U.S.-CANADIAN RELATIONS TOOK A turn for the worse in August: The two nations' dispute over softwood lumber trade took center stage in Canada's political drama, and the long-simmering disagreement flared up into a hot diplomatic spat.

The U.S. Commerce Department has assessed punitive tariffs on imports of Canadian framing lumber since 2001 at the insistence of U.S.-based timber interests. The United States claims that low prices charged by Canada's provinces for the right to log on government land amount to an unfair subsidy for Canadian wood exporters.

Collected at the rate of about $100 million a month, the monies in U.S. government hands now amount to more than $5 billion; under a provision in U.S. law called the “Byrd amendment,” the whole pile of cash could eventually be handed over to U.S. sawmill and timber owners.

Canada has pursued lengthy appeals of the U.S. action before binational review panels set up under the North American Free Trade Agreement (NAFTA). In August, the Canadians won what they say should be the final judgment on the issue, with a ruling from a NAFTA Extraordinary Challenge Committee upholding an earlier panel ruling to the effect that the duties were imposed in violation of U.S. trade law.

GLOVES COME OFF: U.S. Ambassador to Canada David Wilkins (above) chided the Canadians for “emotional tirades” after a government official called the United States a “bully” for its decision to ignore a supposedly final binational trade panel ruling in Canada's favor in the softwood lumber trade dispute between the two nations. Canadian Prime Minister Paul Martin (left) has called the U.S. stance a “breach of faith.”
GLOVES COME OFF: U.S. Ambassador to Canada David Wilkins (above) chided the Canadians for “emotional tirades” after a government official called the United States a “bully” for its decision to ignore a supposedly final binational trade panel ruling in Canada's favor in the softwood lumber trade dispute between the two nations. Canadian Prime Minister Paul Martin (left) has called the U.S. stance a “breach of faith.”

But the United States immediately declared the committee's “last word” decision to be irrelevant; the Commerce Department had changed the legal basis for its duties, it announced, and had no intention of returning any of the billions of dollars held in escrow.

Canadians reacted with anger; the country's Cabinet met to consider unspecified trade retaliation that could include a duty on shipments of electricity, oil, and natural gas to the United States. (Canada supplies a major portion of U.S. energy demand.) Canadian Industry Minister David Emerson said Canada was “letting the bully mop up the floor with us.” In return, newly appointed U.S. Ambassador to Canada David Wilkins told a Canadian newspaper that the Canadian side should stop its “emotional tirades” and get back to the bargaining table. In what has become a consistent U.S. theme, Wilkins said that any long-term answer would have to come via negotiation, not litigation. Calling the U.S. trade tactics “cynical,” Emerson retorted, “This is a game they play where heads they win, tails we lose. ... I think it's hypocritical for him to think we haven't been negotiating. We have.”

The language on both sides has since cooled, but positions have scarcely softened. U.S. negotiators have held firm on their insistence that Canada abandon its legal appeals and consider a compromise, while Canada has so far refused even to re-open talks. Said Canadian Trade Minister Jim Peterson after a 40-minute meeting with Wilkins, “We've always said we would return to the table only when it's in the best interest of Canadians.” The United States has complied with previous NAFTA panel rulings, Peterson pointed out, and also enforces panel rulings that are in its favor. Argued Peterson: “The U.S. cannot cherry-pick the rules it likes and flout the rules it doesn't.”

U.S.-Canadian commerce has burgeoned under NAFTA and remained largely conflict-free, and the trade in softwood lumber amounts to less than 5 percent of what is now the world's largest bilateral trade relationship. Even so, the softwood snag is now throwing the entire trade arrangement into question—at least in Canada's view. Peterson said, “There are many Canadians who've expressed the concern that if they can ignore the NAFTA in one area, then they can ignore it in any other area.” In a Sept. 29 Toronto Globe and Mail commentary titled “Ripping the Heart Out of NAFTA,” Peterson's newly hired adviser, former Trade Ambassador Gordon Ritchie, wrote, “Washington refuses to comply with the very dispute-settlement mechanism on which the original deal was struck.”

Ritchie played a pivotal role in the negotiation of the Canada-U.S. Free Trade Agreement, a precursor to NAFTA, and was involved in the creation of NAFTA. His sharply worded editorial may be a sign of Canada's intent to stand on principle.

Wrote Ritchie: “Clearly, Canada cannot attach much value to a long-term deal with a partner that violates existing arrangements. ... Negotiations can only succeed if the administration refrains from behaving as if it were a hired gun for the U.S. lumber industry. Otherwise, there won't be a negotiated settlement, now or ever.”