U.S. vs. Canada: The Softwood Lumber Dispute

By Brian Costin

U.S. and Canada Trade

The world’s largest trading partnership is between the United States and their neighbors to the North, Canada. Over 23 percent of all US exports, are purchased for use in Canada. Canada, with a population of 30 million, is a bigger consumer of US products than the 15 European Union nations with a combined population of 375 million.

One unique factors contributing to this partnership is the fact that US-Canada trade enjoys little regulation or protectionism. This promotes a healthy interchange of goods between the two nations. Though most goods travel freely across the US-Canada border, the US softwood lumber industry has effectively lobbied the government to write protectionist legislation in its behalf.  This legislation protects the US softwood lumber market and profitability from fair competition. The US softwood lumber industry has been one of the few industries to successfully push for protectionist trade barriers against the Canadians. Such protectionism is in sharp contrast to normal US-Canadian trade relations.

The Tariff

The main protectionist argument in favor of the tariff is needed lies in the issue of determining the price of lumber harvested from Canadian Crown lands. American logging companies argue that “stumpage fees” paid to the government to harvest trees from the Crown lands are at below market levels. They contend that as a result of these below market harvesting rates, Canada’s softwood lumber industry accrues a superior position for the softwood lumber market. American lumber challenges that they cannot compete equally to Canadian industry without government’s help, and that Canadians profits unduly from this arrangement at the expense of American corporations.

In opposition to this claim, the Brookings Institute found that “Canadian stumpage values were within the normal price range and therefore did not distort the price or quantity of logs or softwood lumber.” Also, Price Waterhouse Coopers conducted a forest industry survey that found average return on assets over a 10-year period of 1.0 percent in British Columbia and –0.2 percent in Eastern Canada, versus 3.1 percent in the United States.[i] These two examples would advocate that Canadian Industry was not gaining excessive returns on assets from what appears to be a more than fair stumpage fee structure. In contrast to American logging claims, Canadian returns were much less than that of American logging investments. Nevertheless, American logging interests have been proficient in using government to raise artificial barriers of entry to the American softwood lumber market, and as a result raise the price and profits of the American softwood lumber industry at the expense of all others.

The dispute over Canadian lumber imports dates back many decades, but since April 1, 1996 the two countries have had an agreement in what is called the Softwood Lumber Agreement (SLA). The SLA imposes special fees on any softwood lumber imports in excess of 14.7 billion board feet per year. However that arrangement expired Mark 31, 2001.

In September of 2001 The U.S. Department of Commerce instructed U.S. Customs Service to collect a 19.3% countervailing duty on the "entered value" on all Canadian lumber entering the country, which was later reduced slightly to 18.79%. The reason given for this collection was The DOC found that Canadian softwood lumber exports to the United States were subsidized in the order of 19.31%. The DOC concluded that there had been a surge of softwood lumber exports from Canada since April 1, 2001, thus the reason for the new protective tariff. It seems that the in all likelihood the continuation of the tariff is not in doubt for the foreseeable future.

Passing on Costs to Downstream Industries and Consumers

            As a result of the product tariff that is enforced against the Canadian softwood lumber industry; it is injurious to nearly all citizens of America. Second only to Canada’s loss, Americans consumers swallow a large portion of the tariff burden. The Cato Institute’s Center for Trade Policy Studies determined that the SLA, which has now expired, added an estimated $50 to $80 per thousand board feet to the price of lumber.[ii] This result is that consumers of softwood lumber are unwittingly facing the tradeoff of either reducing the size of their house or increasing the amount of payments for their house.  No matter which path they choose, as a result of protectionism, consumers will always loose.

The U.S. by erecting governmental barriers of access to Canadian softwood lumber, they have consequently also erected barriers to affordable housing for low-income earners. Some 75 percent of softwood lumber usage in the United States is either for new home construction or repairs on existing structures.[iii]  The softwood tariffs will ultimately add about $1500 to the cost of a home, and price approximately 500,000 American families out of eligibility for a mortgage, according to the US Census Bureau.[iv]

In addition to the costs passed on to U.S. consumers, protectionism of softwood lumber producers increases the costs to the softwood lumber consuming industries. In 1999 there was approximately 217,000 jobs in the U.S. related to logging and sawmills. However, there are over 6 million workers in the lumber-using industries.[v] The U.S. softwood lumber protectionism benefits 1 worker for approximately every 27 workers it disparages through higher input prices and scarcer supply. Due to the symptoms of a protectionist lumber market this number may be significantly understated. The net product of protectionism is that a great deal of would-be work in the home building and other softwood lumber industries are never realized due to the higher prices that consumers cannot burden.

            The major argument for the protectionist side of the debate is that American lumber jobs are so important to the American economy that the government must prevent or harm the competition from outside the geographical limits of the country. As a result of the successful lobbying from the protectionist camps, the American government has issued a quasi-monopolistic grant to U.S. logging companies in the form of a product tariff. This tariff directly benefits the quasi-monopolists in the U.S. by debarring with force its Canadian competition from a fair market challenge for the consumers’ dollar.

Results of Protectionist Tariff

It is possible for government to protect a less efficient producer against the competition of a more efficient producer, but it necessarily impairs the satisfaction of the larger group of consumers as a whole. If a group is privileged with the help of the law, the beneficiaries enjoy an advantage at the expense of the rest of the people. If a consumer believes that it is expedient or right to pay a higher price for domestic lumber than for lumber imported from Canada they are free to do so. If given the choice, buyers in the U.S. would likely choose to buy in the manner that gives them the quality they want at the best price. Nevertheless, the U.S. softwood lumber industry should not be allowed to injure both the producer from Canada and the consumer in the U.S. with the force of government. U.S. protectionism in the softwood lumber industry makes their people poorer, not more prosperous.