Madison Paper Pursues Unfair Subsidies Claim

 

With more than 100 employees temporarily laid off at Madison Paper Industries, mill officials are pressing for answers about Nova Scotia’s assistance to a rival mill there that enables it to flood the market with cheaper paper at prices bolstered by what the U.S. producer’s side claims is "unfair" subsidies.

In a Jan. 13 letter to members of Maine’s congressional delegation, Madison Paper President Russ Drechsel cited high energy costs and unfair government subsidies provided to Port Hawkesbury Paper in Nova Scotia as reasons for the temporary shutdown of the mill. Drechsel, contacted Saturday night, would not comment on the shutdown’s start, but his letter had said it would begin on Saturday.

 

 

The Madison Paper Industries mill in Maine faces stiff competition from a mill in Canada that officials claim is unfairly subsidized.

Some industry experts say the criticism of government assistance belies the real issues: a decline in the demand for paper and a difference in government priorities. Still, if government assistance to Port Hawkesbury Paper, which produces the same grade of supercalendered paper the Madison mill makes, consists of subsidies – assistance that wouldn’t be available to other businesses – then the U.S. could charge higher duties on Port Hawkesbury products coming into the U.S.

The Port Hawkesbury and Madison Paper mills are among just eight mills in North America producing glossy supercalendered paper, which is used for magazines and advertisements.

In response to Drechsel’s letter, members of the congressional delegation have been working with U.S. officials – including sending a plea to the secretary of commerce – to stop what they have deemed unfair trade practices in Canada.

The money to keep the Canadian mill afloat is at the heart of the complaint.

Port Hawkesbury, which is owned by Vancouver-based Pacific West Commercial Corp., is the largest producer of supercalendered paper in North America. It reopened in 2012 with the $125 million from the Nova Scotia government, a package that included loans as well as money for training and marketing.

The Madison mill contacted U.S. government officials about investigating Canada’s alleged subsidies in October 2012. U.S. Trade Representative Ron Kirk agreed to look into whether Port Hawkesbury aid conforms with international trade agreements such as those outlined by the World Trade Organization and North American Free Trade Agreement. The latest efforts could result in a case against the Nova Scotia government before the WTO.

In 2013, the Canadian mill said U.S. concerns about possible violations of WTO rules were "completely false."

"The reopening of the mill was part of a normal statutory bankruptcy proceeding in the Canadian courts, in which all stakeholders, including those from the U.S., were provided an equal opportunity to participate," the company said in a news release on its website. The statement also said that mills in Maine have received government assistance.

The agreement between the Nova Scotia government and the mill included two packages totaling $125 million through the province’s Jobs Fund and its Department of Natural Resources, according to a news release from the Nova Scotia government in August 2012.

"Today’s investment further demonstrates my commitment to the workers, families, and businesses in the Strait (of Canso) area and protects good jobs," Premier Darrell Dexter, head of the Nova Scotia government at the time, said in the release announcing the package. "These are smart, strategic investments that will help Nova Scotia families."

At the time, the Canadian dollar was nearly at parity with the U.S. dollar, but it has lost value since then. Today $1 in U.S. currency equals about $1.24 Canadian.

The Jobs Fund supplied a $24 million loan to support improved productivity and efficiency, a $40 million repayable loan for working capital to help the mill lower costs, $1.5 million to train workers on a new supercalendered paper machine, and $1 million to implement a marketing plan.

The Canada Department of Natural Resources agreed to provide $20 million to buy 51,500 acres to preserve for forestry purposes, $3.8 million annually for 10 years to support sustainable harvesting and land management, and additional funding for the development of a forestry strategy and the hiring of a forestry coordinator.

The department declined an interview request by the Morning Sentinel and instead issued a brief statement in response to criticisms of the funding: "We are mindful of our international obligations and are confident our actions are consistent with them."

