THE SOFTWOOD LUMBER GAME
By Allison Henning
Canadian National Railways Fellowship
Western Centre for Economic Research
October 2006
Contents
Executive Summary .....................................................................................................................1
Dispute Overview.........................................................................................................................1
Stumpage Fee Determination..................................................................................................3
Effects of Tariffs on International Trade Economics .............................................................5
Domestic Effects (US) ...................................................................................................................5
Effects on Exporting Nations ......................................................................................................6
Why Settle the Dispute?..........................................................................................................7
Strategic Alternatives...................................................................................................................9
Retaliation.................................................................................................................................9
Creating a Strategic Alliance with Mexico ..........................................................................13
Shifting Trade to Other Nations...........................................................................................14
Cooperation with the United States......................................................................................19
How Can Canada and the United States Cooperate?..........................................................21
Role of an Impartial Governing Body .....................................................................................23
Conclusion....................................................................................................................................23
Acknowledgements....................................................................................................................24
References.....................................................................................................................................24
List of Figures
Figure 1: BC Stumpage Prices in Comparison to US Auction Prices and Appraisals ...4
Figure 2: Lumber Export Partners in China ..........................................................................18
Figure 3: Total Factor Productivity Growth in the Lumber Industry .............................20
List of Tables
Table 1: Distribution of US Softwood Lumber Imports by Country .................................7
Table 2: US and Chinese Activity in the Softwood Lumber Market from 1990 to 2001 8
Table 3: Top Three Buyers of US Wine Exports ...................................................................10
Table 4: 2005 Export Data for Canada, US and Mexico ......................................................10
Table 5: 2005 Import Data for Canada, US and Mexico......................................................11
Table 6: Percentage of US Crude Oil Imports by Nation ...................................................12
Table 7: Combined Crude Oil Exports to the US from Canada and Mexico ................13
Table 8: Growth of Overall GDP, Imports and Exports in China ....................................14
Table 9: Softwood Lumber Export Values in Canadian Dollars.......................................15
Table 10: Softwood Lumber Export Values in Canadian Dollars ....................................15
Table 11: Transportation Costs ................................................................................................16
Table 12: Currency Values ........................................................................................................17
Table 13: Payoff Matrix to the Prisoner's Dilemma .............................................................19
Table 14: US Imports of Crude Petroleum and Natural Gas for Consumption ............21
Western Centre for Economic Research
Information Bulletin #98, October 2006
University of Alberta
Page i
Executive Summary
The NAFTA agreement has allowed a dramatic increase in trade between the
United States and its NAFTA partners, Canada and Mexico. However, for many
years Canada and the United States have been in a disagreement over the
subsidization and tariffs implemented in the softwood lumber industry. Both nations
would benefit from settling this dispute permanently, but neither nation is
cooperating to develop a feasible solution. In this paper, game theory will be used to
assess the options that Canada and the United States have available to deal with this
dispute. Firstly, they can enter into a retaliatory war with one another. Secondly, they
can maintain status quo in the dispute and Canada can seek new trading partners or
attempt to collude with Mexico to place pressure on the US to abide by the rules of
NAFTA and its dispute resolution procedures. Or, lastly, both or all parties could
find a way to cooperate and promote a healthy relationship of free trade between
Canada and the United States. This analysis is based on an article from Canadian
1
Business titled, “The Beautiful Mind Game” . In essence a detailed analysis will be
performed to determine what strategic initiative Canada should exercise with respect
to the softwood lumber disagreement.
Dispute Overview
The North American Free Trade Agreement (NAFTA) brought free trade to one
of the largest continents in the world in 1994. NAFTA resulted in a successful
increase in trade between the United States, Canada and Mexico. However, issues
concerning dispute resolution have surfaced. This is not unexpected with a new and
open trading policy. The member countries of NAFTA are very different structurally;
Mexico is a developing country, whereas Canada and the United States are both
developed countries. Canada, however, is much smaller economically than the
United States, so in effect the United States has become the hub for the NAFTA
2
countries. This raises the question as to whether the United States maintains too
much control and bargaining power over Canada and Mexico.
NAFTA, the World Trade Organization (WTO) and the General Agreement on
Tariffs and Trade (GATT) have established provisions for the freedom of trade. These
provisions address inequalities related to government subsidization and other
factors. However, these provisions have been found to be vague, and because of this,
problems have arisen. When the Softwood Lumber Agreement (SLA) came to term in
2001, the United States imposed tariffs of 27.22% on Canadian softwood lumber.
Since then Canada has been appealing these tariffs, however, to date no solution has
3
been reached. Canada is seeking to remove these softwood lumber tariffs which are
proving to be detrimental to its softwood lumber industry.
1 Mintz, J., A Beautiful Mind Game, October 10, 2005, Canadian Business Magazine. 78(20), 23.
2 Chambers, E.J, and Smith, P.H. (2002). NAFTA in the New Millennium. Center for U.S- Mexican Studies, San
Diego and The University of Alberta Press, Edmonton.
3 Retrieved from www.for.gov.bc.ca on September 11, 2005.
Western Centre for Economic Research
October 2006
University of Alberta
Page 1
Under the new world trading rules of the WTO and GATT, many governments
have chosen to lower trade barriers. Governments have agreed to place caps on their
current trade tariffs, not to impose new tariffs on imports, and to reduce current
4
tariffs. Three exceptions to WTO rules exist and allow trade tariffs to continue:
1. Anti-dumping duties which compensate for companies who sell goods for an
5
unfairly low price.
6
2. Duties to offset government subsidies that give countries an unfair trade advantage.
3. Emergency duties and tariffs designed to safeguard domestic industries that are
7
in serious trouble.
The United States has imposed antidumping duties as well as duties to offset
government subsidies on Canadian softwood lumber. But Canada and the United
States continue to disagree as to whether these tariffs are fair according to the
provisions above. Canada is seeking to have these tariffs lifted, but the United States
8
claims that these tariffs have been fairly placed on Canadian softwood lumber.
In 1996, the Canadian and American governments created the SLA. However,
this agreement was short-lived. In 1998, two years after the SLA came into effect; the
United States challenged British Columbia’s stumpage reduction and reclassified
lumber products that were outside the SLA so that they would be included in the
9
agreement. Under the SLA, the US agreed to refund tariffs collected in the third
softwood lumber dispute. This agreement allowed the Canadian provinces of British
Columbia, Alberta, Ontario and Quebec to export a quota of up to 14.7 billion board
10
feet of lumber per year, duty free. However, when this agreement matured in 2001,
the United States filed a countervailing duty petition and an anti-dumping petition
against the Canadian softwood lumber industry. British Columbia has been
participating in litigation and negotiations since 2001 in an attempt to resolve this
dispute. The United States enacted final duties on Canadian softwood lumber in
11
2002, at which time the combined rate of the tariffs became 27.22%.
Canada has filed seven appeals with NAFTA and the WTO against the softwood
lumber tariffs. Despite the fact that a NAFTA panel ruled that the International Trade
Commission (ITC) has not proven that the American lumber industry is suffering
12
due to Canadian imports, no resolution has been reached.
