By W. Henson Moore, President and CEO
      American Forest and Paper Association

On March 31, 2004 W. Henson Moore, President & CEO of American Forest & Paper Association, was in Vancouver to address the PricewatershouseCoopers Global Forest & Paper Industry Conference. Here is a summary of his remarks:

While the American forest products industry has had a tough time in recent years, America remains the world’s largest forest products manufacturer. That size does not equate to an industry in good health, however.

Through extensive examination of the forest products industry, AF&PA has identified five key areas where change is needed:

Fiber: The forest products industry must have a sustainable and costeffective fiber supply. Given America’s vast resources, there’s no reason—absent poor government policy—for fiber costs to be a concern.

Tax:
The U.S. industry has long been among the highest taxed in the world. Even with dividend and capital gains rate reductions, we’re still taxed at a higher rate than all but one of our competitors.

Energy: Our industry generates 60 percent of its own energy needs, but shortsighted energy policies, such as the switch from coal-fired electricity to natural gas without considering supply issues, have driven costs to a non-competitive level.

Cost of environmental regulation: The U.S. system is an archaic one. The punitive command-and-control model needs to be replaced with a framework that is more collaborative and flexible.

Market access: Both at home and abroad, our industry encounters attempts to place restrictions on our ability to sell our products. Domestically, proposed building code restrictions discriminate against forest products based on slogans not science. Environmentally Preferable Purchasing (EPP), or “green” purchasing guidelines are often similarly founded on political rather than scientific or factual considerations. Overseas, trade barriers—both tariffs and non-tariff—as well as currency manipulation and government subsidies to industry continue to threaten the American forest products industry.

Discussing each of these areas would take more than the space available. Instead, I’ll focus on the fifth key area—market access. The fundamental solution to all market access issues is the same — free and fair trade. It’s more than a loftysounding philosophical abstraction; it’s the right system for world economic progress.

Free trade means that all tariffs and non-tariff trade barriers should be eliminated. It means that basic fairness must be injected into international business competition. But we need more; fair trade too. Fair trade requires an end to currency manipulation and domestic subsidies for capacity additions. These practices distort the market and prevent businesses from taking advantage of business opportunities. They should be recognized as illegal under World Trade Organization rules.

Currency manipulation is a major marketplace distortion. AF&PA was among the first to study the issue, and our findings have significant ramifications. Some governments made concessions in trade talks, then devalued those concessions by artificially lowering the value of their currency vs. the dollar.AF&PA worked with a National Association of Manufacturers coalition to push the issue with U.S. trade negotiators and the Bush administration. The dollar has returned to almost normal levels, but some governments persist in using this strategy—such as China pegging its zuan below the dollar. It is time for this practice to end.

Another destructive market distortion occurs when governments subsidize industry. Governments don’t belong in the forest products business and should not pay for mill construction or for keeping mills open. Subsidies create additional capacity, which the global forest products industry doesn’t need. Uneconomic capacity contributes to environmental degradation and artificially distorts markets by pushing prices lower. This causes profits to dwindle, and unsubsidized industry—like America’s—must reduce capacity, reduce production, and export jobs.

In Korea, for example, government subsidies enabled Korean coated free sheet paper producers to maintain and expand manufacturing capacity while simultaneously in other parts of the world free sheet producers were experiencing widespread losses and bankruptcies. Korean government subsidies included low-cost loans and corporate bond guarantees, bailouts of major producers that should have been liquidated, preferred access to raw material, and more than $2 billion in governmentsponsored funding from 2000 to mid- 2003. This resulted in tripling their exports to the U.S. at the expense of America’s domestic production.

The American coated free sheet industry is well-established and very competitive. The tripling of Korean coated free sheet imports has eroded U.S. market share, and caused revenues and profits to decline. U.S. producers have been forced to close mills and lay off workers. The damage to U.S. producers is directly related to subsidies from the Korean government.

The guiding principle for governments should be to establish a level playing field on which businesses can compete. Governments should not pick winning and losing industries or companies, but instead should focus on creating fair opportunities to compete. A fair and free market will efficiently pick the winners and losers every time.

"Environmentally Preferable Purchasing" is a recent strategy aimed at distorting markets. The facts are that many environmental assurances sought through EPP guidelines are already part of the American forest products industry’s day-to-day operations. Over the years, our industry has improved its resource management, reduced energy consumption, and slashed emissions and effluents.What we need now is a concerted effort to tell the industries customers about our environmental stewardship. The facts are on our side — why not bring them to the customer’s attention?

Leadership in Energy & Environmental Design (LEED) building standards are another form of “green” guidelines. Any “green building” standard should include forest products, which come from a truly renewable building material. Unfortunately, many proposed standards discriminate against wood—yet another market distortion. Environmentally sustainable building standards are a good idea, if they’re based on good science. Slogans instead of science are not a good idea.

Another important factor for our industry is the reality that responsible stewardship isn’t cheap. If one nation operates under lower environmental standards, they have an unfair advantage because the have lower operating costs. An important first step toward a solution is for responsible people to reach agreement on forestry standards that ALL should meet. Forest enterprises worldwide should implement sustainable forestry management as soon as possible—no exceptions.

Of course, that raises the question: "which standards?" The Sustainable Forestry Initiative©, Canadian Standards Association, Pan European Forest Certification and Forest Stewardship Council are all good sustainable forestry programs. All seek the same goals, and the forest operations run under more than one report little on-the-ground difference between the programs. There should be mutual recognition of standards meeting certain criteria, which they all do.

Sustainable forestry standards should be based on sound science; should protect environmental resources like water quality, clean air and biodiversity; should address societal values such as scenic value and community stability; and permit forest operations to be economically viable. Any credible sustainable forestry program should meet these criteria, and the SFI program, FSC and CSA do. Leaders from each of these programs should reach a mutual recognition agreement within the next 12 months. It’s the right thing to do.

The first step in resolving any crisis is identifying the problem.We’ve accomplished that through extensive study of our industry’s key competitive problems.We know that the problems are chronic, not cyclical. We have identified the key threats, focused our resources on those threats, and we have begun to make progress. Our guiding principle is that trade in forest products—globally—should be based on free and fair competition between responsible partners.

That means:

• Everyone should meet equivalent standards of sustainable forestry and establish mutual recognition;
• Establishing a fair tax system;
• Creating a regulatory system that makes sense; and
• Eliminating market access barriers
• tariff, non-tariff, subsidies and currency manipulation.

On a level playing field, with these threats satisfactorily addressed, I am confident that our industry’s business people will recognize the competitive opportunities and thrive.