VISIT OF USTR AMBASSADOR SUSAN SCHWAB TO OTTAWA,

UNCLAS SECTION 01 OF 06 OTTAWA 002837

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/CAN AND EB
STATE PASS USTR FOR AMBASSADOR SCHWAB, JIM MENDENHALL, JOHN
MELLE, AND SAGE CHANDLER
COMMERCE FOR ASSISTANT SECRETARY DAVID SPOONER AND JIM
TERPSTRA

E.O. 12958: N/A
TAGS: ETRD PREL ECON EAGR CA CH KS
SUBJECT: VISIT OF USTR AMBASSADOR SUSAN SCHWAB TO OTTAWA,
SEPTEMBER 11-12, 2006 - SIGNATURE OF U.S.-CANADIAN SOFTWOOD
LUMBER AGREEMENT

REF: A. STATE 147265


B. OTTAWA 2688

C. OTTAWA 2439 (ALL NOTAL)


1. (SBU) Summary: USTR Ambassador Susan Schwab visited
Ottawa on September 11-12 to sign the U.S.-Canadian Softwood
Lumber Agreement, which will be voted on by the Canadian
Parliament during the week of September 18. Prior to the
signing ceremony at the Department of Foreign Affairs and
International Trade (DFAIT),she was the guest of honor at a
lunch hosted by Minister of International Trade David Emerson
at which there was a tour d'horizon on trade and related
topics. The two ministers exchanged views on implementation
of the Softwood Lumber Agreement, joint work on regional
trade initiatives, trade with Korea and China, intellectual
property rights (IPR),the U.S. imposition of APHIS fees on
passengers and cargo crossing the U.S. border from Canada and
related issues, ITAR, and BSE. Ambassador Schwab later met
privately with Minister Emerson and Industry Minister
Bernier. Embassy Comment: Ambassador Schwab's signature of
the Softwood Lumber Agreement, after several years of
discussion and periodic negotiations, marked the end of a
highly contentious and long standing irritant in
U.S.-Canadian relations. End Comment and Summary.


2. (U) On September 12, Ambassador Schwab was hosted at lunch
by International Trade Minister David Emerson and colleagues
from DFAIT. USTR General Counsel Jim Mendenhall, Commerce
Assistant Secretary for Import Administration David Spooner,
USTR, and USDOC officials also attended the meal. The
Embassy was represented by Ambassador Wilkins and Economic
Minister-Counselor Mohler (notetaker).

Softwood Lumber
--------------


3. (SBU) Minister Emerson outlined the GOC's timetable for
implementing the softwood lumber agreement. When the
Canadian Parliament returns after its summer recess on
September 18, the Harper government will immediately
introduce a "Ways and Means" motion to move forward on the
export tax part of the agreement. There will be a vote on
the Motion within 24 hours. Once tabled, the Motion cannot
be amended; it can only be adopted on an up-or-down vote. If
the Motion is adopted, the government would quickly introduce
legislation that conforms to the proposal in the Ways and
Means Motion. The bill would have to go through the usual
legislative procedure (first, second, third reading with
referral to a committee). Regardless of how long this
process takes, the government would be able to impose the tax
immediately so that the agreement would go into effect by the
anticipated October 1 date. As of now, Emerson said that 92%
of Canadian companies have signed up to receive refunds under
the agreement. Embassy Comment: Passage of the Ways and
Means Motion appears assured since the Bloc Quebecois (BQ)
has announced that it will support the Harper government.
The BQ votes will give the Conservatives enough votes to
overcome opposition from the Liberal and New Democratic
Parties. End Comment.

Trade
--------------


4. (SBU) Ambassador Schwab briefed Minister Emerson on the
results of last weekend's Rio meeting of the G-20 Trade
Ministers, where the main topic was resumption of the Doha
QMinisters, where the main topic was resumption of the Doha
Development Round negotiations, which were in July.


5. (SBU) Minister Emerson said that Canada is keen on moving
ahead on sectoral initiatives to broaden NAFTA, in areas such
as swine, electricity, steel, and chemicals (a particular
interest of Mexico). He asked about U.S. interests in this
regard. If the Doha Round fails, Emerson felt that Canada
could find itself marginalized in trade since it does not
have sufficient geopolitical clout to prevent discrimination
in third-country markets. In order to compete with China and
other major trading blocs, he said that North American
competitiveness depends on more standardized rules of origin.



