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Bush 'Slush Fund,' Courtesy of Canada

Softwood deal pours $450 million straight into White House, says U.S. lawyer.

Elliot J. Feldman 29 Aug

Elliot J. Feldman is a partner of the law firm Baker Hostetler and represents clients in Europe, Asia, Latin America and Australia. He is the former director of the University Consortium for Research on North American at Harvard University and is a Director of the Canadian-American Business Council.

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Turning trade deal into Republican ammo?

[Editor's note: On August 21 in Ottawa, the Standing Committee on International Trade heard a U.S. trade lawyer damn the proposed softwood lumber agreement as a terrible deal for Canadians. Elliot J. Feldman of Baker & Hostetler LLP argued that Canada caved at a moment of strength, given that international rulings continued to land firmly on our side. Instead, Feldman argued, this deal will kill the NAFTA process which has favoured Canada's position, and forfeit at least a billion dollars plus hundreds of millions of dollars more in interest that would have come our way had our negotiators hung tough.

Feldman, who is based in Washington, D.C., offered one more bit of startling analysis, excerpted below. The deal, he said, will funnel nearly half a billion dollars directly to George Bush's White House, creating a political "slush fund" available to the Republicans and the U.S. timber industry for waging future campaigns.]

Honorable members, responsibility for this deal ultimately resides with the government and with you, not the industry. It has been forced on the industry for political reasons. No one in the industry likes it, but many believe they have no choice and, therefore, many have already accepted it.

I want to talk for a few minutes about the genesis of this agreement and one of its most important and least discussed elements. There is a bit of Watergate in this story and, as in Watergate, it is essential to follow the money. Back before Christmas, David Emerson, then minister in a Liberal government, and his ambassador in Washington, Frank McKenna, were asking what it would cost to buy peace in softwood lumber. They were adhering to all of the usual Canadian negotiating positions on this subject: protecting Chapter 19 in NAFTA, fending off onerous anti-circumvention clauses, protecting Canadian prerogatives. But, unlike any previous dispute, this one involved the accumulation of over 4 billion, now 5 billion, dollars. And there was the Byrd Amendment, which led the U.S. industry to believe that if it could just stall long enough to wear down the Canadians, while claiming title to all of the money, they could settle for a lot of it. They knew the Canadians had brought a case in U.S. courts that could prohibit them from claiming any of the money pursuant to the Byrd Amendment. They demanded a 60/40 split back at Christmas.

Messieurs Emerson and McKenna negotiated to 50/50 and then asked industry. Industry calculated net present value against litigation prospects, and said "no." But, in the process, Messieurs McKenna and Emerson asked what would be enough. At that time, under those circumstances, they were told 70 per cent. Think, then of how impressed Mr. Emerson was with himself when in April, he could tell industry that he got 80 per cent. But, there were at least four huge problems, and he had neglected all of them.

'Legally entitled to not a penny'

First, on April 7, the United States Court of International Trade ruled that the U.S. industry was entitled legally to no money. None of it. It was not surprising then, that 20 days later, the U.S. coalition said that it would take $500 million. It was hardly a negotiating triumph to persuade them to take $500 million, when they had become legally entitled to not a penny.

Second, net present value at the end of April was not the same as it was at Christmas, especially as the pot kept growing. Canadian industry had in mind a fixed sum for the coalition, maybe as much as $150 million, not half a billion. Third, it was not quite as obvious in the two and a half page term sheet of April 27, that Canada would give away everything that the previous government had been defending in order to complete a deal, because political priorities had changed so radically. And fourth, the term sheet promised a major joint initiative to improve North American competitiveness. The "remainder" -- that was the word the terms said -- would go to so-called "meritorious initiatives" in the United States.

Industry was troubled by this last development. It wondered why it was providing foreign aid to the United States, but it was also reassured that the sum would be small. More impressively, Minister Emerson told CEOs that, as long as they were getting back 80 per cent of their money, it was none of their business what would happen to the rest. He was, by all accounts, very blunt on this subject. And, meanwhile, we were advised by negotiators that the White House had taken a direct and active interest in this money, but that Canadian industry ought to focus on other things. As the minister had said, it was not really their concern. The "remainder," then, became $450 out of $500 million dollars.

