Soft Wood Lumber Dispute Case Study

Soft Wood Lumber and Doman Industries
Soft Wood Lumber Disputes
Simmered more than 20 years, but spilled over May 2002
Dispute from May 2002 to July 2006
Canada’s View
Timber is owned by provincial government, which charge a ‘stumpage fee’ (charge to cut the trees down)
Subsidized because it is used for many industries
United States’ View
Practice competitive auction, and claims Canadian provision unfair
Soft Wood Lumber Disputes (con’t)
Tentative Agreement reached in April 2006
US would lift duties if Canadian lumber stayed in a certain price range
If the price went lower than that range, a mix of export tax/quota regime would be implemented on imports to the US
US would return over 80% of the $5 billion of the duties collected
Agreement last 7 years, with possibility of renewal
Doman Industries
Majors in logging and sawmilling timber into lumber and wood chips
Was 2nd largest coastal woodland operator in BC, products sold in 30 countries
Hit hard times in the 1990’s
Bad investments
Charges of insider trading
Herb Doman charged for insider trading in 1988 (found guilty in 1996 but appeal filed) (found guilty and charged in 2001?)
Invested in Western Forest Products Ltd (WFP), but problems didn’t come up until Doman Industries increased ownership to over 50% Went from being free of debt to near $600 million in debt
Around 1995, lost business with opening of European companies
President (Herb Doman) and board members didn’t listen to Rick Doman’s warnings/concerns about the future
Bought too much, with the hopes of expanding, but oversea markets (Japan in particular) crashed
Debt reached $1 Billion in 1999
2001 – Rick Doman because president, and went straight to work!
Reduce inventory, cut costs, and restructure
Able to do first 2, but board refused the third
Doman Industries (con’t)
2002
Tariffs emplaced by US hit Doman Industries hard ($4 million in first month)
65% of Doman Industries sales were in the US
Nov 2002 - $1 billion debt went into court-ordered protection from its creditors
2002 to
2004
Process of restructuring Company named changed to Western Forest Products Inc.
Quiz #1
Is Canadian timber owned by the provincial government, and do they charge a stumpage fee?
True
North American Free Trade Agreement Provision (NAFTA) Highlights
Tariff elimination
Streamlining border processing and licensing requirements for truckers
Also opening up the border and interior of Mexico
Establishing standards
Raised Health, Safety and Industrial standards
Supplemental agreement
Ease the concerns that companies would shift production to Mexico (for the cheaper labour)
Tariff reduction for motor vehicles and auto parts
NAFTA Provision Highlights (con’t)
Reduce textile and apparel barriers
More free trade in agriculture
Use to be up to 10% tariff on imports to Mexico
Expands trade in financial services
Increases protection of intellectual property rights
Mexico use to copy and create a ‘Mexico’ version of chemicals and technology devises
Opening of insurance market
Absolute and Comparative Advantage
Absolute Advantage
Definition - The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service
Explanation – Entities can produce something using a smaller amount of input than someone else
Absolute and Comparative Advantage (con’t)
Comparative Advantage
Definition - A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor
Explanation – 2 companies produce the same 2 products. For one produce, it costs both the same amount. The other product, one company has a large inexpensive market to get raw materials. The second company needs to ship in all the raw materials. Company one, should think about turning exclusively to the second produce, while company two should think about dropping the second produce, and only produce the first.
Absolute and Comparative Advantage in the Softwood Lumber Industry
Absolute Advantage
No matter where, it takes the same amount of raw trees to create X amount of Y lumber

Comparative Advantage
Canadian lumber was cheaper because the provincial governments charged a lower stumpage fee, while the US paid more because of auctioning of cut-able tress
Canadian had the advantage to more revenues until 2002
Quiz #2
What does NAFTA stand for?
North American Free Trade Agreement
Levels of Involvement in International Business
International Level
Sets out laws of how countries deal with each other
Federal Level
Controls the import and export laws of Canada
Provincial Level
Deals with the business rules and taxes
Municipal Level
Deals with zoning bylaws with in the township
Deals with environmental issues, health and safety, and taxes
Company Level
Deals with the day to day business and sales
Levels of Involvement in International Business (con’t)
The Canadian Softwood Lumber represents all the levels in the International Business
Environmental issues and Taxation at all levels
Health and Safety issues; Air quality emission; and Subsidies at Federal and Provincial levels
Reforestation and Waste Regulations at Provincial and Municipal levels
Many regulations are duplicated at all levels so it is beneficial when these are harmonized
Quiz #3
How many levels are involved in International Trade?
4 5 6
Barriers to International Trade
The barriers to International Trade are the tariffs that add costs to imported goods and are one out of several trade policies that a country can enact
on.
3 tariff taxes that are used are Specific Tariffs, Ad Valorem Tariffs and Licenses.
Tariffs are used or created to protect smaller companies in developing and advanced economies with developed industries.
5 reasons tariffs are used: Protecting Domestic Employment, Protecting Consumers, Infant Industries, National Security and Retaliation.
Barriers to International Trade (con’t)
General Agreement on Tariffs and Trade (GATT) included in the World Trade Organization (WTO)
GATT was formed after World War II and in 1995 established the WTO, which replaced GATT as a world forum for trade negotiations.
WTO is a permanent forum for negotiating, implementing and monitoring international trade procedures and mediating trade disputes among 150 countries.
Relevant Barriers
World Trade Organization (WTO), European Union (EU) and Asia-Pacific Economic Cooperation (APEC) are relevant to the Canadian softwood lumber and Doman Industries because they ship their lumber outside of Canada
Without organizations like WTO, EU, and APEC we, as Canada, would not be able to trade, deal or sell lumber with foreign countries
Quiz 4
What does GATT stand for?
General Agreement on Tariffs and Trade
Sources
http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/texte/index.aspx?lang=en&menu_id=34&view=d http://www.inc.com/encyclopedia/north-american-free-trade-agreement-nafta.html http://www.investopedia.com/#axzz1YOgCwlRP http://www.fundinguniverse.com/company-histories/Doman-Industries-Limited-Company-History.html http://www.westernforest.com/
Sources (con’t) http://www.cbc.ca/news/business/story/2004/06/11/doman_040611.html http://en.wikipedia.org/wiki/Canada%E2%80%93United_States_softwood_lumber_dispute http://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp http://www.dreamstime.com/search.php?firstvalue=softwood+trees&srh_field=softwood+trees