fishing industry, First Nations, and tourism 
     operators pay the costs of this industry.
       The authors are self-described ``ecological economists.'' 
     To many readers, this will be an unfamiliar phrase. But it 
     signifies a new type of economic analysis, a critically 
     important analysis if society is to weed out our landscape of 
     perverse subsidies. As our common sense tells us, the human 
     economic system is a subset of our natural ecological system. 
     Creating a sustainable future means re-embedding our over-
     extended economy in the natural world.
       That challenge is, as the authors makes clear, structural. 
     The forest industry is underpinned by a land tenure system 
     that blankets the province. These long-term tenures 
     artificially depress prices (through lack of market 
     competition) while they discriminate against innovative new 
     entrants (through exclusion from access to timber). Indeed, 
     this is the very sort of state-chartered, state-protected, 
     and bloated industry that, 200 years ago, Adam Smith railed 
     against in his classic text, The Wealth of Nations. Only by 
     taking away their privileged position, Smith argued, could 
     the natural abilities of the citizenry to innovate, and 
     prosper, be set loose.
       Smith's radical argument applies equally in British 
     Columbia today. Indeed, in a thoughtful addition to the 
     discussion of structural subsidies, the authors turn our 
     attention to the failure to pay due regard to aboriginal 
     entitlements to the resource base. As any economist will 
     explain, market values reflect the existing distribution of 
     wealth between sellers and buyers. In British Columbia today, 
     a whole group of buyers (the forest industry) secures its 
     products well below its potential costs because the seller 
     (the provincial government) excludes another legitimate 
     interest (First Nations) from the bargain. This situation 
     dramatically skews the whole forest products market, 
     drastically reducing the obligations of the corporate sector.
       The authors have bravely raised the flag on a critical 
     topic for the new Liberal government in British Columbia. 
     This paper is only a beginning, however. Much work remains to 
     be done to ferret out the true costs of an industry that has 
     for too long gotten by without public scrutiny. Despite its 
     avowed commitment to the ``magic of the marketplace'', the 
     new government will quickly find that it is easier to 
     continue with the status quo than to challenge it fully and 
     transparently.
       Forestry is a powerful industry in BC, its power coming 
     from exactly those subsidies that must now be uncovered, re-
     examined and withdrawn. Remove the subsidies, and you 
     transform the industry.
       This is no small task. But the future health of the BC 
     economy, and the sustainability of its endangered ecosystems, 
     depends upon our doing it.
                                  ____



                          1. executive summary

       Following his recent election victory, Premier Campbell has 
     repeatedly asked British Colombians to hold him accountable 
     to the Liberal Party election promises. For a party generally 
     perceived as pro-business, one of the boldest promises was to 
     eliminate corporate subsidies. The Liberals also committed to 
     developing a ``leading edge forest industry that is globally 
     recognized for its productivity and environmental 
     stewardship.'' Together, these two commitments provide an 
     opportunity for structural reform of the forest industry that 
     could have far-reaching consequences for the future of 
     British Columbia's environment and economy.

[[Page 16546]]

