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### Viewing cable 06OTTAWA2439, CRUNCH TIME COMING FOR SOFTWOOD LUMBER AGREEMENT

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06OTTAWA2439 | 2006-08-15 17:48 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Ottawa

`

    VZCZCXRO0940
    OO RUEHGA RUEHHA RUEHQU RUEHVC
    DE RUEHOT #2439/01 2271748
    ZNR UUUUU ZZH
    O 151748Z AUG 06
    FM AMEMBASSY OTTAWA
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 3474
    INFO RUCNCAN/ALL CANADIAN POSTS COLLECTIVE IMMEDIATE
    RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE

` `

    UNCLAS SECTION 01 OF 03 OTTAWA 002439

    SIPDIS

    SENSITIVE
    SIPDIS

    STATE PASS USTR FOR AMBASSADOR SCHWAB, JOHN MELLE, JIM
    MENDENHALL, AND SAGE CHANDLER
    STATE FOR WHA/CAN
    USDOC/ITA/IA/JTERPSTRA

    E.O. 12958: N/A
    TAGS: EAGR ECON ETRD CA
    SUBJECT: CRUNCH TIME COMING FOR SOFTWOOD LUMBER AGREEMENT

    REF: OTTAWA 2321

    ¶1. (SBU) Summary:  In his vigorous efforts to garner industry
    support for the July 1 softwood lumber agreement,
    International Trade Minister Emerson and other senior
    Ministers met with top Canadian lumber officials in Toronto
    on August 9 to hear their concerns about several of the
    deal's provisions, but he warned that the agreement would not
    be re-negotiated.  While Emerson was publicly optimistic
    after the meeting that there would be significant Canadian
    industry support for the deal, he sought to put pressure on
    the industry to "fish or cut bait" by setting August 21 as
    the deadline for announcing its support.  If sufficient
    support is not forthcoming, the Minister indicated that the
    deal would not go forward to get Cabinet approval for
    Parliamentary action in September, thus killing the
    agreement.  Thus, this week is probably crunch time for the
    future of the July 1 softwood lumber agreement.

    ¶2. (SBU)  Because of their dominant position in Canadian
    lumber, the reaction of the British Columbia companies will
    be key in determining whether Emerson gets the significant
    industry support he needs to recommend the agreement to Prime
    Minister Harper and to Parliament.  The areas of industrial
    concern are pretty clear, but it is still uncertain whether
    these can be addressed satisfactorily (or fudged up) in the
    "clarifications" that Emerson is now discussing with the
    industry, the provinces, and USTR.  Despite the industry's
    discontent, the Embassy believes that Emerson, with the Prime
    Minister's strong support, is adamant that the industry must
    choose between the July 1 agreement as written and a
    continuation of trade conflict, uncertainty and litigation.

    ¶3. (SBU):  Comment: The engagement, in the middle of the
    summer Parliamentary recess, of the senior ministries in last
    week's Toronto talks underscores the importance of the
    softwood lumber issue for the Harper government.  While
    resolving the dispute is not on the government's formal list
    of objectives, contacts have noted to us that it is crucial
    both to improving Canada-U.S. relations and to demonstrating
    the Harper team's ability to marshal business support behind
    a major trade policy initiative.  End comment and summary.

    Toronto Meeting with the Industry
    ---------------------------------

    ¶4. (U)  On August 9, International Trade Minister David
    Emerson, Industry Minister Maxime Bernier, and Finance
    Minister Jim Flaherty met in Toronto for two hours with
    almost two dozen Canadian lumber executives to discuss
    industry concerns regarding the U.S.-Canadian softwood lumber
    agreement that was concluded by Emerson and USTR Susan Schwab
    on July 1.  After the meeting, Emerson told the press that he
    was "optimistic" that Ottawa would get "significant" industry
    support for the agreement by August 21, the date he said he
    would decide whether to recommend to the Prime Minister and
    Cabinet that the deal should be submitted to Parliament for
    its approval after the end of the summer recess on September
    ¶18.  Emerson warned that he would not move the deal forward
    without significant industry support.  The Minister described
    the Toronto meeting as constructive, adding that he would
    continue to meet with the industry, the provinces as well as
    USTR in coming days to "clarify" wording and definitions in
    the July 1 agreement in an effort to address industry
    concerns, but he remarked pointedly that the agreement would
    Qconcerns, but he remarked pointedly that the agreement would
    not be opened for re-negotiation as some called for.

