U.S. Files Arbitration Case Against British Columbia

0db5697b108e33f032c90147f0bebdfdSince the spring of 2007, the British Columbia Government has sold BC Interior lumber producers enormous amounts of timber that was improperly classified as ‘lumber reject’ yet used to manufacture lumber for the minimum price of C$0.25 per cubic meter, contrary to rules grandfathered under the U.S.-Canada Softwood Lumber Agreement (SLA) that govern eligibility for the minimum stumpage price.

The enormous increase in the amount of timber priced at the C$0.25/m3 minimum price has saved BC Interior lumber producers hundreds of millions of dollars in fiber costs, compared to what they would have paid under the timber pricing system that was in place when the U.S.-Canada Softwood Lumber Agreement was signed.

As North American lumber producers have curtailed production, closed mills, and been forced to let go thousands of workers due to the severe lumber market downturn, the BC government’s expanded and unfair subsidy to BC Interior mills has had devastating effects on the rest of the industry outside BC — both in the United States and Canada.

The Softwood Lumber Agreement stipulates that any disputes under the agreement are to be resolved through a commercial-type binding arbitration process before the London Court of International Arbitration (LCIA), involving commercial arbitrators that are neither citizens nor residents of the United States or Canada.  The BC stumpage arbitration is the third brought by the United States against violations by Canada of the terms of the SLA.  The United States won the previous two arbitrations.

The United States filed its “Statement of the Case” – a 93-page brief, plus an expert economic report andsupporting evidence – to the LCIA Tribunal on August 9, along with a public version of the brief on August 16.

The U.S. argument in the brief makes three main points:

First, as the SLA was being negotiated, BC modified its Interior timber pricing system effective April 2006 to eliminate the old rule under which “dead and dry” timber was automatically priced at C$0.25/m3, regardless of quality.  Under the new system, if the majority of a log could be used to produce lumber graded “#2&Better”, it would receive a variable price based on an estimate of the value of the stand (which would take into account any value loss due to the logs degraded by the Mountain Pine Beetle attack affecting BC forests), and only logs not useable for lumber would continue to receive the C$0.25/m3 price.  The SLA provides that any change to this system after July 1, 2006 must maintain or improve the extent to which it reflects market pricing; any move away from market pricing after that date violates the agreement.

Second, beginning around mid-2007, the share of the BC Interior harvest graded as non-lumber-quality and sold for C$0.25/m3 rose sharply.  Yet, there was no significant change in the share of the harvest consumed by lumber mills, or in the quantity of “#2&Better” grade lumber produced by lumber mills per unit of log input.  Indeed, BC’s own studies show that the value loss observed when sawmills process beetle-killed logs dead at least 5 years is relatively small, and most of that value loss relates to factors other than the ability of logs to produce “#2&Better” grade lumber (e.g., more #2 and less “Better,” fewer 2x10s, etc.).  Thus, the massive increase in low-grade, low-price timber cannot be justified under BC’s 2006 grading rules.

Third, a number of BC policy actions taken from 2007 onwards contributed to the increase in misgrading (and therefore underpricing) of the BC Interior harvest.  These actions include changes to scaling conventions regarding checks in logs, the introduction of the practice of heating logs before scaling, and other changes to scaling practices and procedures.  Moreover, the evidence makes clear that the BC Government intended to regularize and extend practices that increased the amount of misgraded timber, while knowing that these practices were not consistent with the new grading rules adopted in April 2006 and grandfathered under the SLA.

With respect to a proposed remedy to the BC SLA violation, the U.S. economic expert found that the misgrading of timber, through March 2012 (the scheduled hearing date), provides benefits to BC Interior producers as they will have paid C$499 million less in stumpage than they would have paid under the “grandfathered” 2006 system if the logs had been correctly graded.  To recoup this amount, assuming a decision immediately after the hearing and assuming that BC immediately ceases its violation, Canada would have to charge an additional export tax of 30.6% if the SLA is not extended beyond its currently scheduled end date of March 2013, and 13.5% if the SLA is extended for two additional years (an option provided for in the agreement, if both governments agree).  If the Tribunal’s decision is delayed, or if BC continues its violation, these export tax rates would have to be adjusted upwards accordingly.

Canada is due to respond to the U.S. filing with a “Statement of Defence” on November 8.  After rebuttal submissions by both sides, the hearing is scheduled to begin in Washington on February 27, 2012

View recent article in the Vancouver Sun regarding the filing