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Korea
--------------


6. (SBU) Minister Emerson acknowledged that Canada is making
little progress in its free trade agreement (FTA)
negotiations with South Korea, which rejected Canada's most
recent substantive offer. Moreover, there is serious
pressure against a Korean FTA from the Canadian auto
industry. The Minister admitted that he needs to show that
free trade with Korea would be a win for Canada.


7. (SBU) Ambassador Schwab noted that U.S., Canada and
Korean trade officials will focus on the auto sector during
their meeting next week in Toronto. Korean President Roh
will also see President Bush later this week. She said that
the most recent round in the U.S.-Korean FTA talks in Seattle
did not result in any breakthroughs, either. Schwab agreed
that Canada and the U.S. should work together on their
respective FTA negotiations with Korea. Both governments
should also discuss in more detail the promotion of sectoral
initiatives in the context, not only in North America, but
also in the Western Hemisphere.


8. (SBU) Deputy Trade Minister Morin pointed out that Canada
hosted Mexican trade officials recently in Vancouver. A
follow-on meeting is possible in Mexico in November, but
substantial progress would await the formation of the new
Calderon government which takes office in December.

China
--------------


9. (SBU) Ambassador Schwab noted that Canada would join the
U.S. in announcing our WTO case on auto parts in China. She
had had productive meetings in China last month and gave the
PRC public and private credit for progress that they are
making on some trade issues, but she also noted problem areas
such as subsidies and intellectual property rights remain.
There was no progress on the auto parts issue. More
generally, Schwab believed that China needs to stand up for
the Doha Development Round given its increasing stake as a
major player in global trade, but she found officials to be
more focused on preparations for the next party congress.


10. (SBU) Minister Emerson noted that Canada has its own IPR
issues with China, but he expect Beijing to become more
vigorous in preserving IPR since it is now developing
products worth protecting. Schwab agreed that the Chinese
understand this in principle, but they still fall down on IPR
enforcement.

IPR
---


11. (SBU) Minister Emerson said that Canada is looking at
amending its Copyright Law, including addressing technical
protection measures and ISP issues, although he doubted that
the GOC would go as far as adopting the "notice and takedown"
approach advocated by the U.S. He assured Ambassador Schwab
that Canada maintains a strong commitment to taking
anti-piracy measures and effective enforcement at the border.
The new legislation, which is still under development,
should be "a little stronger" than the C-60 bill which was
introduced by the former Liberal government. Regarding the
U.S. request for Canada to join in a possible WTO case
against China on IPR, Emerson said that the GOC is consulting
with private stakeholders. He noted, however, that such a
case could cause legal issues with the Canadian Charter of
Qcase could cause legal issues with the Canadian Charter of
Rights and Freedoms, which is akin to the U.S. Bill of
Rights. Ambassador Schwab stressed that violation of
intellectual property rights is a very serious issue for the
U.S.

APHIS Fees
--------------


12. (SBU) Minister Emerson articulated Canada's strong
concerns with the recent U.S. announcement that it would
start to impose APHIS fees on cargoes and passenger traffic
crossing the border starting later this year. He urged the

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U.S. to "back off" this proposal because of the "incredible
backlash" it is causing in Canada: "Please make it go away."
Emerson claimed that Canada had been blindsided by the news,
which, he said, is hampering the Harper government's efforts
to improve relations with the U.S.


13. (SBU) Ambassador Schwab said that she has discussed the
issue with U.S. Agriculture Secretary Johanns, who pointed
out the increased expense in dealing with cross-border
phytosanitary issues such as BSE. She promised to convey
Emerson's concerns to Secretary Johanns, but could not
promise that the fee proposal would be rescinded. However,
Schwab agreed that it would be important that any fee be
levied in such a way as to minimize its impact on the
cross-border trade. She praised the close cooperation
between APHIS and its Canadian counterpart agency, the
Canadian Food Inspection Agency (CFIA). Ambassador Wilkins
noted that the APHIS fee, in combination with the Western
Hemisphere Travel Initiative (WHTI),is seen by Canadians as
"piling on." Ambassador Schwab replied that she had received
the Canadian message of discontent clearly and stressed that
the impact of the fee should be "invisible."

