Letters by a modern St. Ferdinand III about cults

Wednesday, August 17, 2005

US Protectionism – Steel Tariffs, the Byrd Amendment and now Lumber

Protectionism is not smart politics or economics

by StFerdIII

The US will lose credibility on trade issues if it neglects a NAFTA ruling that rightly stated that Canadians do not unfairly subsidize their lumber industry. The Americans incredibly want to ignore the NAFTA decision that they should return to Canadian producers $5 billion of illegally imposed tariffs which were given to US firms [contravening NAFTA and the WTO]. The Americans will lose international respect on a number of trade and political issues by continuing to ignore reality and pander to US protectionist interests and restrict the fair trade of Canadian lumber to the US market.

The US position in stopping Canadian softwood lumber exports, which total some U$8 billion per year, rests on the American claim that Canada unfairly sets below market harvest rates for its lumber. But most analysis states sharply that is not true. In lumber production, Canadians are just simply more efficient than Americans. The US tariff on Canadian wood is crass protectionism, which hurts the US consumer and impacts substantially the cost of US homes.

The US Position:
At first glance the US position that Canada unfairly subsidizes its lumber industry is attractive. In Canada, 90% of timber cut is from public, or Crown land, while 95% of US timber cut is from privately owned land. In the US, private market auctions determine the price for cutting timber. In Canada, the price charged by government to companies to cut timber (stumpage fees) is based on a number of factors: production costs, market calculations, and company obligations regarding conservation, employment, and local processing.

The US complaint centers on 2 subsidies – economic and environmental. On the economic side the US makes the following arguments. Although timber companies pay a stumpage fee for every tree cut to the provincial government, there fees are usually well below market prices. In addition stumpage fees are often reduced or returned to the timber companies. These subsidies do not exist in the United States and create an uneven playing field between U.S. and Canadian timber industry. In addition, most timber companies could not afford to log many of the ancient forests currently being clear-cut without these subsidies.

In BC for example the government subsidizes lumber firms by using an administrative system to set timber prices on 95% of the commercial forest, undervaluing its timber by between C$842 million and C$2.6 billion per year. As well by taking advantage of loopholes in the government's stumpage system, large companies are able to choose the quality of timber they harvest, paying lower rates for top-quality cedar and fir. Many companies harvest their low-grade logs first so that all stumpage rates are set at a lower rate even though high-grade logs are harvested later.

The Americans also argue that on the environmental side the provincial forestry management system in Canada provides substantial environmental subsidies to the major timber companies -- lowering environmental standards and enforcement in order to benefit these companies economically. In addition to harming the environment, environmental subsidies also have a very real financial significance. A logging company's ability to cut corners in environmental compliance can add to that company's ability to produce a product at a lower price.

Why the US position is wrong:
The analysis indicates that the US position is exaggerated and based on faulty logic. A CATO Institute analysis presented very detailed econometric and trade reasons why stumpage fees are not subsidies and why the protectionists in the US want softwood lumber trade from Canada obstructed. [http://www.freetrade.org/new/dearcolleague.html] CATO’s study is backed up by other investigations, which refute the fact that though the Canadian lumber system is based on government owned and government managed land and rates, its practices do not contravene NAFTA or the WTO.

“Furthermore, our review of the evidence makes us very skeptical of the claims that low stumpage fees give Canadian lumber producers any unfair advantage over their American competitors. In particular, economic analysis strongly supports the conclusion that stumpage fees do not have a significant impact on the quantity of timber harvested or, therefore, the quantity or price of Canadian lumber imports. Without such an impact, Canadian policies, whatever their faults, cannot distort trade.

Of crucial importance in this regard is the fact that the amount of timber that can be harvested from Crown lands is fixed by Canadian government officials independently of changes in stumpage fees. Accordingly, the amount of timber cut (and therefore the amount of lumber produced) is not dependent upon the level of the stumpage fees. If Canadian forestry officials allowed loggers to cut as much timber as they wanted at a given stumpage fee, then lower fees would indeed result in more timber cut. But that is not the case.

It is true that lower stumpage fees make logging more profitable than it would be if fees were higher. But that increased profitability cannot translate into increased production because of the government limitations on the supply of timber. Furthermore, a fixed supply of low-cost logs will not affect the price of lumber. Normally a reduction in costs leads to a reduction in prices by shifting the supply curve to the right; increased profitability encourages increased production and thus a lower equilibrium price. But here the supply curve cannot shift because the supply of available timber is fixed by the government. Consequently, any increased profits for loggers do not lead to changes in the quantity or price of lumber.

Thus, even assuming that Canadian federal and provincial governments set stumpage fees lower than what they could obtain in competitive auctions, there is no resulting distortion of lumber trade between Canada and the United States.”

The fact that stumpage fees may or may not be at the same rate as market auction rates, and have no impact on the terms of trade or its flow is the vital point. Such analysis is also supported by the US Coalition for Fair Lumber Imports. This group refutes the argument that stumpage fees are subsidies, pointing out that such claims have been overturned on various rulings in the past 15 years. This group maintains as well that stumpage rates have no impact on either harvesting or trade in lumber product. [

http://www.ftlc.org/index.cfm?Section=1

].

For a change regarding lumber, we can say that Canada is just better than the Yanks. Period. Canada has 15 times as much forestland as the US and thus has a huge supply and economy of scale advantage. Canadian companies have invested heavily in machinery and equipment and are on average much more productive than their American competitors. This is why Canadian exports currently account for about one-third of American consumption. If left to market forces this market share would rise. Canadians are beating their US competitors.

Imagine the howl and whine from various Senators and the Bushies if the situation was reversed and US firms, more productive, efficient and determined were kept out of a Canadian market. If Bush and his Compassionate Conservatives want some credibility on trade and political issues then getting out of the protectionist racket is job #1.

Pandering to certain states, senators and industry sectors is dumb economics and bad politics George.

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