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Costs of the Softwood Tariff

  • Tree_trunks.jpg

Tags Taxes and SpendingProduction Theory

11/14/2001David N. Laband

Halloween is one of America's quaint, informal occasions.  Every October 31, costumed children go door-to-door giving adults the choice of "trick or treat."  In this context, it is only fitting that this past October 31 was the day the U.S. Department of Commerce announced the imposition of an additional 12.58-percent "anti-dumping" duty on imports of Canadian softwood lumber, on top of a 19.31-percent "countervailing" duty imposed in August.  

Both duties are retroactive to last spring.  On the surface, they constitute a damaging, ill-timed trick on American consumers and a treat for American timber producers and timberland owners.  In fact, however, the treat is laced with hemlock--American timber producers may enjoy the treat in the short run, but it likely will harm them in the long run. 

There is no question but that, in the short run, the proposed tariff will benefit America's timber industry.  In terms of the tariff revenues alone, American producers stand to pluck a couple of billion dollars from our Canadian neighbors.  

In addition to the tariff revenues, a number of other Americans--private timberland owners, land management companies, mill owners, loggers, and others--will benefit from timber prices that will be significantly higher than they would be in the absence of the tariff.  In turn, this will keep timber prices higher than would otherwise be the case.  For an industry that has been buffeted by sharply lower timber prices in recent years, this comes as welcome, albeit short-term, relief.  

However, while acknowledging that the beneficiaries of the double tariff may number in the tens or even hundreds of thousands, we also must acknowledge that the number of people harmed is counted in the tens of millions.  Further, one of the worst-kept secrets in both politics and economics is that the aggregate losses sustained by American consumers from this (or any other) tariff are much larger than the gains to the U.S. timber supply industry.  

The losses sustained by American consumers are reflected only partially in losses sustained by the housing construction industry.  Higher prices of softwood lumber mean higher home construction costs.  The average cost of a new home likely will increase a minimum of several hundred dollars.  

Note that the higher costs do not mean that the houses are more valuable.  Rather, the higher prices are the handiwork of a U.S. Department of Commerce-enforced protection racket that drives up production costs.  Inevitably, this will dampen consumer demand for houses--new housing starts are likely to fall by an estimated 72,000 units or more annually, and some 220,000 first-time home buyers will be priced out of the housing market.  

Additional losses to consumers are reflected in lowered consumer spending everywhere else in the economy, since the share of consumers' disposable income spent on housing rises.  The too-painful-to-ignore political hypocrisy is that Washington's politicians and bureaucrats are urging patriotic Americans to spend money to keep our economy strong, while simultaneously knifing consumers in their collective backs through regulatory actions like this "anti-dumping" tariff.  This raises an interesting conundrum.

Given that millions more American consumers (many of whom vote) are harmed than American producers gain and that the aggregate losses imposed on consumers are much larger than the aggregate gain to the U.S. timber supply industry, why does Washington embrace such obviously net-welfare-reducing trade policy?  

If we favor corporate welfare for the timber supply industry, surely it is more efficient for the government to simply give timber suppliers a cash transfer from taxpayers than to enact policies that create significant resource distortions in the economy in addition to beggaring consumers.  The answer to this puzzle is that politicians and bureaucrats know that voters will not tolerate such obvious robbery, therefore welfare-reducing transfers enacted under a guise of "fairness" are preferred over welfare-neutral cash transfers.   

But this mantle of "fairness" is nothing more than political rhetoric, designed to obscure the fact that consumers are made worse off.  Take the claim that Canada sells timber to the U.S. at "below cost."  If Canadians were crazy enough to do this, why on earth should Americans want to stop them?  The aggregate gain to American consumers from lower timber prices would swamp the adverse effects felt by the American timber industry.  

We could fully compensate the timber industry's losses and still enjoy a net gain in social welfare.  But increasing social welfare is not on the timber industry's agenda; increasing its own welfare is.  If this comes at the expense of America's social welfare, so be it.  In this respect, U.S. timber interests are no different than any of a multitude of other special interests willing to use the fiat power of the State to enrich themselves while imposing costs on consumers.

However, even though the tariffs provide a short-term wealth transfer to the American timber industry, they unavoidably set into motion economic forces that will harm timber suppliers in the longer run.  It would be a disservice to our profession not to identify and discuss these consequences frankly.  

By keeping prices of softwood lumber artificially high, the tariffs, which have been opposed bitterly by the construction industry, provide significant added financial incentive for home builders to accelerate their already-underway switch from using wood studs to steel studs.  

In this regard, the facts speak loudly. Average usage of softwood lumber per square foot of residential construction declined from 7.9 board feet in 1988 to 6.4 board feet in 1994.  Had home builders not embraced alternative materials, softwood lumber usage per house would have been an estimated 14.9 thousand board feet in 1994 instead of the 13.4 thousand board feet that was actually used. Given the required investment in equipment and human capital to work with steel studding, once the domestic timber industry loses this major component of its market, it seems unlikely to come waltzing back in the door.  

Unless timber suppliers expect continuing public assistance when there no longer is demand for their product, the tariff starts the clock ticking toward a day of reckoning for private timberland owners, when they find that without government assistance programs their land is much less valuable than they like.  This painful moment may not be felt by current landowners, but it will be felt.  

In addition, there are political ramifications that even members of the domestic timber industry are less than comfortable with.  Forest industry and other private timberland owners increasingly are burdened by environmental and other government regulations that, in many cases, constitute de facto seizures of their property rights.  But it is awkward, at best, to embrace government involvement in the timber industry when the result is a favorable wealth transfer, while professing dismay at government regulations that constitute unfavorable wealth transfers.  

The problem is that in selling out your principles for short-run gain, no matter how rewarding at the time, you forever lose the moral high ground with respect to other government entanglements that may prove to be, in the aggregate, much more costly.  

Addressing government cost-share programs in the July/August 2001 issue of Forest Landowner magazine, Keville Larson, president of the Forest Landowners Association, asked: "How many of our property rights are we willing to sell for public welfare?"  But his question is equally relevant with respect to the tariff on Canadian softwood.


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