Academic journal article Contemporary Economic Policy

The Effects of the 1996 U.S.-Canada Softwood Lumber Agreement on the Industrial Users of Lumber: An Event Study

Academic journal article Contemporary Economic Policy

The Effects of the 1996 U.S.-Canada Softwood Lumber Agreement on the Industrial Users of Lumber: An Event Study

Article excerpt

I. INTRODUCTION

Bilateral trade in softwood lumber is the subject of a long-standing and ongoing dispute between Canada and the United States of America (see Zhang, 2007, and Reed, 2001, for a detailed chronology). Since 1982, the United States has claimed, and still claims, that fees charged for harvesting softwood on public lands by certain Canadian provincial governments are artificially low. It also claims that artificially low fees set by provincial governments constitute countervailable subsidies.

In May 1996, Canada and the United States signed the Softwood Lumber Agreement (SLA). Using a tariff rate quota, the SLA voluntarily restricted U.S.-bound exports of Canadian lumber from four provinces, Alberta, British Columbia, Ontario, and Quebec. The first 14.7 billion board feet (BBF) of softwood lumber from these provinces was exported duty free. The next 650 million board feet exported was subject to a tax of $50 per thousand board feet. All further exports were subject to a tax of $100 per thousand board feet.

In this article, we investigate the impact of the SLA on industries in the United States using lumber as an input (called the downstream industry). All else being equal, restrictions on Canadian lumber exports raise lumber prices in the United States. (1) This raises profits for U.S. lumber producers, but also makes those who use lumber worse off. The National Association of Home Builders (2000) estimates that the SLA raises the cost of lumber in an average new U.S. home by 800-1,300 dollars. (2) More dramatically, it also estimates that for every $50 increase in the price of 1,000 board feet of framing lumber, 300,000 potential homeowners are priced out of the housing market. However, homeowners are not the only group affected by an increase in lumber prices. When customers can no longer afford to buy homes, home builders lose business. Furthermore, as the cost of softwood lumber rises, remodeling costs rise, and subsequently, remodeling orders fall. In other words, besides homeowners, trade restrictions on lumber adversely affect other industries that use lumber as a raw material, such as home builders, manufactured-home builders, and lumber dealers.

Most previous studies of the softwood lumber dispute focused on the obvious gainers or losers: the U.S. and Canadian producers, and final U.S. consumers (see, e.g., Li and Zhang, 2006; Zhang and Hussain, 2004; Zhang, 2001; Van Kooten, 2002; and Begley et al., 1998). To our knowledge, the industrial users of softwood lumber are usually ignored. We believe that it is important to include this industry for two reasons. First, as lumber is primarily used as a raw material, (3) the effects of the SLA on the industrial users of lumber are likely to be significant. Secondly, this group is an important political player in the softwood lumber dispute. The American Consumers for Affordable Homes (ACAH; see http://www.acah.org) is a special interest group largely comprising the industrial users of lumber and has been an active participant of this dispute for several years. Because of the literature's omission of this group, potentially large costs borne by this group have so far been ignored.

The antidumping and countervailing duty legislation in the United States also ignores the impact of any proposed duty on the users of the imported good. Currently, U.S. law requires that the International Trade Commission (ITC) and the International Trade Administration (ITA) (4) only consider the effects of trade on the import competing industry and ignore the impact of imposing any countervailing or antidumping duties on consumers of the imported good (see Destler, 2005). We believe that it becomes particularly important to consider the users of the imported good when restricting trade could potentially deny some a basic necessity of life--housing.

To investigate the impact of the SLA, we use an event study. (5) We calculate the changes in stock prices of firms that use lumber as an input attributed to the news release of three important events leading to the SLA. …

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