Province Specific Impacts of the 2006 United States-Canada Softwood Lumber Agreement: A Seemingly Unrelated Regression Approach

Western Spruce KD 2x4 #2&Btr prices OCT 2019

In November 2016 Madison’s was co-author of an economics study on the impacts of the 2006 Canada-US Softwood Lumber Agreement on each of Canada’s provincial forest industries:

The full report “Province Specific Impacts of the 2006 United States-Canada Softwood Lumber Agreement: A Seemingly Unrelated Regression Approach” is available for a small fee here:

In this paper, we evaluate effects of the 2006 U.S.-Canada Softwood Lumber Agreement (SLA 2006) in U.S. lumber imports from Canadian provinces. Based on monthly data from January 1988 to October 2015, we estimate a system of U.S. softwood lumber import equations by using Seemingly Unrelated Regression approach. The results reveal that SLA 2006 had a negative impact on softwood lumber shipments to the U.S. from British Columbia, Ontario, Quebec, and Saskatchewan, and no effect on those from SLA-exempted provinces.
Thus, SLA 2006 did not provide an opportunity for trade diversion from SLA covered provinces to exempted provinces.
Keywords: U.S. lumber imports, trade diversion, Softwood Lumber Agreement 2006, U.S. housing starts, seemingly unrelated regression

Rajan Parajuli, Texas A&M Forest Service College Station TX
Daowei Zhang, School of Forestry and Wildlife Sciences Auburn University Auburn, AL
Keta Kosman Madison’s Lumber Reporter Vancouver, BC Canada

Below is the section explaining North America construction framing dimension softwood lumber circumstances at the time of the 2006 duty:

6. Conclusions and Discussion
The U.S. and Canada have a rich history of softwood lumber trade dispute, and various trade measures have been put in place restricting Canadian softwood lumber to the U.S. These trade measures are unique in the sense that they impose restrictions only on the exports of covered provinces and give a free ride to exporters from other provinces. This feature provides us an opportunity to estimate trade diversion within a country. Furthermore, SLA 2006 had two options, and we could estimate the results of provinces choosing different options.

Madison's Weekly Movers & Shakers Softwood Lumber and Panel Prices Chart OCT '19

In this paper we use the SUR econometric approach to estimate U.S. lumber import equations for all Canadian lumber exporting provinces separately and to quantify the effects of SLA 2006 on lumber shipments from Canadian provinces to the U.S. We find that while SLA 2006 is able to limit softwood lumber flows to the U.S. from BC, ON, QC, and SK, the SLA 2006 excluded provinces and companies are unable to take advantage of the SLA 2006 restrictions on major lumber exporting provinces.
Thus, SLA 2006 did not cause any significant trade diversion from SLA-covered provinces to non-covered provinces. Furthermore, the different export performance from various SLA-covered provinces could be related to their export opportunities to other countries and their choice of different options under SLA 2006.

Thus, the Coalition’s call for one single quota for Canada which includes maritime provinces that have been excluded from all trade restrictions is not warranted. These provinces did not increase their exports to the U.S. under SLA 2006. This, in addition to the fact that private landowners supply a significant amount of softwood stumpage in these provinces, will give more credence that these provinces should be left out in any future trade investigations and possible restrictions.
As for litigation and negotiations between the U.S. and Canada with respect to Canadian provinces that are covered under SLA 2006, one should understand that compared to 2006, the current dynamics of softwood lumber trade between the U.S. and Canada is different.
First, the U.S. is no longer only a single customer for Canadian softwood lumber. The overseas export market of Canadian lumber has been flourishing in recent years. China is a customer for 15% of Canadian lumber, almost all of which comes from BC. While Chinese purchases tend to be almost entirely low-grade commodities, the country is apparently a blessing to BC as BC is still clearing its post-mountain pine beetle killed forest stands therefore still has an excess supply of lower-quality timber available for processing.
Second, in early 2000s, there were significant US holdings of Canadian sawmill operations. In 2016, that situation has more than reversed; the three largest North American producers, all based in BC, now own as much or more capacity in the US than they do in Canada. Having their operations in both countries, they could be less actively engaged in the trade negotiation process.

Madison's Historical Softwood Dimension Lumber Price Comparison Table OCT 2019

Nonetheless, we see that Canadian lumber industry is still fragmented, and it appears that all provinces barely have a unified stand in the trade negotiation with the U.S. during the one year standstill period. BC always leads the trade negotiation process, and it is quite important to note that three largest BC operators hold their vast majority of sawmills in the U.S. in recent years. On the other hand, QC lumber industry gets regularly put at a disadvantage by inexpensive BC wood flooding their market; western spruce-pine-fir (SPF) lumber competing directly with eastern SPF to domestic Canadian and also US customers in the St. Lawrence/Great Lakes Zones.
Producers in QC are happy when lumber prices drop enough for China to once again become interested in Canadian lumber; so they don’t have to worry about BC sawmills sending lower-cost western lumber into their region.
Similarly, some provinces in Canada, QC and ON, recently started adopting market-based auction timber pricing system, and they will negotiate for exemption, since the administrative pricing system in Canada is the ground argument of the trade dispute for U.S. producers. Indeed, leaders at the US Lumber Coalition informed Madison’s in September 2016 that some southern QC sawmills (so-called “border mills”) will be exempt from the next litigation because they source timber from the US.

Moreover, given BC’s sheer neglect of QC before and during the 2006 SLA when there were disputes and arbitrations with the US, it is difficult to imagine QC standing up with BC to present a unified voice against the US now. All this will give the U.S. producers an upper hand in any future negotiations.

Madison’s Lumber Reporter

The full report “Province Specific Impacts of the 2006 United States-Canada Softwood Lumber Agreement: A Seemingly Unrelated Regression Approach” is available for a small fee here: