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FARE-talk is to provide an enduring conversation about contemporary topics relevant to food, agricultural, and resource economics.

The Softwood Lumber War - April 9th, 2017

[00:00 – 01:58]

[music fades in]

Brady Deaton Jr: Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Junior of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I will be your host. [music ends] Canada and the United States have been engaged in a long and enduring trade conflict with respect softwood lumber. Today my guest Dr. Daowei Zhang of Auburn University will be discussing his book, “The Softwood Lumber War: Politics, Economics and the Long US-Canadian Trade Dispute”. Dr. Zhang welcome to FARE Talk and what's currently going on?

Daowei Zhang: Well there are litigations going on on this case. The Department of Commerce is supposedly to rule, make a preliminary ruling on April 24 for the countervailing side and early May on the anti-dumping side, so it’s in litigation right now.

Brady: Just for some of our listeners who might not know what is softwood lumber, what is it that we’re talking about?

Daowei: There is a scientific definition of softwood versus hardwood, but in laymen’s language softwood is basically the species, lumber made from species like spruce, pine and firs and commercially hardwoods are made from oak, maple and beech, these types of species and the softwoods they have much stronger characteristics therefore can be used for construction where the hardwoods are mostly used for furniture and flooring and so on and so forth.

[01:58 – 03:06]

Brady: So the Canadian softwood that goes into the United States is it mostly used for housing or?

Daowei: Correct, it’s for housing.

Brady: Which provinces in Canada are the big suppliers of softwood lumber to the United States?

Daowei: The big supplier is BC and the second largest is Quebec and the third I think is either Quebec or Alberta and those four provinces roughly supplies the US with we’re talking about 95 or 96 percent. BC takes the lion’s share of the Canadian’s, it’s way over half of the Canadian softwood lumber supply to the US.

Brady: Roughly how much money are we talking about on an annual basis in terms of the value of softwood lumber that moves across?

Daowei: The Canadian dollar varies over the years, I mean on average we are talking about like six to eight billion Canadian dollars, five to seven billion sometimes depending on the exchange rate, US dollars annually.

[03:06 – 04:15]

Brady: And so that's a fair amount of money, that’s a fair amount of importance to currency values but I suppose it's also important to particular groups with vested interests, so like homebuilders in the United States but also certain specific communities that rely heavily on forestry in Canada. What other key constituents really have vested interest in this issue?

Daowei: Absolutely. It’s very important. You mention a couple, the homebuilders in the US are the big players over in the US and also the US lumber producers, to some degree the US landowners the property landowners and their managers. On the Canadian side obviously you have the Canadian producers in the various provinces and the provincial government, on top of that you have the federal government responsible for international trade, so those are the players. Again on the US side you also have the US government as well.

[04:15 – 07:15]

Brady: In your book you point out that this you know what they call the softwood lumber war, which is a trade dispute between Canada and the United States, has been going on for well over 20 years. One of the very fascinating points that you raise in the beginning of your book, it's kind of a puzzle and I’ll just read it to you for those listeners this is on page five of his book and Dr. Zhang says, "One of our first puzzles is that there's been increasingly free trade for most goods and services but not for softwood lumber." Why is that?

Daowei: Well that’s very true and if I could correct me that number one nowadays it’s going on for more than 30, 35 years now.

Brady: OK.

Daowei: When I wrote this book it was more than 20 years.

Brady: That's right.

Daowei: But it’s fascinating. If you look at the book, basically the US they admit for all of the imports, like 70 percent are duty free. For the duty for goods it’s like four and five percent. If you do it with average of the tariff rate of all the goods and services that come to the United States it’s about one, one-half percent. Lumber we’re talking about sometimes 15, 20, even preliminary we got even 27 percent. So it’s a puzzle, it’s something so interesting that’s my interest in this book – it rises. So, why is that? I mean, why is that? I mean we talk about, why free trade or freer trade for other goods and services, but not lumber? It’s a long story. In my book I listed several factors, but if I could summarize quickly, basically I outline three factors for this longevity issues. One is economics. We talk about the endowment of softwood lumber resource in the two countries it’s just too much different. If I could share with your audience the graph in my book, look at the softwood stocks in Canada and the US, basically that’s referred to as Figure One. The US as a country as a whole has about 14 billion cubic feet of lumber stock, softwood timber stock. Canada as a country has 20 billion, so that’s a big difference just between those two countries. If you use … we’re talking about resource endowment, every Canadian has 667 cubic metres where in the United States it’s only about 51 cubic metres per person.

