An Evaluation of Canadian and U.S. Policies of Log and Lumber Markets
Devadoss, Stephen, Journal of Agricultural and Applied Economics
The recent lumber trade war between Canada and the United States deals with Canadian stumpage policies, Canada's log export controls, and U.S. retaliatory duty. This study determines the appropriate level of U.S. countervailing duty (CVD) by employing a vertically interrelated log-lumber model. The theoretical results show that the U.S. CVD can be greater (will be less) than the Canadian subsidy for a vertically related log-lumber market (for lumber market only). Empirical results support the theoretical findings in that the U.S. CVD for the log-lumber market (lumber market alone) is 1.55 (0.91) times the Canadian subsidy.
Key Words: countervailing duty, dispute, log, lumber, subsidy
JEL Classifications: F13
In recent years, countervailing measures undertaken by many countries to protect domestic producers against unfair production subsidy practices in exporting countries have alarmingly burgeoned because the WTO's Agreement on Subsidies and Countervailing Measures (ASCM) allows for such trade retaliation. For instance, from 1996 to 2005, the number of countervailing duty (CVD) cases filed with the WTO increased from 6 to 81 (WTO 2005). However, many countries go overboard and abuse the ASCM, which further escalates the complexity of litigations, adding undue burdens on the WTO Dispute Settlement Body (Miranda).1 The crux of the issues involved in the vast majority of the CVD cases is this-what is the correct level of CVD that will offset the adverse effect of exporters' production subsidies without overly penalizing the exporting country?
The U.S.-Canadian softwood lumber (hereafter termed only as lumber) trade dispute is one such case filled with numerous and contentious disagreements over the magnitude of Canadian subsidies and U.S. countervailing duties, and it is a fertile ground for informative economic analysis. The underlying cause for this ongoing trade litigation is that the U.S. lumber producers contend that Canada with its vast endowment of government-owned forest land charges only nominal fees for stumpage (timber) sold to Canadian lumber producers. The U.S. lumber producers argue that selling timber at low prices amounts to an input subsidy because auctioning the timber in the open market will fetch much higher prices. In addition, the U.S. producers claim that Canadian log export restrictions amount to an implicit subsidy to Canadian lumber producers because U.S. lumber companies cannot avail the benefits of purchasing low-priced timber, and thus, log export controls help to keep costs down only for the Canadian companies. In 2001, a coalition of U.S. lumber producers submitted a petition to the International Trade Administration of the U.S. Department of Commerce (USDOC) and the U.S. International Trade Commission to investigate Canadian timber sales and trade policies (USDOC 2001a and 2001b). These agencies extensively studied Canadian lumber policies and found that Canada does subsidize its lumber companies with low-priced timber. On the basis of these findings, the U.S. government imputed that the Canadian government provides its lumber companies a production subsidy of 19.34% and retaliated by levying a countervailing duty of 18.8% in May 2002 (U.S. Federal Register) to protect its lumber producers from adverse effects of the Canadian subsidy.2 Canada vehemently refuted the level of U.S. computed subsidies and tariffs.
The objective of this study is to determine the appropriate level of U.S. countervailing duties on Canadian lumber produced from subsidized timber by employing a vertically interrelated log-lumber model. If the subsidy and CVD are for a single and not vertically integrated commodity, then the CVD will be necessarily less than the subsidy, as we show in the theoretical and empirical analyses. However, in a vertically integrated market, the value of CVD relative to production subsidy depends on several factors such as whether the subsidy is for production of output, input, or both and whether both output and input are traded or one of them is nontraded. …