Why U.S.-Canada Trade Relations Soured

By Paul Vieira, Jacob Bunge and William Mauldin Features Dow Jones Newswires

Just two months ago President Donald Trump was praising the "very outstanding trade relationship with Canada." Now Mr. Trump has been criticizing Canada, with a focus on its policies for dairy and lumber. Last night Commerce Secretary Wilbur Ross announced preliminary tariffs on Canadian software lumber. Here are some basics on why the focus has shifted to Canada.

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Q: Wasn't the president targeting Mexico on Nafta? How did Canada suddenly become a trade adversary?

During the 2016 campaign, Mr. Trump repeatedly criticized immigration and imports from Mexico, where the U.S. has a big trade deficit. But in recent weeks his administration has consulted with Congress on Nafta and tapped into long-simmering disputes over the way Canada protects its dairy industry and paves the way for inexpensive production of softwood lumber, which is used in building homes in the U.S. Meanwhile, the expiration of a lumber agreement between the two countries allowed U.S. firms to file a case through the Commerce Department. On Monday Mr. Ross said the department would apply preliminary tariffs on Canadian wood.

Q: This lumber dispute has been going on for decades. Why is it coming to a head now?

A: The U.S. and Canada reached a truce in 2006, in which the U.S. agreed not to impose duties in exchange for Canadian lumber producers either accepting a quota on U.S.-bound shipments or paying a tax. That deal expired in the fall of 2015, with a one-year standstill built in to give the two countries a chance to reach a new pact. No deal was reached, the U.S. lumber industry filed a complaint with Commerce, and officials have now ruled that new levies are warranted.

Q: What is at the heart of the U.S.-Canada lumber dispute?

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A: The bulk of wood used to produce Canadian softwood lumber comes from forests on publicly owned land. Canada's provincial governments charge private companies a fee in exchange for the right to harvest. The U.S. government and lumber industry have long complained these fees -- known in industry parlance as stumpage -- are significantly lower than they would be in an open-market environment, and hence gives Canadian producers an unfair advantage over their U.S. peers. More than two-thirds of U.S. lumber comes from privately held land and sold on a market basis.

Q: Will this raise lumber prices for builders in the U.S.?

A: U.S. builders are paying higher prices due to the dispute. Lumber prices have been rising since February in anticipation of increased tariffs, and lumber futures prices have been unusually volatile. Stinson Dean, a lumber broker in Kansas City, Mo., said he sold wood for $300 per 1,000 board feet in January. "Now the same stuff is selling for $400," Mr. Dean said. The National Association of Home Builders estimates higher lumber prices this year have added about $3,600 to the cost of construction for a typical single-family home.

Q: What does this mean for U.S-Canada trade in general? Where are other tensions?

A: The U.S.-Canada trade row over lumber spans decades, and this isn't the first Canada's lumber industry has dealt with over U.S. protectionist measures. Further, two-way U.S.-Canada trade of sawmill products -- which incorporates softwood lumber -- totaled nearly $7 billion last year, or a fraction of total trade between the two countries. However, the softwood tariff could be a precursor of tougher measures ahead, as Canada's dairy regime -- which limits foreign competition -- is now prominent on the White House's radar.

Q: The president early Tuesday tweeted about Canada and dairy farmers. So that is another flashpoint?

A: Yes. U.S. dairy farmers and some elected officials, including the governors of Wisconsin and New York, have protested Canada's recent move to close off that country's market to U.S.-produced ultra-filtered milk, used to make cheese. It is a long-churning dispute that U.S. dairymen say has dented their exports to the north; Canada has argued that U.S. overproduction is the real culprit for the U.S. milk-sector struggles and that the U.S. maintains its own barriers to Canadian dairy.

Q: What does all this signal about the coming Nafta renegotiations?

A: The softwood tariff could provide clues "about how hardline the Trump administration aims to be when renegotiating Nafta," economists at National Bank Financial in Montreal tell clients. Also, the softwood response debunks any suggestion that Canada was going to emerge relatively unscathed from the Nafta renegotiations, even though most of Mr. Trump's focus has been on Mexico and the president and some of his advisers spoke glowingly about America's ties to its northern neighbor.

Chris Kirkham contributed to this item.

Write to Paul Vieira at paul.vieira@wsj.com, Jacob Bunge at jacob.bunge@wsj.com and William Mauldin at william.mauldin@wsj.com

(END) Dow Jones Newswires

April 25, 2017 14:04 ET (18:04 GMT)