[07:15 – 9:42]

Brady: For listeners out there, we will make these figures available and they’re really compelling. That’s interesting okay.

Daowei: Yes. It’s not only interesting, but it’s not reported in most of the media, it’s overlooked. I mean we in economics we think about the absolutely a comparative advantage of those two countries and it’s just enormous. One story – I made the seminars 10 years ago in my school. The Department of Economics say well jeez the Canadians just look at this figure: the number one they do not … is their lumber produce and number two are they charging too much? And that’s just, I mean, I was interviewed by the many radio stations and newspapers, publishers and they all pointed this out, they said “Jeez, we did not know this.”

Brady: Let’s go over those points again if you don’t mind. When economists talk about absolute advantage and talk about that's this idea that you can produce this softwood lumber at the lowest cost and the comparative advantage we bring in the idea of opportunity cost.

Daowei: Correct.

Brady: So in the in these cases what specifically is the difference in the opportunity? It's clear I think, if I’m following you, in terms of the graph Canada has the absolute advantage, it can produce softwood lumber the cheapest, but the story is a little different in terms of the comparative advantage. Can you just walk us through that a little bit more? Because it is fascinating.

Daowei: Yes, well absolutely the amount, Canadians produce more and also in term of opportunity cost of producing lumbers the Canadians are are much more I mean compared look at the resource endowment. For example, the computer industry in the United States is leading the world, it’s way more advanced. Canadians’ computer industry relatively sized compared to the US does not have some kind of a comparable advantage, but in lumber, Canadian does, it’s a huge difference in opportunity cost being produced in lumber, in softwood.

[09:42 – 12:40]

Brady: So Canada has both an absolute advantage in a comparative advantage in this?

Daowei: Absolutely.

Brady: OK. And so then how does that translate into your thoughts about whether or not, and I guess one of the big issues in this enduring softwood lumber wars you point out that’s been more than 30 years ongoing is this issue of whether Canada subsidizes its softwood lumber.

Daowei: Well, you are moving to the second factor now. If we think about economic factors, the second factor of the softwood lumber war is I call this institutional factors. In the United States you have a presidential systems, you have Congress and so they are subject to the influence of some of the special interest groups, and most importantly one institutional factor is that in this lumber dispute the consumer, which is mostly homebuilders and home dealers, those peoples under the US legal systems, they are not part of this dispute. Let me rephrase. They do not have legal standing in the legal fact. So legally, they are put at a much disadvantage compared to the producers the US lumber producers. So this is what I called the institutional factors, the second factor, in this long dispute.

Brady: So Canada has a comparative and absolute advantage but there are key stakeholders with differing interests. This really comes out nice in your book, and I guess let’s maybe go through them. That’s fascinating. One of the stakeholders is the US consumer who presumably benefits from lower prices but they don't have legal standing in this debate, one of the other stakeholders is the US producer and they do have standing and they don't, I take it, they would prefer the less volume coming in from Canada. Is that right?

Daowei: Correct. That’s correct. And for example the US consumers they are not at the negotiation table. When Canada and the United States try to make a deal there were three deals over the years and there was no presence of the US consumers so anyways they were complaining but under the US legal system … they are not a part of it so that’s the second factor I am talking about.

[12:40 - 14:45]

Brady: Well somebody out there might be in the United States or in Canada might be out there wondering well does Canada subsidize softwood lumber? How have you thought about that, the answer to that question?

Daowei: Well, this is the heart of the dispute. I in my book alluded that there was no evidence, no credible evidence that I have found anywhere to say that Canadians are subsidized. It is true that in a couple of occasions that the US Department of Commerce found there was subsidy, but if you look at the WTOs if you look at the three NAFTA panels there’s no evidence and also empirically from the academic side there is no such evidence that says there was an independent credible study shows that Canadians have subsidized their lumber producers.

