Canada is a trading nation.
Trade accounts for more than half of gross domestic product. The country's future prosperity depends heavily on opening new markets and protecting traditional ones in a competitive global marketplace. Canada already has free-trade deals in place with 11 countries, plus agreements in the works with nearly 40 more.
And yet, the federal government is working diligently behind closed doors on a pact with the United States that is the antithesis of all that – an agreement that would inhibit billions of dollars' worth of Canadian exports, perhaps for years. In essence, Ottawa is ready to commit to self-imposed protectionism.
Why would Justin Trudeau & Co. do that? Because the export in question is softwood lumber.
The federal government and a significant portion of the Canadian forestry industry are ready to do a deal because they believe it's better than the alternative – potentially punishing U.S. duties and years of costly litigation.
On the table is a demand from the U.S. industry to permanently cap Canada's share of U.S. lumber consumption at 25 per cent. That's lower than Canada's 2015 market share of 30 per cent and well below the 33-per-cent level reached before the two countries signed their last managed trade deal in 2006.
No one really knows how much of the U.S. market Canada would grab in a free and open market. With the exception of a few brief interludes, trade in lumber hasn't been free since the Canada-U.S. free-trade agreement went into effect in 1989.
No irony there.
As luck would have it, Canada is enjoying one of those happy interludes at the moment. The doors to trade in lumber have been wide open since October, when nine years of restrictions expired. And Canadian manufacturers are taking full advantage.
The volume of Canadian lumber exported to the United States surged 9 per cent last year and 29 per cent year over year in the first three months of 2016, according to figures compiled by Vancouver-based economist Doug Smyth. Producers in all regions – from British Columbia to Atlantic Canada – are getting in on the party.
But it's not just about the open border. The cheaper Canadian dollar has made our lumber much more affordable. Just as importantly, the size of the pie is growing. Americans are buying more new homes – the main market for Canadian lumber. U.S. housing starts are averaging more than a million units a year, roughly double the lows reached in 2009, and are still rising.
Alas, this party won't last long. Under the 2006 agreement, the United States has pledged not to initiate a new trade case against Canada for one year. That cooling-off period expires in October.
A new agreement appears unlikely in time for U.S. President Barack Obama's planned visit to Ottawa later this month. Officials have held a number of inconsequential meetings to date.
The main lumber-producing provinces – B.C. and Quebec – are at odds over what they want. B.C. is more willing to accept restrictions, but prefers a tax rather than the hard quota being pushed by the United States. Resolute Forest Products Inc., a leading Quebec producer, is advocating a much more muscular stand against the United States. Chief executive officer Richard Garneau insists he wants an open border.
It's worth pointing out that there's scant evidence Canada is doing anything wrong. Previous rounds of U.S. litigation have failed to prove historic U.S. grievances that Canadian provinces unfairly subsidize exports by undercharging lumber producers for cutting on Crown land and in the case of British Columbia, by restricting log exports.
Yes, it's true that the low Canadian dollar has pushed down various costs faced by Canadian producers, including timber. But a floating currency that has fallen sharply against the U.S. dollar – largely because of the collapse in the price of oil – is not a subsidy.
In the Alice in Wonderland world of softwood lumber, absence of evidence is no defence against another U.S. trade challenge. The U.S. Lumber Coalition insists it will have "no choice but to assert its rights under U.S. trade law" unless Canada shows a willingness to engage in "substantive negotiations," according to a document circulated on Capitol Hill and obtained by the trade publication Inside U.S. Trade.
Substantive, one presumes, means capitulation.
Canada would be unwise to do a deal that betrays the country's fundamental economic values.