A New Chance to Kill Lumber Subsidies

December 15, 2000 |
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The United States and Canada have been locked in a protracted battle over softwood lumber subsidies for two decades. With newly elected governments in both countries, the time has come to end the conflict by finally doing away with lumber subsidies.

A wide range of analysts, from independent Canadian forest product experts to the U.S. Commerce Department, conclude that Canada's provincial governments have heavily subsidized lumber production, selling timber to Canadian lumber companies for as little as one-quarter of its market value to encourage harvesting. Those in the United States who want the subsidies to continue --primarily the housing industry and other users of cheap Canadian lumber --brand U.S. government measures to keep out subsidized imports as 'taxes on consumers.'

In the mid-1980s, the Reagan administration negotiated an agreement with Canada's federal government that gave Canada's provinces this choice: Sell trees on Crown land at a price closer to its market value or the Canadian federal government will collect a tax on lumber exports to the United States that offsets the value of the subsidy. In response, some provinces reduced their subsidies, while others chose to simply pay the tax. That same basic arrangement continues today.

A recent study from the Washington-based Cato Institute, which portrays itself as a defender of the free market, claims this export tax effectively taxes U.S. consumers, raising the price of the average new home by around US$1,000. The economics of this estimate are dubious, since lumber prices are now near record lows, the tax is currently collected on less than 2% of the lumber sold in the United States, and lumber represents only 3% of the price of the average home. But the Cato claim suffers from a more fundamental problem.

The World Trade Organization, the North American Free Trade Agreement and U.S. trade law condemn subsidies such as those granted to Canadian lumber, for good reason. The very same economic models that equate duties on imports with taxes on consumers demonstrate that subsidies similarly distort markets, contribute to inefficient consumption of resources and penalize taxpayers, among other ill effects. After Canadian subsidies on lumber exports were curbed, US softwood lumber production rose by nearly 20% compared with the pre-agreement level.

More importantly, at least from the perspective of restoring the free marketplace, the anti-subsidy stand has let forest products be priced to reflect their true costs, not sold at an artificially low price. Eliminating or offsetting the subsidy encourages rationalization of the forest products industry in North America and discourages environmentally devastating over harvesting of Canadian forests. This restoration of the free market's operation is a policy that free market purists such as the Cato Institute should applaud, not castigate.

The stopping of uneconomic harvesting explains why a number of leading US and Canadian environmental groups, including the Natural Resources Defense Council and the Defenders of Wildlife, have backed the efforts of American lumber companies to eliminate Canadian lumber subsidies. Because of the subsidies, old-growth Canadian forests have been needlessly slashed.

The subsidy battle strongly demonstrates why one should be wary of those who present themselves as advocates of the American consumer in international trade matters. Revealing the wolf in sheep's clothing, two of Canada's leading newspapers recently reported that the US lobbying campaign to 'protect American consumers' by eliminating the U.S.-Canada agreement on lumber subsidies is actually largely funded by the very Canadian lumber companies responsible for the over logging.

Unquestionably, consumer interests should be a concern in making trade policy decisions. However, the actual interests involved are often quite different than they appear, and the economic calculations used to make their case are, at best, half-truths. When considering the claims of advocates who rail away at efforts to counter unfairly traded imports as 'taxes on consumers,' it is important to know who is making the case, and to remember that low prices often come at very high costs -- in this case, the fleecing of Canadian taxpayers, the devastation of North American forests and the loss of jobs in the US timber industry.

Now that elections have concluded on both sides of the border, the two countries' leaders can put this problem to rest permanently by ending both subsidies and duties on timber and lumber throughout North America.