Brady: So if they don't subsidize what you think that Commerce is gonna come back and say in this recent I guess when I think they are sometime in April [Daowei: Correct.] are supposed to, what are your thoughts about that?

Daowei: Well I said there were no subsidies found by international panel there were no subsidies found by any credible, scholarly work, but the Department of Commerce did find a couple of occasions there was subsidies, but they have their own criteria, they have their benchmarks. Depending on which benchmark they use I think they might find a subsidy. I suppose we’ll find out in just a couple of weeks what happens.

[14:45 – 16:47]

Brady: One of the really fascinating discussion points of your book and I wouldn’t mind you just talking about it in general is that you know we teach in our classes and we talk about certainly with our families the idea of free trade but what's clear is that trade is negotiated and there's tremendous rules and what was fascinating to me when reading your book was all the discussion about subsidies that come along with allowing free trade of defining what a subsidy is, what kind of actions can be taken against countries if the subsidy is argued to be in effect and the definition and the measure of what a subsidy is legally seem to be changing over time. What are your thoughts on that?

Daowei: In this case, if I could basically summarize, in the eighties the US Department of Commerce had a different set of rules and in the 1990s, 1994 they changed it. Well not only this, within the same set of rules there are alternative benchmarks. They could choose one or two or three of those benchmarks. Depending on which benchmark is used and you can find some level of subsidies I suppose and one of the critical issues here is whether or not cross-country border comparison of stumpage is blocked, so it depends what type of benchmark you could find. There could be no subsidies, or small level subsidies or large level subsidies, so that’s critical issues in this case. My thought is well in the future it depends on which type of benchmark the Department of Commerce use so it could change the result.

[16:47 – 18:15]

Brady: If you a crystal ball there what kind of a benchmark do you think the Commerce is going to use and what you think will happen?

Daowei: I can only speak on behalf of the Department of Commerce [Brady: Sure.] but I know there are three benchmarks in this realm. So the definition of subsidies is some kind of adequate … they define … that whatever adequate is so-called … so their benchmarks are three benchmarks. One is market price from actual transactions from within country, in this case within Canada. The second is wood market price that would be available for purchase in the country of exportations, in this case it’s cross border comparison. The third one is whether assessment whether or not the government price is consistent with market principle. This is a cost approach. I do not know which one they will use, but if I were Canadian I would definitely oppose them to use the cross-border pricing because cross-border pricing there is a problem with the exchange rate and different market conditions, different species compositions, so on and so forth. That is one of the most contentious issues in this dispute.

[18:15 – 19:48]

Brady: Let me ask you this question because it’s kind of interesting. Wouldn’t we expect there to be differences in prices across borders and that that's in fact what leads to exchange?

Daowei: Correct. This is an interesting story. If there is no difference among countries in price, there will be no treat. Now you use the cross-border pricing you essentially turn the comparative advantage to some kind of comparative disadvantage. It’s totally against the economic principles that we have learned.

Brady: Alright, so politics are at play and probably the choice of these. What from your standpoint and you really are kind of one of the world's experts in this area if not the world's expert in this area. What would you what kind of comparison would you suggest?

Daowei: I would suggest well at least use the in country. For example, you have private ownership in Canada and you have crown land and you could use property land somebody price to infer the crown land somebody price probably to adjust for the difference for example reforestation and so on and so forth. The other would be more legit to me than cross-border pricing, there’s just too many problems with cross-border. Let me give you an example of these problems, within country and cross-borders.

[19:48 – 21:29]

Brady: OK before you do that let me just make one point for our listeners because you just raise the point that I realized I probably should have asked you about earlier, it’s important. So Canada, a big distinction between Canada and the United States is that Canada much of the land is in provincial ownership whereas in the United States it's private, so when you say compare the stumpage the kind of the rental rate on provincial land with the rental rate on private land that's a better way of assessing the subsidy from your standpoint. Did I get that right?

