The Hard Facts About Softwood Lumber

Commentary, Trade, Frontier Centre

Canada recently won another appeal at the World Trade Organization against new American tariffs on softwood lumber, but they will stay in place while lengthy appeals proceed. In the meantime, the tariffs are causing massive damage.

The impact reflects our reliance on the American market, which took two thirds of the 28 billion board feet we produced in 2000. Just weeks after the tariffs started, as many as 16,000 Canadian forestry workers landed in unemployment lines. The effects have been massive, especially in British Columbia, where half the GDP is at stake. In Manitoba, a promising new sawmill at Pine Falls has been indefinitely shelved, with the attendant loss of at least 100 direct jobs.

Even usually pro-American Canadians condemned the new levies and Trade Minister Pierre Pettigrew called them “obscene.” In terms of its dollar impact, this trade failure far outweighs the steel and farm trade issues. It contradicts the spirit and letter of a decades-long transition to open borders. How did we get into this mess?

The tariffs had a long, complicated set of triggers. After 70 years of fairly free trade in lumber, the climate changed twenty years ago. Stung by recession, a coalition of American lumber companies filed a complaint with the U.S. Department of Commerce. It claimed that Canada was subsidizing exports by charging foresters low stumpage fees for cutting raw timber. The same group also lobbied successfully to exclude lumber from the North American Free Trade Agreement.

The complaint bounced around for years. Even though the WTO in repeated rulings saw no evidence of subsidy, Washington ruled for the lumber companies in 1996. To forestall retaliation, Canada negotiated the five-year Softwood Lumber Agreement, which allowed us to export duty-free lumber south to a certain limit, beyond which punitive duties kicked in.

A Cato Institute study found that this quota/tariff combination drove American lumber prices up between 20 and 35%, and added $1,500 to the price of a new home. Gary Hufbauer, the leading trade economist at the Institute for International Economics, estimates that the SLA cost the U.S. economy $758,678 for each job saved.

The SLA expired in 2001, and Canadian foresters expanded exports to meet the price gap. Back to Washington went the lumber companies, and the U.S. Commerce Department imposed new interim tariffs of 32%. In May, 2002, the U.S. International Trade Commission upheld the complaint, and set the tariff levels at 29%.

Is the subsidy charge true? Yes, although its effects are close to zero. Does it justify tariffs? No.

The two countries determine stumpage fees in entirely different ways. Provincial governments, who own 90% of Canada’s timberland, allocate cutting rights and fees, which have always been low. In the U. S., the federal government owns 42% of harvestable forests, but most of them have been withdrawn from the market. Sales and auctions determine stumpage prices on private lands, which supply most of the harvest.

Cutting fees in the U.S. have risen steadily with the decline in federal allotments, down 70% in Montana alone over the last ten years. Estimates of the price differential between the two countries vary, but the U.S. forestry lobby claims a 40% price subsidy on the Canadian side.

The lower stumpage fees do reduce the price of our lumber. But forest companies face much higher fixed costs in Canada, which cancel out any price advantage. The Cato study concluded that “stumpage fees do not have a significant impact on . . . the quantity or price of Canadian lumber imports.” The lower fees do not mean that more lumber is actually produced, an effect you would expect from a subsidy.

Vulnerable to wide price cycles, the industry is also exposed to regulatory impositions that accelerate booms and busts. On both sides of the border, successful campaigns by environmentalists have mandated complex new rules for cutting. Worse, they’re different rules at different times, making prices even more volatile.

No matter what the real source of its woes, the logging lobby heads to Washington and pleads for protection. Tariff costs are dispersed across the retail lumber and building industries, which gives American loggers a clear field for capturing concentrated benefits by means of duties.

Both governments have distorted the industry too much to expect an orderly market, with arcane webs of tax breaks and hidden subsidies. Ideally, lumber should come under the NAFTA umbrella, where dispute resolution has been less disruptive. Barring that, Canada should consider changing its stumpage system by moving from bureaucratic allocation to a bidding system, and even privatizing our forests to create a similar playing field. George Bush is talking about reversing the short-sighted American policy on timber harvesting from federal land. He should also dump the tariffs, immediately.

The good news is that Canada’s economy is booming. We are the only G-8 country that is running budget surpluses, and taxes are falling. The likely result: a stronger Canadian dollar that will more than offset any small stumpage subsidy.

It’s incredible that two countries with a long record of trade accord could have bolluxed a simple commodity like trees. In the Wealth of Nations, Adam Smith told the British that the best response to subsidized pins from France was to buy as many as possible. It’s in the American interest to wink at Canadian stumpage fees, and take all the cheap lumber they can get.

Pettigrew needs to explain that to the Americans, and quickly.