VANCOUVER, British Columbia – When Canada and the United States signed a softwood lumber agreement last fall, it was supposed to end decades of bitter, costly trade battles and take the issue off their foreign policy agendas.

Maine officials, including U.S. Sen. Olympia Snowe, applauded the agreement. Snowe said it brought to an end a dispute that had lingered for nearly a quarter century.

But it took less than three months for cracks to show, leading to a U.S.-launched demand for arbitration under the deal’s dispute-settlement mechanism.

The process is being closely watched because it’s the first real test of the agreement and the first time the London Court of International Arbitration – which handles mainly private commercial disputes – is being used as part of a state-to-state treaty to settle a disagreement.

An American victory in this new case could cost Canadian lumber exporters more than $100 million in penalties.

People involved in the softwood dispute agree this arbitration is an important test of the seven-year renewable lumber agreement.

“You want to see how the arbitration’s going to work so the agreement can stand the test of time,” says B.C. Forests Minister Rich Coleman, whose province accounts for more than half of Canadian lumber exports to the United States. “This is certainly something that’s going to tell us that.”

If the process or the outcome leaves a bad taste, it could increase chances the deal won’t survive past October 2008 – its minimum two-year term. Either country can give six-months notice it’s exiting the agreement.

There’s evidence the agreement has put only a thin veneer on top of the historic cross-border mistrust over lumber.

“This is an issue that is not a matter of an honest disagreement where an arbitration panel can help decide things from our perspective,” says Zoltan van Heyningen, executive director of the U.S. Coalition for Fair Lumber Imports, which represents American producers.