The Trump administration’s imposition of a tariff on softwood lumber imports from Canada is getting a lot of coverage. The story is a long one however, and in this chapter it will prove to be less important than it might seem. But it’s still a good case study of some of the intricacies of U.S. trade policy.
The taxes imposed by the administration are “countervailing duties” that ostensibly offset some illegal measures, especially subsidies, implemented by the nation that exports to us. U.S. trade law gives the president authority to impose these when a determination is made by the U.S. International Trade Commission that some prohibited action has taken place. In the softwood case, the offending action is the sale by provinces of standing timber to logging companies at less than competitive market value. That below-market sale purportedly has the effect of a government subsidy.
All well and good, but understand some background.
First, this ITC is a purely U.S. government body, not some international organization like the International Monetary Fund, World Trade Organization or International Court of Justice. It has quasi-autonomous status under the Commerce Department, but effectively is part of the executive branch.
Further, just as any good district attorney supposedly could get a grand jury to indict a ham sandwich, any presidential administration can get the ITC to find whatever offending actions by other trading partners it wants. So take any pious declarations about the ITC having found terrible wrongdoing with a large grain of salt.
Secondly, the legislation setting up the ITC and that giving the president authority to impose countervailing duties all precede our signing the North American Free Trade Agreement and our participation in the transformation of the old General Agreement on Tariffs and Trade into the current World Trade Organization. In signing NAFTA and joining the new WTO, we agreed to forsake unilateral action in trade disputes. But we did not repeal legislation already in effect, or dissolve bodies such as the ITC, that would be largely redundant if we did what we had just contracted to do.
We made a contractual commitment to Canada that we would use dispute resolution mechanisms written into NAFTA in cases like this. These involve negotiation with our partner and involvement of an impartial third party. If this dispute resolution results in a ruling in our favor, then Canada has a contractual obligation to stop the practice.
The WTO similarly has dispute resolution mechanisms laid out in the treaty. Only after a WTO panel has ruled in a nation’s favor can it legally impose countervailing duties. The fact that country may have old laws on the books domestically authorizing unilateral government action does not supersede what was agreed to in the treaty signed.
Canadian softwood has been an object of contention for decades. And whenever it has come up before an impartial third party in the past, the U.S. has lost, regardless of whatever our own internal ITC has ruled at the time. There have been long periods in which we effectively reneged on our word and refused to abide by arbitration rulings, but we have never won the core case. We use our weight to muscle Canada into some “voluntary” agreement that lasts for a decade or so and then we have another round of blustering.
Recognize also that while a much higher and growing proportion of our own lumber comes from private lands, our own history of timber sales from public lands is not exactly pristine. We have auctioned off federal timber plots for a long time. But in many cases, the Forest Service spends more money building improvements such as logging roads to make the tract easier to harvest than it actually got in payment from the highest bidder.
Moreover, while there is considerable competition in U.S. forest products, sales of federal logging rights are not exactly a model of econ textbook perfect competition. The big companies have the clout of oligopolies, a market structure where a few large firms have undue pricing power. This limitation on competition is more noticeable when one looks at specific regions rather than market shares for the nation as a whole.
Also note that in commodities other than lumber, we have our own traditions of government giving away public resources at less than market prices. In the leasing of grazing lands, state level agencies and private landowners often charge five times or more what holders of federal grazing permits, like Nevada’s infamous Bundy family, pay to use equivalent federal land.
This is a give-away that has been sanctioned over a century of history. And anyone who has bought a ranch that carried with it federal permits faced the value of that give-away capitalized into the price they paid for the ranch. But fundamentally, the federal government leasing out tens of millions of acres of public land for private grazing at cheap rates is no different from Ontario administratively selling standing timber for less than it might bring at auction. Beef producers in any nation importing meat from the United States could make an argument that their situation was exactly the same as the U.S. lumber producers who claim harm from Canadian wood.
An even more egregious case is the U.S. General Mining Act of 1872 that gives away mineral deposits on federal land to whomever legally claims them. So if you find a copper deposit on federal land in Arizona, it is yours for a few hundred dollars in filing fees. We no longer export non-ferrous metals in any significant quantity, but if we did, copper producers in the Andean republics and elsewhere would be completely justified in complaining that a U.S. giveaway to producers constituted a subsidy as directly as the Province of Ontario selling trees cheap.
Finally, keep in mind that most of the incidence of the tax will be on U.S. consumers. Market prices for all lumber, not just that brought from Canada, will increase as a result of this restriction on supply. The materials bill for any new house constructed will be higher than without the tariff. The builders’ associations argue that the increase will total $1,200 to $1,500 per typical U.S. house. Yes, always be skeptical of such industry association numbers. But the true increase in house prices to new buyers will be in this range.
Minnesota does not have a large dog in the softwood lumber fight. A larger proportion of our forest industry is engineered products like oriented-strand board. But we still have sawmills producing conventional lumber and they will see higher prices and increased sales. They may hire more people. The loggers who supply these mills will also benefit.. But given the number of potential home buyers versus workers in forest products, Minnesota probably will be a net loser.
Don’t interpret this as a bold initiative by Donald Trump. An existing U.S.-Canada softwood agreement expired just last year and we were due for a kerfluffle just as El Nino periodically perturbs the weather. And don’t swallow any of the president’s rhetoric about how badly Canada is treating us. Bad treatment goes both ways. We are like two neighbors who basically get along well, but have periodic spats about who has to rake up which leaves that blow across the lot line.