(Adds Ross comments on dairy, Canadian reaction, impact on Canadian dollar, details on NAFTA talks)
By David Lawder
WASHINGTON, April 24 (Reuters) - The United States will impose preliminary anti-subsidy duties averaging 20 percent on imports of Canadian softwood lumber, Commerce Secretary Wilbur Ross said on Monday, escalating a long-running trade dispute between the two neighbors.
The move, which affects some $5.66 billion worth of imports of the construction material, sets a tense tone as the two countries and Mexico prepare to renegotiate the 23-year-old North American Free Trade Agreement.
Canada denounced the U.S. action and vowed to protect its lumber interests through litigation.
News of the tariffs sent the U.S. dollar sharply up against the Canadian dollar in Asian trading to hit an almost four-month high. The Canadian currency sank to C$1.3559 to the greenback, or 73.75 U.S. cents, down from its North American close of C$1.3516, or 73.99 U.S. cents.
Ross told Reuters in a telephone interview that Canada was "already retaliating" against the United States well ahead of the lumber duties by restricting imports of U.S. highly filtered milk protein products used by cheesemakers.
President Donald Trump last week called Canada's dairy protections "unfair."
Ross said some Wisconsin dairy producers were now "losing their farms" because of the restrictions. "Apparently Canadians now are coming down and saying: 'Since you can't do it anymore, I'll buy your equipment for 5 cents on the dollar,'" he said.
U.S. lumber producers asked the Commerce Department last November under President Barack Obama to investigate what they viewed as unfair subsidies to Canadian competitors who procure their timber from government lands at cheaper rates. U.S. lumber producers generally cut timber grown on private land.
Canadian Natural Resources Minister Jim Carr and Foreign Minister Chrystia Freeland said in a joint statement that Commerce's accusations "are baseless and unfounded" and would raise U.S. home construction and renovation costs.
Ross said the duties collected would total about $1 billion a year. In a statement, he said the need for the lumber duties and Canada's dairy restriction were "not our idea of a properly functioning free trade agreement."
NAFTA never addressed the softwood lumber issue or Canada's largely closed dairy market. The Trump administration has vowed to renegotiate NAFTA on terms that would reduce U.S. goods trade deficits of $63 billion with Mexico and $11 billion with Canada last year.
Ross said NAFTA's dispute resolution system needed to be changed because it had worked against the United States in the lumber dispute.
NAFTA talks are expected to begin later this summer after a 90-day legal consultation period.
The Commerce Department said West Fraser Mills would pay the highest duty rate at 24.12 percent, followed by Canfor Corp at 20.26 percent.
Resolute FP Canada Ltd will pay a 12.82 percent duty, while Tolko Marketing and Sales and Tolko Industries will pay a 19.50 percent duty and J.D. Irving Ltd will pay 3.02 percent.
All other Canadian producers face a 19.88 percent duty, according to the document.
The preliminary determination directs U.S. Customs and Border Protection to require cash deposits on all softwood products imports starting 90 days ago.
To remain in effect, the duties need to be finalized by Commerce and then confirmed by the U.S. International Trade Commission after an investigation that includes testimony from both sides. (Additional reporting by David Ljunggren in Ottawa; Editing by Peter Cooney)