The purpose of this study is to determine how Canada can most effectively deal
with the softwood lumber dispute. It is important to address this issue because
businesses and economies on both sides of the softwood lumber argument suffer
immensely when these disputes are not resolved in a timely manner. The duties
imposed on Canadian softwood lumber by the United States have in effect created a
downturn in the Canadian softwood lumber economy. Canada is therefore seeking to
remove these softwood lumber duties, but has had little success.
4 Ibid
5 Ibid
6 Ibid
7 Ibid
8 Retrieved from www.for.gov.bc.ca/HET/Softwood/disputes.htm on September 11, 2005.
9 Ibid
10 Ibid
11 Ibid
12 Ibid
University of Alberta
Page 2
Western Centre for Economic Research
October 2006
Stumpage Fee Determination
In Canada, the majority of its forest lands are publicly owned. So, lumber
companies must pay a stumpage fee prior to logging this publicly owned land.
Stumpage rates are based on a base rate that depends on the price indices for lumber
and wood chips in each geographical region. These rates are also adjusted quarterly
13
in order to reflect changing market prices. Included in the calculation are other
factors such as the Cutting Authority Value Index and the Mean Value Index which
represent the difference between the selling price and costs of harvesting wood and
the weighted average of the total Cutting Authority Value Indices over the past year
14
respectively. In the United States, much of its timber harvesting takes place on
private lands. Wood cutting is therefore auctioned off at fair market value to the
highest bidder.
These systems are inherently different, but have been created on the basis of
forest land ownership in each nation. The question that has arisen is whether
Canadian stumpage fees are accurate estimates of the fair market value of lumber.
The United States believes that since lumber producers experience increased
efficiency with low stumpage rates, the industry is being subsidized by the
15
provincial authorities. They believe that Canada should undertake a new stumpage
fee system that is based on fair market prices. British Columbia is currently
considering moving towards an auction-based stumpage fee determination system in
16
its new forest revitalization plans.
13 Government of British Columbia. 1998. Stumpage: An Information Paper on Timber Pricing in British
Columbia. British Columbia Ministry of Forests, Revenue Branch. Retrieved April 9, 2006 at
www.for.gov.bc.ca.
14 Ibid
15 Government of British Columbia. 2003. The Forestry Revitalization Plan. British Columbia Ministry of Forests.
Retreived April 9, 2006 at www.for.gov.bc.ca.
16 Government of British Columbia. 2003. The Forestry Revitalization Plan. British Columbia Ministry of Forests.
Retreived April 9, 2006 at www.for.gov.bc.ca.
Western Centre for Economic Research
October 2006
University of Alberta
Page 3
Figure 1: BC Stumpage Prices in Comparison to US Auction Prices and Appraisals
Average Stumpage Prices in British Columbia between 1987 and 2005
40
35
Stumpage Fees
(C$/m2)
US Auction and Appraisal
(C$/cord)
30
25
20
15
10
5
19
87
/1
98
8
19
88
/1
98
9
19
89
/1
99
0
19
90
/1
99
1
19
91
/1
99
2
19
92
/1
99
3
19
93
/1
99
4
19
94
/1
99
5
19
95
/1
99
6
19
96
/1
99
7
19
97
/1
99
8
19
98
/1
99
9
19
99
/2
00
0
20
00
/2
00
1
20
01
/2
00
2
20
02
/2
00
3
20
03
/2
00
4
20
04
/2
00
5
0
Year
Coast
Interior
Province
US Auction Price
US Appraisal Value
Exchange Rate used for conversion= 0.80 CAD/ 1.00 USD
Source: Quarterly Stumpage Updates for January 2005 and January 2006; Council of Forest Industries,
www.cofi.org and US Auction Data Source: www.co.st-louis.mn.us
Stumpage prices in British Columbia have been falling since 1997/1998 when
they hit a maximum of almost $30/m2. (Figure 1) Since then, stumpage prices have
fallen to approximately $15/m2 (2004/2005 rate), a drop of 50% over a 7 year period.
Data from the St. Louis County Timber Auctions of 2004 and 2005 show that the
average market price that all timber was purchased for at the auction was almost
double the stumpage fee charged in British Columbia. The stumpage fees were in fact
slightly higher in value than the appraised value of the wood sold at the St. Louis
Timber Auction. This data implies that Canadian Stumpage fees may very well be
too low in comparison to US market prices for timber that are set by auction pricing.
It must be noted that the types of wood that are used in developing BC stumpage
fees may not match exactly to the wood sold at the St. Louis Auction. This was,
however, the only data available to be used in this analysis. Data for US auction
prices could not be located for most of this time period. It is therefore difficult to
determine whether these stumpage rates are fair for each respective time period.
Furthermore, auction prices were measured in cords, a cubic measurement;
comparisons with BC stumpage rates that were priced per square meter were
therefore not possible. Standards for the measurements of log diameter vary between
countries, so lumber measurements are difficult to compare without detailed
17
measurement information.
17 Neil Miller; Alberta Spruce Industries, collected on April 11, 2006
University of Alberta
Page 4
Western Centre for Economic Research
October 2006
Effects of Tariffs on International Trade Economics
Domestic Effects (US)
A common form of protectionism seen in international trade is the
implementation of a tariff or quota on international imports. For many years Canada
and the United States have been disputing over softwood lumber trade.
In 2002, the United States government placed a duty of 27.22% on softwood
18
lumber imports from many provinces in Canada. This duty did not apply to those
provinces whose lumber production was private because subsidization was not an
issue for them. The United States claims that Canadian provinces are subsidizing the
softwood lumber industry by charging very low stumpage fees. They have also
implemented tariff penalties against Canadian softwood lumber because they claim
that Canada is dumping its lumber into the United States at prices lower than the
19
costs of production.
Tariffs, such as the 27.22% that the US has placed on Canadian lumber, hurt the
domestic economy in the United States. Consumers pay the price of government
induced protectionist tariffs as prices rise in response to the tariff.
The duties placed on softwood lumber have placed considerable pressure on the
US housing market. The US housing market depends on Canadian supplies for 34%
of its high quality building lumber, but with the implementation of these tariffs, the
20
stable lumber supply from Canada is threatened.
Because of high lumber prices, both the US and Canadian economies have
experienced market distortions. The rising costs of lumber have inflated the price of
new homes in the United States. In response to these price changes, many American
families have been priced out of the housing market. Lumber costs have added
approximately $1000 USD to the price of a new home in the US since higher duties
21
were placed on lumber exports from Canada.
For every job in the lumber producing industry that is saved, 25 jobs in the
lumber consuming industry are lost. These jobs depend on the availability of
22
reasonably priced lumber. The implementation of tariffs in order to protect the
industry, therefore, has a negative overall impact on the domestic economy. Tariffs
will protect inefficient American industries from overall destruction, since the loser
firms of an inefficient industry are protected. The economy as a whole suffers
because resources that could be employed efficiently are wasted while inefficient
ones are being used. Higher unemployment resulting from tariffs can have a
23
negative impact on other sectors of the economy that rely on consumer spending.
