Trade Deals and Softwood Lumber: North America and International

Just as the 2006 Canada-US Softwood Lumber Agreement is expiring, leaving a one-year stand-still period before either country can embark on any kind of trade action against the other, the Trans-Pacific Partnership is signed between twelve Asian and North American countries, including Canada and the US.

Rajan Parajuli, Sun Joseph Chang, and R. Carter Hill
Copyright © 2015 Society of American Foresters
http://dx.doi.org/10.5849/forsci.15-014

“By estimating a system of supply and demand equations for the US softwood lumber market, this article assesses the possible effects of the export tax on the lumber trade between the US and Canada. Unlike previous studies, this study computes the actual monthly export tax collected by Canada during the period of SLA 2006 and incorporates it into the empirical modelling. The findings reveal that SLA 2006 has no statistically significant effect on the softwood lumber trade between the United States and Canada. The Canadian lumber exports from SLA-included provinces are found to be price elastic, whereas the US domestic supply schedule is price inelastic. Further, Canadian overseas lumber exports significantly influence the Canadian lumber exports to the United States. Given that SLA 2006 is scheduled to expire in October 2015, this article provides useful insights into the decades-long trade battle between the otherwise friendly neighboring nations.

Theoretical Framework

“We use an econometric model for the US softwood lumber market that follows the theoretical framework as devised by Myneni et al. (1994), Baek and Yin (2006), and Song et al. (2011). We modify the model specifications of Song et al. (2011) to include an export tax and Canadian overseas lumber exports to evaluate the effects of SLA 2006 on the lumber trade. Generally, a Cobb-Douglas profit function for the softwood lumber industry is considered to derive the lumber supply model, and a Cobb-Douglas cost function is used to derive the lumber demand equation (Song et al. 2011).”

Conclusions

“The LIML estimates of supply and demand equations for the softwood lumber market show that the Canadian lumber exports from the SLA-included provinces are price elastic, yet US domestic lumber supply is price inelastic. This fact clearly indicates that the monthly lumber composite price alters the quantity of Canadian lumber exports to the United States, but the US domestic supply schedule is less affected by the change in the lumber composite price. More importantly, contrary to the expectation and results of past studies, the export tax is found to be ineffective in limiting the Canadian softwood lumber shipments to the United States during the SLA 2006 period. However, a recently increasing trend in Canadian overseas exports suggests that, in the future these overseas markets will gain in importance, whereas the trade dispute between the United States and Canada will be less important.

However, if the United States looks for stronger trade barriers to restrict Canadian lumber imports, US consumers would need to bear a higher cost for a smaller benefit to US producers. Because most of the Canadian lumber-pro- ducing provinces already started implementing an auction-bid tim- ber-pricing system similar to that of the United States (BC Timber Sales 2015, Farnia et al. 2015), such a development may make the argument of the US Lumber Coalition to lobby for import protection policies against Canadian lumber shipments a moot point and eventually lead to free trade in softwood lumber between the two countries in the long run.”