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
Copyright 2000, Financial Post