The Trump administration’s imposition of a tariff on softwood lumber imports from Canada is getting a lot of coverage. It’s a good case study of some of the intricacies of U.S. trade policy.
U.S. trade law gives the president authority to impose such a tax 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, such as 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 giving the president authority to impose countervailing duties all precede the signing of the North American Free Trade Agreement and 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.
We made a contractual commitment to Canada that we would use dispute resolution mechanisms written into NAFTA in cases such as 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 complaining nation’s favor can it legally impose countervailing duties. The fact that country may have old domestic laws on its books 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. 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 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. So we effectively give that timber away.
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 even 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 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, such as Nevada’s infamous Bundy family, pay to use equivalent federal land.
This is a giveaway 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 giveaway 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.
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.
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.