       However, to fulfill its commitments, the new government 
     must phase out the subsidies that have inhibited the logging 
     industry from developing into an innovative, diverse and 
     sustainable industry. The elimination of subsidies is 
     necessary to create that ``leading edge forest industry'', 
     because existing subsidies encourage economic inefficiency 
     and the depletion of resources. Existing subsidies inhibit 
     change, innovation and investment. They also hinder the 
     development of value-added industry.
       This report focuses on subsidies to the BC forest industry. 
     Subsidies occur when public resources are available to 
     private interests at less than their true cost. Resource 
     industries are frequently heavily subsidized, often receiving 
     ``perverse subsidies''--subsidies that hurt both the economy 
     and the environment. As a result, subsidies to the logging 
     industry deserve special attention in the BC government's 
     drive to eliminate business subsidies.
       The report examines five main categories of subsidies:
       Stumpage: The fee charged by government to companies for 
     harvesting trees from public land is called stumpage. This 
     report concludes that flaws in the calculation methodology 
     result in the BC government charging companies stumpage rates 
     below market stumpage. The failure to ensure that the rules 
     for calculating stumpage are equitably implemented and 
     enforced provided a potential subsidy of about $350 million 
     over a two and a half year period. Comparing BC's stumpage to 
     competitively driven stumpage rates in similar timber regions 
     in the US demonstrated total subsidies to the BC forest 
     industry resulting from undervaluing of public timber at $2.8 
     billion for one year.
       Bailouts and Handouts: Direct payment of cash to forest 
     companies is the most readily understandable of forest 
     industry subsidies. Although sometimes public investment may 
     be justifiable to meet broader societal objectives, the $329 
     million bailout of the antiquated Skeena Cellulose mill is a 
     textbook example of a perverse subsidy. Handouts are endemic 
     in BC. The report documents ongoing efforts of the Job 
     Protection Commissioner to find ways to reduce company costs 
     through the use of public monies and through regulatory 
     waivers.
       Waiver of Environmental Protection. When government allows 
     industry to operate without full compliance with 
     environmental legislation, industry is able to transfer the 
     cost of bad environmental practices onto the public, 
     resulting in a substantial subsidy. In BC, neither provincial 
     nor federal environmental rules related to forestry are being 
     fully implemented or enforced, allowing companies to 
     financially benefit from lack of regulatory compliance. It is 
     estimated that this amounts to a subsidy of $950 million 
     annually.
       Non-recognition and Infringement of Aboriginal Title. First 
     Nations traditional territories include virtually all of BC's 
     commercial forests. Although Aboriginal Title is 
     constitutionally protected right, logging activities--that 
     would amount to infringements of Aboriginal Title--routinely 
     occur in BC without consent of or meaningful consultation 
     with affected First Nations. Compensation will ultimately be 
     required for both the extraction of First Nations' resources 
     and for restoration of traditional territories damaged by 
     logging. This burden will fall on taxpayers, not the 
     companies who have profited, resulting in a subsidy. In 1999 
     this subsidy is estimated at between $233 million and $1.163 
     billion.
       Tenure, BC logging companies operate predominantly on 
     public land and under government licenses, or tenures. 
     Because of BC government consistently undervalues the 
     stumpage rate, tenures have acquired a market value related 
     to the ongoing stumpage subsidy. Furthermore, the BC 
     government has allowed corporate interests to shut down mills 
     in violation of obligations in tenure agreement yet retain 
     secure supplies of timber, thus providing further corporate 
     benefits.
       While the BC Liberal Party has made the general promise to 
     eliminate business subsidies, it has also other more specific 
     promises that directly bear on the subsidies outlined above. 
     These promises include:
       Create a market-based stumpage system that reflects global 
     market realities and local harvesting costs;
       Cut the forestry regulatory burden by one third within 
     three years;
       Introduce a legislative framework for legally respecting 
     Aboriginal Rights and Title and work to expedite interim 
     measures agreement with First Nations;
       Develop a working forest land base on public land and fully 
     protect private property rights and resource tenure rights.
       Depending on how these promises are implemented, they could 
     help reduce subsidies, but they could also dramatically 
     increase the subsidies to the BC forest industry.
       The Liberals also made other specific election promises 
     that speak to other potential subsidies to the forest 
     industry, including:
       Apply 1% of all direct forest revenues, not including 
     ``super stumpage'' to global marketing of BC's forest 
     practices and products;
       Increase the Allowable Annual Cut over time through 
     incentives to promote enhanced silviculture.
       A high level of vigilance will therefore be required to 
     ensure that subsidies to the BC forest industry do not 
     persist or even increase under the Liberal watch.
       The elimination of subsidies in any sector causes economic 
     change and human displacement. As one researcher commented,
       Obstacles to removing subsidies tend to be highly 
     political. Opposition of vested interests, local businesses 
     and segments of the workforce can be very powerful. Once 
     payments are in place then a type of addiction follows, and 
     there may be uncertainty and fear over the consequences of 
     subsidy removal.
       This report therefore recommends that subsidies to the BC 
     logging industry be phased out gradually and carefully.
       Taken as a whole, the federal and provincial government 
     subsidies of the BC forest industry are considerable and 
     counter-productive. The amount of subsidies coming from the 
     provincial government alone (including those proposed by the 
     Liberals) is between $3 billion and $6 billion each year. 
     These subsidies represent a significant cost to the taxpayers 
     of British Columbia, while encouraging over-exploitation of 
     forest and hindering the development of a modern, competitive 
     forest industry. British Columbians deserve better.

                          ____________________