OTTAWA – The U.S. government is seeking arbitration over what it contends are unacceptable subsidies to lumber producers in Ontario and Quebec.

The Office of the United States Trade Representative said Friday that the 2006 Softwood Lumber Agreement between Canada and the United States is being violated by “grant, loan, loan guarantee, and tax credit programs, as well as so-called ‘forest management’ programs and programs that promote wood production.”

The notification is the next procedural step in the American challenge against the provincial programs after attempts to resolve the issue through talks.

“The United States and Canada have tried, through consultations since last April, to address U.S. concerns about new provincial subsidy programs that appear inconsistent with the terms of the SLA [lumber deal],” trade representative spokeswoman Gretchen Hamel said in a statement from Washington.

“It is particularly troubling that, since the consultation process began, we have seen a series of announcements of new assistance programs.”

The Coalition for Fair Lumber Imports, a Washington lobby group for the American forest industry, has been complaining about alleged provincial violations almost from the moment the agreement took effect in October 2006.

In a separate arbitration initiated last August, the United States is challenging Canada’s implementation of export measures under the agreement, which was intended to resolve a long-standing trade dispute over Canadian lumber that the Americans regarded as unfairly subsidized by provincial forestry policies.

Under the deal, the U.S. returned about $4 billion of the $5 billion in penalties it had imposed on Canadian softwood shipments since 2002, and the punitive duties were replaced with a border tax and quota system designed to shelter American producers.

Canada undertook not to try to circumvent the accord through grants or other benefits to lumber producers.

The agreement provides for binding arbitration to settle disputes.

Earlier this week, the U.S. raised concerns about the federal government’s planned $1 billion fund to aid economically struggling communities – many hit by lumber mill closures – largely through retraining of displaced workers.

International Trade Minister David Emerson quickly offered assurances that the Community Development Trust assistance wouldn’t violate the softwood lumber agreement.

In recent months, many lumber companies have restructured their operations, shut down mills and laid off workers as the softwood industry reels from slumping demand from the battered U.S. housing sector.

On Friday, Canfor Corp., Canada’s biggest lumber producer, announced it’s closing two mills in Fort Nelson, British Columbia – putting 435 people out of work. Those closures come after earlier layoffs by the Vancouver company that affect operations in Chetwynd and New Westminster, British Columbia, affecting about 300 people.

In late November, Abitibi-Bowater Inc. announced it was cutting 2,600 jobs in Canada and the United States in a major streamlining of the company’s pulp and paper operations.

The restructuring affects mills in Ontario, Quebec, New Brunswick, British Columbia and Texas.

Earlier, Tembec Inc. and Domtar also cut jobs and output to reflect a slump in their market.