Flaherty reluctant to counter U.S. pulp mill subsidy with Canadian payments

Canadian mills say they can’t survive without help from the feds

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Finance Minister Jim Flaherty is firmly reluctant to spend billions countering a massive new U.S. subsidy for pulp and paper producers by offering a comparable Canadian pay-out to forest products companies.

“We really don’t want to do that,” Flaherty told Maclean’s in an interview earlier this week. “That’s the sort of thing that’s been talked about time and time again around the G20 finance ministers’ table, around the leaders’ summits in Washington and London—to avoid protectionist measures.”

“This is the lesson of the 1930s,” he added. “This is a recipe for a downward spiral into depression.”

He was referring to the vows not to set up barriers to trade issued after meetings of the Group of 20 leading industrial and developing nations, first in Washington last November, then in London this spring.

After the London meeting on April 2, the G20 issued a communiqué on shoring up the global economy that pledged to “reject protectionism” and avoid repeating “the historic mistakes of protectionism.” Many economic historians blame a wave of protectionist trade barriers for deepening and prolonging the Great Depression.

Still, the Conservative government is coming under intense pressure from the forest products industry to spend up to $2 billion in reaction to a U.S. subsidy estimated to be worth as much as $7 billion to American pulp and paper producers.

It’s called the “black liquor” subsidy, since it involves a U.S. tax credit, designed to support alternative fuels, which is being applied to a pulp mill waste byproduct called black liquor that’s used as a fuel in the mills.

Avrim Lazar, president and CEO of the Forest Products Association of Canada, estimated in an interview (more with Lazar here) that Ottawa would have to put up $1.5 billion to $2 billion to put Canadian pulp mills on an even playing field with their U.S. competitors.

He declined to estimate how many Canadian jobs could be lost if the federal government doesn’t act, but noted that at least one B.C. mill has already shuttered in response to the U.S. subsidy.

“It’s very pressing,” Lazar said. “Most pulp companies are North American at least or global. You’ve got a pulp mill in Canada and a pulp mill in the U.S., and somebody’s going to give you half your cost of production in the U.S., you just shut the Canadian one and run the U.S. one.”

As well, he argued that beyond a short-term advantage, the subsidy could give the U.S. mills a head start coming out of the current recession. “They are using it to modernize their mills. So when they end [the subsidy], they will be more competitive than we are.”

Lazar also pointed out that because the U.S. subsidy isn’t permanent, any Canadian response would also be a one-time payment. “We’re just looking to offset what they have done, not to create a new continuing support system.”

Although Flaherty seemed to reject the notion of an outright subsidy, the Canadian government has joined with the European Commission, Brazil and Chile in threatening to take the U.S. to the World Trade Organization if the subsidy isn’t withdrawn.

“It is clear that these credits amount to actionable subsidies,” a letter the Canadian, European and South American coalition issued late last month, “and that any adverse effects caused by them could be subject to remedies in the WTO or through domestic countervailing duty investigations.”