In addition to the $125 million package, the province also invested $36.8 million to keep the mill in a "hot idle" state—open but not producing paper—during the transition to new ownership and to set up a Forest Infrastructure Fund to keep employees working in the forestry industry.

In December, the Cape Breton Post reported that the mill also had applied for $40 million in federal funding from the country’s Forest Industry Transformation Fund, a program that was created in 2010 to help Canada’s forest sector become more competitive.

Lloyd Irland, a Maine-based forest industries consultant, said government assistance to the paper industry in the U.S. is not on the scale of assistance provided by the Nova Scotia government.

"A big difference between Canada and the U.S. is that the Canadian and provincial governments are just willing to go a lot farther to keep jobs in small communities alive," Irland said. "The story isn’t all on one side, though. If you were to make a list of all the ways the U.S. and state governments have tried to keep the paper industry alive, it would fill a long sheet of paper."

Dreschel’s letter said nothing has come of the efforts by the U.S. trade office, and it asked Maine’s congressional delegation to contact Secretary of Commerce Penny Pritzker. U.S. Sens. Angus King and Susan Collins, and U.S. Rep. Bruce Poliquin sent a letter to Pritzker urging the Commerce Department to put a stop to "unfair Canadian trade practices in the paper market."

Representatives from the Office of the U.S. Trade Representative did not return requests for comment.

Whether the 2012 package to Port Hawkesbury would be considered a subsidy is unclear and probably would be a point of contention between lawyers for each side, according to Charles Colgan, a professor of public policy and management at the University of Southern Maine and associate director of the school’s Center for Business and Economic Research.

Under WTO law, assistance not generally available to other businesses usually would be considered a subsidy, he said. Investments in forestry and sustainable harvesting – such as those made by the Canada Department of Natural Resources – might not be considered subsidies.

If the U.S. can prove the Canadian assistance amounts to subsidies, then the U.S. can charge extra duties on the Port Hawkesbury imports, Colgan said.

"Clearly the province is doing a lot to help the mill, and that’s more typical in Canada, to put cash into struggling industries," Colgan said. "The U.S. generally doesn’t put this kind of cash into manufacturing or business. A lot of people in Maine have considered this unfair, but unfair and illegal are two different things."

U.S. government assistance to the mill in Madison has been minimal and nowhere near the financial benefit received by the Canadian mill, Drechsel said.

Manufacturing businesses in Maine do have the chance to apply for assistance programs such as the state’s Pine Tree Program, which gives tax breaks to new job creators, or the Business Equipment Tax Exemption program, which offers tax exemptions and reimbursements for investments in new equipment.

Doug Ray, spokesman for the Maine Department of Economic and Community Development, said some Maine paper mills have received tax breaks from the Pine Tree Program, but Madison wouldn’t qualify unless it was expanding its business activity. The program mainly aims to attract new businesses to the state, he said.

In other mill towns, efforts have been made to keep jobs available and the paper industry going.

For example, Old Town Fuel and Fiber in Old Town received a $30 million federal grant in 2013 to develop a bio-refinery to make energy out of wood waste left over from the papermaking process. In 2012, the Finance Authority of Maine granted $16 million in tax credits to two groups investing in Great Northern Paper Co.’s mill in East Millinocket.

"It’s not as large as you see in Canada, but you do see frantic efforts," Irland said, adding that the U.S. state and federal governments might be reluctant to invest in the paper industry because of declining demand.

In the early days of the paper industry, Maine rivers—both a method of transporting wood from the forests and of generating power—made it an appealing place for paper mills to start. Today, however, energy costs and less demand for newsprint have proved to be challenges across the industry.

"It’s just not a good business proposition now," said Irland.

The president of Steelworkers Local 36, which represents Madison Paper employees, said the layoffs will affect 110 of the union’s 136 members as well as some contract and temporary employees, and are expected to last until February 9. The mill employs about 230.

Temporary production shutdowns are fairly common within the European paper industry, said Eikens in an email. The company, which is based in Finland, also operates several machines that produce supercalendered paper.