No softwood lumber deal, as 'challenging but productive' talks drag on

JustinTrudeauandBarackObamadidn't say anything publicly about one of the toughest files in Canada-U.S. relations when they met in Ottawa Wednesday.

An update on Canada-U.S. softwood lumber talks instead came by press release, and only after the U.S. president's planetook off.

And despite an intensified, late push for concrete progress on the trade issue including a trip to Washington last week by International Trade Minister Chrystia Freeland what's shaping up doesn't look great for Canada.

Wednesday evening's statement from Obama and Trudeau characterized discussions as "challenging but productive."

But: "significant differences remain," so the two countries' ministers would "maintain an intensive pace of engagement."

"These negotiations seem to be completely blocked,"said CarlGrenier, a former lumber council executive and Quebec trade diplomat.

"The mood in Washington is extremely protectionist," he said. "Any deal that cannot be shown to be more restrictive [on Canada] than the last one will cost them votes."

"Theydon't have any incentive now to do a deal quickly. None."

But for Canada, time is ticking.

'Key features' now set

At issue are the fees charged for logging rights and American lumber producers' contention that Canadian fees are subsidized. The issue is further complicated by the fact that forests are managed differently across Canada.

The 2006 softwood lumber agreement, negotiated by the previous Conservative government,expired lastOctober. OnOct. 12, aone-year "standstill"period during which the U.S. is not allowed to launch trade actions runs out.

November brings a new president and a potential return to the starting line.The White House may neverbe more friendly to resolving thingsthan it is now.

• ANALYSIS: Trudeau in Washington: Softwood lumber at loggerheads again

When the two leaders met during Trudeau'sofficial visit to Washingtonin March, U.S. Trade Representative Michael Froman and International Trade Minister Chrystia Freelandwere given 100 days to report back on what a deal might look like.

That deadline came and went mid-June. No parameters were set. All the two sides said was that they'd identified "shared goals" and that negotiations continue.

Wednesday's statement outlinesnine "key features" of afuture deal.Many resemble the expired 2006 agreement not surprisingly, since Canada's preference would have been to simply extend that.

Two aspects appear most contentious:

• An agreement to maintain Canadian exports at or below an agreed U.S. market share in effect capping, or setting a hardquota that would be negotiated with"the stability, consistency and flexibility necessary."
• Provisions for regions or even individual companies to be excluded from the deal, including a regional exit process toallow a province to get out of the deal after it's implemented.

The Maritime provinces, whose forests are on private lands rather than Crown-owned lands as in Western Canada, were excluded from the 2006 deal, as were two regions in B.C.

This time, Quebec, which changed over to a market-basedpublic auction system for logging rights in 2013, may also want to opt out and argue its case, if needed.

"The provinces (that have different forest management systems) fight among themselves and that makes it difficult for them to find a united front," said Brenda Swick, a trade lawyer withDickinson Wright.

But the Americans want a hard quota that applies to all of Canada. "Unless they get that, there's not much of an incentive to sign a deal," she said.

"Without an agreement being imposed on the parties, which would take a lot of political fortitude, it is getting rather late in the day."

Sticking point: market share

The U.S. Lumber Coalition, the industry'sWashington-based lobby group, holds fast to its claim thatCanadian lumber exports are unfairly subsidized. In astatement Thursday, itblamed Canada for not engaging sooner to reach a deal.

The U.S. industry wantsto grow to "its natural size" so it can supply the U.S. market and restore thousands of jobs its says have been lost there.

Since the deal expired in October, the opposite happened:a lower Canadian dollar and rising U.S. housing construction (this is primarily a fight about two-by-fours), drove demand for Canadian imports.

"For a new agreement to be durable, it must establish border measures that are effective in all market situations and be sufficiently robust to prevent Canadian producers from exceeding the target market share," the U.S. Lumber Coalition said. "The U.S. industry will not give up its rights under the U.S. trade laws in return for an agreement that fails to meet these objectives."

Translation: cap exports, or brace for counterveilingduties.

"Those cases can take years to resolve," trade lawyerSwicksaid. "In the interim, there will be hundreds of millions collected in duties... it's in (the American producers' interest) to file a dispute."

That's not a choice that appeals toWestern Canadian producers, who had the option under the 2006 agreement of paying exporttaxes instead of havingquotas limitgrowth.

No deal at any cost?

Canada's position is thattaxes work well and should remain an option undernegotiation.

"Negotiations over the mechanism used to manage the trade aregoing to be more contentious than the cap itself," saidNaomiChristensen, an analystwith the Canada West Foundation.

Plus,the amount of Westernforests lost to the pine beetle means that Canada's available supply for shipping tothe U.S. market issmaller now.

"We don't want a deal at any cost," she said. "Western Canada is well-positioned to take advantage of markets outside the U.S. (such as Asia) ... but that takes time."

"Amanaged trade agreement is preferable to U.S. trade action," B.C.'s forests minister Steve Thomson said in a statement.

But if a settlement can'tbe reached, B.C. is prepared once more to defend its market-based forest policies before tribunals, he said.

"There's a pattern to these agreements," Greniersaid. "Every agreement is more restrictive than the previous one."

The 2006 deal cost Canadian industry $4 billion.

"This is a bit of insanity," Grenier said.