Bushwhacked in Timber Country
President Bush didn't sound like ultra-protectionists Pat Buchanan and Ross Perot during last year's election campaigns, but he certainly acting like these gentlemen now that he is president.
On August 10, the Bush administration announced plans to impose a 19.31-percent countervailing duty on nearly all Canadian softwood lumber imports, which account for approximately 35 percent of U.S. softwood lumber consumption.
The giant sucking sound we'll be hearing on August 20, when the duties are slated to go into effect, will be the sound of millions of dollars being vacuumed from the pocketbooks of American consumers and redistributed to a small group of domestic softwood producers.
The newly announced import duty is the latest salvo by the U.S. in a century-old dispute with Canada. It was touched off by the March 31, 2001, expiration of the 1996 U.S.-Canada Softwood Lumber Trade Agreement (SLA), which instituted a tariff-regulated quota system to restrict softwood lumber exports from Canada to the U.S.
On April 2, a scant two days after expiration of the SLA, the U.S. Department of Commerce received a petition from a group called the Coalition for Fair Lumber Imports (CFLI), to initiate a countervailing duty investigation on imports of softwood lumber from Canada.
The CFLI, which successfully lobbied the U.S. government to restrict Canadian lumber imports via a memorandum of understanding (MOU) with Canada in 1986 and the SLA in 1996, used two trucks to deliver a 7,000-page document to members of Congress and the Bush administration. That document claimed that countervailing and antidumping duties on Canadian lumber are urgently needed because, in the peculiar parlance of the Commerce Department, increased Canadian exports of softwood lumber create a "critical circumstance" for domestic producers.
In the last fifteen years, the CFLI has insisted that Canadian softwood be sold at "unfairly" low prices in the U.S., because the Canadian government sells timber-cutting rights at "below-market" prices to Canadian timber firms. The dubiousness of this claim notwithstanding, CFLI's lobbying has succeeded in the past and apparently is working again this time.
What is at stake for the CFLI? A massive wealth redistribution from American consumers to a handful of timber producers. An article published in 1993 in the highly respected journal, Forest Science, estimated that U.S. softwood lumber producers gained $4.4 billion over a four-year period of the MOU. A forthcoming article in another well-respected journal, The Canadian Journal of Forest Research, estimates that U.S. producers gained approximately $7.7 billion in the first four years under the SLA (both numbers in 1997 dollars).
However, the aggregate costs to U.S. consumers were much larger in both cases—an estimated $6.4 billion and $12.5 billion, respectively. Even ignoring the possibility of retaliation by Canada, the economic consequences of the Department of Commerce's move to reduce foreign competition for domestic softwood lumber producers are substantial. If the preliminary decision by the Commerce Department stands (imposing the 19.31-percent duty August 20), we estimate the following five effects:
- The price of softwood lumber in the U.S. will increase approximately 6.9 to 8.7 percent.
- New home construction costs will rise on average by $420-$850.
- In the aggregate, this will cost American consumers $675 million to $1.35 billion annually.
- The increased lumber prices will depress housing construction (housing starts) by 53,000 to 106, 000 units (3.2 to 6.5 percent of the second quarter 2001 seasonally adjusted number of 1.6313 million housing starts).
- U.S. Gross Domestic Product will fall by 0.13 to 0.26 percent.
To put the last number in perspective, if the 19.31-percent duty had been applied on April 1, 2001, U.S. GDP growth in the second quarter would have been 0.45 to 0.57 percent, some 20 to 30 percent lower than the 0.7-percent growth that we actually experienced.
But why should domestic timber growers and their lackeys at Commerce be content to fleece American consumers and trash the economy a little, when they have the ability to really do the job right? The CFLI is pressing the Bush administration and the Commerce Department to impose a 78-percent duty on Canadian softwood because, they claim, Canadian timber producers have been "dumping" cheap softwood on the U.S.
If the administration buys this line (which it already has with respect to foreign-produced steel), the wealth transfer to domestic timber producers, and losses to American consumers, will be all the larger.
We have three observations to this unfolding regulatory situation. First, the fact that logging rights on Canadian public land are sold at prices that are below prices paid for supposedly equivalent rights in the U.S. does not imply that U.S. timber is produced "at cost" while Canadian softwood is produced "below cost."
Second, it is absurdly ironic that one branch of the federal government brings antitrust actions against private firms on the grounds that they attempt to drive out supposedly more efficient competitors, while at the same time another branch of the federal government serves as the deux ex machina to achieve this very result on behalf of certain favored producers! In both cases, by protecting competitors rather than competition, the regulatory machinery in Washington, D.C., undermines the legal foundation of our free enterprise system and thereby discourages productive entrepreneurial activity.
Third, even acknowledging that fairness, like beauty, is in the eye of the beholder (really the beholden), it is hypocritical for domestic softwood producers—who have lobbied strenuously for, and been the beneficiaries of, access to below-cost timber-cutting rights off U.S. federally owned lands—to then whine about Canadian companies doing the same thing.
No doubt, one of the arguments advanced by U.S. firms seeking such favorable cutting rights on federal lands is the beneficial effect on housing prices. Even though most federal timberlands are now off-limits to cutting, there is an equivalent beneficial effect for American consumers of Canadian timber companies cutting timber off of Canada's public lands at low prices for sale in the U.S.
Prior to and just after last year's election Bush warned Americans—correctly, as it turned out—of the impending economic slowdown that we now are experiencing. Earlier this year, President Bush sold Americans on his tax-cut proposal as a means of stimulating our weak economy.
If Mr. Bush now looks the other way while the Commerce Department dynamites the housing industry and consumer spending—the only pillars of strength in the U.S. economy at the moment—he runs the genuine risk of precipitating a real recession. Further, and disappointingly, he will reveal himself as a de facto hypocrite with respect to his stated commitment to free trade.