Crossing the Border
--------------


14. (SBU) Deputy Minister Morin agreed with Ambassador
Wilkins' characterization of Canadian perceptions. She noted
that the new North American Competitiveness Council (NACC),
the private sector component of the Security and Prosperity
Partnership (SPP),hopes to address the need for the border
to be predictable. Schwab agreed. Morin pointed out that
there has been a recent reduction in border crossings by
Americans traveling to Canada. Ambassador Wilkins added that
cross-border traffic is being deterred by high gasoline
prices and the strong Canadian dollar. Speaking personally,
Minister Emerson, who lives in British Columbia, said that he
would be less likely to spend a weekend playing golf in
Washington State because of the long lines of cars at the
Blaine border crossing. He thought that all these factors
serve to discourage Canadians and Americans from making
spontaneous trips across the border for shopping and sporting
events as they had done in the past. On the positive side,
Ambassador Wilkins observed that air travelers in Canada are
finding their trips to the U.S. expedited by being
"pre-cleared" by U.S. CBP officials at major Canadian
airports. A new pre-clearance site opens at the Halifax
airport in early October.

ITAR
--------------


15. (SBU) Minister Emerson briefly raised Canadian concerns
about the operation of the U.S. ITAR program. He said that
Canadians understand how the events of 9/11 have affected
U.S. security, but enforcement of ITAR rules is increasingly
affecting Canada because of its defense relationship with the
U.S. 20% of Canadian defense procurement now comes directly
from the U.S. and 20% more comes from the Canadian
subsidiaries of U.S. defense companies. He noted that the
Harper government intends to spend $17 billion in defense
expenditures over the next decade. Canada will work hard to
comply with U.S. ITAR checks, but the requirement for dual
Qcomply with U.S. ITAR checks, but the requirement for dual
nationals working on ITAR-related technologies sometimes
causes problems, such as for Canadians who also hold Chinese
citizenship. Emerson did not have a solution, but wanted the
U.S. to know about the problems the GOC can face in complying
with the ITAR regulations.


16. (SBU) While admitting that the State Department, not
USTR, takes the lead on ITAR within the USG, Ambassador
Schwab replied that the regulations can cause frustrations
for U.S. companies as well. There needs to be a balance
stuck. It would be better, she continued, if we could look
at issues as if there were a common border surrounding Canada
and the U.S., rather than as an issue caused by the
Canadian-U.S. border. Emerson agreed. He said that policies
such as the WHTI are a "running sore" in the bilateral
relationship and are inconsistent with policies to integrate
the Canadian and U.S. economies to the maximum extent

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possible. Ambassador Schwab thought that technology will
eventually ease such border issues.

BSE
---


17. (SBU) In answer to Minister Emerson's question about the
impact of recent Canadian BSE cases, Ambassador Schwab said
that USDA is working on a science-based solution to open the
border to all Canadian cattle without regard to age.
Secretary Johanns told her that USDA is moving to implement

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this policy as soon as possible. She said that such
decisions take political will as well as the will to take
some risk. Emerson praised the unprecedented flexibility on
the part of the U.S. on this sensitive issue. He admitted
that Prime Minister Harper has been under a lot of pressure
from an often polarized Canadian public in which there are
anti-U.S. feelings, but he has always acted in Canada's
national interest. Emerson appreciated the fact that the
U.S. has ignored similar pressures on its side of the border
to stay the course and "do the right thing." Ambassador
Wilkins pointed out that leadership matters.


18. (SBU) After the lunch, Ambassadors Schwab and Wilkins
held private meetings with both Minister Emerson and Industry
Minister Maxime Bernier, who could not attend the lunch, but
did come to witness the signing of the softwood agreement.

Signing the Softwood Lumber Agreement
--------------


19. (U) The signing ceremony on the DFAIT roof terrace
overlooking downtown Ottawa and the nearby Gatineau Hills
took place on a gorgeous early fall afternoon and was well
attended by the Canadian press. Ambassador Schwab's
statement at the signing:

"Thank you Minister.
"This is a great day - a day that is a long time in the
making - and which many people understandably thought would
never come.
"With this signing and implementation of this landmark
agreement, we hope to bring to a close over 20 years of
litigation - and the market instability and political tension
that have often accompanied it.
"To reach this agreement, both sides had to compromise and
make hard choices - and there is still much work to be done
to bring the agreement into force. But once it is
operational, this will be a good agreement for the United
States, for Canada, and for the relationship between our two
countries.
"Canada is the United States' largest trading partner, and it
is vital that we keep that relationship strong and growing.
Even while this dispute was ongoing, over 96% of our trade
with Canada was dispute-free. After this agreement is
implemented, over 99% of our trade will be dispute free.
"For those who would criticize this agreement, I ask them to
consider the alternatives. Without this agreement, we would
see a continuation of litigation - either through
continuation of the existing anti-dumping and countervailing
duty orders or through the filing of another round of cases.
The duties collected as a result of those cases could be
substantially higher than those applied under the settlement
and would be susceptible to great volatility. Since 2002, the
combined duty margins on softwood lumber have ranged from 11%
to 27%. If this agreement had been in place over the last ten
Qto 27%. If this agreement had been in place over the last ten
years, there would have been unrestricted trade for over half
the time.
"In place of costly litigation, we will create a predictable
and stable market; strengthen the competitiveness of the
North American lumber industry; provide a pathway to resolve
the policy questions underlying this dispute; bring a little
more harmony among neighbors; and provide financial
assistance to worthy causes.
"With this agreement, we will have a formal channel - outside
the super-heated environment of litigation - to discuss ways
to resolve our differences once and for all. Under the terms
of the agreement, we will establish a bi-national working
group to discuss policies that could eventually result in the
elimination of border measures. The commission is expected to

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produce a report within 18 months after the agreement is
signed. We have never had that before under any previous
lumber agreement.
"With this agreement, almost half a billion dollars will be
used to advance low income housing initiatives and disaster
relief, to provide community assistance to timber-reliant
communities, and to assist in the development of forest
management practices that will promote sustainable forestry.
Another $50 million will be disbursed to a bi-national
industry council, which will work to build an atmosphere of
trust and cooperation, while promoting the integration and
strengthening of the industry.
"The United States Government is fully committed to this
endeavor. We fully expect that this agreement will have a
duration of at least seven to nine years. In fact, it is our
sincere hope that the processes that will be established
under the agreement will lead to a permanent solution to a
problem that has too long been a distraction in our
relationship. We have an historic opportunity and we need to
grab it.
"I want to thank the leaders of our two great countries -
President Bush and Prime Minister Harper - for their
leadership and their unwavering commitment to finding a
solution to this longstanding irritant.
"I also want to thank my Canadian colleagues and
counterparts, Ambassador Michael Wilson and Minister David
Emerson, for their tremendous efforts in concluding this
agreement. Their steadfast support has been, and will
continue to be, absolutely critical to the success of this
undertaking.
"Finally, I want to thank the U.S. negotiating team from USTR
and the Department of Commerce, which has put in long hours
over many months to negotiate this agreement.
We can all be proud of this tremendous achievement. Let us
stay committed to its success.
Thank you."


20. (U) Emerson's remarks:

"Canada's New Government today marked another important step
toward fulfilling a commitment to resolve the longstanding
softwood lumber dispute, signing an agreement with the United
States that delivers real results for Canadians.
"Backed by two national governments, all major
softwood-producing provinces and an overwhelming majority of
Canadian softwood lumber producers, this historic Agreement
delivers predictable access to the U.S. market; guarantees
the repayment of more than US$4.4 billion in disputed duties;
provides provincial and regional flexibility in forestry
policies; and brings an end to years of uncertainty and
costly litigation.
"Professionalism, mutual respect and sustained effort have
delivered this deal for Canadians. By approaching our most
important diplomatic and trading relationship in a rational,
workmanlike fashion, we are getting things done for Canadians.
"Today's signing-and the opportunity to begin constructive,
new dialogue with Trade Representative Schwab on issues that
matter-represents hope that trade irritants, however few
there are, can be dealt with in a courteous and professional
manner."


21. (U) During the press question and answer session
following the signing ceremony, Ambassador Schwab rebutted an
American trade attorney's claim to a Parliamentary committee
QAmerican trade attorney's claim to a Parliamentary committee
last month that the US$450 million Meritorious Initiative
would be used as a political slush fund to elect Republicans
in the U.S. congressional elections. She characterized such
an allegation as "silliness" and stressed that the money will
only be spent by non-profit organizations selected after
consultations with Canada. The money would be spent in U.S.
communities dependent on timber, for low income housing and
disaster relief and to promote better forestry practices.
Ambassador Schwab also pointed out that the money will not
flow until after our elections: "So I think there is no way
it will become a political fund."


22. (U) The text of the 82 page agreement is at
http://www.dfait-maeci.gc.ca/eicb/softwood/SL A-main-en.asp.


23. (U) This message has been cleared by USTR and Commerce

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staff.

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