    August 21 Deadline and Next Parliamentary Hearing
    --------------------------------------------- ----

    ¶5. (SBU)  We understand that Minister Emerson's August 21
    deadline was dictated by the amount of time the GOC needs to
    draft the legislation to implement the export tax component
    of the agreement in time for Parliament's review in late
    September.  A senior advisor in the Prime Minister's office
    opined that another reason for the date is that it's time for
    the industry "to fish or cut bait."  Perhaps coincidentally,
    August 21 is also the date of the final hearing of the House
    of Commons Standing Committee on International Trade that is
    reviewing the July 1 agreement.  At an earlier hearing on
    July 31, Emerson stressed that "negotiations have ended,"
    that if the July 1 agreement is rejected, there is no chance
    that another one can be renegotiated for at least three
    years, and that a fresh round of the litigation cycle would
    be "ugly."  Expected witnesses at next Monday's hearing
    include the CEO of Domtar; senior officials from Canfor and

    OTTAWA 00002439  002 OF 003

    Weyerhaeuser; the Presidents of the British Columbia (BC)
    Lumber Trade Council; the Ontario Lumber Manufacturers'
    Association, and the Quebec Forest Products Council; and
    attorney Elliot Feldman.  The hearing would be an opportunity
    for major industry players to present their definitive views
    on the July 1 agreement.

    ¶6. (SBU)  In recent days, the Embassy and the Consulates have
    discussed Emerson's August 9 announcement with government and
    industry contacts.  Policy advisors in the Prime Minister's
    office expect Harper to continue to support Minister
    Emerson's refusal to re-open the July 1 agreement to
    amendment, despite industry dissatisfaction with some of its
    provisions.   However, key contacts at industry associations
    were split on whether the GOC will or will not receive
    sufficient industry support in coming days to go forward with
    implementing the agreement.

    Optimists Versus Pessimists
    ---------------------------

    ¶7. (SBU)  The "optimistic" view of industry observers is:
    "The deal is absolutely essential not just for the industry,
    but for Canada-U.S. relations and in order to demonstrate
    that this government has the ability to complete an
    international treaty.  It won't be easy and there will be
    lots of acrimony, but the stakes are high enough that many
    parties will sign on to work the backrooms, persuade the
    companies, and ensure that the Parliamentary vote on the
    agreement is based on national interests rather than on party
    lines."  On the other hand, the "pessimistic" view believes:
    "It will only take one company to scuttle this deal and there
    are several that can do it.  Some of those firms have an
    interest in dragging out the dispute so that they can pick up
    distressed assets from their failed competitors.  This
    industry has repeatedly shown that it just cannot speak with
    one voice - the regional and business diversity is just too
    great for that to be possible."  There also seems to be a
    split on the agreement depending on company size.  Large
    companies with interests in both the U.S. and Canada (e,g.,
    Weyerhaeuser and Canfor) favor the agreement whereas some
    smaller Canadian only companies do not.

    The View From Quebec
    --------------------

    ¶8. (SBU)  In an August 14 conversation with our Consul
    General in Quebec City, Guy Chevrette, President of the
    Quebec Forest Industry Council, commented on the state of
    play:

