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Even though Canada is the UnitedStates’ largest trading partner and mostgoods flow freely across the border, oneU.S. industry—softwood lumber—contin-ues to lobby successfully for the impositionof trade barriers against our neighbor tothe north. Although there is a long historyof trade barriers in this industry, the mostrecent manifestation is the SoftwoodLumber Agreement, which was signed in1996. The SLA imposes special fees onany softwood lumber imports in excess of 14.7 billion board feet. The SLA is set toexpire in April 2001, and the U.S. andCanadian governments are consideringoptions that might replace the SLA.The best policy course is to simply letthe SLA expire and not impose any newbarriers. We calculate that trade restrictionsadd an estimated $50 to $80 per thousandboard feet to the price of lumber, whichdrives up costs and shrinks profits for lum-ber users. The resulting addition of $800 to$1,300 to the cost of a new home pricessome 300,000 families out of the housingmarket, denying them the dream of homeownership.Protectionist trade barriers in the soft-wood lumber industry impose great costson businesses and consumers here in theUnited States in order to enrich a few lum-ber producers. To put employment figuresin perspective, it is noteworthy that work-ers in the major lumber-using sectors out-number logging and sawmill workers bybetter than 25 to 1.Advocates of protectionism claim thattrade barriers are necessary to offset unfairsubsidies enjoyed by Canadian lumber pro-ducers, but such claims do not withstandscrutiny. Neither do arguments that freetrade in lumber would harm the environ-ment. It is time for the United States to stoplining the pockets of a few producers here atthe expense of U.S. homebuilders and fami-lies who dream of owning their own homes.
 Nailing the Homeowner 
The Economic Impact of Trade Protection of theSoftwood Lumber Industry
by Brink Lindsey, Mark A. Groombridge, and Prakash Loungani
July 6, 2000No. 11
 Brink Lindsey and Mark A. Groombridge are, respectively, director of and research fellow at theCato Institute’s Center for Trade Policy Studies. Prakash Loungani is an economist with the International Monetary Fund. The views expressed in this paper are those of the authors and donot necessarily represent those of the IMF or IMF policy.
Executive Summary
 
Introduction
The long-running and rancorous battle oversoftwood lumber stands out as the UnitedStates’ largest single trade dispute with itslargest trade partner. Specifically, lumber tradebetween Canada and the United States hasbeen dogged for years by U.S. charges thatCanadian lumber producers benefit fromunfair government subsidies. To put the stakesof this dispute in some perspective, the value of U.S. softwood lumber imports from Canadanearly matches the value of U.S. carbon steelimports from the entire world.
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Mechanisms to “resolve” the dispute havevaried, but they typically have entailed theerection (or threat) of trade barriers under theU.S. countervailing duty law. Most recently,Canada and the United States signed in May1996 the Softwood Lumber Agreement,which restricts imports of lumber from Canadaby subjecting amounts in excess of agreed lim-its to special charges. The SLA is set to expirein April 2001, however, and both the Canadianand U.S. governments are expressing dissatis-faction with the agreement and signaling adesire for change.Through all the iterations of this dispute,the debate has been framed in this country as aconflict between American lumber companiesand Canadian lumber companies over whethera “level playing field” exists. Defining the issuein that way overlooks an important part of theequation—the other U.S. interests with a stakein this dispute. The long and sterile controver-sy over alleged Canadian subsidies fails to takeinto account the interests of American lumberusers in the lumber-dealing, homebuilding,and home-furnishings industries. It also over-looks the interests of American buyers of newhomes and home furnishings. Trade restric-tions on Canadian lumber injure importantAmerican interests and have done so for near-ly 15 years.At the center of the controversy have beenquestions about the pricing of lumber onCanadian Crown lands (timberlands owned byCanada’s federal and provincial governments).From a free-market perspective, that system isclearly imperfect. But the U.S. system is notperfect either. In the end, the claim thatCanadian producers enjoy an unfair advantageover their American rivals is not persuasive,and certainly is not compelling enough to jus-tify saddling American lumber users with costsartificially inflated by trade restrictions.Accordingly, the SLA should be allowed toexpire in 2001, and new trade restrictionsshould be avoided.