Daowei: Correct, correct. You correctly point out that in the United States most states 73% of land is owned by private landowners, whereas in Canada we’re talking about something like 90% is owned by the public, but that aside let’s just compare apples to apples in this case. In this case, private landowners in the United States in my state we have a … the same state the stumpage price could be 10, 15, 20 percent different; we are only talking about the same species. [Brady: Right.] So … talking about the same land ownership private land ownership the stumpage price is different. If you compare the stumpage price in the state of Alabama, compare with its neighbouring states, Florida, Georgia, Tennessee and Mississippi state same species the soft timbers they are going to be easily 5, 10, 15 percent different. So my point is that cross-border or cross-region comparison is riddled with problems.

[21:29 – 23:40]

Brady: Oh I see. So you would suggest a relatively focused comparison within regions between and to assess whether there was a subsidy in stumpage between the private and the public?

Daowei: Correct.

Brady: I want to move to a more abstract discussion that I thought was really fascinating and well developed in your book and that was the way you brought in public choice theory into this discussion of the softwood lumber war. Talk to me a little bit about public choice theory.

Daowei: Public choice is basically a school of economics using economics to study politics and political process and common actions in this case is pre-deregulation. The public choice school started with assumption phase, OK all of the players, we’re talking about politicians elected or the administrations … as well as the players like producers and consumers. Those people, every one of them, have a self interest and sometimes their self interest overrides the pubic interest so in this case and secondly some interest group, small well-organized interest group, when their loss is concentrated whereas the benefit of in this case the free trade is like a spread to many, many people. When that occurs you have a symmetry in the benefit and cost concentrations. In that case it will lead to some kind of lobbying more intensively to people who lost, in this case the US lumber producers. They could overcome the lobby of the consumer groups and find their voice in US Congress and Congress in turn apply pressure to the administration and therefore you could lead to some kind of result which is contrary to economic efficiency, contrary to free trade.

[23:40 – 26:09]

Brady: Right so consumers and producers on net could benefit from expanded trade with Canada but producers would be hurt and because they have relatively intense interest and I guess in this case, what you said US consumers don’t even have standing, they can lobby government to take certain actions against traders. Is that right?

Daowei: Correct, correct. Well actually free trade is better for the United States as a whole. There is a loser in free trade, which is the lumber producers and there is a benefactor in this case is the US consumers. Yes the lobby could be more intense to Congress from the producer side. And now I’m saying the US consumers do not have a legal standing, politically they can still lobby [Brady: Right.] but if their intensity of the lobby is subdued overshadowed by the lobby of the lumber producers, let’s put it this way. They can be effective in the lobbying effort, but legally they do not have legal standing, so there is a difference on that.

Brady: What's your thoughts? Canada is worried about this, why wouldn't they just adopt a system like the United States and just auction their land and be done with it? What you think stops that as a potential solution?

Daowei: There are two things: Number one, it’s not very good for the Canadian social and … objective. If we use the United States’ systems number one the US Forest Service the public land the auction their timbers, stumpage. They lose billions of dollars. In Canada, you do not want to have somebody auction your timberland and lose a billion dollars. That I do not think the Canadian public will agree with if the Canadian public stumpage system loses billions of dollars over the years.

[26:09 – 28:09]

Brady: That’s a great point. Why do they lose the money, why when they auction?

Daowei: Well it’s a long story in the US Forest Service but it’s documented. They lose money because the cost of logging is just too high, there are litigations and so on and so forth so the transaction cost is too high for harvesting public forest or national forest in the United States, OK, and long story short they are losing money the US Forest Service in their timber sales they’re losing money for years, for 10, 20 years now.

Brady: So they auction off, but they don’t get enough revenue to cover their, is that what you’re saying?

Daowei: Correct. And secondly to answer your question why Canada cannot do this kind of stuff, I realized this to a talk I did in Kelowna back in 1985. There was two key people in lumber negotiations back in 1995 and the coalition of the US lumber lobbyists the chairman by the name of Dick Bennett and I had an exchange with one of the leaders of the BC lumber industry by the name of Jake Kerr. So this is Jake Kerr asked Dick Bennett, he said, I quote: “I understand that you [which means the coalition] want to have a competitive timber sale system in Canada that is similar to the one used by US Forest Service. What will happen if the stumpage price fails after we implement such a timber sale system in British Columbia?” Dick Bennett replied, I quote, “We will sue you again if that happens.”

