PROBLEMS LOOMING FOR SOFTWOOD LUMBER DEAL

C O N F I D E N T I A L SECTION 01 OF 02 OTTAWA 002321

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 08/01/2016
TAGS: ECON ETRD PREL CA
SUBJECT: PROBLEMS LOOMING FOR SOFTWOOD LUMBER DEAL

Classified By: AMBASSADOR DAVID WILKINS FOR REASONS 1.4 (B) AND (D)


1. (C) Summary: There is growing widespread and persistent
Canadian lumber industry and provincial dissatisfaction with
the July 1 U.S.-Canadian agreement to settle the longstanding
and contentious softwood lumber dispute after a July 21 U.S.
federal court decision in Canada's favor which encouraged
opponents to hope for an eventual victory through litigation.
For now, Prime Minister Harper is staking his government's
future on Parliamentary approval this fall of the Canadian
export tax associated with the deal. International Trade
Minister Emerson is trying hard to convince Parliament and
the public that the deal is the best one Canada can expect,
but this is proving to be a tough sell in light of opposition
from several provinces, especially British Columbia, and from
enough Canadian lumber companies who have enough market power
to stop the agreement. Both the PM and Emerson agree that
while they could win the vote in Parliament, the loss of
support from the industry could kill the deal. End Summary.


2. (U) While Canada's largest lumber producer, Canfor, has
expressed public support for the draft July 1 agreement,
Canfor President Jim Shepherd said on July 31 that "common
sense" suggests that the current deal is unlikely to get
necessary backing from the Canadian industry without some
changes. Two major British Columbia firms, West Fraser
Timber and Interfor, have been quoted in the press as being
dissatisfied with the deal as written and as trying to
get it changed. However, the companies stopped short of
saying that they would exercise the implicit veto that they
have over its implementation (the deal requires that 95
percent of the Canadian industry support it, a high threshold
that may be difficult to reach in the current atmosphere).


3. (C) There is also opposition to the deal from other major
players, including the British Columbia provincial
government, and industry associations in the four key lumber
exporting provinces of BC, Quebec, Ontario, and Alberta.
Saskatchewan's Forestry Minister told the press that the
agreement is unfair and unworkable for his province.
Manitoba
Premier Doer suggested to the Ambassador that since his
province is a relatively small lumber exporter, he would
take his cue from "the big guys." On the other hand, Quebec
Premier Charest implied to the Ambassador that his
government, while not happy with the current deal, would
probably support it in the end. Alberta Conservative MP
Rob Merrifield recently told the DCM that Alberta's industry
favors the status quo, i.e., no deal.


4. (C) Opposition forces were given a boost by the July 21
decision in the U.S. Court of International Trade which
favored Canada. Since then, International Trade Minister
Emerson has stepped up his efforts to save the deal, not so
much by touting its merits, but by warning of the alternative
of endless litigation. Emerson is particularly
knowledgeable about the industry since he was Canfor's CEO
prior to entering politics. The Minister told a House of
Commons committee on July 31 that "negotiations" have ended,
and that if the July 1 deal is rejected, there is no
chance that another one can be negotiated for at least three
years, and that a fresh round of the litigation cycle
would be "ugly." The Minister warned to the House of Commons
Qwould be "ugly." The Minister warned to the House of Commons
committee that "if we do not have sufficient buy-in from
industry, there really isn't an agreement to bring before
Parliament" after it reconvenes on September 18. Without
support from "the appropriate number of players in the
industry, you're dead on arrival," the Minister conceded. He
suggested that killing the current deal would probably lead
to another long trade war with the U.S., launched by U.S.
lumber interests and Congress: "The choice is not between
this negotiated deal and some Utopian model of free trade.
Don't think we can walk away and, when we feel like it,
negotiate another deal to our liking. That is not going to
happen." Emerson later told reporters that he continues to
meet with industry leaders about the deal. The Minister
told the Ambassador in a private conversation that he sees
only two options: sign-on to the July 1 agreement, or
continue with costly litigation and escalating tariffs from
the U.S.


5. (C) When the Ambassador raised the softwood lumber issue
with the Prime Minister on July 30, Harper conceded that
getting Parliamentary approval for the export tax portion of
the softwood lumber deal in the fall would be "tough,"
but he still believes that he will have the votes for passage
since none of Canada's four political parties or the

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public want to have another election so soon after the
previous one in January 2006. Harper has already made it
clear
that he intends to treat the softwood lumber legislation as a
vote of confidence that, if lost, could topple his
minority government.


6. (C) The future for resolving the contentious softwood
lumber issue remains unclear. Emerson is making a strong
effort to sell the July 1 agreement during the six weeks
before Parliament returns as the best deal Canada will get,
and it still is possible that the Harper government in the
end will be able to muster enough votes from the three other
parties to garner approval for what everyone agrees is an
imperfect deal. But a Parliamentary vote may never take
place if industry opposition to the deal, as initialed on
July 1, does not abate. Although the U.S. Coalition for
Fair Lumber Imports has stated publicly that the proposed
agreement is not open to further negotiations, we are not
privy to discussions that might be occurring privately
between the two industries to address the changes to the
agreement that the Canadian industry seeks, such as a longer
termination period, equal treatment for lumber processed
from logs harvested on private lands in BC, and a reduced tax
on remanufacturing.


7. (C) At this point we suggest that Washington not make any
statement to try to influence the current internal debate
within Canada. It's Canada's decision, and anything that we
say might backfire and make Harper and Emerson's vigorous
efforts to sell the deal to fellow politicians and to the
public even more difficult than it is already proving to be.



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WILKINS