The Softwood Lumber Agreement (SLA) export tax and quota arrangements include provisions intended to deal with the reality that the demand for softwood lumber within the United States (U.S. consumption) fluctuates. In this regard, SLA volume limits on Canadian lumber exports to the United States are to change depending on changes in U.S. lumber consumption levels.

Part of the means by which the SLA accounts for consumption changes is a special adjustment to estimated U.S. consumption figures used for export limit calculations. This special adjustment is to minimize the time lag between actual changes in consumption and calculated export limits.

In January 2007, Canada began miscalculating SLA “surge mechanism” volume limits and quota volumes by failing to apply the special adjustment. The United States engaged Canada in official consultations on this topic in April 2007. The U.S. government commenced an arbitration proceeding regarding the trigger/quota volume issue in August 2007.

On March 4, 2008, a London Court of International Arbitration tribunal adopted Canada's interpretation as to volume limits applicable to British Columbia and Alberta "surge" export taxes. Under the surge mechanism, if any region's exports to the United States exceed 111% of its allocated share in any period, then those exports face a retroactive penalty equal to an additional 50% of the export charges that should already have been collected during the period.

The arbitrators ruled that the SLA does not require Canada to make the special adjustment in determining the volume of shipments beyond which surge taxes must be paid by BC and Alberta exporters.

The U.S. industry disagrees with the tribunal's ruling on surge volume calculations. However, while Canada's refusal to apply the special adjustment for BC and Alberta surge volume calculations reduces the export taxes owed (makes surge penalties less likely) during periods when lumber consumption is rapidly declining, it will likely have the opposite effect when consumption increases. Canada must now abide by the arbitrators' decision consistently and potentially impose appropriately higher surge taxes when lumber markets recover.

The LCIA tribunal found, however, that Canada had violated the SLA by failing to apply the special adjustment in calculating quotas and by exceeding properly calculated quotas in Quebec and Ontario. In February 2009 the LCIA tribunal rejected Canada's position that there should be no remedy and prescribed the preferred remedy recommended by the United States - an additional 10% export tax on Ontario and Quebec shipments to the United States until C$68 million is collected.

Canada refused to implement the prescribed remedy, and the United States exercised its rights under the SLA to impose a duty on lumber imports from these provinces, in place of the remedy that Canada has failed to implement. The arbitration tribunal confirmed that the U.S. compensatory duty was consistent with the SLA and the tribunal’s earlier decision. Canada finally began imposing the 10% remedial export fee itself on September 1, 2010. Canada’s reluctant and extremely slow compliance with the decisions of a neutral arbitral panel – the dispute resolution procedure that Canada agreed to under the SLA – is indicative of the attitude behind other SLA violation issues.