Canadian Mill Towns Pay For U.S. Housing Collapse

What experts are learning is that the huge gains from the U.S. housing bubble created unstable pockets of wealth worldwide, leaving more than Americans to get soaked when the bubble burst. Citibank and Merrill Lynch have been forced to take billions in write-downs from the U.S. subprime crisis, but so too have Swiss banking giant UBS and Germany's IKB Deutsche Industriebank.

Some observers are even more concerned by the fallout on individual investors and communities overseas whose fortunes have turned decidedly south. In Norway, eight towns have reported losing $125 million through bad U.S. subprime investments, threatening payrolls and services. In Mexico, where tens of thousands of undocumented workers poured across the U.S. border in search of lucrative construction jobs during the housing boom, villages are suffering from a sharp drop in remittances as those jobs have dried up. Remittance flows into Mexico have ebbed from a record high of $2.36 billion in May, 2006 to $1.79 billion in November of 2007, the most recent figure available, according to the Bank of Mexico.

"The global effect is diverse, wide and, in some countries, quite deep," said Nicolas P. Retsinas, director of Harvard University's Joint Center for Housing Studies. "There is no question that it is working its way through the global economy. Whether it's the Central Bank of China or dentists in Scandinavia, they are feeling it."

'Different This Time'

Perhaps nowhere else outside the United States has the sting been felt as badly as in Canada. Economists are sharply cutting their 2008 growth forecasts for this vast country of 33.4 million, which is taking hits to a variety of industries, including auto manufacturing, as its largest trading partner, the United States, flirts with recession.

The drop is most visible in the lumber industry. In recent months, that has been particularly true in the mountainous interior of British Columbia, a region of sweeping vistas that locals proudly claim was settled by Canada's "hewers of wood and carriers of water." More than 100 communities in the area remain largely dependent on the forestry sector, accounting for more than 200,000 jobs, according to the Vancouver-based Council of Forest Industries.

Canada's lumber trade, as with all commodity-driven industries, has traditionally gone through ups and downs. But officials and analysts call the scope of the current crisis unprecedented. "In the past, you might have had a saw mill reduce shifts or idle for a short period of time," said Kevin Mason, managing director and forestry analyst with Equity Research Associates of Gibsons, B.C. "But it's different this time. You're seeing mills close up indefinitely with lots of uncertainty about when, if ever, they're going to open again."

It happens as a number of forces pummel the industry, including the sharp rise in the value of the Canadian dollar against the U.S. dollar and the fast spread of the pine beetle, which leaves only a few years for viable harvest once it infests a forest. But analysts and officials agree that no single event has caused more damage than the U.S. housing crisis.

To capitalize on the initial boom, the AbitibiBowater sawmills in Mackenzie spent nearly $17 million on new machinery and upgrades, roughly doubling production capability since 2001. But with prices falling precipitously in recent months, it is now more expensive for the company to make a 2-by-4 than to sell one -- hence the decision to shut down the mills.

"By the time the housing market started to go down in the United States, we were geared up for more, not less," said Jean Beaulieu, AbitibiBowater vice president of operations, walking through the company's cavernous and empty sawmill. Layers of ice had frosted over outdoor machinery a week after it shut down. "As you can see, that was not exactly the best-case scenario."

U.S. lumber producers have been hit hard too, and blame the Canadians in part for the nose dive in prices. After years of disputes, the two countries signed a softwood-lumber trade agreement in September 2006, bringing into effect various tariffs and quotas. But Canadians scaled back production at a slower rate than their U.S. counterparts even as demand began to slump.

They were able to do that, the U.S. forestry industry has charged, because the Canadian government, and particularly its provincial governments, unfairly assist the lumber industry through subsidies and tax breaks that violate the softwood agreement. If the Canadians had scaled back production earlier, they argue, prices across North America may not have fallen as steeply.

Additionally, U.S. trade officials and forestry-industry executives remain very skeptical of a plan being floated in Ottawa to offer $1 billion in emergency assistance to hard-hit communities such as Mackenzie, saying it could skew the marketplace and drive prices down even further.