The standstill agreement on softwood lumber trade expired recently, leaving Canadians holding their breath for the U.S. Lumber Coalition to launch legal proceedings.
In the calm before the storm of the next Canada-U.S. softwood lumber dispute, speculation about how the issue will unfold has crystallized around two options: a tax or a quota. The differences may appear merely technical, but they would mean vastly different things economically.
While a quota would impose a cap on exports to the United States, a tax would allow the level of exports to fluctuate with U.S. consumers' willingness to pay for Canadian lumber. In other words, as U.S. lumber prices increase, Canadian lumber would still be able to enter the U.S. market to meet demand.
The previous softwood lumber agreement, signed in 2006, included both options. Provinces were able to choose between an export tax of up to 15 per cent, depending on monthly lumber prices in the United States, and an export tax of up to 5 per cent plus a quota on total lumber exports.
British Columbia and Alberta, which collectively account for nearly 60 per cent of lumber exported to the United States, opted for the tax, while Manitoba, Saskatchewan, Ontario and Quebec chose the combined tax and quota based on the expectation that their lumber exports would remain below their quota level. A recent study of the market effects of the 2006 agreement found that the tax reduced U.S. lumber imports from Canada by 7.78 per cent, worth nearly $1-billion (U.S.). And while U.S. lumber producers gained $1.6-billion, U.S. consumers lost $2.3-billion.
This time around, the U.S. Lumber Coalition is angling for a quota that would apply across all provinces. Lobbyists like quotas because they offer greater certainty to producers and increase profit. From an economic perspective, trade quotas are inefficient: Protectionism imposes a cost on many to create benefits for a few. Trade quotas are the reason that Japanese cars became more expensive in the United States and dairy and poultry products cost more in Canada.
A quota on all Canadian lumber imports would limit the amount of lumber that crosses the border, thereby restricting supply and boosting prices. This is good news for U.S. producers, who would rake in higher profits. The impact on Canadian lumber producers is more mixed: Those that hold quota and can adjust production or access other markets may also benefit, while those that cannot would suffer. Most small and family-owned businesses fall into the latter category.
Even U.S. producers should expect any gains from a quota to be short-lived as other countries clamour to fill the shortfall. Consumers would be forced to pay higher prices and either source lumber from other markets such as Germany, Finland and Sweden or find substitutes such as concrete or steel. Either way, they will find alternatives to meet demand. Beyond its obvious market impacts, the previous agreement hamstrung Canadian provincial and federal governments' willingness to invest in the forest sector for fear of fuelling accusations of unfair subsidies.
Investments in forest stewardship, competitiveness and innovation could all become targets of a future lawsuit by the U.S. Lumber Coalition, which has charged that Canadian forestry companies have an unfair advantage over U.S. producers. A more restrictive agreement could harm both forests and the economy by hampering initiatives such as the new Forest Sector Strategy for British Columbia, which aims to advance economic and environmental sustainability and promote opportunities for First Nations.
Trade Minister Chrystia Freeland has said that the federal government is "prepared to fight" for a good deal for the Canadian forest industry. But fighting is expensive: The 2006 agreement was the result of five-and-a-half years of litigation and negotiations between industry groups and governments, making it the longest in a series of five softwood lumber disputes between Canada and the United States. Protracted international trade lawsuits are costly, creating a strong incentive for the federal government to expedite the negotiation process.
While free trade would serve the broader interests of both countries, the history of softwood lumber disputes between Canada and the United States has moved trade agreements in the opposite direction. In the short term, a quota agreement would ease tension between the two sides and avoid litigation. But over the long term, succumbing to pressure from the U.S. Lumber Coalition would create greater economic inefficiency and harm the economies of both countries.
Harry Nelson is assistant professor in the faculty of forestry at the University of British Columbia. Ngaio Hotte is a resource economist and facilitator with Resource Economics Group and a PhD candidate in the faculty of forestry at UBC