Softwood Lumber Agreement between Canada and the United States: National Accounts treatment

Background

On May 22, 2002, the U.S. government imposed anti-dumping and countervailing duties on most exports of softwood lumber to the United States. The Canadian federal and provincial governments and industry challenged the U.S. actions at the World Trade Organization and under the North American Free Trade Agreement, and before the U.S. Court of International Trade.

The effect of the duties was to lower the export price for Canadian softwood to the U.S. Lowered value added in Canada was observed through lower operating revenues for softwood establishments and lower surplus (profit) for Canadian exporters.

The Canadian Balance of Payments (BOP) treated these disputed amounts differently from how they were treated in the U.S. The difference between the export price and the final price to U.S. customers, which was used to pay the duty, was considered by the BOP as non-resident income of the Canadian exporters. The amounts paid to the U.S. government were treated as a bond posted with the U.S. government in order to continue operations and recorded as a financial asset.

The Income and Expenditure Accounts do not include the un-remitted income from non-resident operations as is done in the BOP. (There is an explicit reconciliation published each quarter in the National Income and Expenditure Accounts, Table 14 on this difference in treatment.) Thus, the income earned and used to pay the duty did not enter Canadian income up to this point and no asset was accumulated in the business sector.

The Canadian exporters were effectively allowed to treat the value of the payments to the U.S. government as a reduction in income for tax purposes.

Highlights of the Agreement

• The Agreement was signed on September 12, 2006 and came into force on October 12, 2006. It confirms that the duties collected since May 22, 2002 and interest will be refunded to the importers of record, the vast majority of which are Canadian exporters.
• Under the Agreement, 1 billion U.S. dollars, about 18% of the duties to be liquidated by the U.S. government, will be distributed to the following U.S. interests:
  • 500 million to the members of the Coalition for Fair Lumber Imports;
  • 450 million to meritorious initiatives as described under the Agreement; and
  • 50 million to the bi-national industry council as described under the Agreement.
• The U.S. government indicated during the negotiation of the Agreement that it could take up to two years to liquidate the duties. In order to accelerate the return of money to Canadian companies, the Government of Canada, through its agent, Export Development Canada (EDC), developed a duty refund mechanism.
• Companies therefore had two options:
  1. sell their rights to the refund to EDC; or
  2. get their refund directly from the U.S. government.
  • Companies that chose the first option would receive from EDC approximately 82% of the refund owed to them by the U.S. government, with the remaining approximately 18% paid by EDC to the U.S. interests.
  • Companies that chose the second option would receive from the U.S. government 100% of their refund. The Government of Canada is collecting these companies’ share of the U.S. interests' money through a special charge of approximately 18% that was imposed under the Softwood Lumber Products Export Charge Act, 2006.

System of National Accounts and Balance of Payments treatment

• For the BOP, the refunds will be recorded in the financial accounts with the resulting changes in positions recorded in the International Investment Position.
• In the Income and Expenditure Accounts, the refunds will be recorded in 'interest, dividends and miscellaneous receipt income' from non-residents.
• This difference in treatment requires a one time adjustment to reconcile saving in the non-resident sector of the national Income and Expenditure Accounts and the current account surplus of Canada’s Balance of International Payments. This adjustment will appear in 'net reinvested earnings on direct investment'.
• These transactions will have no impact on current operating costs or revenues and will not affect value added (GDP).
• The income will now be recognized in the income and outlay accounts. However, it will not affect surplus and thus GDP.
• This income may result in changes to tax liabilities.
• The US$ 1 billion payment that is to be transmitted to the U.S. interests will be a transfer from the Canadian corporate sector to the U.S. corporate sector.

Timing of transactions

• The vast majority of the companies that chose option 1 received their refunds in the fourth quarter of 2006. It is expected that the remainder will receive their refunds in the first quarter of 2007.
• The U.S. government has liquidated the duties faster than originally suggested. As a result, the vast majority of the companies that chose option 2 also received their refunds in the fourth quarter of 2006. It is expected that the remainder will receive their refunds in the first quarter of 2007.
• The majority of the monies payable to U.S. interests under option 1 transactions were transmitted to the U.S. interests in the fourth quarter of 2006.
• The special charge to collect the monies owed under option 2 transactions is beginning to be collected in the first quarter of 2007.
• The monies owed under option 2 transactions will likely be transmitted to the U.S. interests in the first quarter of 2007.