WORKING PAPER

Prominent trade disputes between Canada and the U.S. involve agriculture and forestry, with lack of transparency caused by Canadian non-market institutions a source of U.S. objections. Though there has been a recent flurry of activity in the binational dispute resolution panel on Canadian exports of wheat, one of every six panels since 1989 has involved softwood lumber. We examine lessons from the lumber dispute to shed light on U.S. objections to the Canadian Wheat Board (CWB). We argue that U.S. lumber lobbyists will continue to use perceived Canadian institutional obscurity to keep pressure on policymakers, while the CWB system enables similar agricultural interests in to agitate for trade sanctions. Traditional strategies such as dispute resolution boards, appeals to the WTO, and bilateral policy reform can only buy Canada time – new strategies are needed if Canada is to maintain sovereignty over its trade institutions. Acknowledgement: A previous version of this paper was presented at the Annual AAEA meetings in Denver, August 2004. Comments from participants at those meetings are greatly appreciated. INTRODUCTION Canada and the United States are each others most important trading partners. In 1988, the two countries concluded a Free Trade Agreement (FTA) that was subsequently expanded in 1994 when Mexico was included in the North American Free Trade Agreement (NAFTA). While NAFTA has benefited all three countries, tripling (nominal) merchandise trade between Canada and the U.S from under 200 billion CAD in 1989 to $550 billion CAD in 2003, there have also been glitches (Canadian Embassy 2004). Some of the most 1 prominent trade disputes have involved agriculture and forestry, where state intervention plays a significant role. From the U.S. perspective, Canada’s state trading in wheat (and marketing boards in an earlier dispute) and near exclusive public ownership of forestlands, with less than transparent setting of stumpage prices, are viewed as obstacles to free trade. From the Canadian perspective, political lobbying by vested interests in these sectors has resulted in U.S. intransigence in freeing the flow of agricultural and forest products. In this paper, we examine these disputes and argue that lessons learned from two decades of conflict in softwood lumber can be applied to the dispute concerning state trading by the Canadian Wheat Board (CWB), which has been ‘heating up’ in recent years. The situations share several commonalities. Lobbyists in the United States protest that Canadian institutions violate the spirit of free trade as agreed to under NAFTA and the General Agreement on Tariffs and Trade (GATT) as administered by the World Trade Organization (WTO), and that they are injured as a result. In both the lumber and wheat cases, Canada appealed to the Department of Commerce, the NAFTA binational panel and the WTO in an effort to resolve the trade disputes. In both, similar rulings have been made by these panels: though Canadian institutions require minor reform, their non-market (or quasi-market) nature is not inherently trade distorting. As a result, large initial duties have been ruled unjustified in most instances. Nonetheless, given significant and repeated U.S. intransigence in accepting these rulings in the softwood lumber case, Canada has used Memoranda of Understanding (MOU), export quotas, export taxes, provincial policy reforms and other compromises in an effort to resolve the dispute and avoid duties. The paper is organized as follows. We begin by providing a brief history of the CWB dispute, placing particular emphasis on specific U.S. complaints, relevant GATT/WTO principles and recent rulings. This is followed by an in-depth overview of the softwood