Economic Development:

U.S. and Canadian Governments Have Established Mechanisms to Monitor Compliance with the 2006 Softwood Lumber Agreement but Face Operational Challenges

GAO-09-764R: Published: Jun 18, 2009. Publicly Released: Jun 18, 2009.

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The United States and Canada have been involved in a long-standing dispute regarding the softwood lumber trade. Canada is the primary exporter of softwood lumber to the United States. In 2008, Canada exported approximately $3.2 billion worth of softwood lumber products to the United States, about 17 times the amount supplied by the next biggest exporter to the United States. After several years of litigation related to U.S. allegations of unfair Canadian subsidies, the United States and Canada signed the 2006 Softwood Lumber Agreement ("agreement"). The agreement ended ongoing litigation and requires, among other things, Canadian federal and provincial governments to establish export charges and quotas for Canadian lumber exports and for the two countries to exchange information to support monitoring compliance with the agreement. In 2008, the United States passed the Softwood Lumber Act that requires, among other things, that the U.S. government reconcile and verify softwood lumber trade data. The act also requires GAO to report on (1) whether countries that export softwood lumber or softwood lumber products to the United States are complying with international agreements entered into by those countries and the United States; and (2) the effectiveness of the U.S. government in carrying out the reconciliations and verifications mandated by the Softwood Lumber Act. This letter contains information in response to the first mandate concerning compliance with international softwood lumber agreements. In accordance with our agreement with the Senate Committee on Finance and the House Ways and Means Committee, we will issue a separate report in December 2009 that will supply additional information and findings on U.S. efforts to monitor compliance and will also address U.S. efforts to reconcile and verify softwood value data. We focused on Canada because it is the only country with which the United States has an agreement specifically related to softwood lumber and is by far the largest exporter of softwood lumber to the United States. We are not conducting a legal review of compliance with the Softwood Lumber Agreement. Our objectives in this review are to describe (1) U.S. government agency efforts to monitor compliance with the agreement, including cooperating with the Canadian government, (2) operational challenges agencies face in monitoring compliance, and (3) current compliance concerns.

Since the Softwood Lumber Agreement was adopted in 2006, both the U.S. and Canadian governments have implemented policies and procedures for administering and monitoring the agreement. Five U.S. government agencies (Commerce, CBP, DOJ, State, and USTR) have major roles in administering the agreement and in monitoring Canada's compliance. These agencies participate in an informal working group that meets several times a month. Both Canadian federal and provincial governments have roles in administering the agreement for Canada. U.S. agency officials noted that their monitoring of the agreement is dependent on information they receive from Canadian federal agencies and provincial governments, and that the agreement has facilitated increased dialogue between the two countries. In addition, as called for in the agreement, Canada and the United States have established a joint committee to supervise implementation. They have also established several technical working groups. U.S. and Canadian governments face multiple operational challenges in monitoring compliance with the agreement. These challenges include reconciling value data of the softwood lumber trade; monitoring data related to the export charge that Canada collects; and monitoring whether changes to Canadian forest policies and programs are in compliance with the agreement. U.S. and Canadian officials have identified several factors that make 100 percent reconciliation of value data challenging. For example, Canadian export prices on the export permit can be reported in either U.S. or Canadian dollars, which can lead to confusion regarding which values need to be converted to U.S. dollars when reconciling with the U.S. values. U.S. agencies have several ongoing concerns regarding compliance with the agreement. The United States and Canada have utilized the agreement's formal dispute settlement provisions to refer three cases to international arbitration. The arbitration tribunal has found one case partly in the United States' favor; judgment in the other two cases is pending. In addition, U.S. agency officials told us they are continuing to monitor other issues. One issue involves the large amount of low-grade timber being harvested in the mountain pine beetle-infested British Columbia interior region. Another relates to recently reduced fees to harvest timber in the British Columbia coast region. Although both the grading system and formula used to determine harvest fees existed prior to the agreement and were grandfathered into the agreement, U.S. agencies have some continuing questions about how these systems are now being applied.

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