From the economic analysis of tariff effects on the domestic economy we can
conclude that by placing a tariff on softwood lumber, the US is essentially creating a
18 Retrieved from www.for.gov.bc.ca/HET/Softwood/disputes.htm on September 11, 2005.
19 CBC News Online, March 20, 2006. Softwood Lumber Dispute, Retrieved from http://www.cbc.ca/news on
April 1, 2006.
20 International Trade Canada, retrieved from http://www.dfait-maeci.gc.ca/eicb/softwood/menu-en.asp
retrieved on September 11, 2006.
21 Softwood Lumber Dispute, Embassy Washington: Trade and Investment, retrieved from http://www.dfaitmaeci.gc.ca/wor;d/site/includes/print.asp retrieved on September 11, 2006.
22 Ibid.
23 International Trade Canada, retrieved from http://www.dfait-maeci.gc.ca/eicb/softwood/menu-en.asp
retrieved on September 11, 2006.
Western Centre for Economic Research
October 2006
University of Alberta
Page 5
deadweight loss that consists of those who are hurt by the tariff. These individuals
cannot buy lumber for less than they are willing to pay, and more people are forced
out of using lumber as an input. The housing industry, therefore, suffers as many
people are priced out of the market for building new houses due to the rising costs of
lumber inputs.
Effects on Exporting Nations
When tariffs are placed on a country’s exports, such as Canada’s softwood
lumber industry, producers of softwood lumber have to pay the tariff to the
government of the importing nation. Tariffs can be defined as special taxes that are
placed on producers. Producers experience increased production costs when they are
required to pay tariffs, and are forced to decrease production. The supply of lumber,
therefore, falls as a consequence of high production costs, and the price of lumber
rises.
As production costs increase companies are forced to reduce supply, and
unemployment occurs in the industry. The softwood lumber industry has
experienced many job losses as a consequence of the tariffs imposed on Canadian
24
lumber producers by the United States government in 2002.
Further issues have arisen in the Canadian lumber market due to the tariffs
placed on Canadian lumber exports by the United States. The Canadian government
has turned to subsidization of the lumber industry because of the negative impacts
the industry has suffered through the dispute. In December of 2005, the Canadian
government announced a $1.2 billion aid payment to the Canadian lumber industry.
25
This has caused further tensions in the dispute.
A government subsidy will counter the effect of the tariff on the producers of
softwood lumber. The producer is essentially paid back the amount of the tariff by
the federal government, which brings their production costs back down to the level
they would have been at had no tariff been instated.
Thus, the problem continues to persist. The US government placed tariffs on the
Canadian lumber producers because they believed that the producers were being
subsidized by the Canadian government. WTO and NAFTA reviews found that the
US tariffs were much higher than the actual level of government subsidization in
Canada, and the US was ordered to recalculate the duties to be paid by Canadian
lumber producers on exports into the United States. But, now that the Canadian
government has provided more subsidization to lumber producers, the US will be
26
even harder to negotiate into compliance.
The ensuing question is what Canada could do, and should do to end this
dispute. Both the Canadian and American economies would benefit from finding a
solution to the disagreement.
24 CBC News Online, March 20, 2006. Softwood Lumber Dispute, Retrieved from http://www.cbc.ca/news on
April 1, 2006.
25 Ibid
26 CBC News Online, March 20, 2006. Softwood Lumber Dispute, Retrieved from http://www.cbc.ca/news on
April 1, 2006.
University of Alberta
Page 6
Western Centre for Economic Research
October 2006
Why Settle the Dispute?
In 2000, Canada accounted for 76% of United States softwood lumber imports;
this percentage has been falling continuously since this time. (Table 1) In 2005,
Canada only accounted for 48% of the United States softwood lumber imports. Since
the Softwood Lumber Agreement expired in 2001, Canadian exports of softwood
lumber into the United States have fallen by 28%.
Table 1: Distribution of US Softwood Lumber Imports by Country
Percent of Total US Imports
by Country
2000
2001
2002
2003
2004
2005
Canada
76.38
75.37
67.06
55.17
49.54
48.40
Brazil
6.64
7.62
15.64
27.85
35.48
36.28
Chile
4.43
7.04
8.29
8.58
7.83
8.72
China
0.00
0.59
0.95
1.40
2.30
2.13
Finland
2.95
3.23
2.84
2.80
1.84
1.38
New Zealand
1.48
0.59
0.71
0.88
0.92
0.96
Thailand
0.00
0.29
0.71
0.70
0.35
0.43
Mexico
2.58
0.88
0.71
0.53
0.23
0.21
Subtotal
94.46
95.60
96.92
97.90
98.50
98.51
Other
5.54
4.40
3.08
2.10
1.50
1.49
Total
100
100
100
100
100
100
Data from USITC Interactive Trade Analyzer, US Department of Commerce and the US International Trade
Commission
While Canada’s share in the US softwood lumber market was falling, Brazil was
taking advantage of the US demand for lumber. Brazilian softwood lumber exports
into the US have increased from 7% of US imports in 2000 to 36% of imports in 2005;
this is an increase of 29%. US imports of lumber from Brazil have risen by 29% while
US imports from Canada have dropped by 28%. Clearly, Brazil has taken over a large
portion of Canada’s market share in US softwood lumber imports. (See Table 1)
Western Centre for Economic Research
October 2006
University of Alberta
Page 7
Table 2: US and Chinese Activity in the Softwood Lumber Market from 1990 to 2001
Year
US Portion of Market (%)
Chinese Portion of Market (%)
1990
23.06
0.06
1991
24.31
0.07
1992
29.09
0.17
1993
35.05
0.34
1994
34.90
0.17
1995
31.11
0.18
1996
37.44
0.26
1997
38.19
0.25
1998
40.25
0.36
1999
46.21
0.43
2000
43.32
0.50
2001
42.25
0.67
Source: Trade Analyzer: World Trade Database, University of Alberta Library.
Since 1990, United States participation in the softwood lumber market has been
increasing. By 2001, the US accounted for 42% of the entire market, whereas in 1990 it
only accounted for 23% of the market. Concurrently, China’s participation in the
softwood lumber market has been increasing since 1990, but in 2001, China still
accounted for less than 1% of the total softwood lumber market (See Table 2). Data
could not be collected for the years between 2001 and 2005, but, if the numbers were
available it would be likely that the US would still take up a large portion of the
softwood lumber market, while China’s participation would likely be higher than 1%.
The US is a very important player in the import market for softwood lumber. In
2001 it accounted for over 40% of all softwood lumber imports. This, combined with
Canada’s falling share in the US softwood lumber market since the expiration of the
SLA in 2001, would signal that Canada and the United States need to find a solution
to their disagreement. Although China’s share in softwood lumber imports is likely
growing, the size of this market is not likely to compete with the size of the US
softwood lumber import market soon. China’s position in the softwood lumber
market will be discussed further below.
