Under-pricing of Timber

New us Request For Arbitration on Under-pricing of Timber: Case no 111790 in 2011

United States views on international law (based on the document “Digest of U.S. Practice in International Law”): On January 18, 2011, the United States requested arbitration at the LCIA, regarding the under-pricing of timber harvested from public lands in the Interior region of British Columbia. United States Trade Representative Ron Kirk explained:

Canada is providing an additional benefit to Canadian exporters of softwood lumber by selling timber harvested from public lands for prices below those provided for under the timber pricing system grandfathered under the SLA. By doing so, Canada is in breach of its commitments under the Agreement. This type of benefit harms U.S. workers and firms in the lumber industry, and is inconsistent with Canada's obligations under the 2006 Softwood Lumber Agreement.…

USTR press release, available at (internet link) ustr.gov/about-us/press-office/press-releases/2011/january/united-states-requests-arbitration-canada-under-so. The dispute involves the assignment of public timber to the salvage “grade 4,” which British Columbia then sells to Canadian softwood lumber producers at the low fixed rate of 25 cents per cubic meter.

Developments

In 2010, the United States had requested formal consultations with Canada on the issue. see this world legal encyclopedia in relation to the year 2010 at 495. Consultations were held in 2010 but did not resolve the matter. After requesting arbitration in January, the United States submitted its Statement of Case on August 9, 2011. Excerpts follow (with footnotes and references to other submissions in the case omitted) from the Statement of Case, which is available in full in its non-confidential version at (internet link) ustr.gov/webfm_send/3053.

Details

2. Since early 2007, Canada's largest softwood lumber exporting province has systematically underpriced timber harvested from Crown forests and sold it to Canadian lumber producers in breach of the 2006 Softwood Lumber Agreement (“SLA” or “Agreement”). In the SLA, Canada promised the United States one of two things regarding “stumpage” fees that British Columbia (“BC” or “the BC government”) charges lumber producers for Crown timber: BC either would apply its newly-reformed timber pricing system to reflect its suitability for producing lumber, or if BC modified its system, it would do so in a way that maintained or improved the extent to which its stumpage fees reflect market conditions. BC did neither of these things. Instead, it ran in the opposite direction from market conditions by selling large volumes of lumber-quality timber for C$0.25 per cubic meter, the fixed minimum price generally reserved for “reject” logs incapable of producing lumber. This was a breach of the SLA.

3. Over 90 percent of the forests in BC are owned by the provincial government. Under its timber pricing system, BC charges lumber companies a fee, known as “stumpage, for timber harvested from Crown forests. Stumpage fees are based on the timber's “grade”—an evaluation of the timber's suitability for manufacture into lumber. Before April 2006, the BC system had automatically graded all timber affected by the mountain pine beetle (“MPB timber”) as lumber “reject” priced at the minimum stumpage fee, even though most beetle-affected timber can be used to produce merchantable lumber. This, of course, was a tremendous competitive advantage for Canadian lumber companies harvesting MPB timber for the manufacture of their lumber products.

4. While Canada and the United States were negotiating the SLA in 2006, BC agreed to reform its pricing system to address predicted increases in MPB timber. Under the reforms, BC would sell its timber at prices that reflect whether the timber could be used to make lumber, not whether the timber was affected by the mountain pine beetle. The reforms recognized that the mountain pine beetle does not impair the quality of timber, which still can be used to produce lumber, and therefore recognized that BC should not sell all MPB timber for the minimum stumpage fee. BC anticipated that most MPB timber would be sold as lumber-quality. The calibrated new system, which also adjusted the timber price to reflect the effects of the mountain pine beetle, was a critical component of the SLA and of great importance to the United States, which had been concerned for years about BC's pricing system.

More about the Issue

5. In April 2006, BC reformed its timber grading rules with the stated intent of pricing MPB timber in a way that reflects its suitability for use in making lumber. Shortly thereafter, Canada announced that the two governments had reached an agreement on the general terms of the SLA.

6. The SLA, effective as of October 2006, grandfathered the reforms made part of BC's timber pricing system. Although the SLA permitted BC to change the system, any changes had to maintain or improve the extent to which timber prices reflect market conditions for BC to avoid a breach.

7. But after reforming its system in 2006, BC quickly abandoned the new reforms beginning in early 2007, almost exactly when the North American housing and softwood lumber markets began to precipitously decline, driving the price of lumber down. BC resumed selling MPB timber for the minimum stumpage fee, to the enormous benefit of BC lumber producers and exporters; and in breach of the SLA.

8. Canada acknowledges that MPB timber can be used to manufacture merchantable lumber. The province's own commissioned studies of lumber recovery from MPB timber uniformly demonstrate this. More recently, Vancouver showcased MPB lumber during the 2010 Winter Olympic Games by constructing its speedskating venue using one million board feet of lumber made primarily from MPB timber.Yet soon after BC enacted its reformed system, and just months after the two governments entered into the SLA, BC restored the windfall that it previously had given BC lumber producers and exporters for MPB timber under the pre-April 2006 system. When those producers and exporters then sell lumber made from the cheaply-purchased timber, they recover substantially more money than they could have had they purchased the timber under the reforms grandfathered by the SLA. By its actions, BC has provided its lumber industry benefits approaching C$500 million. Because these benefits breach the SLA, the United States has brought this arbitration proceeding to require Canada to remedy its breach.

Resources

See Also

• Trade
• Commercial Relations
• Investment
• Transportation
• Trade Agreements
• Trade-Related Issues
• Arbitration