October 2010

U.S. REQUESTS CONSULTATIONS WITH CANADA UNDER

SOFTWOOD LUMBER TRADE AGREEMENT

FACT SHEET

The United States recently initiated formal consultations with Canada under the Softwood
Lumber Agreement (SLA) to address timber pricing practices in the British Columbia (BC)
Interior that circumvent the SLA export tax regime. Since the spring of 2007, the BC
Government has sold enormous amounts of timber to Interior lumber producers for the minimum
price of C$0.25 per cubic meter, contrary to the rules governing eligibility for minimum
stumpage prices that are grandfathered under the SLA. In effect, BC has collected export taxes
from Interior lumber producers, and then funneled back hundreds of millions of dollars of those
taxes in lower stumpage – basically nullifying the export taxes Canada promised to collect under
the SLA.

This circumvention of the SLA has provided BC Interior lumber producers an unfair advantage
over U.S. producers – and, indeed, producers elsewhere in Canada. Through these actions, BC
has sustained a significant amount of otherwise uneconomic lumber production through the
historic down turn in the lumber market of the last three years, at the expense of producers,
workers, and communities in the United States. As the BC Interior accounts for half or more of
Canada’s softwood lumber exports to the United States, these actions have significantly
depressed U.S. lumber markets. And, this giveaway of Canadian taxpayer-owned resources does
no favors, ultimately, to the people of BC – especially as budget cutbacks attributed to low
stumpage revenues have decimated the Ministry of Forests and its enforcement capacities.

If the consultation process fails to resolve adequately this matter in 40 days, the United States
then has the right to initiate arbitration proceedings under the SLA’s dispute resolution
mechanism. The venue for arbitration would be a London Court of International Arbitration
(LCIA) Tribunal, as was the case for the first three arbitrations under the SLA. If the United
States prevails, the LCIA Tribunal would order Canada to remedy BC’s past and current
breaches of the SLA.

The core SLA violation is the significant reduction in BC Interior stumpage prices through an
enormous, unjustified expansion of timber deemed eligible for minimum stumpage rates.

Historically, BC has charged a nominal stumpage fee of C$0.25 per cubic meter for poor quality
logs deemed mostly unsuitable for making merchantable lumber (so-called “Grade 4” logs).
Prior to April 2006, BC also sold “dead and dry” timber for C$0.25 per cubic meter, regardless
of quality. However, as BC Interior lumber producers began to rely on timber affected by the
mountain pine beetle (MPB) outbreak, BC changed the Interior log grading system effective
April 1, 2006 to ensure that timber prices more closely related to the actual quality of logs and
their potential to produce lumber. Under the new system, timber capable of yielding lumber
would be sold for a variable price, reflecting quality and costs, while the minimum C$0.25 rate
would apply to logs not capable of producing lumber. This is the system that was grandfathered
under the SLA.

Beginning in the spring of 2007, however, the proportion of the BC Interior harvest that was
classified as “Grade 4” timber and sold for C$0.25 increased dramatically.

Share of BC Interior Softwood Timber Scaled as Grade 4 (Monthly)

Source: BC Harvest Billing System. April scaling volumes are too small for meaningful data.

Since the Interior “Average Market Price” in the spring of 2007 was C$14.33 per cubic meter,
the action of improperly grading average timber as Grade 4 translated into a stumpage reduction
of 98 percent.

This increase in the amount of Grade 4 timber is not justified by the rules defining Grade 4 that
were grandfathered in the SLA, even taking into account any change in the quality of BC Interior
timber due to the MPB outbreak. Studies of lumber recovery from MPB-affected logs, including
several studies by the BC Government itself, confirm that the quantity and quality of lumber
recoverable from MPB-affected logs is relatively high and would not justify the misgrading of so
many logs as Grade 4. If nothing else, the very speed of the increase – the percentage of the
harvest deemed Grade 4 nearly doubled in the span of a couple of months – is far more
consistent with a change in the Grade 4 eligibility procedures than with a gradual decline in
timber quality, whether MPB-related or not. And the BC Government made express changes in
some of those procedures since 2007 – including changes to grading conventions and the practice
of heating sample logs in kilns to produce visible cracks – that would tend to increase the amount
of timber called Grade 4.

The BC timber pricing system that was grandfathered under the SLA already took quality
factors, including MPB attack, into account when setting the variable price for lumber-quality
timber. Rather than simply apply this system, BC has sold huge volumes of lumber-quality
timber at the minimum stumpage rate of C$0.25 per cubic meter, just as it did before April 2006
– and as it promised not to do when the SLA was being negotiated and put into effect.

Under the SLA, Canada agreed to maintain or improve the extent to which provincial timber
pricing systems reflect market value. By selling large volumes of timber for a lower price than
should have been charged under the BC Interior timber pricing system grandfathered in the SLA,
BC has moved Crown timber prices even further from market value – giving back to lumber
producers with one hand the export taxes it has collected with the other. Such actions defeat the
very purpose of the SLA, and must be addressed.

BC must reverse its actions and begin to charge the stumpage fees required under the SLA
– and impose additional, compensatory export taxes to collect the export taxes that its
producers have been effectively evading since 2007. If it does not do so, the United States
must proceed to arbitration and the LCIA Tribunal will require BC to take these steps.