University of Alberta
Page 8
Western Centre for Economic Research
October 2006
Strategic Alternatives
Canada has a variety of alternatives to consider in dealing with the softwood
lumber dispute. These options include:
1. Retaliation
2. Entering a strategic alliance with Mexico
3. Shifting trade to other nations
4. Cooperation with the United States
Retaliation
If the exporting nation retaliates by placing a tariff on an import from the
protectionist nation, a tariff war may result in a detrimental outcome for the
economies of both countries involved.
For example, if Canada were to place a retaliatory tariff on California wines, then
Canada would be acting in a protectionist fashion towards the wine industry. Placing
a tariff on wines would be beneficial to Canadian wine producers, the majority of
which reside in British Columbia, the province most affected by the softwood lumber
dispute. However, the implementation of such a tariff would lead to an economic
deadweight loss in Canada. The government would essentially be aiding an industry
that may not be functioning efficiently. The Canadian wine producers would win
because the price of California wine in Canada would rise, thus making local BC
wines cheaper than California wines for Canadians to buy.
Elasticity of demand is very important in these circumstances because if demand
is elastic, a small change in the price of a good will lead to a larger change in the
quantity of the good demanded. If the demand is inelastic, a small change in price
will lead to an even smaller change in the quantity of the good demanded. When a
country imposes a trade tariff on another country’s exports, it will only be effective at
protecting industries that produce goods with an elastic demand. The increase in the
price of the good being imported into the tariff imposing country would then have a
large effect on the demand for that good. Consumers must, therefore, be price
sensitive in order for governments to place successful protectionist tariffs on imports.
Wine is a commodity product that would be price sensitive. If the Canadian
government wanted to enter into a retaliatory war with the US, they could start by
placing a tariff on a US export commodity such as wine.
As a result of Canada placing tariffs on the United States, the United States wine
industry would be forced to reduce its supply output, but, by how much?
Western Centre for Economic Research
October 2006
University of Alberta
Page 9
Table 3: Top Three Buyers of US Wine Exports
2000
2001
2002
2003
2004
2005
(% of total
exports)
(% total
exports)
(% total
exports)
(% total
exports)
(% total
exports)
(% total
exports)
UK
25.00
30.07
33.57
32.52
36.66
21.92
Canada
18.15
16.78
16.61
17.33
15.47
21.48
Japan
12.50
10.66
14.66
11.70
11.21
12.48
Data from USITC Interactive Trade Analyzer, US Department of Commerce and the US International Trade Commission
Canada has consistently been the United States’ second largest buyer of wines.
(Table 3) In 2005, Canada’s share of the wine export market grew by 6.01% while the
UK’s share of this market fell by 14.74%. Recently, Canada has become an even more
important buyer of American wines. It would therefore be feasible for Canada to
place a retaliatory tariff on US wine exports entering Canada, but this action could
lead to further retaliations from the US against Canada.
Will retaliation be effective against a huge trading nation such as the United
States? Tables 4 and 5 show the top five nations that the United States, Canada and
Mexico interact with as trading partners. In 2004, the United States was ranked 2nd in
the world for its level of exports, and 1st in the world for its level of imports, whereas
27
Canada was ranked 9th in exports and 10th in imports. If Canada were to place a
tariff on American wines, American wine producers would be left with excess
capacity that they would have been able to sell into Canada in the absence of any
tariffs. Wine producers would be forced to either decrease their production or seek
new markets for their excess capacity. Because the US is a major player in the world
of trade, it is likely that US wine producers would find other export markets for their
California wines.
Table 4: 2005 Export Data for Canada, US and Mexico
2005 Export Data
Canada (%)
1
United States (%)
US
84.5
2
EU
3
Japan
4
5
6
Other
Mexico (%)
Canada
23.1
US
88.9
5.5
EU
2.1
Mexico
21.1
EU
3.4
13.5
Canada
1.7
China
1.6
Japan
Mexico
0.7
China
6.7
Aruba
0.5
4.2
Switzerland
5.6
Other
0.4
31.4
Other
5.1
Table Data Source: World Trade Organization website, Country Profile Database. Retrieved from www.stat.wto.org on
January 31, 2006.
Note: Minor discrepancies may exist between reported import and export values between nations because they are reported
by different sources to the WTO.
27 World Trade Organization website, Country Profile Database. Retrieved from www.wto.org on January 6,
2006.
University of Alberta
Page 10
Western Centre for Economic Research
October 2006
Table 5: 2005 Import Data for Canada, US and Mexico
2005 Import Data
Canada (%)
United States (%)
Mexico (%)
1
US
58.8
EU
19.1
US
61.9
2
EU
11.8
Canada
17.0
EU
10.9
3
China
6.8
China
13.8
China
5.5
4
Mexico
3.8
Mexico
10.3
Japan
4.5
5
Japan
3.8
Japan
8.7
Canada
2.4
6
Other
15.0
Other
31.1
Other
14.8
Table Data Source: World Trade Organization website, Country Profile Database. Retrieved from www.stat.wto.org on
January 31, 2006.
Note: Minor discrepancies may exist between reported import and export values between nations because they are reported
by different sources to the WTO.
Table 4 shows that Canada and Mexico rely heavily on the United States as their
number one export partner. Canada and Mexico export 84.5% and 88.9%,
respectively, of their export goods to the United States. On the other hand, the United
States has a much more varied group of nations that it exports to; no nation receives
more than 23% of US exports. Canada and Mexico only account for a total of 36.6%
percent of all American exports.
Table 5 shows that Canada and Mexico also rely heavily on the United States as
an import partner. Canada and Mexico import 58.8% and 61.9% respectively of their
import goods from the United States. On the other hand, the United States only
imports a total of 27.3 % of its import goods from Canada and Mexico. The United
States is, therefore, much less reliant on Canada and Mexico as both import and
export partners.
The United States imports 31.1% of its imported goods from nations other than
its top five import partners. Additionally, it exports 31.4% of its total exports to
nations other than those listed as its top five export partners.
The data presented above shows that the United States has an established
network of trading partners. Placing a retaliatory tariff on the US would, therefore,
not be an effective strategy for Canada to implement. Firstly, US companies can
redirect their exports that would have been destined for Canada to another trading
partner. Secondly, there is always a risk that the US will retaliate by placing a tariff
on another Canadian export. This would seriously harm Canada because, as stated
previously, 84.5% of Canadian exports are destined to the United States. It is clearly
not as easy for Canada to redirect its exports to other countries without developing
new trade relations. Lastly, if Canada were to place a retaliatory tariff on an
American export such as California wine, the Canadian consumers would be the
biggest losers because they would suffer from having to pay higher prices.
Canada is too dependent on the United States as a major trading partner. This
dependency has arisen because Canada has limited itself to performing the majority
of its trade with its neighbor, the United States. This arrangement is geographically
simple for Canada, and trade agreements such as NAFTA have presumably made
trading between Canada and the United States even easier, but, the United States
clearly has too much bargaining power over trade between these countries.
Western Centre for Economic Research
October 2006
University of Alberta
Page 11
In order for Canada to create a strong position against the United States, it would
have to consider using resources that the US is dependent on Canada for as a
bargaining tool in their negotiations. For instance, the US is reliant on Canada to
supply them with crude oil and petroleum products.
