Case of the Month: Canadian Softwood Lumber

My vote for the most important international case for the month of April is the Canadian softwood lumber case. The case was one of the largest and oldest trade disputes in U.S. history, a dispute that spawned over 20 different litigations in multipla fora, spanned over two decades, and had over $5 billion at issue.

The dispute threatened to dramatically undermine the credibility of the NAFTA binational panel procedure, with the United States stretching the limits of the extraordinary challenge procedure after mutiple losses. It dramatically tested the relationship between administrative adjudication within the United States, binational litigation through NAFTA, federal court review, and adjudication before the WTO. The softwood lumber case was even shaping up as the vehicle for a direct challenge to the constitutionality of NAFTA Chapter 19’s binational panels.

In the end the parties settled the case rather than push the limits of NAFTA dispute resolution process. Canada was winning the most significant issues before the federal, binational, and international adjudicative bodies. But the United States had the leverage of $5 billion in Canadian duty deposits that it was threatening to retain and the strong support of U.S. administrative agencies. So on April 27, the United States and Canada announced that they had settled their differences. (The settlement agreement is available here).

Under the settlement, the United States will refund $4 billion of the $5 billion collected and lift a 10 percent duty on softwood lumber. Canada will impose various taxes and border restraints limiting its market share to one-third of the American softwood lumber market. It also will allow the United States to keep $1 billion in duty deposits, with $500 distributed to American softwood lumber producers, and $500 million used to promote North American lumber. Absent the settlement, the distribution of any duty deposits to the American lumber mills would, according to a recent CIT ruling, be an unlawful application of the Byrd Amendment to antidumping and countervailing duties on goods from Canada.

How did each side fare under the settlement? As Prime Minister Stephen Harper noted, Canadians walk away from this agreement with (1) a stable and predictable access to the U.S. market, with no quotas or duties on Canadian softwood lumber at current market prices; (2) repayment of 80% of the duty deposits; (3) provincial flexibility on compliance, and (4) the certainty of a seven year renewable agreement. The United States secures (1) a limit to Canadian lumber’s share of the U.S. market, (2) protection against Canadian lumber if the lumber market slumps, and (3) access to $1 billion in duty deposits to, among other things, pay for years of litigation expenses.

The case highlights just how difficult major trade disputes can be to resolve through litigation when the stakes are so high. Perhaps the Canadian Minister Emerson put it best when he said at the press conference “my own feeling is NAFTA … is an imperfect trade agreement. All trade agreements are imperfect in one way or another.” Not exactly a ringing endorsement of NAFTA dispute settlement.