A History of TradeRestrictions
Although the dispute over Canadian lum-ber imports dates back many decades, it hasheated up significantly since 1982. Since thattime, three countervailing duty (CVD) caseshave been initiated by the U.S. Department of Commerce and the International TradeCommission. Specifically, Commerce and theITC investigated whether the Canadian feder-al and provincial governments were injuringU.S. softwood lumber producers by subsidizingCanadian firms. The most important allegedsubsidy involved “stumpage” fees, the pricestimber users pay to the government to harvesttrees from Crown lands. The claim was thatCanadian lumber producers benefit frombelow-market stumpage rates.In the first CVD investigation (known asLumber I) in 1983, Commerce ruled thatCanada’s stumpage system did not confer asubsidy to a specific industry or group of indus-tries because it was used by a wide range of diverse businesses—including the lumber andwood products industries; the veneer, plywood,and building board industries; the pulp andpaper industries; and the furniture manufactur-ing industries.
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Commerce also concluded thatthe system constituted a “reasonable methodfor establishing stumpage prices” and thus didnot provide goods at preferential rates underthe standards of the U.S. law. In that regard,Commerce found that “a comparison of Canadian stumpage prices with U.S. priceswould be arbitrary and capricious in view of 
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The long andsterile controversyover allegedCanadian subsidiesfails to take intoaccount the inter-ests of Americanlumber users.
 
the wide differences between species composi-tion; size, quality, and density of timber; terrainand accessibility of the standing timberthroughout the United States and Canada.”
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Nevertheless, the review of available datashowed that “Canadian prices for standingtimber do not vary significantly from U.S.prices. Indeed, in some cases the Canadianprice may be higher.”
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That decision byCommerce was upheld on appeal by the U.S.Court of International Trade.Three years later, Commerce reversed itself ina second CVD investigation (known as LumberII) and found that Canadian stumpage rates con-ferred a 15 percent subsidy. The CommerceDepartment’s about-face reflected, not a changein practices by the Canadian government, but achange in the way that Commerce analyzed theissue.
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The investigation and appeals were ulti-mately terminated, however, when Canada andthe United States entered into a memorandum of understanding (MOU). The 1986 MOU stipu-lated that a 15 percent export charge would beimposed on all Canadian softwood lumberexports to the United States. Canadian provinces(notably British Columbia) subsequently imple-mented changes to their stumpage systems andtransferred certain costs to the softwood lumberindustry; the U.S. government responded byagreeing to reduced export charges.In light of changing practices, Canada uni-laterally terminated the MOU in 1991. TheU.S. government responded immediately byimposing interim duties on Canadian lumberunder section 301 of the Trade Act of 1974,and then initiated a new CVD investigation(Lumber III). This time, the CommerceDepartment found a smaller stumpage subsidyof 2.91 percent on lumber from BritishColumbia; in addition, though, it concludedthat restrictions on exports of unprocessed logsconstituted a subsidy of 3.6 percent.Lumber III was the first of the CVD cases tooccur after the signing of the U.S.-Canada FreeTrade Agreement. Canada appealed both theCommerce and the ITC determinations underthe binational dispute settlement procedures of the FTA. What followed was an extremely con-tentious process as binational panels repeatedlyoverturned both the Commerce and the ITCfindings while the two agencies repeatedlyupheld their original determinations. Ultimately,the United States agreed to refund more than$800 million in duties collected, and both coun-tries agreed to enter into a “dialogue” on futurelumber negotiations.
The Softwood LumberAgreement
The victory in Lumber III took its toll onthe Canadian softwood lumber industry, whichpaid out millions in legal fees fighting U.S.claims of subsidization. As one formerCanadian trade negotiator remarked, “Theprospect of fighting trade cases against the U.S.was considered too costly and fraught with risk,given the U.S. system’s arbitrary and capriciousnature.”
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Accordingly, when threats of a newCVD case surfaced in 1995 and 1996, Canadagave in to protectionist pressures.The compromise solution was the SLA, setto run from April 1, 1996, to March 31, 2001.Specifically, the SLA sets export quotas forcompanies operating in British Columbia,Alberta, Ontario, and Quebec. Those producersare permitted to ship 14.7 billion board feet of lumber a year to the United States duty-free.The next 650 million board feet are subject to afee of $50/thousand board feet; all greater quan-tities are subject to a charge of $100/thousandboard feet. Although each company’s quota isnot public knowledge, the allocation of the quo-tas among the four provinces was based on his-torical shipments. Since Canadian coastal pro-ducers sent 48 percent of their wood to Japanwhen the SLA was signed, interior provinceshold over 75 percent of the quota because theywere concentrating on U.S. markets.
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As part of the agreement, the United Statesagreed not to pursue trade remedy actionsunder the CVD or other trade laws. Severaladditional disputes, however, have arisen. U.S.customs officials reclassified three processedproducts (pre-drilled studs, rougher-headerlumber, and notched studs) so that they fallunder the scope of the SLA. Canada respond-
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The SLA setsexport quotas forcompanies operat-ing in BritishColumbia, Alberta,Ontario, andQuebec.
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