The U.S. Department of Commerce released a preliminary ruling Tuesday that says supercalendered paper, a product sold by the companies in the U.S., is unfairly subsidized.
The ruling sets the Irving subsidy rate at 11.19 per cent, lower than the Port Hawkesbury rate, which it sets at 20.33 per cent.
Those rates could be used to determine the level of duties.
Cash deposits to be collected
While the duties and tariffs won't be imposed unless both the department and the U.S. International Trade Commission confirm the findings later this year, the preliminary decision will hurt both companies.
That's because the commerce department will instruct U.S. customs officials to start collecting cash deposits immediately based on the preliminary rates.
That will increase the cost of Irving paper in the U.S., making it less appealing to buyers there.
The department's final ruling is due Oct. 13, with the commission's final ruling due Nov. 23. Assuming they uphold Tuesday's decision, duties and tariffs would be ordered in place Nov. 30.
Two other Canadian companies, Resolute Forest Products of Quebec and Catalyst Paper Corporation of Quebec, are also affected. Resolute's subsidy rate was found to be 2.04 per cent and Catalyst's is the same as Irving at 11.19 per cent.
The Catalyst and Irving rates are an average of the higher Port Hawkesbury rate and the lower Resolute rate. Only Port Hawkesbury and Resolute were investigated in detail by the commerce department.
The U.S. investigation began in February after a complaint by an American industry group, the Coalition for Fair Paper Imports.
The $124M government bailout
The complaint was prompted by the Nova Scotia government's 2012 rescue package for a mill in Port Hawkesbury, a $124-million package that included a $40-million provincial government loan guarantee, training money and lower electricity costs.
The Nova Scotia government and Port Hawkesbury Paper said lawyers vetted the financial assistance to withstand future trade challenges from unhappy U.S. papermakers.
The U.S. group said the re-opening of the Port Hawkesbury mill boosted Canadian exports to the U.S., depressed prices, and made it unworkable for Verso Corp. to rebuild its mill in Minnesota, which had burned down.
But the initial investigation by the U.S. International Trade Commission broadened beyond 13 incentives from the Nova Scotia government to include the four New Brunswick programs benefitting Irving, as well as others offered by the federal, British Columbia, Quebec, and Ontario governments to other companies.
The commission's preliminary ruling in April agreed that American manufacturers had been hurt by Canadian subsidies.
There was "a reasonable indication that an industry in the United States is materially injured by reason of imports of supercalendered paper," it said.
"For purposes of this preliminary determination, we find that the significant volume of subject imports from Canada had a significant impact on the domestic [U.S.] industry."
That ruling triggered the commerce department's own investigation.
Its decision Tuesday follows a last-ditch effort by Irving to persuade the U.S. administration that it doesn't benefit from the same level of subsidies as Port Hawkesbury.
Irving pointed out that the bailout of Port Hawkesbury by the Nova Scotia government didn't benefit Irving.
Last week, Irving Paper vice-president Mark Mosher even filed a certification officially renouncing any subsidies that were covered by the investigation other than programs offered by the New Brunswick government.
The certification amounted to a guarantee that Irving will never accept those non-New Brunswick subsidies.
Maine's governor gets involved
Maine Governor Paul LePage also joined the lobbying effort to exempt Irving from the investigation, pointing out in a letter last week "there is no possibility" Irving benefitted from the Nova Scotia bailout because it has no mills there.
LePage wrote that any sanctions against Irving would threaten the 1,200 Irving forestry jobs in Maine.
While the U.S. assigned a lower subsidy rate to Irving, it will still require upfront cash deposits when the company ships paper to the U.S., something the company hoped to avoid.
Irving complained in the spring that it was not being allowed to respond to the commerce department investigation, even though any duties would hurt its business.
It said at the time that if it were allowed to respond, it was confident it could persuade the U.S. government that its products were not unfairly subsidized.
The commerce department, citing the huge volume of documents in the case — 17,000 pages in May, up to 30,000 by this month — decided to limit its investigation to the two biggest Canadian exporters, Port Hawkesbury and Resolute, even though the ruling would also affect Irving and Catalyst.
Heavy lobbying by the Canadian ambassador
Documents filed in Washington show there was a vigorous lobbying campaign — that included Canada's ambassador to the U.S. Gary Doer — to have Washington reconsider the decision to prevent Irving and Catalyst from responding.
The commerce department stood by its decision.
The April ruling by the commission cited four provincial subsidies offered by New Brunswick to Irving:-
"Government funds for J.D. Irving Ltd."
A loan from the New Brunswick government
Grants under Efficiency New Brunswick
New Brunswick Climate Action Fund grants
In documents filed in Washington in May, the New Brunswick government responded to questions from the commerce department about subsidies to Irving under the One Job Pledge, the Regional Development Corporation, the Climate Change Action Fund, the High Energy Use Tax Rebate, the Forestry Industry Remission Program, the Financial Assistance to Industry Program, and Efficiency New Brunswick.
The dollar value to Irving of those programs was blanked out in the version of the filings publicly available on the U.S. government website.
The commerce department ruling says the value of Canadian supercalendered paper imports to the U.S. last year was $868.4 million dollars, down from $1.3 billion in 2013.