Canadian PM responds to lumber tariffs imposed by the US

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The trade spat had contributed to a more than 20 percent surge in wood prices since the US election on concern that penalties would increase costs even more.

The ministers promised that Canada "will vigorously defend the interests of the Canadian softwood lumber industry, including through litigation".

The two neighbors have had other big trade wars - in the 1930s, the US Congress imposed tariffs against all countries to protect jobs.

Trump has been railing against Canada's decision to change its policy on pricing domestic milk to cover more dairy ingredients, leading to lower prices for products, including ultra-filtered milk.

So what is the dispute about, and what is the impact of the decision likely to be?

Softwood lumber is one of Canada's largest exports, and according to Statistics Canada the USA buys 80 percent of the supply, most of which is then used by construction companies to build timber frames for homes. In total, the trade is estimated to be worth about $6 billion a year, according to Canadian government data.

For the Bank of Canada Governor, it's a reason for caution.

In Canada, they tend to be owned by the government, and American mills contend that Canadian provinces subsidize their industries by charging low royalty rates for cutting trees.

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They allege that their Canadian counterparts receive subsidies from the Canadian government, which allows the Canadian firms to sell lumber in the United States at prices lower than what American companies can sell at. That sent the loonie and Mexico's peso tumbling as traders took the move as a signal that the USA administration could pursue protectionist policies. President George W. Bush and President Obama both put temporary tariffs on Canadian lumber.

At the heart of the trade quarrel is that the majority of Canadian lumber comes from Crown lands, managed by provincial governments.

"Canada trade relations", Commerce Secretary Wilbur Ross said in a statement, linking the lumber issue to the administration's broader dissatisfaction with the North American Free Trade Agreement. The US and Canada had an agreement in place that expired in October, making the lumber dispute ripe for trade action. The U.S. and Canada, among the most open economies in the world, enjoy a booming cross-border trade.

A joint statement from Canadian Global Affairs Minister Chrystia Freeland and Natural Resources Minister Jim Carr says the tariff is "unfair and punitive duty" and the result of "baseless and unfounded" rhetoric from the Trump administration.

They say the tariffs will cause unemployment on both sides of the border and raise the price of a US home.

Meanwhile, Canada's dollar has lost 1.2 per cent as trade tensions mounted and oil fell below $50 a barrel.

The predictions from several analysts have pegged the countervailing duties to be between 10 and 15 per cent, while anti-dumping duties are expected to be 20 to 30 per cent. Kevin Mason, managing director of ERA Forest Products Research in Vancouver, told Bloomberg: "It definitely could've been a heck of a lot worse".