Understanding Softwood Lumber: Another View

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[Nothing very surprising here. The fundamental issue that clouds Canada-US relations on this issue is the different way in which lumber is priced (by regulation in Canada vs free markets in the US). But Americans tend to get most worked up about Canadian lumber when the value of the Canadian dollar drops and lumber demand is simultaneously rising. *RON*]

As we move into the latest iteration of the ongoing softwood lumber dispute with the United States, I thought it might be useful to look at some data to see if any additional insight can be gained. The conventional wisdom on the story is that the disagreements have been over the way the two countries treat their respective lumber industries. In Canada the provincial governments mainly own the resource and the harvesting price or stumpage fees are set by administrative regulation. In the US the resource is owned privately with harvest prices set by markets. The United States claims that the stumpage fees in Canada are set too low and constitute a subsidy – hence the source of the dispute.

Of course, this difference in ownership of the natural resource has been the case since 1867 and there have been disputes over timber between Canada and the United States in our distant economic past. However, the post World War II era was mainly devoid of these softwood lumber disputes until the early 1980s. Since then, there have been four major dispute periods.

Very briefly: First, there was 1982-1983, which did not result in the implementation of tariffs after a U.S. Department of Commerce investigation. Then soon after came 1986-1991 which saw the U.S. Department of Commerce conclude that Canada was subsidizing its lumber industry and where Canada agreed to collect a 15-per cent tax on lumber exports. This was quickly followed by 1992 to 1994 (when the U.S. imposed tariffs after Canada terminated the previous agreement and ultimately was resolved by the 1996 Softwood lumber agreement). Finally, 2001-2006 when the U.S. imposed duties again on Canadian exports and ended with the 2006 Softwood Lumber agreement which lasted for nine years. Then of course there is now the current dispute over the last few months of 2017, which has seen tariffs imposed by the US.

What explains the flare-ups? The accompanying figure provides data on two key variables – the price of softwood lumber and the Canada-U.S. exchange rate – and juxtaposes these eras of dispute. The softwood lumber price is a monthly U.S. softwood lumber price index (with 1982=100) that comes from the Federal Reserve Economic Data (https://fred.stlouisfed.org; Series WPU0811). The monthly Canada-U.S. exchange rate is from CANSIM (v37426 Canada; United States dollar, noon spot rate, average). Looking at the two series juxtaposed with the highlighted dispute periods is not a terribly robust method of analysis but here goes anyway.

While the fundamental underlying source of the dispute may be the difference between the way which the two countries manage their timber resource, ultimately the ignition to the dispute is provided by a combination of market conditions and the exchange rate (given that the primary export market for the Canadian lumber industry is the United States).

The 1981-1982 softwood lumber dispute came after a period of rising U.S. lumber prices, a steep recession in the United States and a period of Canadian dollar depreciation (relative to the U.S. dollar). The follow-up period of dispute saw some appreciation of the Canadian dollar (though not back to the level of the mid 1970s) but it was combined with steep increases in U.S. prices and economic recovery making the lumber market quite lucrative for U.S. producers and providing an incentive to restrict Canadian competition. The third period of dispute seems to have been ignited by another major depreciation of the Canadian dollar combined with lumber prices that remained high – though they do seem to fluctuate. Finally, the current dispute which seems to come at the tail end of another period of softwood lumber price increases and a depreciating Canadian dollar.

My point is while the fundamental source of the dispute may be the differences in the management of the timber resource and the claim the Canadian timber sector is subsidized by low stumpage fees, it seems to matter mainly when the U.S. industry is more sensitive to Canadian competition. If the dollar is depreciating and the U.S. industry is losing out to Canadian competitors as market prices are rising, then the heat of the dispute rises. If the Canadian dollar is appreciating, whether with rising or flat lumber prices, the appreciation of the dollar serves as a natural “tariff” and the heat of the dispute diminishes. Note the period in the chart from 1960 to 1980 – the value of the Canadian dollar stays relatively stable, softwood lumber prices rise but there is not a softwood lumber dispute during this period.

I think a factor in the most recent escalation of the softwood lumber dispute is the depreciation of the Canadian dollar. While currency depreciation can serve as a form of economic stimulus the recent evidence for Canada suggests it has had mixed effects. Over the last few years, a low Canadian dollar has not sparked a resurgence of Canada’s manufacturing sector. It has raised the cost to business who want to invest in new capital and technology (given that a lot of technology and equipment is imported from the U.S.) hurting our capital formation and long-term productivity and it now seems to have been a factor in sparking a new round of softwood lumber disputes to a Canadian forestry sector that was finally beginning to put the forest sector crisis of the early 21st century behind it.


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