Table 6: Percentage of US Crude Oil Imports by Nation
2000 (%)
2001 (%)
2002 (%)
2003 (%)
2004 (%)
2005 (%)
Canada
34.06
38.66
33.87
34.44
31.22
30.59
Mexico
14.63
12.13
15.79
14.56
14.04
13.48
Nigeria
5.89
10.59
7.87
9.98
12.42
12.97
Venezuela
11.51
10.03
10.20
8.62
9.03
8.74
Saudi Arabia
9.43
7.30
7.14
7.93
7.54
7.01
Table Data Source: USITC Interactive Trade Analyzer, US Department of Commerce and the US International Trade
Commission
For instance, the United States imports between 30% and 40% of its crude oil and
petroleum from Canada. Canada is by far its largest crude oil and petroleum supplier
(See Table 6). The US therefore has a reliance on Canada for its crude oil supply.
Canada could take advantage of this reliance that the US has on them and use it to
their advantage in negotiating a solution to the softwood lumber dispute. With this
commodity, it would be more difficult for the United States to turn to other nations
to import large quantities of crude oil. Furthermore, crude oil is a necessity in the
United States, and they must be able to rely on a consistent and reliable supply of
this product. It would, therefore, be in the interests of the United States to maintain a
healthy relationship with Canada for the sake of their national crude oil supply.
As stated previously, Mexico is also reliant on the United States as a trading
partner; Mexico sends almost 90% of its exports into the United States, and receives
62% of its imports from the United States. Mexico is very dependent on the United
States as a trading partner because it, too, does not have a diverse group of trading
partners. It is interesting to note from Tables 4 and 5 that, despite the NAFTA
agreement, trade between Canada and Mexico is not high. In fact, Canada only
exports 0.7% of its goods to Mexico and imports 3.8% of its goods from Mexico.
Mexico exports 1.7% of its goods into Canada, and imports 2.4% of its goods from
Canada. Note: Minor discrepancies may exist between reported import and export
values between nations because they are reported by different sources to the WTO.
The impending question is whether Canada and Mexico could join forces in an
attempt to alter the amount of power that the United States has over its NAFTA
trading partners?
University of Alberta
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Western Centre for Economic Research
October 2006
Creating a Strategic Alliance with Mexico
Canada and Mexico could create a strategic alliance based on their oil exports to
the United States as a means of pushing the United States to cooperate with NAFTA
protocol.
Table 7: Combined Crude Oil Exports to the US from Canada and Mexico (Percent)
2000 (%)
2001 (%)
2002 (%)
2003 (%)
2004 (%)
Canada
34.06
38.66
33.87
34.44
31.22
Mexico
14.63
12.13
15.79
14.56
14.04
Total
48.69
50.79
49.66
49.00
45.26
Table Data Source: USITC Interactive Trade Analyzer, US Department of Commerce and the US International Trade
Commission
Canada and Mexico combined account for approximately 45% to 50% of the
crude oil exports into the United States. Because they supply almost half of the
United States oil imports, Canada and Mexico could take advantage of this
dependency by joining forces and using this advantage to pressure the US to
cooperate in trade dispute resolutions such as the softwood lumber dispute.
Could Canada and Mexico strengthen their trading relationships with each other
in order to take some control away from the United States? The NAFTA agreement
has opened up the borders between Canada, Mexico and the United States, however,
trade between these countries tends to focus on the United States as a trading hub for
two spokes, Mexico and Canada.
If Canada and Mexico could divert some of their trade to each other rather than
the United States, they would be less reliant on the United States. In this case, if the
US were to place a tariff on either a Canadian or Mexican export, the impact on
Canada or Mexico would not be as great, especially if that good can easily be traded
into Canada or Mexico rather than the United States. Furthermore, tariff wars would
not be as one sided because Mexico and Canada could work together to balance the
power between all NAFTA nations.
However, one issue will still remain. No matter how trade is organized between
Canada and Mexico, the United States will still have many other trading partners.
They have diversified themselves so that they are not reliant on any one country for
trade. In both exports and imports, no one country accounts for more than 23% of
trade. So, creating a coalition against the United States may backfire on Canada and
Mexico unless they too seek new trade relations outside of the NAFTA nations.
Another barrier to a coalition between Canada and Mexico is their geographic
proximity to one another. If Canada and Mexico were to increase their trade with one
another, they would have to route goods through the United States.
Western Centre for Economic Research
October 2006
University of Alberta
Page 13
Shifting Trade to Other Nations
Another option that Canada could explore would be to redirect some of its
softwood lumber exports to other importing countries. From this perspective Canada
could focus more of its exports to rapidly developing nations such as China. China,
28
with a population of 1.3 billion people, is growing rapidly. Its GDP, imports and
exports have been growing rapidly over the last 10 years (See Table 8). With this
economic growth, a growing middle class population has arisen, as well as a growing
demand for new housing, especially in the urban areas of China. Chinese new
housing starts are currently 10 million in comparison to 2 million in the United
29
States, and this number is expected to approach 30 million by 2010.
Table 8: Growth of Overall GDP, Imports and Exports in China
Annual Percent Change
1995-2004
2003
2004
GDP
8
9
10
Imports
16
25
30
Exports
16
27
26
Table Data Source: World Trade Organization website, Country Profile Database. Retrieved from www.stat.wto.org on
January 31, 2006.
In the past China has not traditionally built infrastructure using a wood
structure. But it would be feasible for them to build with wood because the wood
structure is more resilient to earthquakes, more economical for heating, and more
30
environmentally friendly. There are many benefits that the Chinese would
experience from building with wood rather than concrete and iron. However, China
has suffered from the depletion of its natural forest reserves. In fact, the Chinese
Academy of Forests has recently banned the harvest of Chinese forests. These
circumstances have forced the building industry to switch from wood to concrete
31
and steel building products.
The Chinese have not been advocates of wood structures because they believed
that wood structures were not as safe as concrete and steel structures. Furthermore,
32
China did not have building code regulations for wooden structures. These barriers
had to be dealt with in order for Canadian softwood lumber producers to break into
the Chinese economy. Canada has assisted the Chinese in drafting new building code
regulations for wooden structures in order to open the economy to wood imports
33
from Canada. With their abundance of international travel, many Chinese have
developed an appreciation for wooden infrastructure, and have promoted a positive
28 World Trade Organization website, Country Profile Database. Retrieved from www.stat.wto.org on January 31,
2006.
29 Adam. D., Building Foundations: Wood-frame Construction in China, 2004, Pacific Rim Magazine.
30 Ibid
31 Ibid
32 Ibid
33 Adam. D., Building Foundations: Wood-frame Construction in China, 2004, Pacific Rim Magazine.
University of Alberta
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Western Centre for Economic Research
October 2006
opinion of wood housing throughout China. Thus, the barriers to the export of wood
34
from Canada into China have fallen.
Canada can therefore take advantage of China’s rapid growth by promoting and
selling wood product exports into the Chinese economy. China has vowed to reduce
its greenhouse gas emissions, and using environmentally friendly building practices
will help them to achieve these goals. They are suffering from an annual shortfall in
lumber products, and this shortfall is equivalent to the annual allowable cut in
35
British Columbia. There is, therefore, a gap between the wood supply and demand
in China. This gap could be effectively filled by Canadian lumber producers. While
the softwood lumber disagreement persists between the United States and Canada, it
is important that Canada diverts its producer surplus to growing countries like
China.
