US & Canadaselected

Has the US started a lumber trade war with

Canada?
 26 April 2017
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Image copyrightGETTY IMAGESImage captionSoftwood lumber is used mainly in homebuilding

The United States is slapping hefty new tariffs on the import of Canadian softwood lumber.

The US Commerce Department says that Canada is improperly subsidising its exports of the forestry
product.

This is just the latest volley in the long-running lumber trade dispute between the two countries.

It also comes during a sensitive time in US-Canada trade relations, with North American Free Trade
Agreement (Nafta) talks on the horizon.
US President Donald Trump has been sending Canada mixed messages on trade, initially offering
assurances that Nafta will only need "tweaks" but recently singling out Canada's softwood lumber
and dairy industries for criticism.

As US Commerce Secretary Wilbur Ross said in a statement: "It has been a bad week for US-Canada trade
relations."

Canada is "generally a good neighbour but that doesn't mean they don't have to play by the rules," he later
said.

Canadian Prime Minister Justin Trudeau says his job is to stick up for Canada's interests.

Here are five things to know about the Canada-US softwood lumber spat.

What are the most recent developments?

The US has claimed for decades that Canada is unfairly subsidising its lumber industry by charging
minimal fees to log public lands.

On Monday, the US Commerce Department imposed an overall 20% tariff on Canadian softwood lumber.
In this "preliminary determination", five exporters each face specific countervailing duties, which are
meant to level the playing field between domestic producers and government-subsidised foreign producers
of a product, ranging from 3.2% to 24.12%.

The US Commerce Department valued softwood lumber imports from Canada at US$5.6bn
(C$7.6bn/£4.3bn) in 2016.
 Trump's trade agenda: Just what are his priorities?

The duties will amount to about US$1bn, according to Secretary Ross.

This comes after no breakthrough was reached in recent talks in the decades-long dispute.
Image captionBritish Columbia is Canada's biggest logging province

A safe fight to pick - John Mervin, BBC Business, New

York
President Trump is finding it difficult to turn campaign rhetoric into government action in in many arenas,
but particularly so in overseas trade.

He won the presidency, in part, with a strong and simple message of "winning" trade deals and being
"tough" with the US's biggest trading partners. In the real world, that turns out to be a risky approach.

The president has notably declined to follow up on any of his harsh rhetoric about China, for example.
Nevertheless he needs some way of showing how he can be tough. A dust up with Canada about lumber is
probably a safe fight to pick. The lumber business is worth a fraction of the overall trade with Canada and
set against so much shared history and thousands of miles of border, it's hardly likely to undermine US-
Canadian relations on its own.
However it doesn't auger well for a smooth renegotiation of the North America Free Trade Agreement if
that's really what President Trump wants.

What is the response?

Mr Trudeau spoke on Tuesday evening with Mr Trump and said afterwards that Canada would "vigorously
defend" its softwood lumber industry.

Natural Resources Minister Jim Carr and Foreign Affairs Minister Chrystia Freeland said in a joint
statement that Canada "disagrees strongly" with what they called "an unfair and punitive duty".

Mr Trudeau said on Tuesday that "you cannot thicken this border without hurting people on both sides of
it".

Susan Yurkovich, president of the British Columbia Lumber Trade Council, said in a statement that "these
duties are unwarranted, and this determination is completely without merit".
 Trump promises 'aggressive' action on trade to protect US

The province is the the largest Canadian exporter of softwood lumber to the US.

But the decision was cheered by the US Lumber Coalition, an alliance of American lumber producers
formed in 1985 to fight what it calls the "devastating effect of Canada's lumber subsidies" on their
industry.

Meanwhile, the US National Association of Home Builders denounced the decision as "short-sighted" and
warned it would increase the cost of housing in the US. Secretary Ross said it will only have a small
impact.

Softwood lumber products, like pine, fir and spruce, are mainly used in the construction of single family
houses.
Image captionIn 2002, former US President George W. Bush (R) and former Canadian Prime Minister
Jean Chretien also dealt with the softwood lumber spat

What is the backstory?

Minister Jim Carr quipped on Tuesday that lumber disputes have been "the most significant trade irritant
between the US and Canada since Confederation" 150 years ago.

This specific dispute, however, dates back over 30 years to the early 1980s, when a group of US lumber
producers first called for countervailing duties on Canadian softwood.

As a result of a series of disputes in the intervening years, the first US-Canada Softwood Lumber
Agreement - a five year deal - was signed in 1996.
 Trump's weapon in trade war

Soon after that deal expired, the US lumber industry petitioned Washington to impose duties on softwood
lumber imports.

In 2002, the US imposed those tariffs.

In 2006, Canada and the US reached a second Softwood Lumber Agreement for a seven-year term, under
which the US scrapped the duties and Canada imposed taxes and quantitative restriction on lumber exports

That was extended until 2015, and the US government and industry agreed to not undertake any new
countervailing or antidumping duty investigations for a year - that deal expired last October.

In November, the US lumber industry filed antidumping and countervailing duty cases under American
trade laws, launching the fifth round in the lumber row.

What is the impact?

Both countries will feel a shock, with the US comprising almost 70% of Canada's softwood market.

There are about 600 mills across Canada producing softwood lumber and over 170 communities get 20%
or more of direct income from that industry.

Minister Carr noted there were lost job and closed mills the last time the US imposed tariffs, and Ottawa is
preparing for "tough times".

