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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