In the rhetorical battles that accompany a trade war, each tariff and retaliatory duty is an economy-wrecking job killer, a misguided policy that punishes the end consumer as well as the targeted foreign industry.
In the case of the softwood-lumber tariff, in place since late 2017, an exceptionally strong U.S. housing market has created a different set of truths.
Canadian lumber producers seem to have recouped the entirety of the tariff from their customers, U.S. builders that have in turn passed along the costs to the American home buyer. And because of the small amount of lumber in the typical U.S. house, the end impact is not nearly as punishing as the U.S. home-building industry claims.
For now, in this environment, the economics suggest the lumber tariffs are much ado about not much at all.
“The Canadian industry doesn’t get much better than this, even with duties,” says Russ Taylor, Canadian managing director for consultancy Forest Economic Advisors. “They were already making money before the duties kicked in, so even if they ate half the duty, they’d still be making money.”
Certainly, the lessons of the lumber spat don’t necessarily transfer to other trade disputes. The newsprint industry, for one example, suffers from a lack of demand and end customers in dire financial straits. And the U.S. housing economy may turn, particularly with interest rates on the rise, and the demand for lumber may ease, making it more difficult for Canadian producers to pass on to their customers the whole of the tariff.
In the meantime, however, the lumber dispute has created a circular firing squad of charges and counter-charges. The U.S. lumber trade group supports the trade case against the Canadian lumber industry, but the dispute is complicated by the increasing number of companies that own lumber mills in both countries. In the meantime, the two lumber trade groups can unite against the U.S. home-builders’ lobby, which continues to escalate its rhetoric.
“It seems to me the large cross-border lumber companies are reaping a big enough profit that it’s probably to their advantage to encourage our governments to disagree,” says Jerry Howard, the CEO of the National Association of Home Builders.
“This whole situation being fuelled by greedy lumber companies is a stain on the relations between the two countries. They are behaving almost like a cartel. They’re behaving toward lumber today the way OPEC behaved toward oil in the 1970s.”
The O-word is a new front in this particular war of words, Mr. Howard acknowledges, and one that seems to puzzle the Canadian side.
“I’m not really sure how us having tariffs applied to us by the U.S. industry results in us working with them,” says Susan Yurkovich, president of the British Columbia Lumber Trade Council. “That would not be our choice to put duties on ourselves.”
In the 35 years of the trade dispute − we are on “Lumber 5,” in the parlance, and “Lumber 1” started in 1982 − the U.S. lumber industry has never been more profitable. “They’ve never made more money in their entire existence, and they’re claiming there’s a threat of injury to the industry,” Ms. Yurkovich says.
To recap the fight, nearly 95 per cent of forest land in Canada is owned by provincial or federal governments, while the numbers are flipped in the United States. Canadian governments set stumpage fees for tree-cutting that, nominally, are much lower than what private landowners in the U.S. charge.
The United States argues that is the most meaningful of the subsidies of the Canadian lumber industry, one that drives the argument for retaliatory duties. But owing to a host of other economic factors, as well as provisions of international trade law, no non-U.S. body has found that the Canadian system provides an economically meaningful subsidy.
The new tariffs, imposed by the administration of Donald Trump late last year, “have been the primary contributor to an increase in lumber prices by over 60 per cent since January, 2017,” says Mr. Howard of the U.S. home-builders’ group. “That has meant that for the average American homeowner, for a new home, the lumber increase alone cost almost US$9,000. It means that many Americans are priced out of the market. For every US$1,000 price increase, 150,000 Americans are priced out of the market for that house. So you can do the math and see this has a chilling effect on the American housing markets.”
The U.S. housing markets are a long way from a chill, however. The most recent home-sales data blamed a lack of supply of houses for the decreased growth numbers. The prospect of higher U.S. interest rates, of course, raises questions for what’s in store for the second half of the year.
But so far in 2018, the strong demand for lumber, coupled with the United States’ chronic inability to produce enough wood for the homes its citizens want to buy, plus supply and transportation disruptions, have all combined to drive lumber to record prices, above US$650 per thousand board feet, the standard measure.
“If you’re getting close to US$400, and you’re going to get a 20-per-cent duty, that pushes you down to US$320, and some mills would be squeezed at those levels,” says Mr. Taylor, the forest consultant. “That was the worry we had when the duties were about to come on. But then the prices started to rally, and [lumber companies] pushed the prices up 20 per cent and said, look if you want our lumber, [it’s] plus-20 per cent, and the market went for it because the supply was a bit tight.
“They pushed it right through, and then it just kept going after that, for the whole year, as the supply tightened up more and more.”
The result has been fatter profit margins for Canadian producers, despite the tariffs. West Fraser Timber Co. reported adjusted EBITDA, or adjusted earnings before interest, taxes, depreciation and amortization, of nearly 28 per cent of revenue in its most recent quarter. “Those kind of numbers are off the scale,” he says. “Five-per-cent EBITDA would be a pretty good year, and they’re all in double-digits.”
While the lumber companies are in fine shape, their ability to profit from home buyers may be overstated by Mr. Howard’s group. The U.S. Lumber Coalition, that country’s industry trade group, says about 16,000 board feet of lumber goes into the average-sized U.S. home. At US$554 per thousand board feet, the prevailing price when it prepared its analysis, the lumber cost is US$8,864, compared with the average new-home price of US$376,240.
Each US$100 increase in lumber, while meaningful in percentage terms, adds just US$1,600 to the cost of a home with 16,000 boardfeet of wood.
The figure of a US$9,000 increase “is blatantly false,” Zoltan van Heyningen, executive director of the U.S. Lumber Coalition, said in e-mailed comments. “A US$9,000 dollar cost increase for lumber would suggest that lumber used to be free in the construction of a home. Such false claims are unfortunate and harmful to U.S. companies, their workers, and the thousands of communities they support.”
Meanwhile, the U.S. home-builders group’s claim that for every US$1,000 price increase, 150,000 Americans are priced out of the market is based on the idea that that number of households can’t afford a US$6 monthly increase in their housing costs. That amount of extra payments − US$72 a year − requires an extra US$252 a year of income, if the household sticks to paying just 28 per cent of income on housing.
Then, using household income data, the economists at the home builders’ group took that 28-per-cent rule, pinpointed the income bracket for the average house price, and figured that every extra dollar of household income required for that average house cut out 606 U.S. households. An extra US$252 of annual income required, times 606 households, yielded more than 150,000 households “priced out of the market for that house.”
If any of those projected households might find a way to cut other spending by US$6 per month to buy a house, they were not included.
David Milstead