    -- the Quebec lumber industry believes that it could reach an
    agreement with the U.S. without much difficulty, but that the
    BC industry is the real problem.
    -- What Quebec is looking for is "souplesse" or flexibility
    in three areas: 1) "circumvention" - the existing agreement
    says that any changes to the "forest industry regime" under
    the agreement are an infraction.  In Chevrette's view, this
    is an overly broad provision as there are some changes that
    Quebec may need to execute that would have nothing to do with
    softwood lumber, and such adjustments should not be seen as
    an "infraction" of the July 1 agreement.  He cited as an
    example that the GOQ will need to address how it handles poor
    quality lumber within the province.  The Quebec industry does
    not want needed changes in the province to be held hostage to
    the softwood lumber agreement.
    2) interpretive annexes - the Quebec industry feels that
    adding interpretive annexes would give it the flexibility it
    needs to sign off on the agreement.  3) the Quebec industry
    Qneeds to sign off on the agreement.  3) the Quebec industry
    wants a mechanism that would extend the 23 month limit of the
    agreement for some additional months.  For example, if one
    side wanted to withdraw from the agreement, then it would
    give that party 2-3 months to announce who would be members
    of its delegation that would discuss the intention to
    withdraw; then a few more months to file an intention to
    withdraw; and so forth.  The idea would be to draw out the
    disengagement process by several months: "giving up a billion
    dollars is a lot for an agreement that only lasts 23 months."

    ¶9. (SBU)  Chevrette thought that BC in fact doesn't want an
    agreement at all.  They've got their pine beetle infestation
    disease ravaging their wood, so they would prefer not to have
    an agreement, and to flood the U.S. market with their
    softwood instead.  The Quebec industry will meet on August 18
    to come to agreement on its position.

    OTTAWA 00002439  003 OF 003

    Ontario
    -------

    ¶10. (SBU)  According to Consulate General Toronto soundings,
    the language on running rules - prospective versus
    retrospective - and monthly quotas are problematic in the
    July 1 agreement.   Ontario's lumber producers are quite
    concerned about the agreement's provision to divide Canada's
    export quota into monthly allotments.  Under the present
    agreement text, if companies do not fulfill their share of
    the monthly quota, the unused quota is lost and cannot be
    carried forward.  An Ontario Ministry of Natural Resources
    official said that province's industry would prefer a rolling
    quota over three months, for example, so that any lost
    production in a given month could be made up in subsequent
    months.

    ¶11. (SBU)  While many contacts have either been silent about
    what happened at the August 9 meeting or have been
    unreachable, the Vice President at Abitibi said that
    Emerson's meeting was "very productive, honest, and open."
    Ontario Premier McGuinty told the Ambassador on August 14
    that the BC industry's position will be key to determining
    the Canadian industry's support of the July 1 agreement.

    The Prairies
    ------------

    ¶12. (SBU)  There has been little reaction to Emerson's
    meeting from industry leaders in Manitoba, Alberta, and
    Saskatchewan.  The lumber industry in these provinces is an
    important sector, but relatively small in the big picture.
    In the past, these observers have said that they have no
    choice but to "go with the flow" and support the positions of
    the bigger players in BC, Ontario and Quebec.  However, a
    Conservative Alberta MP had a different take on the current
    situation.  He told the DCM that he heard that the lumber
    industry in his province favored the status quo of endless
    litigation over the July 1 agreement.

    British Columbia
    ----------------

    ¶13. (SBU)  A key Consulate Vancouver contact was pessimistic
    about the outcome of the Emerson meeting.  The industry in
    the west is not on board with the July 1 agreement and
    believes that the GOC is maneuvering the BC companies to kill
    the deal and then have them take the blame.  This outcome
    would also avoid the deal becoming the subject of a
    Parliamentary vote of confidence in the fall, which could
    force a new election if the Conservatives lost.  The BC
    industry was told that their list of demands for
    modifications in the July 1 agreement was too long and should
    be shortened.  At the August 9 meeting with Emerson, the BC
    industry said it wanted: 1) a 12 month standstill; 2) running
    rules (i.e., the border tax calculation on the date a lumber
    order is placed versus when it actually crosses the border)
    should be prospective rather than retrospective; 3) border
    tax adjustments should be reviewed quarterly rather than
    monthly; and 4) BC's coastal logging should not be subject to
    a duty (in concert with the rest of the province).

    Visit Canada's Classified Web Site at
    http://www.state.sgov.gov/p/wha/ottawa

    WILKINS

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