Dispute Resolution: Softwood Lumber and Chapter 11

1. Dispute Resolution:Softwood Lumber and Chapter 11 Geoffrey Hale Political Science 3170 The University of Lethbridge October 28, 2010

2. Outline • The Softwood Lumber Dispute • Past, present, future? • Chapter 11 • Purpose / context • Political contestation: property rights, non-discrimination, and public policy goals. • Outcomes and prospects

3. Softwood Lumber – Aberration or “Canary in the Coal Mine?” • Several disputes since early 1980s • Softwood Lumber I (1983) – US Department of Commerce rejects challenge to Canadian provincial forest management policies • Softwood II (1986) – Canada agrees to SLA I – 15% export tax on all softwood lumber exports in response to US DOC finding of injury (1986-91) • Softwood III (1991-96) – Further disputes under NAFTA; concluded by SLA II – export tax agreement on Cdn. Exports (1996-2001) • Softwood IV (2001-06) – Multi-tiered dispute at NAFTA, WTO, US Court of International Trade – concluded by agreement on two-tier export tax combined with export quota for low tax provinces (QC, ON, MB, SK).

4. Common features of disputes • Challenge by U.S. Industry (Coalition for Fair Lumber Imports) strongly supported by lumber state senators (Pacific NW + Southeast US) • Effort to identify Canadian forest management practices (esp. stumpage fees) as effective subsidy causing harm to U.S. industry  reflective of different forest management, property ownership and taxation policies in each country. • Competing interests in both countries • Different forest management practices, industry structures in BC, Ont./QC, Maritimes • Dissenting voices: US consumer groups (esp. Homebuilders), Canadian environmental groups and B.C. First Nations.

5. Softwood Lumber IV • Aggravating features • Initiated by B.C. Government’s insistence on cancellation of SLA III (2001), challenging U.S. Policies under NAFTA • U.S. “Byrd Amendment” (1999)  providing share of AD / CVD duties levied to plaintiffs – “ambulance chasers’ bill of rights” (ruled in violation of WTO, 2003, NAFTA, 2005) • US DOC rejection of initial Chapter 19 NAFTA rulings • Mixed results from Canadian appeal to WTO, muddying legal waters • CFLI constitutional challenge to NAFTA dispute resolution processes under Chapter 19 (opposed by Bush administration) • Growing politicization of NAFTA in both countries made political climb-down risky  pressures for negotiated settlement

6. SLA III: “the Good, the Bad and the Ugly” • Negotiation of 7 year “market stabilization” deal – driven by falling U.S. Housing, lumber prices • $ 4 billion of $ 5 billion in US duties collected returned to Canadian producers • Binding arbitration of disputes by LCIA • Renders constitutional challenge “moot” • Two-tier, phased export tax • No barriers to Cdn. Imports when prices over $US 365/mcf • Escalating tax • 15% (BC, Alta) with no volume constraints • 5% (ON, QC, MB, SK) with quota. • $ 1 billion in US duties retained • $ 500 mm to community funds (e.g. rebuilding New Orleans) • $ 500 “signing bonus” to industry • Followed by collapse of U.S. housing prices in 2006-09 Weekly average prices: USD / mcf. 2005 393.12 2006 325.73 2007 283.12 2008 256.25 2009 221.92 Oct.2010 252

7. Softwood Lumber:Trade Politics vs. Underlying Market Issues • North American market still faces lumber surplus • e.g. SLA grievance on BC subsidies for beetle-killed wood. • Medium-term weakness of U.S. housing industry with high proportion of U.S. homeowners “under water” following market meltdown of 2007-09. • BC industry has consolidated; Ontario and Quebec industries face comparable challenges • BUT – pine beetle infestation has seriously damaged BC industry in short-medium term • Cda.-US exchange rate parity major challenge to industry competitiveness. • Market reorientation, shift to higher value added products • BC industry likely to depend on Chinese market for medium-term growth; options for ROC??

8. Summary – Chapter 19 / WTO Disputes • Growing integration of Canadian, U.S. economies has reduced vulnerability of Canadian firms to U.S. trade remedy sanctions  only 2 cases since 2004, 1 “successful”. • Dispute resolution system remains vulnerable to political end runs in Washington by special interest lobbies with political connections. • Disputes based on major differences in regulatory systems best contested through WTO  enabling coalitions of aggrieved countries to increase critical mass of economic risk to major trading powers. • 10 of 14 recent cases (2007-10) against major trading powers in cooperation with one or more major powers.

9. Chapter 11 Disputes • Objectives: protect foreign investments against arbitrary expropriation by nationalist governments, discrimination in favour of locally-based industries • Lock in policy changes of 1980s (Canada), 1990s (Mexico) expanding opportunities for foreign investment. • Establish minimum standard of treatment for foreign investment (no less favourable than domestic investors) • Requirement to pursue “least trade restrictive” measures necessary to achieve public policy goals. • Impose due process disciplines on use of domestic “public interest” regulations • Requirement for “fair and equitable treatment”. • Broad scope for environmental, land use regulations, but subject to non-discrimination, demonstrated relationship between regulatory objectives and outcomes. • Provide precedent for “investment protection agreements” at WTO, elsewhere.

10. Political challenges • Chapter 11 opponents • generally object to expansion of investment rights clauses on grounds of “public interest” assumptions in regulation. • fear external constraints on environmental and other regulations through risks of paying compensation to investors • Key issues: burden of proof, non-discrimination, good faith. • Restrictive interpretation by NAFTA Commission (2001) to apply relatively narrow construction of “national treatment” requirements to Chapter 11-specific measures.

11. Chapter 11 cases in Canada • Ethyl Corporation (MMT) (1998) • Compensation of $ 13 mm paid re: import ban on gasoline additive which continued to be produced by other firms in Canada (1998) • Also challenged by 3 Canadian provinces, MMT manufacturers on basis of discriminatory regulation under Canadian AIT • S.D. Myers (2000) • Compensation of ~ $ 9 mm for ban on PCB exports for processing in US facility; • Tribunal viewed measure as protecting Canadian processors at expense of U.S. firm. • Pope and Talbot (2001) • Tribunal rejected claim BC treatment of Pope and Talbot under SLA II violated Chapter 11 • $ 500,000 in damages for secondary requirements arising from the regulatory dispute. • Abitibi-Bowater (2010) • Federal government paid $ 130 mm. claim following Nfld./Lab. expropriation of A/B paper mill in Grand Falls, NF after plant closings related to firm’s bankruptcy proceedings. • No effort made by NF government to negotiate terms or pursue due process. CONTRAST • Chemtura (2010) • NAFTA tribunal upheld Canadian ban on lindane, related processes for licencing “replacement products”. • Firm assigned $ 3.5 mm. in court, legal costs in addition to own costs.

12. Emerging Challenges under Chapter 11 • Federal government has legal responsibility for defending Chapter 11 claims under NAFTA • Growing number of claims come from actions by provincial governments – e.g. Abitibi-Bowater • Most likely to be related to measures arising from jurisdiction over health, environmental and land use regulation. • But – due process, proportionality standards still apply. • No current constitutional mechanism for federal government to recover costs from provinces in such cases, even if actions taken in total disregard of NAFTA provisions.