When Prime Minister Trudeau and President Obama met in Ottawa at the end of June, they apparently reached no agreement about how to handle a file that has been an ongoing source of conflict between Canada and the United States since 1982—softwood lumber exports from Canada to the U.S.

A press release issued after the two leaders met characterized their discussions as "challenging but productive." However, the press release went on to note that significant differences existed between the two governments’ positions on the relevant issues and that negotiations would continue.

In fact, there’s a very short fuse on this potentially explosive bilateral issue. The last softwood lumber agreement (SLA)—signed in 2006 and extended in 2012—expired in October 2015. The 2006 agreement provided for a one-year "standstill" period during which the U.S. government was not allowed to launch trade actions against Canadian exports of softwood lumber. The standstill period expires on Oct. 13, 2016. If no new agreement has been reached by that date, the coalition of U.S. lumber producers that has repeatedly filed petitions with the U.S. Trade Representative’s Office against “unfairly traded” Canadian softwood lumber will likely file new petitions against imports of softwood lumber from Canada.

And the U.S. Lumber Coalition (known as the Coalition) will likely demand the reinstatement of countervailing and anti-dumping duties on Canadian softwood lumber that were terminated as part of the 2006 SLA. The imposition of such duties would impose a harsh financial burden on Canadian lumber producers and would likely significantly curtail Canadian exports of lumber to the U.S. (Of course, they would also hurt U.S. consumers of softwood lumber.)

It would appear that provincial governments in Canada, as well as Canadian softwood lumber exporters, strongly favour a renewal of the SLA, primarily because it allowed Canadian producers the option of paying export taxes to the Canadian government instead of having hard quotas limiting the volume of Canadian exports to the U.S. This time around, the Coalition will likely demand the imposition of a hard quota that applies to all Canadian softwood lumber exports. The quota would cap Canadian exports at or below a given share of the U.S. market for softwood lumber regardless of market conditions or lumber prices in the U.S.

Current political conditions in the U.S. are far from conducive to a mutually agreeable renewal of the SLA. The lame duck Obama Administration arguably has little leverage with a Republican-controlled Congress to push for new trade legislation before a new administration takes office. If anything, the current administration would use what little remaining leverage it has to seek congressional approval of the Trans-Pacific Partnership (TPP), an unlikely development itself. The two presidential contenders, Hillary Clinton and (especially) Donald Trump, have staked out positions that favour the protection of U.S. domestic producers, so it’s likely that the Coalition will find the new administration favourably disposed to its complaint that provincial governments subsidize Canadian lumber exports.

If new U.S. tariffs are imposed on imports of softwood lumber from Canada, Canadian producers will likely have to endure another round of prolonged dispute-resolution procedures under the auspices of the WTO and/or NAFTA. Avoiding costly, time-consuming and uncertain dispute resolution proceedings was a major reason provincial governments and Canadian producers supported the SLA. The Canadian government will argue, as it has in the past, that softwood lumber exports are not subsidized. The U.S. government will likely argue that the auction system implemented by the governments of British Columbia and Quebec does not produce “market pricing” of timber sold from Crown-owned land to privately-owned sawmills. Nor is it likely that any fine-tuning of current auction procedures will placate the Coalition.

The reemergence of softwood lumber as a trade dispute adds to the growing list of bilateral trade irritants. As in the case of the Keystone Pipeline, U.S. actions against Canadian softwood lumber will have Canadian businesses thinking even more seriously about increasing exports to Asia. In particular, China represents a growing market for B.C. wood products. A failure to renew the SLA to Canada’s satisfaction will also add some momentum to Canadian interest in negotiating new free trade deals with Asian trading partners, especially China.

As a consequence, the decline in the relative importance of the U.S. as a trading partner for Canada, underway since 2000, might well continue into the future.