Table 9: Softwood Lumber Export Values in Canadian Dollars
Year
China
(BC)
Percent
Change
US (BC)
Percent
Change
China
(AB)
Percent
Change
US (AB)
Percent
Change
1999
29862
-------------
181580119
-------------
0
------------
9028395
------------
2000
70323
135.49
195140443
7.47
0
------------
5950884
-34.09
2001*
168814
140.06
241409476
23.71
0
------------
7931444
33.28
2002
879304
420.87
207599145
-14.01
28413
------------
7751133
-2.27
2003
1188934
35.21
194638931
-6.24
299187
952.99
4960022
-36.01
2004
1314018
10.52
287912665
47.92
731437
144.47
4615683
-6.94
Source: Trade Analyzer: World Trade Database, University of Alberta Library.
* expiration of softwood lumber agreement
Table 10: Softwood Lumber Export Values in Canadian Dollars
Year
China
(ON)
Percent
Change
US (ON)
Percent
Change
China
(QC)
Percent
Change
US (QC)
Percent
Change
1999
0
--------------
3557542
--------------
0
-------------
12619615
--------------
2000
0
--------------
2680306
-24.66
0
-------------
26448344
109.58
2001*
0
--------------
3424573
27.77
21757
-------------
60185861
127.56
2002
0
--------------
4072234
18.91
20290
-6.74
54995611
-8.62
2003
0
--------------
2660530
-34.67
0
-100.00
54962826
-0.06
2004
79611
--------------
17362578
552.60
322427
-------------
74652679
35.82
Source: Trade Analyzer: World Trade Database, University of Alberta Library.
* expiration of softwood lumber agreement
In 2001 the Softwood Lumber Agreement between Canada and the United States
expired. Table 9 shows the relationship between the expiration of the Softwood
Lumber Agreement and the increased exports to China and decreased exports to the
United States from British Columbia. In 2002, exports from BC to China rose by 421%
while exports from BC to the United States declined by 14%. Exports from Alberta to
the US also declined after the expiration of the SLA. Since 2002, Alberta has increased
34 Ibid
35 Ibid
Western Centre for Economic Research
October 2006
University of Alberta
Page 15
its exports into China substantially. 2003 showed rapid growth rates in exports of
lumber from Alberta to China; exports to China grew by almost 1000% (See table 10).
However, in Alberta and British Columbia, the number of softwood lumber exports
to China has been increasing more slowly over recent years, while in British
Columbia softwood lumber exports to the United States have begun to rise again.
The effects of the expiration of the Softwood Lumber Agreement on exports of
lumber from Quebec and Ontario were also present, but trade was not diverted into
China to the extent that it was in Alberta and BC.
The United States market for softwood lumber is amongst the largest in the
world. And its geographic positioning relative to Canada makes it a much easier
market to service than the Chinese markets. It is intuitive to assume that the
transportation costs for shipping wood products to China are higher than those for
shipping to the United States, but this is not always the case. Transportation costs
will be discussed later in this paper. Factors such as this could make it easier for
Canadian firms to ship to the US market. Many companies will, therefore, continue
trying to penetrate the US market to the best of their ability.
Some obstacles to shifting a large quantity of lumber exports from the United
States to China are the Chinese trade barriers and the regulatory system. China is in
the process of opening its economy by lifting its barriers to trade. In the case of
softwood lumber, the Chinese have restructured their building regulations to
promote lumber construction. Over time China will continue to reduce its trade
barriers, and Canada will face more competition from other lumber exporting
countries that are geographically located closer to China’s market. If transportation
costs and shipping time become important determinants for Asian lumber buyers,
they may seek out markets that are more easily accessible. Because China is such a
large market that is experiencing massive levels of growth, many countries see them
as a critical target for lumber exports.
Table 11: Transportation Costs
Shipping Costs per Container to China from Various Countries
To
From
Price
Rail
Shanghai
Edmonton
$1400-$1500 USD
$400 USD
$1000-$1100 USD
Rail to Vancouver
Ship from Vancouver to
China
China
Germany
$1200-$1320 USD
Russia
China
$10-$12/m3
Ship
$450- $540 USD
Trans Siberian
Railway
Sources : Neil Miller; Alberta Spruce Industries and Alberta Forest Product Shippers Association
Shipping costs between Vancouver, BC and Shanghai, China are between $1000
and $1100 USD per container. (Table 11) Shipping lumber from Edmonton to
Shanghai costs between $1400 and $1500 USD per container. This is comparable to
the cost of shipping from Edmonton to Kentucky. Shipping costs for China are not
high which makes China an attractive market for Canadian lumber producers to sell
into. The shipping costs from European countries to China could not be obtained, but
University of Alberta
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Western Centre for Economic Research
October 2006
shipping costs between Germany and China are 20% higher than from Vancouver to
China, so it is likely that other shipping costs between Europe and China will also be
high.
The shipping costs between Russia and China are very low. It only costs between
$10 and $12 per m2 to ship lumber to China from Russia; this equates to $450-$540
USD per container. Shipments from Russia to China are transported by rail across the
Trans-Siberian Railway. The Chinese prefer to buy whole logs from Russia because
they have the ability to process the wood cheaply with their abundance of cheap
36
labor.
Another issue in the Chinese lumber market is that they prefer to purchase lower
quality wood so that they can take advantage of their laborers who can cut out the
37
high quality parts from the cheaper wood. This is a barrier to the Chinese lumber
market that must be considered as Canada strategically decides how to deal with the
softwood lumber dispute. The Chinese market may be difficult for Canadian forest
companies to compete in based on price. Canadian lumber producers have to pay
higher prices for labor and other productive inputs than other lumber export nations
in Russia and Asia.
Table 12: Currency Values
Currency Value
Euro- Finland, Germany
1.2100
US Dollar
1.0000
Canadian Dollar
0.8698
New Zealand Dollar
0.6086
Brazilian Real
0.4653
Malaysian Ringgit
0.2726
Myanmar Kyat
0.1562
Swedish Krona
0.1293
Hong Kong Dollar
0.1289
Chinese Renminbi
0.1248
Mexican Peso
0.0897
Russian Ruble
0.0361
Thai Baht
0.0262
Chilean Peso
0.00192
Mongolian Tugrik
0.000845
Indonesian Rupiah
0.0001
Sources: www.yahoo.ca, finance section
Another competitive barrier to the Chinese lumber market is the value of the
Canadian dollar. (Table 12) Because the Canadian dollar is valued much higher than
the currencies of its competing nations, the Chinese are less likely to buy from the
Canadian market. The Chinese market seeks low quality, cheap lumber that can be
36 Neil Miller; Alberta Spruce Industries and Alberta Forest Product Shippers Association, collected on April 11,
2006.