[28:09 – 30:06]

Brady: So at the end of the day it may not really be about subsidy it's more about wanting to control the volume of timber that comes from Canada into the United States?

Daowei: That’s my understanding of this case. I have talked with many people in the coalition and US industry and Canadian industry and this seems to be the consensus, it’s not about the pricing, it’s about market share.

Brady: One thing that I think is important to raise is that there's a lot of you know business going across borders and I think in one of our discussions you pointed out just how much of the forestry activities were actually in the United States were actually owned by Canadian companies. I don't know if you want to expand on that little bit but I think that's a fascinating point.

Daowei: Yes that’s something new; in fact it’s one of the six puzzles that I point out in the book that basically you see the forest across the border in multiple cases a forest that does not recognize national borders. I mean you have the forest very similar in species and so on and so forth and the industries are somewhat integrated and yet we have this dispute. Anyway, you point out that basically what is happening in the last maybe 10 to 15 years was that increasing ownership over Canadian sawmill ownership in the United States in some state for example the state of South Carolina, the state of Georgia, the state of Alabama and the state of Arkansas those are big lumber producing states and the north Canadians are unique in the number of shares, we’re talking about 35 to 50 percent of the capacities.

[30:06 – 32:55]

Brady: I think that’s kind of an important point. In Canada for example we’ve had some people concerned about US ownership, or sorry not US but foreign ownership of Canadian farmland but I think oftentimes we don't sit back and reflect on just how integrated the ownership patterns are in other areas and that Canadians are surprised to learn how much Canadian ownership of US assets there are in the United States.

Daowei: Well actually this is a fascinating point. I did a study back in the nineties. The US ownership of Canadian assets back in the seventies and eighties was higher than today. So the point is … basically that if the Canadians are really subsidized why don’t the US producers go buy Canadian assets and just be a recipient of this quote end quote win for profit from the subsidies and empirically it’s the other way around, and nobody can give me an answer to this question just yet.

Brady: That’s a very powerful point. I’m conscious of the time and I want to if the United States slaps a tariff for an export tax on walk me through really quickly the implications for both sides of the borders for producers and provinces in Canada and consumers and producers in the United States.

Daowei: Well, if the tariff is imposed ultimately the lumber price will rise in the United States, and it depends on the magnitude of the tariff, and it will hurt the US consumers and it will benefit the US lumber producers and to some degrees landowners. The Canadians, if there is a quota or export tax the producer will be somewhat limited in their export activities. They are going to be hurt, and if they could tell their production and employment level of the sawmill sector in Canada will decline so the workers may suffer a little bit in Canada as well so that’s I mean without knowing what’s the magnitude and what exactly the deal will be I guess I can generally just summarize like that.

[32:55 – 34:54]

Brady: That way if you were given the opportunity to make a suggestion to policymakers and they would follow through, what would that be in dealing with this dispute?

Daowei: If I had the opportunity I think I would be rational and reasonable in this case. I would appoint some kind of commission and negotiate for a deal for both countries. Back in 2003, I proposed a voluntary export tax of five percent and that deal was not very far from the settlement the software lumber agreement of 2006. The tax rate was about four to five percent and so anyway I think that kind of compromise somewhere in the middle will be a better deal.

Brady: So the export tax that would be Canadian provinces placing it on the timber or the softwood lumber producers, is that right? So the money with the five percent that stays in Canada but it reduces the volume because it essentially raises the cost of production?

Daowei: Right, correct and also as a goodwill maybe the Canadians should use a portion of the money to you know promote softwood lumber use in that case stimulate demand for lumber, so it will benefit both the Canadian lumber producers and the US lumber producers if the demand is increased.

Brady: Dr. Zhang thank you for taking the time to discuss your book and your research with us on FARE Talk. I learned a lot and I wish you best of luck.

Daowei: Thank you very much.


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