'Gift of $450 million to the president'

That, honorable members, is a colossal sum of money. It certainly got the U.S. government, as well as the coalition getting the other $500 million, committed to the deal. It is astonishing how little, nothing really, the Canadian Government got in exchange for it. And let's understand this money -- the $500 million -- not the coalition's money, about which you heard some on July 31, but the rest.

Some perspective. At the height of the Watergate scandal, focus was on an illegal slush fund available to the Committee to Re-Elect the President, that was thought to be tipping the balance of American politics. The fund never exceeded $20 million. One of the articles of impeachment against Richard Nixon was that he received foreign campaign donations, perhaps as much as $50,000. Both by statute and by the United States Constitution, gifts of money to the United States must go to the treasury and be appropriated by Congress. The lone, aberrant and still controversial exception has been money donated in the immediate aftermath of the emergency created by Hurricane Katrina, and the sums involved were very small.

So, here we have the government of Canada requiring that Canadian private parties sign over $450 million to an escrow fund slated to be conveyed to the White House. The agreement does not mention Congress, and the Bush administration says that Congress will not be involved in any way with this agreement. The government of Canada thus is making a gift of $450 million to be spent by the president. That was more than a belt buckle, even more than a stetson, on July 6th. There is only one date certain in the deal: that the planned expenditure of the $450 million must be determined by September 1.

Political blowback?

Curious, that date, which traditionally is the kick-off for campaigns in the United States in election years. Yes, it's an election year, and the Republican control of Congress is considered in trouble. The entire Republican campaign war chest is less than $300 million. Canada will add to it by 150 per cent in funds to be expended for "meritorious initiatives." It does not require much imagination to foresee the strategic places where this money will be spent.

This peace on softwood lumber will probably not improve Canada's relations with the United States, because this colossal sum of money is going to the White House, not the U.S. Treasury. When the Democratic party learns of it and understands it, it's not likely to be pleased, and it's possible that, despite the infusion of such money, the Democrats nevertheless will win in November. Canada may then have much improved relations with the Republican party but not with the United States.

During questions following Feldman's presentation, NDP MP Peter Julian (New Westminster/Burnaby) noted the "quite a staggering revelation that the funding of $450 million would be, if I understand it, under the control of the White House; Congress would have no say and Canada would have no say as to the use of that money. And, hence, in a mid-term election year we would be giving $450 million to a massive political fund." Feldman responded:

This is in my view an historic, unprecedented, astounding intrusion into American politics. We searched all the way back to the Revolution and found nothing like it in American history. And the question that I came this morning to put is, "Will the Parliament of Canada accept responsibility for possibly tipping the balance in American politics in preserving the control of Congress by the president's party?" This softwood lumber agreement is an historic moment in part because of that proposition, and it's up to this Parliament to decide whether it will accept the responsibility. That responsibility cannot be shifted and, indeed, that money inevitably will go to shore up the electoral aspirations of the Republican party through the president -- it's not going to be touched by Congress -- it's going through an escrow fund. And these are questions that could impact American politics for generations and impact relations between Canada and the United States for generations to come. And that is entirely in the hands of this Parliament.

Mr. Julian: So what you're saying is that we are not only providing money to the coalition to fight further legal victories, for further legal battles -- giving half a billion dollars to them -- but we're also providing money that may go to political purposes for the re-election of Republicans, many of whom have been the most adamant against allowing free trade in lumber. It is ridiculous.

Mr. Feldman: The provision in Article 13.A.2 of the agreement, which recites the meritorious initiatives, is language which could be defined only as a slush fund for the president.

Elliot J. Feldman is a partner of the law firm Baker Hostetler and represents clients in Europe, Asia, Latin America and Australia. He is the former director of the University Consortium for Research on North America at Harvard University and is a director of the Canadian-American Business Council.  [Tyee]

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