37 Ibid
Western Centre for Economic Research
October 2006
University of Alberta
Page 17
internally processed at a reduced cost. Countries like Russia have a competitive
advantage in the Chinese market because the value of Chinese currency is so low in
comparison to the value of the Canadian and American dollars. Importers prefer to
buy products from countries with a poorly valued currency because it is cheaper for
them, specifically when their currency has a stronger value than the currency of their
trading partner.
Figure 2: Lumber Export Partners in China
Exports of Lumber into China
800000
700000
600000
Canada
USA
Brazil
Myanmar
Lumber Exports
('000 USD)
500000
Hong Kong
Indonesia
Chile
400000
Mongolia
New Zealand
Russia
300000
Finland
Sweden
200000
100000
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Sources: All countries except Russia; Trade Analyzer: World Trade Database, University of Alberta Library.
Russia; www.forest-trends.org
Russia is a strong competitor for other nations who are exporting lumber into
China. Figure 2 shows the extent of Russia’s presence as a lumber exporter in the
Chinese market. The factors that contribute to Russia’s competitive advantage are its
geographical location with respect to China, its low transportation costs for shipping
lumber into China, and its poorly valued currency which is worth less than the
Chinese Renminbi. Data for all countries except Russia could not be found for 2002
and 2003. Data for Russia could not be found for the time period prior to 1998.
If Canada and the United States cannot reach an agreement over the softwood
lumber dispute, the Canadian industry may have to settle for an alternative to a
negotiated agreement. It would be in Canada’s best interest to find new markets to
sell its excess capacity of lumber to. It would be inefficient for Canadian lumber
producers to sit on their excess capacity rather than sell it into another market, but,
finding new markets to enter could be challenging. Countries such as China show
great market growth potential, but also pose barriers to entry that can be difficult for
Canadian lumber producers to overcome.
University of Alberta
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Western Centre for Economic Research
October 2006
Cooperation with the United States
Finally, Canada and the United States could cooperate with each other so that
both countries could benefit from softwood lumber trade within North America. If
Canada and the United States could reach a binding agreement to implement and
enforce a joint strategy both parties would consequently be in a better position than
the one that they are in now.
Past research argues that tariffs lead to adverse outcomes for all countries that
38
are involved with trade amongst one another . But trade wars can also result in
some participants being better off than they would be with cooperation. This is
increasingly common when one country is much more powerful than its trading
39
partners. Currently and historically, the United States has been much more
economically and politically powerful than countries such as Canada and Mexico, its
trading partners. It may be plausible to say that one reason why trade disputes have
been common between NAFTA countries is because of the imbalance in power
between participating nations. The United States, because of its size, economic power
and diversity in trading partners, can actually improve its own position by
participating in trade disputes that hurt its trading partners economically.
Table 13: Payoff Matrix to the Prisoner's Dilemma
Canada
US
(US, CAN)
Cooperate
Do not Cooperate
Cooperate
No Dispute or Retaliation leads to
economic success for both parties
(6, 5)
Dispute and Retaliation leads to
economic injuries for the US and
economic success for Canada
(2, 7)
Do not Cooperate
Dispute and Retaliation leads to
economic injuries for Canada and
economic success for the US
(10, 0)
Dispute and Retaliation leads to
economic injuries for both parties
(3, 1)
Table 13 was developed using information from Mansfield and Yohe (2004) and from the assistance of Terry Daniel,
University of Alberta. This matrix, by being simplified to a world of two players, is a stylized depiction of the real world.
Table 13 describes the payoff to the prisoner’s dilemma. When Canada and the
US negotiate with one another to solve trade issues such as the softwood lumber
dispute, both parties have an incentive not to cooperate with one another. This often
leads to a situation where both parties choose not to cooperate and both sides of the
dispute suffer from economic injuries. From this position, neither party has an
incentive to cooperate, assuming the opposite party remains at status quo. If Canada
chooses to cooperate and the US does not, Canada will receive a zero payoff, and if
the US decides to cooperate and Canada does not, the US receives a payoff of 2.
Therefore, the incentives of the prisoner’s dilemma do not lead to the cooperation of
both parties. This is why an international governing body such as the WTO is
necessary to urge individual nations toward an agreement that will make both
38 Scitovsky, T., 1942. A reconsideration of the theory of tariffs. Review of Economic Studies, 9, 89-110.
39 Johnson, H.G., 1954. Optimum tariffs and retaliation. Review of Economic Studies, 21, 142-153.
Western Centre for Economic Research
October 2006
University of Alberta
Page 19
parties better off as a whole. The combined payoff when both parties cooperate is
greater than the combined payoff of any other solution.
Both parties as a whole would benefit from cooperation. Cooperation would be
beneficial to those Canadian producers that have been injured by the dispute and to
those consumers in the United States who are paying inflated prices because of the
tariffs that their government has placed on Canadian lumber imports. Furthermore,
the efficient industries in the US that are currently being affected by import tariffs,
such as the home building industry, would have less pressure placed on their
resources. The US government’s attempts to support inefficient industries such as the
US softwood lumber industry, inevitably cause more harm to employment in other
successful industries that depend on access to reasonably priced, high quality
lumber.
If the United States is benefiting from the implementation of tariffs on Canadian
lumber, they may have an incentive to cheat away from co-operating with Canada.
Because they are so economically powerful it is difficult to stop them from using
their power to their own advantage. Politics are important to consider as well since
the US softwood lumber industry is old and many of its participants have the
political power to lobby the government to protect their industry. Protectionism may
not be beneficial for a country’s economy, but there are specific economic and
political incentives that drive it to exist in the modern economy of trade.
Figure 3: Total Factor Productivity Growth in the Lumber Industry
Source: Figure 3 was taken from Forest Products Association of Canada, Presentation to CCFM, September 15, 2004.
Realizing the Potential: Canada’s Forest Products Industry.
University of Alberta
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Western Centre for Economic Research
October 2006
Figure 3 shows the total factor productivity in the lumber industries of Finland,
Canada and the United States. Since 1991, productivity in the lumber industries of
Canada and Finland have been increasing, however, the United States has remained
at level productivity. Canada and Finland are more productive at harvesting lumber,
and may, therefore, be able to charge lower prices in the US than American lumber
producers. Canada has had a competitive advantage over the US in productivity
within the lumber industry.
Cooperation would lead to economic efficiencies in the United States and
Canada. Each country would be able to focus its energy and resources towards
industries where it holds a comparative advantage rather than supporting so called
“loser” industries for the sake of saving jobs. Many more jobs are lost in efficient
industries than in inefficient industries when government protection is implemented
in favor of inefficient industries.
How Can Canada and the United States Cooperate?
The United States has indicated that its main problem with the Canadian lumber
sector is the structure of the stumpage fees that the provincial governments charge
Canadian lumber producers for their use of public forests. The Canadian government
could revise its stumpage fee structure. This would not only eliminate the United
States issue with Canada’s subsidization of the lumber industry, but it would
eliminate the market distortions that have been caused by the stumpage fee structure
40
in Canada.
