September 2005 Volume 1
Article 2.

Author
Peter Dash

Biography:

The writer, Peter Dash, MA applied linguistics is a professor, author and conservative environmentalist. He is a principal editor of the Asian Business Journal and Asian EFL Journal (www.asian-efl-journal.com) Asia's leading on-line academic journal on English instruction. He is a graduate in forestry from the University of British Columbia and former Associate to Harvard University's Center for International affairs. He was a trade policy advisor on forest products to the federal government and as well has worked on forest sector productivity. He lives in Montreal and the Caribbean and is clearing his lungs after spending 9 years in Asia including China and South Korea.

Canada, a Venezuela of the North?

Reaction by Canadian nationalists to the U.S. decision on softwood lumber could blacken Canada's image and eventually kill NAFTA. Business like alternative solutions are available that are win-win-win -win to Canada, U.S. and even Asia than tit for tat slapping on of countervail tariffs.

Over 5 billion dollars is owed by the U.S. government to Canada in softwood lumber tariffs given a recent North American Free Trade Agreement (NAFTA) decision. This is no small change in the Canada-U.S. relationship especially since Washington will not play ball in remitting what is owed. In retaliation, the Ottawa solution as hinted at by federal industry minister David Emerson -a former Canadian lumber executive- is to restrict energy flows to the United States and tariff U.S. exports like corn. To use his sports analogy, it is now time to check the big U.S. bully where it counts.

Welcome to Canada's new image -the "Venezuela of the North" ? Is this to replace the Brazilian variation, which was used unfairly by environmentalists to describe Canada's forestry practices which still by the way receive focus by Americans in rationalizing their lumber tariffs. A better game plan is needed. While Emerson back checks in panic and now publicly denies that energy will not be part of the retaliation picture, he has now let the oil genie out of the public bottle and onto the trade field. Putting it away may be harder to do given strong Canadian nationalist sentiments and American sensitivities on energy matters.

Canada thus needs to at least first take stock and listen to cooler and wiser heads before it hits back given what is globally at stake. For example, Allan Gotlieb, Canada's former ambassador to the United States, so eloquently stated in a recent National Post article that restricting oil to the Americans would be like trying to jump over the head of a unicorn. While East Asia, under such a scenario might benefit from any redirected surplus Canadian oil to meet its huge current demand, it would be folly not to believe that Washington would not react -and swiftly. The same would go for disproportionate responses relating to other cross border flows.

This is the same Washington which behind the scenes appears to have blocked China's attempted purchase of a U.S. energy company. It further portends how the U.S. government can even subtly as well as quickly react when its energy security -so much tied to its national security- is threatened.. Whether (left leaning) nationalist Canadians may be peeved with this thought, Washington may see Canada and Canadian energy these days as more a part of its world order orbit- not China's. As a result, the U.S. government might be happy to reinforce that message at the erosion of China-U.S.A. trade relations and despite the full extent of U.S. Treasury bill holdings by East Asian monetary authorities. Energy indeed is very serious business to Americans these days faced with record prices at the gas pump and upwards of $67 U.S. dollars a barrel. The message will be simple. Hands off, China. Hands up Canada.

More specifically, any efforts by the Canadian federal government at blocking energy to the south will immediately bring to attention clause 603 in the NAFTA agreement. If NAFTA judges have been supposedly impartial in the softwood lumber dispute then expect the same on oil . That clause effectively prohibits the Canadian government from restricting oil exports to the United States. .

A real casualty in the fall-out to the recent response by Ottawa to the U.S.'s unwillingness to pay up and eliminate lumber tariffs is the Canadian industry minister who is suppose to represent the whole Canadian business landscape not just behave like a CEO forestry executive. David Emerson is usually a bright and engaging person -a former economics professor as well, -representing an industry that has been badly led in the past by some rather narrow-minded "social Neanderthals". However, the language he now uses against the United States these days is less profound and more "profane" including ending meetings with American trade reps.

Positive industry initiatives up to now which have Emerson's attention include the Canada-Korea free trade negotiations. Such Asian initiatives could help open up additional markets to alleviate U.S. trade pressures on lumber albeit at some sacrifices. The Canadian auto industry competes dead on with Korea's Hyundai and Kia car manufacturers. These manufacturers have steadily improved their market share. But they represent a real worry to Canadian automotive workers who can not be forgotten. This is another reason why the minister can not effectively act as a paid lobbyist by the public for one sector which he is known to be so well attached -at the expense of others. He would be wiser to take a more balanced perspective on trade issues.

Emerson also needs to better remember that the Canadian forest industry has not been able to do that well even in a world-wide commodity boom. Therefore, Canada can not simply point fingers at the Americans for all of its problems. The mountain beetle that is eating at so much British Columbia timber and creating forest fires was not invented in Washington unless one of course believes CIA conspiracy theorists to the contrary. Further, and possibly more importantly, the Canadian industry is suffering for the many sins of Canadian forebears of not planting trees early enough. As well, Governments which control over 85% of the forest cutting lands were profligate in setting low timber prices which the U.S. sees as trade subsidies. It can be argued that such policies discouraged pricing that would have allowed better forest management and sufficient revenues for the government to pay for forest renewal. That image -central to the lumber dispute- still has currency in the United States where timber costs are enormous and where forest management regimes tend to be more expensive.

