As President Bush returned last week from a trip halfway around the world to improve US trade ties in Asia, a significant development closer to home eased a longstanding dispute between America and its No. 1 trading partner, Canada.
The US Department of Commerce begrudgingly conceded to a NAFTA panel last week that American duties on Canadian lumber are wrongly calculated. The 16 percent duties - imposed on imports believed to be unfairly subsidized - will be dropped when NAFTA releases its final ruling just over one month from now.
However, the battle still rages between the neighbors over $4 billion in duties that Canada wants the US to refund. And in a move that has infuriated Washington, Ottawa announced a $1.2 billion aid package for the Canadian softwood lumber industry just days after the US concession.
The softwood lumber dispute stretches back nearly 20 years and has posed a major challenge to the free-trade principles and the process of arbitration set forth in the NAFTA agreement.
"US credibility is on the line here. I think the decision is a good first step towards reconciliation," says Daniel Ikenson, a trade policy analyst with the Cato Institute's Center for Trade Policy Studies in Washington, D.C. "All the countries under NAFTA should play by the rules agreed on. If pushed, Canada might find it convenient to impose antidumping duties on the US or withdraw from NAFTA."
At the heart of the softwood disagreement is the US government's contention that provincial governments unfairly support lumber producers. This allows Canadians, it argues, to sell lumber to the US at a price that undercuts most American lumber producers - hence the US-imposed duties. Subsidization is possible because, in Canada, most forests are owned by provincial governments while in the US most softwood trees are owned by private interests.
This is the fifth time in recent months the NAFTA panel has pursued the Department of Commerce to recalculate the 16 percent countervailing duties. Antidumping duties - fees placed on goods sold to another country for less than it cost to produce them - of 4 percent will continue to be enforced.
"I don't think the Americans had any choice but to agree with the panel - not unless they wanted to tear up the NAFTA," says Michael Hart, professor of trade policy at Carleton University in Ottawa and one of the original negotiators of the NAFTA.
Approximately $7.5 billion worth of Canadian softwood lumber - close to 70 percent of Canada's lumber production - is sold to the US annually. The US desperately needs the imports because the US domestic industry can only supply 50 to 60 percent of its own needs.
Canada's new aid package for its softwood lumber industry may set back progress toward resolving the issue.
"Canada's actions illustrate what the United States has been saying all along: The Canadian industry is the beneficiary of subsidies that create an unlevel playing field to the detriment of the US industry," US Trade Representative Rob Portman said in a statement to the media.
Ottawa says the aid is not a subsidy and suggested it would review the package if Washington ended and refunded all duties.