Canada-EC Nematode

CASE NUMBER: 4
CASE MNEMONIC: NEMATODE
CASE NAME: Nematode Trade Dispute

1. Issue

In 1990, the European Community (EC) imposed a ban on the importation of untreated, green (or raw) softwood lumber. The ban was a means to avoid the inadvertent importation of the pinewood nematode into Europe, which could have destructive affects on the local forest environment.1 These affects would result from a failure in phyto-sanitary measures to prevent foreign alien introductions. Until recently, both the United States and Canada possessed a derogation to this ban, therefore allowing the export of Canadian and U.S. softwood to continue provided that special certifications of inspection and debarking standards were met. This derogation was scheduled to formally end on October 1, 1993. The EC then imposed the ban, particularly impacting Canada's wood exports.

2. Measure: Import Standard

Since 1990, the EC has adhered to an import ban requiring softwood timber (from areas in which the nematode is indigenous) to be kiln-dried as a precaution against transporting the pinewood nematode to Europe. Although the United States and Canada have previously held derogations, they expired on October 1, 1993.

The ban on untreated, or green, softwood lumber began as an informal multilateral agreement among the EC's twelve member states. Although the United States and Canada held derogations, Ireland and Denmark chose not to accept the special certification procedure in exchange for kiln-dried lumber. By 1993, however, harmonization of standards within the Community became a priority and the responsibility for implementation fell upon the EC.

3. Exporter and Importer: CANADA and European Union

The ban was targeted against North American exporters, of which Canada is easily the largest.

4. Trade Impacts

Canada's exports of wood to EC countries covered by the nematode ban peaked at $945.9 million in 1991 and fell to $315.3 million in 1993. In 1994, it rose slightly to $323 million. Prior to the ban, Canada's exports of wood to the EC was on the rise. Canada's exports actually jumped from $709.6 million in 1990 to almost a billion in 1991 (see Figure 5).

Most of Canada's decline in overall EC exports due to the ban was the result of a drop in sales to the United Kingdom. From a peak of $495.4 million in 1990, Canadian sales to the United Kingdom in the following year fell by about one-third and declined to $153.2 million in 1994, a drop of over two-thirds from its peak.

Wood exports from the United States to the EC fell much less. U.S. exports rose from $253.1 million in 1988 to $323.6 million in 1991. In 1994, U.S. exports declined by about one-third to $204.3 million.

In fact, U.S. exports to the United Kingdom were about the same in 1990 and 1994. U.S. experienced export declines in Germany, where exports fell from $33.9 million in 1991 to zero in the 1992-1994 period. In the same year, Canada's exports to the United Kingdom fell from $70.4 million to zero in the 1992-94 period. Italy showed contradictory patterns. U.S. exports rose from $95.5 million in 1988 to $130.3 million in 1991, before falling back to $61.9 million in 1994. Canada actually doubled its exports to Italy over the 1988-94 period, from $30.9 million in 1988 to $69.5 million in 1994.

Besides trade losses, new capital equipment to meet the requirements was required, further adding to the overall economic cost of the measure. Canada estimated that purchasing the kiln facilities would initially cost $500,000 and add approximately $72 million to the production costs of lumber mills.2

One other way to look at the economic impact is through prices. The price effect, based on the adoption of the Canadian proposed heat method (the cheapest alternative because it is more time and cost effective), increases production costs by 8-15 percent. In comparison, the EC mandated kiln-drying method could increase costs from anywhere between 16 and 40 percent.

5. Other Economic Impacts

Canada's Forests Minister, Dan Miller, said the Europeans are using the nematode -- a microscopic bug that has yet to kill a tree in Canada -- to restrict Canadian access to European markets. In fact the culprit in the case was not even from Canada. The bugs that led to a European Community ban on Canadian green wood exports actually came from American wood, Miller said.3

Two studies of the problem scope were conducted by the Western Wood Products Association and the U.S. Forest Service. One study sampled regular lumber production in Oregon and California; the nematode was found only in ponderosa pine. In the other, "bait logs" of western pine species were exposed to nematode-carrying beetles. Again, the nematode was found only in ponderosa logs.4

6. Environmental Impacts

The case prevented a possible nematode infestation in Europe but the actual risks of an infestation were minuscule. Despite this low risk, the measure may well have cost billions of dollars. The problem is that the risks and the payoffs were never clearly enunciated. Perhaps such cases need to be evaluated more from an actuarial standpoint rather than from the threshold standpoint used for setting standards. Under such a scheme, companies would be free to choose a European or Canadian method, but that other costs may differ. The cheaper Canadian method may have a higher tariff or insurance liabilities might differ. The NEMATODE case is similar to the APPLE case in its rationale of preventing infestation of forests, but different in application. Apple infestation must be prevented in the orchard, but nematode-caused softwood infestation must be treated assuming infestation.

7. References

1. "British Columbia Softwood Lumber Industry Explores New Method to Fight EC Export Ban", International Trade Reporter (BNA, September 1, 1993).

2. "Atlantic Mills", The Financial Post, 6.

3. Bernard Simon, "Canada accuses EC over lumber ban," Financial Times, July 13, 1993, Commodities and Agriculture, 26.

4. Miller Freeman Inc., Wood Technology, January, 1993, 120/1; Pg. 25; ISSN: 1067-1064.