By William Mauldin 

MADAWASKA, Maine -- The river that divides the U.S. and Canada in this border town also cuts directly through the Twin Rivers Paper Co.'s wood pulp and paper operation.

The two-country arrangement has worked for years in the tightly integrated operation, with a Twin Rivers Canadian lumber mill up the road supplying wood chips to a plant that turns the chips into pulp in Edmundston, New Brunswick. The pulp is then piped across the St. John River into Maine, where it gets pressed into massive rolls of paper used to make Bible pages, food packaging and shipping labels.

Today, company managers say the entire operation -- including 500 jobs on the U.S. side -- is at risk, threatened by a trade fight between the U.S. and Canada over the softwood logs from which the chips are collected to make the pulp. This year the Trump administration announced preliminary 27% tariffs on the lumber from Twin Rivers's sawmill, squeezing the margins of the operation and weighing on the rest of the business.

Sawmills and timberland owners from Alabama to Oregon are eager to benefit from the higher lumber prices that come with tariffs on their Canadian competition, which they say benefits from unfair subsidies. But U.S. home builders are complaining about higher lumber prices, and American businesses, like Twin Rivers's paper mill, that rely on raw materials from north of the border, find themselves caught in the middle.

"Ultimately [the tariff] affects everything from where the trees come in to where the paper comes out," said Ken Winterhalter, president of Twin Rivers. "It is an economic driver for that area, and the impact would be felt in the entire northern part of Maine."

The forest fight is putting Washington and Ottawa at loggerheads at time when senior officials from both countries are sitting down with Mexican counterparts to renegotiate the North American Free Trade Agreement for the first time since the pact was enacted 23 years ago. Officials are hoping to resolve the matter separately but concede it could bleed into the talks, complicating political support in the U.S. and Canada.

Fights over lumber and logging have plagued U.S. relations with its northern neighbor for two centuries, especially in and around Maine. In recent decades, logging and lumber production have remained an important part of Canada's economy especially on the other side of the continent, in British Columbia. There, forests on government-owned land provide the biggest share of wood for the U.S. home-building industry.

Lumber mills across the U.S. say their Canadian counterparts get below-market access to logs from government-owned land and have urged the U.S. to take actions like the one hitting the Twin Rivers operation.

One of them, the Pleasant River Lumber mill in Dover-Foxcroft, Maine, churns out 2 by 4s and other boards from fragrant spruce, with an American flag printed on each stick. The Brochu family, which has worked in forest products for four generations, says it uses nearly all American spruce and pine logs in its mills.

Jason Brochu has traveled to Washington with the U.S. Lumber Coalition to argue that Canadian mills in general aren't paying market prices for coniferous logs cut from "crown," or provincial government-owned, land. He backs the preliminary tariffs that Commerce Secretary Wilbur Ross imposed this year and believes any deal to avoid tariffs should limit Canadian lumber strictly to a limited share of the American market.

"That's one thing we like about a quota system -- it just evens everything out," Mr. Brochu said on a recent afternoon after showing off laser-guided machines for optimizing the board sizes from each log.

With the uncertainty hanging over the market, the Brochus for now are delaying a goal of expanding production, instead investing in upgrading equipment to boost efficiency.

"If we can't be competitive because of subsidies, then we have to maintain what we have," said Mr. Brochu. He said his firm faces competition from companies in Quebec that obtain logs both from private land and Canadian public land.

Quebec has faced lumber tariffs before, but neighboring New Brunswick was for years previously excluded from U.S. tariffs.

This year, Mr. Ross included New Brunswick in the preliminary tariffs. The move is supported by the U.S. Lumber Coalition, a powerful group that has the backing of at least 25 U.S. senators. Led by Democratic Sen. Ron Wyden of Oregon, the senators signed a letter in October 2016 saying any deal struck with Ottawa to avoid tariffs should limit Canadian imports to "at or below an agreed U.S. market share."

In Maine and New Brunswick, politicians are concerned that penalizing New Brunswick lumber could hurt the Twin Rivers paper operation as well as major timberland and sawmill owners on both sides of the border.

The Canadian government and the country's industry groups call the U.S. allegations baseless and are prepared to fight the tariffs.

In the sparsely populated northern tip of Maine, the paper plant's unionized manufacturing jobs are an important economic driver, a fact not lost on the state's U.S. senators who have visited the plant, or Republican Gov. Paul LePage, who himself once worked in the paper and lumber industry.

Several Maine paper mills closed as local firms struggled to acquire affordable wood chips and compete with low-cost paper mills abroad. The housing crisis of a decade ago crimped home builders and the lumber and related paper industries.

Faced with the preliminary tariffs, Twin Rivers formally wrote to Mr. Ross in Washington to ask that lumber produced in New Brunswick get excluded from tariffs, alongside lumber form Newfoundland, Nova Scotia and Prince Edward Island.

Meanwhile, the company is setting aside funds in case the preliminary tariffs are made permanent, a process that could advance in early September if the U.S. and Canada don't come to an agreement.

Permanent tariffs would "drastically increase the cost of the wood chips and biomass used by the Madawaska paper mill," Twin Rivers's Mr. Winterhalter wrote to Mr. Ross. "These increased costs have the potential to destroy the financial viability of the Madawaska operation and eliminate thousands of jobs in northern Maine."

Write to William Mauldin at william.mauldin@wsj.com

(END) Dow Jones Newswires

August 21, 2017 05:44 ET (09:44 GMT)

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