A truce in softwood war.

Byline: The Register-Guard

Everyone's for free trade - as long as it's conducted on their terms. A dispute between the United States and Canada over the terms of trade in softwood lumber has hurt the wood products industry on both sides of the border, and cracked the foundation of the North American Free Trade Agreement. A compromise announced last week doesn't resolve the underlying issue of Canadian subsidies but it provides U.S. producers with a partial shield against unfair competition.

Most forests in Canada are government-owned, and are managed primarily for the benefit of the wood products industry. The U.S. government also manages vast tracts of forest, but sells its timber at auction to the highest bidder. In Canada, mills are given long-term rights to public timber, charged a floating price that guarantees a profit, and required to maintain production at levels that protect loggers' and millworkers' jobs.

Canada's system clearly constitutes a subsidy. The United States responded to the subsidy by imposing a tariff in 2002, and has collected $5 billion from Canadian lumber exporters. Despite the tariff, higher transportation costs and a strengthening Canadian dollar, Canadian producers have captured more than a third of the booming U.S. market for softwood lumber.

Canada has steadfastly denied that its system of timber pricing constitutes a subsidy, and has mostly prevailed in a flurry of appeals to tribunals established by NAFTA and the World Trade Organization to resolve trade disputes. In recent months it became hard to tell who was winning - a NAFTA panel ruled in Canada's favor in March, but a WTO ruling in April appeared to uphold the U.S. tariff. Both countries found reason to question the ability of international trade agreements to resolve disagreements. Canadian politicians openly spoke of quitting NAFTA if the United States continued ignoring its rulings.

An agreement reached last week promises to resolve the dispute. The United States will refund 80 percent of the money collected as a result of the tariff. The U.S. government will keep the remaining $1 billion, dividing it between companies and communities - undoubtedly including some in Oregon - damaged by the trade dispute. Canada will supply no more than its current 34 percent share of the U.S. softwood market. And if the price of Canadian lumber falls below $355 per 1,000 board feet, Canada will tax its own softwood exports. The agreement will last seven years and could be extended.

The practical benefits of the agreement are clear: U.S. companies will have an upper limit on the volume of Canadian imports, and a lower limit on Canadian prices. Moreover, a threat to commerce between the world's largest trading partners has been set aside.

Yet a key demand of U.S. producers - a transition to a U.S.-style system of setting timber values in Canada - has not been met. The agreement, with its volume threshold and price trigger, implicitly acknowledges that Canada's softwood producers have an unfair advantage over their U.S. counterparts. The agreement will limit the effects of the advantage, but the advantage will remain. Reform of Canadian timber pricing should remain a long-term goal of the United States.