In the US, the renovation and construction industries are expected to feel the impact.

One-third of lumber used in the US last year was imported and the bulk - over 95% according to the US
National Association of Home Builders - was Canadian.

The group estimates the recent 22% jump in the cost of softwood lumber in the US, caused by recent
uncertainty around the product, has added almost US$3,600 to the price of a new home.

What's next?
Canada says it is interested in a "good faith resolution" in this dispute but will defend its interests including
through litigation, though that was not immediately on the table.

Minister Carr noted Canada has prevailed in previous rounds of litigation "and we will do so again" but
also said he believes that the trade relationship is so consequential for both countries that "we will work
through this".

Canada is also seeking to open new markets abroad, including in China.

In the US, a preliminary antidumping ruling is scheduled for 23 June, looking at whether Canadian lumber
has been dumped in the US market. Dumping occurs when a company exports its product at a lower price
than it charges domestically.

The US Department of Commerce is also expected to announce its final duty rates by late 2017.
 The US and Canada have been trading amongst each other for more than 150 years.
However, the trade disputes on Canadian softwood lumber has been in motion for more than
30 years. The US Lumber Coalition, which was formed in 1985 were the reason to start the
dispute as the Canadian- subsidized lumber imports were damaging to their industry.
Therefore, the Coalition requested the US government to impose a tariff on lumber imports.
A tariff is defined as “a tax that is charged on imported goods”1 In-order to avoid future trade
disagreements, a five-year agreement was signed in 1996 between both countries. In 2002,
after the agreement ended, the US imposed tariffs on Lumber imports. In 2006, the US
cancelled the imposed tariff. And until October 2016, the US government agreed not to
undertake any measures to investigate dumping. Dumping is “the selling by a country of
large quantities of a commodity, at a price lower than its production cost, in another country”2
By April 2017, and as a response to the antidumping cases filed by the Lumber Coalition, the
US imposed a 20% tariff on Canadian softwood lumber. Figure 3.1 illustrates the imposition
of a tariff on the softwood lumber market.

Price of softwood lumber ($)

S (Domestic)

Pe

PW+T S (World) + tariff (20%)

PW S (World)
) D

Quantity of softwood lumber ()

As shown in figure 3.1, before the imposition of the tariff, 0Q2 – of lumber was
consumed at the world price PW. Domestic lumber producers were producing at 0Q1 and
Canadian lumber imports were at Q1Q2. After imposing the 20% tariff, the world supply
shifts up by the amount of tariff (20%) to Sworld +tariff (20%). As a result, a new market price is

1
Blink, J., & Dorton, I. (2012).
2
Blink, J., & Dorton, I. (2012).
established at PW+T. An increase in price leads to a fall in total quantity demanded to 0Q2.
Consequently, domestic production increases to 0Q3 and foreign production falls to Q3Q4.
Domestic (US) lumber revenues increase from g to g+a+b+c+h. Foreign (Canadian) revenues
falls, they receive PW+T but are forced to pay a tariff for US government. Therefore, they
receive only i+j instead of h+i+j+k. The US government now receives a tariff revenue of d+e.
However, there are two further results. Since total quantity demanded fell to Q4, Q4Q2 is
now not demanded. This is considered as a dead- weight loss of welfare because of the loss of
consumer surplus, which is represented by k. Consumer surplus is “extra satisfaction gained
by consumers from paying a price that is lower than that which they are prepared to pay”3
Another implication is the inefficiency, represented by c. this is because after the imposition
of the tariff, inefficient domestic (US) producers are now producing at Q1Q3 and taking h+c
as a revenue. In-contrast with more efficient Canadian producers who were willing to
produce same amount of lumber and take only h as a revenue.

The reason behind imposing the tariff, as mentioned earlier was to protect domestic
lumber industries from cheap government-subsidized Canadian imports which threatened
domestic industries competitiveness, and to take antidumping measures. as a result, both
countries will be affected. According to the article, over 170 Canadian communities receive a
20% direct income from the lumber industry which contains 600mills. The last time the US
has imposed a tariff, several Canadian mills closed which contributed to both lower levels of
output and higher levels of unemployment in Canada and could lead to structural
unemployment if the tariff is further increased. This would lead to lower living standards for
lumber workers and their families, and less levels of output will hinder economic growth. On
the other hand, US lumber industries will benefit from the higher levels of output due to the
tariff, more competitiveness in the international market, lower rates of unemployment in the
industry as producers hire more workers in response to higher demand. However, after the
imposition of the tariff, the price of lumber increased by 22% due to uncertainty which adds
up to US$3,600 to the price of a new home. This could affect the US community, especially
low-income families. An increase in the price of lumber will lead to less “real income” to
consumers and they will suffer from lower living standards; as they’re paying more for the
house and less for other goods and services. Also, the production will take place at an
inefficient level. It’s also quite hard to prove if a country is dumping or not, and so further
negotiations and investigations should take place between both countries. The result of
investigations according to this article, will be out by June 2017.

3
Blink, J., & Dorton, I. (2012).
 Citation and Bibliography

BBC. (2017). Has the US started a lumber trade war with Canada? Retrieved from:
http://www.bbc.com/news/world-us-canada-39708779

Blink, J., & Dorton, I. (2012). Economics: course companion. Oxford: Oxford University
Press.