Such subsidy-trade related issues on the other hand have low interest in the fast growing markets of China, a country with very limited commercial forest resources. A country because of serious flooding problems is increasingly restricting the logging of its own trees. Concurrently, China might better put to work its huge foreign exchange reserves for purchasing Canadian wood product imports as a more environmentally friendlier substitute to the further harvesting of its own watershed forests.

Further, China's huge recycled paper supply as well as its low labour rates are desirable in partially helping to rejuvenate the balance sheets of the Canadian industry which is largely integrated from pulp to paper to lumber. The Canadian industry being at the geographical top of the North American markets has also a hard time accessing U.S. recycled paper so necessary to better deal with green markets and its decreasing timber supplies. Little wonder that Abitibi-Consolidated, a money losing company -and Canada's largest newsprint producer-is opening two plants in China. By doing so it could better place itself to secure Chinese purchases of its own pulp. It could also get a localized advantage in accessing China's huge urban forest (recycled paper) along with lowered manufacturing costs. Canada can not ignore such trends even as forestry unions begin their campaign to arrest the fast decline in employment in the sector. A more vigorous industry due to such a diversification will be better placed to protect remaining jobs at home while helping to stabilize China which severely requires new jobs for its more than 100 million unemployed. If China does not sufficiently develop we may be all in for a bigger nightmare that a deteriorating U.S.-Canada trade relationship. China cannot be allowed to fail.

Environmental regulations, some of which have been demanding though largely well needed have had also their effects of depressing profitability through the 90s and beyond. These regulations are less severe in Asia. The net overall effect is a Canadian forest industry that is looking east to Asia in a desperate attempt to deal with less than satisfied shareholders. Such a focus will increasingly compete against putting excessive energy into fighting the U.S. forest lobbies with their gargantuan money pots and battalions of trade lawyers that make Congress jingle. However, given global pressures, the industry can not think that it will not be eventually "stalked" by Canadian environmentalists to ensure Chinese operations conform to good environmental and labour practices. These environmentalists with their past campaigns in Europe demonstrated their real media fire power. Canadian forest industry presence there will further social development in a country that is the linchpin to sustained global growth. That being said, the China market advantage would seem to still be of particular benefit to Canadian forest product exports including lumber.

Rather than using the stick of the Canadian energy industry to offset forest industry losses due to the U.S.-Canada lumber dispute and other frustrations, Ottawa needs to reinvent its position to secure more markets -everywhere. It needs, as well to promote a much better strategy in Washington than one of negotiation silence. As Emerson has already unwisely connected energy to lumber, U.S. policy makers may now make their own connection and request more committed participation by Canada in a sensible North American energy strategy. Is it a coincidence that U.S. Vice President Dick Cheney is still coming to Alberta at the heel of the lumber dispute?.For Ottawa lacks clarity on oil and gas exports while Ralph Klein, Alberta's premier does not. Nevertheless, there is no contradiction for Ottawa at the same time to promote more sensible energy conservation and common sense accords on climate change.

On the longer run, fossil fuels have a dark future for Canada's industrial strategy as well as tearing up virgin old growth forests. Asian investors in Canada, therefore need to look at a gamut of opportunities such as companies like Bombardier, a transportation and mid aircraft size manufacturer and Nortel, a telecommunications company that recently bought into an LG subsidiary and the concept of Korea as an Asian hub. Commodities are highly cyclical and what was only months ago 30 -40 dollars a barrel for oil could return to such lows rather quickly. And forest commodity prices could go lower, too.

While energy is going good, however, Canada needs to export more oil and gas to both the United States and Asia to further reduce federal government debt and grow the economy in preparation of a post fossil fuel future. The net result of a more generous hand across the border on energy could be for the Bush administration to be more reasonable in examining Canadian trade irritants. At the same time, Canada would be able to improve its trade relationship and image with key Asian countries while buying more good will for a range of other trade agreements and products including lumber and paper. This would be a win win situation for Canada, United States, China and other East Asian countries.

Threatening to turn off the energy tap would not only bring about serious punitive measures, but at worse could lead to the demise of NAFTA -an agreement that according to most statistics and trade experts has significantly raised two way trade between the countries. Canadian nationalists of which many are in the Canadian Liberal Party need to think long and hard on this one before they get their fellow party member, Emerson more hyped on trade retaliation bravado. That is not to say all things have been beautiful or ever will be on the U.S.- Canada trade front - and that NAFTA should not be improved.

While Asia could obtain some short to medium term benefits of greater access to Canadian oil due to NAFTA's collapse or frustration because of the rise of zealot nationalist pressure on both sides of the border, a serious deterioration in one of the world's largest trading partnerships would send a very bad signal to America's other global trade partners including those around the Pacific and in Europe. Asia, as well as Canada indeed, should watch closely as to what happens with this lumber dispute and together look at more imaginative solutions as enumerated here that are to the benefit of investors, trade and employment on all sides. Simply speaking, the softwood lumber dispute outcome could be an important barometer for things to come in Asia-North America trade relations. It is time to realize this is not just the Canada Cup but a fight to keep out of the image with Washington as being in the little leagues of nations. If we retaliate with no positive effect then we will be there.