| Canada’s vast forestlands are capable of producing an amount of timber that supports lumber, panel and pulp production in excess of its domestic needs. It’s proximity to the U.S. market, its ability to service this market and the excess U.S. demand for these products from outside U.S. borders produces trade in Canadian forest products. Canadian lumber trade has garnered the spotlight over the past three decades due to its growth in the U.S. lumber market share over U.S. production.
Trade Theory
Trade in any product occurs since there are economic gains associated with competitive market conditions. These economic gains are considered welfare improving. Domestic consumers benefit from imported products. Trade lowers the price domestic consumers pay, and, from a societal point of view, the improvement in domestic consumer welfare associated with a lower price more than offsets the lower profits made and lost production incurred by domestic mill owners. Foreign consumers see their product prices rise, but, from a societal point of view, the welfare gain associated from higher profits incurred by foreign mills are sufficient to offset the consumer loss. There is a shift in where production takes place; more production occurs in the foreign country as the trade volume grows.
In theory then, domestic consumers can compensate domestic mill owners for their lost profits (and vice versa in the foreign county) and still come out ahead. In practice, a portion of the domestic mill owners accept lower profits and the rest leave the sector and invest in another sector that presents them with a more attractive rate of return on their capital (or they locate in the foreign country to supply a part of the imported volume).
The greater the trade volume the lower the domestic production until a price equilibrium is reached where any further trade activity would lower economic gain (i.e. consumer benefit is no longer sufficient to offset producer loss and vice versa). Trade increases economic efficiency since production is located where costs are lowest to service both foreign and domestic markets.
Canadian Trade
Canadian lumber trade is no different. The North American softwood lumber market is a commodity market with a high degree of competitiveness. Excess in Canadian timber and excess in U.S. demand suggest trade in softwood lumber could be welfare improving. U.S. consumers of softwood lumber could reap a greater benefit with higher trade volumes, for example. However, there are many actions that impact the volume of trade. Foreign governments can subsidize industries through programs that financially assist firms in their manufacture or exportation of products. These programs distort competitive market conditions.
The fact that a foreign country may have a competitive advantage in servicing U.S. domestic markets is not the basis for trade disputes. Rather, pricing products below market values and its impact on the domestic industry is the principal cause. This action, known as “dumping”, led the U.S. Department of Commerce to investigate subsidy programs that led to Canadian mills having a price advantage in the U.S. market, and the International Trade Commission to determine the impact or “injury” to U.S. softwood lumber mills. Countervailing action against Canadian lumber mills has taken the form of a duty when subsidies have been found to exist. The amount of the duty is calculated to compensate for the injury to the affected mills. The resolution of the trade disputes have been agreements using restrictions on volumes traded and taxes on exported lumber.
Increases in U.S. market share by Canadian lumber mills have led to four distinct trade disputes between the two countries. In 1982 the U.S. Department of Commerce studied Canadian provincial stumpage programs. It found no evidence of a subsidy under the existing rules. In 1986, the department commenced a second review, and determined preliminarily that evidence of a subsidy from government stumpage programs existed. A memorandum of understanding was reached imposing a 15 percent export tax on softwood lumber. The revenue from the tax was kept in Canada. This was important since, if a final determination were to have succeeded, a countervailing duty would have been collected by the U.S. In 1991, the memorandum was terminated by Canada, and in 1992 the U.S. Department of Commerce made a final determination that set a duty rate of 6.5 percent.
After several years of dispute, a softwood lumber agreement was reached in 1996. The agreement used a quota system with export taxes becoming effective after quotas were exceeded. The agreement expired after five years and led to the fourth dispute. In 2001 the U.S. Department of Commerce and the International Trade Commission made preliminary determinations that softwood lumber exports were subsidized and these programs posed a threat of injury to the U.S. industry. Negotiations were ongoing through various stages of the dispute. In 2006 the Canadian-U.S. Softwood Lumber Agreement was implemented. It is a seven-year agreement with an option to renew for two additional years. Again, the agreement used an export tax or export tax plus volume quota as the basis to control Canadian lumber trade.
Conclusion
As indicated above, there are winners and losers when changes in trade volumes occur. U.S. mills lose profits when Canadians mills increase lumber trade volumes. U.S. consumers enjoy lower prices and Canadian mills garner higher profits with greater trade volumes. Earlier disputes involved Canadian and U.S. mills. More recently U.S. consumers represented by big box retailers and home associations have entered the fray. Left out to date has been the Canadian consumer. Their small size relative to the U.S. consumer is likely to inhibit any real interest in these disputes. Of more interest has been the perspective presented by environmental groups during the last dispute. Environmental goals of preserving forests by reducing harvest levels in Canadian provincial forests can be achieved through maintaining trade restrictions on Canadian lumber.
Why has the competitive market outcome been so elusive? One factor is ownership, or more importantly the public policies reflecting ownership views. In Canada, the vast majority of forestlands are provincially owned. Timber harvesting rights are leased to private firms with stumpage fees set by the government. Consideration is given to various costs associated with harvesting timber. This system of price-setting leads to low prices and is the basis for the softwood lumber dispute.
In the U.S., federal timber, an important source for mills in the West during the first dispute, was offered through a competitive auction. The role of federal timber in supplying the needs of mills in the West has declined dramatically by the time we entered into the fourth dispute, however. The majority of logs harvested in the U.S. today do not use any administratively set pricing mechanism. The competitive nature of the stumpage market insures that lumber markets are not distorted by public timber price setting policies. Incorporating more competitiveness into Canadian stumpage markets would help alleviate the Canadian lumber trade disputes.
References
Brink Lindsay, Mark A. Groombridge, and Prakash Lougani . 2000. Nailing The Homeowner: The Economic Impact Of Trade Protection Of The Softwood Lumber Industry. The Cato Institute, Warrington, D.C. 16 pgs.
Cashore, B. 1998. Flights of the Phoenix: Explaining the durability of the Canada-U.S. softwood lumber dispute. Canadian-American Public Policy No.32. The Canadian-American Center, University of Maine.
World Resources Institute, Canada’s Forest at a Crossroads: An Assessment in the Year 2000, a Global Forest Watch Canada Report (Washington, DC: 2000).
Posted 4 September 2007
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