To absorb the US duties of 2017, Canadian softwood lumber companies must increase production, improve efficiency and upgrade lumber quality.

A day after the US Thanksgiving holiday in November 2016, the US Lumber Coalition filed petitions for countervailing and antidumping duties against Canadian lumber imports. Five months later, the US Department of Commerce issued its preliminary assessment in the countervailing duty case and levied duties averaging 19.88 percent against Canadian lumber exports to the United States. Canadian lumber companies will be paying a projected $500 million in countervailing and antidumping duties for the year 2017.

In this long-running and bitter trade dispute, the primary concern raised by the US lumber industry is about the Canadian government’s pricing practices. The fees paid by Canadian lumber mills for their timber, which is cut largely from government-owned land, are lower than fees paid on US timber, which comes mainly from private land. The US industry claims that these low stumpage rates — the market prices that companies must pay for the right to cut trees — constitute a subsidy that has allowed Canadian producers to gain an unfair competitive advantage over their US counterparts. Canada has repeatedly denied these claims and says the reasons why lumber exports to the US keep going up are not any unfair practices but the exchange rate advantage, superior production efficiency and US consumers’ preference for superior-quality Canadian lumber. The two countries signed agreements in 1996 and again in 2006 that kept the dispute under control for a few years, but when the latest one expired in October 2015, the wrangling resumed.

The Canadian government criticized the United States for the April 2017 decision to impose duties and has emphasized its determination to fight the move. Ottawa has initiated challenges with the World Trade Organization (WTO) and through the North American Free Trade Agreement (NAFTA). Since the latest duties were imposed, Canadian lumber exports to the US have dropped by at least 8 percent (figure 1). However, the industry did not take as big a hit as it might have. Due to record-high lumber prices and extraordinarily strong demand from US builders, the Canadian lumber firms — touch wood — did not need to make major staff layoffs or massive production cuts.

Numerous complex forces of demand and supply are at play in the US softwood lumber market. Several anomalous political and natural events occurred in 2017, rendering a comprehensive assessment of the impact of the latest duties close to impossible. Forest fires in British Columbia resulted in an overall decline in the province’s lumber production last year. In fact, production was 8.7 percent lower in August 2017, when the forest fires were at their peak, than in August 2016. At the same time, intensifications in US housing starts as well as repair efforts in Texas and Florida after Hurricanes Harvey and Irma created a heightened demand for lumber. With this tightening of the market, the benchmark lumber prices have increased about 25 percent over the past year and are at their highest levels in over a decade.

Higher demand in the US and lower supply in Canada were not the only demand and supply shocks the lumber market endured last year. The extraordinarily strong Canadian housing market also raised demand for an array of wood products at home, reinforcing the price hike. Furthermore, escalating prices prompted US lumber companies to increase their own production.

Higher lumber prices are good news, of course, for both countries’ producers. But the estimated $1.2 billion in duties to be collected in 2018 will be passed on to American consumers. The US does not produce enough lumber to make all of its new houses and will continue to use large quantities of Canadian wood. The consumption of lumber in the US did not change a great deal during the first eight months of 2017, compared with the same period in 2016. Rising demand during the third quarter was met by higher domestic production. Despite the duties, the US will continue to build with enormous amounts of Canadian lumber, raising the cost of a new home built with Canadian lumber species by at least $5,000.

That is not a surprise. Basic international economics says that the imposition of import duties by a large country will eventually result in a price rise, bringing in tariff revenue for the government and sales revenue for local firms, at the expense of domestic consumers. Moreover, government interference with the free functioning of markets creates production and consumption distortions by artificially lowering demand and raising local supply of the commodity in question. At the end of the day, there is a considerable possibility that the duty will reduce national welfare. The only scenario in which the welfare of the country imposing the duties might improve is when the foreign price falls. In the case of the new US lumber duties, this scenario can easily be ruled out because lumber prices have gone up on both sides of the border. The US manufacturers of lumber are certainly better off but these gains are not big enough to offset the pain caused to the American homebuyers.

But the higher prices are not likely to last. Production is going up in the US, as noted above, and it will bounce back in Canada after a bad year. In addition, it is expected that the gap left by lower Canadian lumber exports to the US in 2017 will be filled by lumber imported from other countries. So Canadian companies must make adequate capital investments to raise their production, improve their efficiency and upgrade their lumber quality. Now that it is clear that forest fires are becoming more common and pose a serious threat to softwood lumber production, close monitoring of fires and preventive measures are needed. A few such measures have already been initiated, including removing vegetation to create fire breaks and installing sprinklers around facilities. In British Columbia, forest and land management practices include preventing monocultures in the forest and reducing dead trees and brush areas.

The Canadian industry must also export more lumber to other countries. Thankfully, many foreign markets appear to present promising opportunities. China is one example. Chinese softwood lumber imports are projected to mushroom in the near future. According to one estimate, Chinese imports were 21 percent higher during the first nine months of 2017 than in the same period in 2016. Canada’s new associate membership in the Pacific Alliance will help us become more competitive with in trade with Asia — an encouraging prospect as hope dwindles for a successful NAFTA renegotiation. Elevated prices may have helped to absorb the shock of American countervailing and antidumping duties in 2017, but the industry cannot afford to rely on an occasional fluke, especially when thousands of Canadian jobs are at stake.

Photo: Shutterstock, by Howard Sandler.

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