A Silver Lining for Canada

Commentary, Natural Resources, Frontier Centre

Common among free traders is the mantra that tariffs are destructive both to nations imposing them and to the exporting countries who pay the duties. As the softwood lumber dispute between Canada and the United States rolls on, we are also discovering that the laws of unintended consequences are quite unpredictable. Despite the damage to Canada’s forest industry, in the long run it may well emerge in better shape than ever.

Canada exports about two-thirds of its forest production south, trade worth almost $6 billion a year that accounts for a third of American supply. Since the tariffs were imposed in May, 2002, companies here have paid out more than a billion dollars. A lot of sawmills have closed, with a net loss of about 11,000 jobs.

Many, most notably Brink Lindsey at the Cato Institute, have been warning the American government all along that the tariffs were akin to shooting yourself in the foot. They have added about $1,300 to the cost of a new home in the United States. The tariffs were technically justified, because the Canadian method of calculating stumpage fees clearly confers a subsidy on our forest industry. But hard times for American lumber interests were just as clearly blamable on other factors, like sharp reductions in the harvest from federal lands, a policy pushed by politically effective environmentalists.

Adversity can make you strong. The first mills that shut down in Canada were the least efficient ones. Others absorbed the additional costs by reducing overheads. What’s the best way to do that? By running mills more intensively, thereby spreading fixed costs over more production units, facilities have mitigated the effects of the tariffs. “In British Columbia, many timber companies have added shifts and are running mills seven days a week,” reported Katherine Yung last May in the Dallas Morning News.

Yung also described other unanticipated consequences: “Shakertown, a [Washington-based] maker of cedar shingle panels, has laid off 34 of its 48 workers and hiked prices because of the duties. The company has yet to find any U.S. suppliers of cedar and Douglas fir plywood.” American companies who operate on both sides of the border, like the multinational giant, Weyerhaeuser, also have to pay the tariffs, $80 million and counting in this case.

Beleaguered Canadian companies are also counting on at least the partial success of appeals against the tariffs. On August 13, a NAFTA dispute panel upheld the arguments in favour of the duties, but ruled that they were set too high. It gave the Commerce Department 60 days to recalculate them, and they are almost certain to come down.

B.C. Forests Minister Mike de Jong is optimistic about the outcome: “The foundation on which the Americans have built these crippling duties is slowly but surely crumbling,” he says. The American lumber lobby disagrees, and claims it got everything it wanted from the panel. Wherever the final tariff sits, according to commentator Matthew Daly, “The decision also could put pressure on Canada to reform its timber industry and move toward a more market-based system.”

Canada’s Trade Minister, Pierre Pettigrew, is still holding out for zero, but nobody else thinks that will happen. The likely outcome will be a negotiated compromise. Pettigrew’s reputation as an effective spokesman for Canadian interests is suffering. The Chrétien government’s low standing in Washington hasn’t helped, but Pettigrew’s record of failure in stopping the tariffs on lumber and steel, or the closure of the border to Canadian beef, or expanded American farm subsidies for that matter, is undeniable.

The country’s lumber remanufacturers, who sell about 10% of Canada’s lumber output, are especially annoyed with Pettigrew. They have to pay the tariffs, even though they operate at arm’s length from the cutters and millers and add value. The minister has done nothing, in their eyes, to lobby for an exemption for them. Their tariff-swollen prices have reduced export sales by 50%.

Nor, in hindsight, do other Canadian politicians come off too well. Former B.C. Premier Glenn Clark, for instance, took the advice of American gadfly Jeremy Rifkin and embarked on a program to subsidize sawmills “to preserve jobs.” This irritated American lumber companies, already upset over the stumpage issue, and may have provided the proverbial last straw for the tariff camel. Trade rulings before those direct subsidies had come down in Canada’s favour.

The stupidity of Clark’s policy of propping up inefficient sawmills has been demonstrated in the aftermath of the tariffs. The mills that have closed are precisely the same, unsustainable facilities the NDP sought to protect. The newer, larger, technologically up-to-date plants have added third shifts.

In short, the softwood lumber tariffs may end up making the Canadian forestry sector stronger and more competitive, especially if the tariffs are reduced. That’s not what American timber interests intended but, in the absence of rational, negotiated solutions, that outcome will provide an ironic form of justice.