Canada should not be at the mercy of the United States; it does have negotiating
power that it can use to encourage the US to cooperate in the negotiation. For
example, the United States is dependent on Canada for its oil supply, and
dependencies such as these should not go unmentioned. Furthermore, it would be in
the best interest of both governments to understand how decisions are made in each
country. Understanding this process will make negotiations more efficient for all
parties involved.
Table 14: US Imports of Crude Petroleum and Natural Gas for Consumption
Exporting
Nation Rank
Exporting
Nation
Export Quantity
2002
(Millions $)
Export Quantity
2003
(Millions $)
Export Quantity
2004
(Millions $)
Export Quantity
2005
(Millions $)
1
Canada
23
32
38
51
2
Mexico
10
14
17
22
3
Nigeria
5
9
15
22
5
Venezuela
7
8
11
15
4
Saudi Arabia
5
7
9
12
Table Data Source: USITC Interactive Trade Analyzer, US Department of Commerce and the US International Trade
Commission
Table 14 contains import data for crude petroleum into the United States. The top
five nations that export crude petroleum into the US are Canada, Mexico, Nigeria,
Venezuela and Saudi Arabia. Canada is clearly the most important exporter of crude
40 Mintz, J., A Beautiful Mind Game, October 10, 2005, Canadian Business Magazine. 78(20), 23.
Western Centre for Economic Research
October 2006
University of Alberta
Page 21
petroleum for the United States. It is very important for Canada to consider this
dependency that the US has on Canada during softwood lumber negotiations.
As discussed previously, Canada and the United States deal with stumpage fees
in very different manners. In Canada the government charges a stumpage fee for
trees that are cut from public lands, whereas in the United States, timber prices are
41
auctioned off at market prices. Both Canada and the US have their own methods
for charging companies that harvest wood products from public lands, but no
consensus has been reached on which method should be used.
Canada and the United States could collaborate and determine what a fair
stumpage fee would be for the North American lumber industry. They could
compromise by creating a standard North American stumpage fee, or by auctioning
all lumber off at market prices. All lumber producers would then be on a level
playing field with respect to subsidization and could compete on the basis of their
own efficiencies. It is important that the stumpage fees accurately reflect their
purpose.
Canada could also eliminate the protectionist measures that it places on many of
its agricultural products. Either of these options would demonstrate to the United
42
States that Canada is interested in the growth of free trade.
The United States could cooperate with Canada by removing its protectionist
measures from softwood lumber and repaying the excess tariffs that Canadian
lumber companies have been charged over the course of this dispute.
These are effective ways in which Canada and the United States could attempt to
work together in order to achieve a more accessible market for softwood lumber
exports.
Cooperation between Canada and the United States would lead to a more
competitive softwood lumber industry. Canadian producers would benefit because
they would not be restricted by how much lumber they can ship into the United
States in one year, and they would be free from paying unnecessary tariffs on their
lumber exports. The US lumber market would be more open to Canadian lumber
imports and US consumers would therefore have greater access to the housing
market because the price of high quality lumber for building would decline. The loss
in the consumer surplus would decline as more consumers become able to purchase
lumber products. As consumers gain buying power, more money would be put into
the housing market in the United States and jobs would be gained especially in the
housing tradesman market.
Canada may still be able to sell lumber for lower prices if their producers are
indeed more efficient lumber producers than their American counterparts. In this
case, the United States lumber industry will still suffer from price competition
through traded goods. With the ever expanding world of trade, governments have to
choose which industries are most efficient and focus on them. It is no longer feasible
for governments to protect industries that are too inefficient to compete in the
growing world market. Markets will then be free of distortions and the actual market
winners will be chosen.
41 CBC News Online, March 20, 2006. Softwood Lumber Dispute, Retrieved from http://www.cbc.ca/news on
April 1, 2006.
42 Mintz, J., A Beautiful Mind Game, October 10, 2005, Canadian Business Magazine. 78(20), 23.
University of Alberta
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Western Centre for Economic Research
October 2006
One main function of international trade is to promote world economic growth
by focusing on the production of goods in which a specific country has a
comparative advantage. By specializing in the production of a bundle of goods that
one is efficient at producing, greater well-being will be seen throughout the trading
43
world.
Role of an Impartial Governing Body
The WTO is supposed to act as an impartial governing body over trade between
member countries. However, because the WTO is highly influenced by the United
States, it is difficult for them to govern over the decisions of the US Government. A
more impartial governing body is necessary in order to help influence both parties to
a trade dispute to be cooperative. The Prisoners Dilemma will always create
incentives for the disputing parties to move away from cooperation.
Conclusion
In summary, the best option for all parties involved in the softwood lumber
dispute would be to cooperate with one another in creating a free market economy
for lumber trade. When strategic analysis is used to assess Canada’s options in
pursuing the softwood lumber dispute, we find that tariffs and retaliation have a
very negative effect on the economies of all parties involved. Tariffs lead to a decline
in the consumer surplus of the domestic nation, as well as a pronounced increase in
the producer surplus in the foreign nation. Although the government of the domestic
counterpart receives revenues from importers, it is clear that the overall domestic
economy suffers from a deadweight loss that must be supported by the government.
Retaliation is clearly not beneficial to US-Canada trade relations; it is important that
Canada maintains a healthy trading relationship with the United States since they are
dependent on them as a trading partner.
Although Canada could create an alliance with Mexico in an attempt to reduce
the power that the US has over the NAFTA agreement, this arrangement would
unlikely be successful. Mexico and Canada together would still not be powerful
enough against their American counterparts to force them to engage in friendlier
trade practices.
Canada could look to other markets to make up for its loss of trade with the
United States. Canada should look for a greater variety in trading partners because
with their current trading relationships they are too dependent on the United States
as a trading partner. They need to diversify in order to reduce this dependence.
However, lumber is a large, heavy good that may be difficult to export to other
centers around the world. Canada is geographically located too far from the booming
Asian markets, so as countries such as China open themselves up to world trade
Canada will face competition from other lumber producers that are better located
geographically and cheaper to buy from; many lumber exporters see China as a key
market to grow into in the coming years. Furthermore, this is only a temporary
43 Miller, R.L., Abbott, B., Fefferman, S., Kessler, R.K., Sulyma, T., 2002. Economics Today: The Micro View 2nd
Canadian Edition, Pearson Education Canada Inc; Toronto, ON.
Western Centre for Economic Research
October 2006
University of Alberta
Page 23
solution to the Softwood Lumber Dispute. Because the American lumber market is so
convenient for Canada, and so large in comparison to other lumber import markets,
it would be in Canada’s best interest not to dismiss this market.
In conclusion, Canada and the United States sould work together to reach a
cooperative agreement that would open up the North American market for lumber.
The United States is the largest market for lumber in the world, and it has an easy
access geographical location for the Canadian lumber exporters. Consequently, both
Canadian lumber producers and United States builders and consumers would
benefit from a cooperative agreement between Canada and the United States.
Acknowledgements
I would like to recognize the Western Center for Economic Research at the
University of Alberta for funding this research project as a Canadian National
Railways Fellowship.
I would also like to thank Terry Daniel, Helmut Mach, Neil Miller and my
supervisor Barry Scholnick for their assistance with this project.
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