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U.S.-Canada Paper Dispute Shows Unintended Results of Import Tariffs

MADISON, Maine (From The Wall Street Journal) -- Workers at a struggling paper mill in rural Madison, Maine, cheered in 2015 when the U.S. government slapped an import tariff on a type of magazine paper made in Canada.

"We really thought it was going to be key to our survival, " said Mike Croteau, a former union leader at the Madison Paper Industries mill. The union had joined the company in pushing for a tariff to offset what it thought were unfair Canadian government subsidies.

It wasn't enough. Months later, Madison's owners--Finland's UPM-Kymmene Inc. and a New York Times Co. subsidiary--closed the plant and laid off more than 200 workers. The owners said the decision to shut down after 38 years was based on declining demand for the special paper it produced. It was the fifth paper mill to shut down in Maine in two years.

The tariff also triggered a cascade of unintended consequences, hurting U.S. operations of some Canadian paper mills and firing up a trade dispute with Canada. The U.S. Department of Commerce is now devising a plan to trim back the tariff on certain mills.

Since his election in November, President-elect Donald Trump has invoked tariffs in his tough talk to U.S. businesses that are moving manufacturing to Mexico, threatening 35% levies on goods they import back into the U.S. Both Carrier and Ford altered their Mexico plans following Mr. Trump's threats.

Maine's push to penalize Canadian paper products illustrates how the desired aims of import tariffs to protect U.S. manufacturing and jobs may not always be achieved--especially for industries with deteriorating markets and economics.

There has been an uptick in cases of U.S. companies seeking such protections over the last couple of years as more foreign governments, spurred on by China, subsidize their industries, causing U.S. companies to feel harmed, said Alan Price, a partner at Wiley Rein LLP who represents U.S. industries in trade matters.

"This is ultimately in many respects a fight for survival for U.S. manufacturing," he said.

Meanwhile, a 2015 a change in U.S. trade law made it easier for U.S. industries to demonstrate injury caused by foreign trade practices, according to the Stimson Center, a nonpartisan think tank in Washington, D.C.

For decades, the U.S. paper industry has been losing jobs, hurt by forces beyond foreign competition. Other factors include automation, turnover among owners and eroding paper demand, as many products are increasingly accessed on computers and smartphones. Paper manufacturing employs nearly 370,000 people in the U.S., down 20% from a decade ago, according to the Bureau of Labor Statistics.

Those same obstacles are troubling Canadian mills. In 2011, a plant in Port Hawkesbury, Nova Scotia filed for bankruptcy and laid off close to 600 workers. The plant made so-called supercalendered paper, a glossy stock used for magazines, catalogs and newspaper inserts. But it was able to restart production a year later, thanks to an aid package from the Canadian province worth nearly 125 million Canadian dollars.

In early 2015, Madison Paper Industries and Memphis-based Verso Corp., two U.S. producers of supercalendered paper, petitioned the U.S. government, alleging the Port Hawkesbury mill across the border was benefiting from unfair subsidies that led to depressed U.S. prices. Elected officials from U.S. paper-producing states jumped to their defense.

"As we like to say, we can see Canada from our porch," Sen. Amy Klobuchar (D., Minn) testified at a fall 2015 hearing by the U.S. International Trade Commission on the matter. "They are our friends, they are our neighbors, but in this case, this is unfair."

The North American Free Trade Agreement, the pact between Canada, the U.S. and Mexico that took effect in 1994, eliminated most tariffs. Exceptions were made to combat so-called dumping--the sale of products at a lower value in the foreign market than in the domestic market--and to offset subsidies that benefit a particular industry.

The International Trade Commission and Department of Commerce sided with the U.S. mills, and in December 2015 the U.S. government imposed tariffs of up to roughly 20% on purchases of imported Canadian supercalendered paper. The tariff was based heavily on the U.S. government's conclusion that the Port Hawkesbury mill received a special break on its electricity costs in a contract approved by a provincial regulator. Energy is often a paper mill's biggest expense.

Port Hawkesbury's owners say the power rate was negotiated with another private company and wan't a subsidy. The tariff was "grossly unfair," said Neil de Gelder, the executive vice president of Stern Partners, Inc., a Vancouver, Canada investment firm that owns the controlling interest in the Port Hawkesbury mill.

The impact hit in ways that hadn't been anticipated. Maine Gov. Paul LePage, a Republican, said it inadvertently hurt Maine outposts of Canadian paper producers that employ more than 1,200 people. One of them, British Columbia-based Catalyst Paper, which has a mill in Rumford, Maine and also has workers in Wisconsin, Ohio and Washington state, estimates it has lost millions from duties and legal costs and that its competitiveness was reduced.

The Commerce Department is now planning to readjust the tariffs for Catalyst and another mill. A final decision expected in February.

In the end, the tariff on the Canadian paper company wasn't a cure-all for the two Americans mills that advocated for it. Besides Madison closing its mill, Verso Corp. plans to lay off about 190 workers, or a third of the workforce, at a coated-paper mill in Jay, Maine this quarter, said spokeswoman Kathi Rowzie. The company is still running its supercalendered paper mill in Minnesota, however.

"The lesson is the same one we've seen many times," said William Reinsch, who works on trade policy at the Stimson Center and was the former president of the National Foreign Trade Council. "You mess with the market, there are always unexpected developments."


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