President Trump imposing a tariff on softwood lumber from Canada is in the news, especially in timber-producing states like Idaho. The story is long, however, and this chapter less important than it might seem. Yet it is a good case study of U.S. trade policy.
The taxes just imposed are “countervailing duties” that ostensibly offset some illegal measure taken by the nation that exports to us. U.S. law gives the president authority to impose these when the U.S. International Trade Commission declares some prohibited action has taken place. In the softwood case, the offense is provinces selling standing timber at less than competitive market value. That below-market sale purportedly is a government subsidy.
All well and good, but understand some context.
First, this ITC is a purely U.S. government body, not some international organization like the World Trade Organization or International Court of Justice. It has quasi-autonomous status under the Commerce Department but is part of the executive branch.
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Further, just as a good district attorney supposedly could get a grand jury to indict a ham sandwich, any president can get the ITC to find trade offenses. Take any declarations about the ITC having found terrible wrongdoing with a large grain of salt.
Secondly, the legislation setting up the ITC and that giving the president power over countervailing duties all precede our signing the North American Free Trade Agreement and our participation in the World Trade Organization. In signing NAFTA and joining the new WTO (when transformed from the old GATT), we agreed to forsake unilateral action in trade disputes. But we did not repeal existing legislation or dissolve the ITC that would have been redundant if we had kept our word.
We contracted with Canada to use dispute-resolution mechanisms written into NAFTA in cases like this. These involve negotiations and impartial arbitration. If this process results in our favor, Canada has a contractual obligation to stop.
The WTO similarly has dispute-resolution mechanisms. Only after a WTO panel has ruled for a complaining nation can it legally impose countervailing duties. The fact that a country may have old domestic laws authorizing unilateral action does not supersede terms agreed to in the treaty.
We have fought over Canadian softwood for decades. And whenever it came before an impartial third party in the past, the U.S. has lost, regardless of what our own ITC had ruled. Over long periods we reneged on our word and refused to honor arbitration rulings, but we have never won the core case. We 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 higher proportion of our own lumber comes from private lands, our history of timber sales from public lands is not exactly pristine. We long have auctioned off federal timber plots. But often, the Forest Service spends more money building improvements like logging roads than it got in payments. So we effectively gave that timber away.
Moreover, while there is competition in U.S. forest products, sales of federal logging rights are not textbook perfect competition. The big companies constitute oligopolies, market structures where a few large firms have undue pricing power.
Also note that in commodities other than lumber, the U.S. government often sells public resources at below-market prices. In the leasing of grazing lands, state-level agencies and private landowners often charge five times what federal grazing permit holders, like Nevada’s Bundy family, pay to use equivalent federal land.
This is a give-away that has been sanctioned over a century of history. But the U.S. government leasing out tens of millions of acres of public grazing land cheaply is no different from Ontario selling standing timber for less than it would get at auction. Beef producers in other nations importing from the United States can argue that their situation matches that of U.S. lumber producers.
An even more egregious case is the U.S. Mining Act of 1872. It gives away mineral deposits on federal land to whomever legally claims them. Find a copper deposit on federal land, and it is yours for filing fees. We no longer export nonferrous metals much, but copper producers elsewhere could complain that this U.S. giveaway is a subsidy identical to Ontario selling trees cheaply.
Finally, most of the incidence of the tax will be on U.S. consumers. Market prices for all lumber, not just from Canada, will increase as a result. The materials bill for any new house constructed will be higher than without the tariff.
My home state of Minnesota does not have a large dog in the softwood lumber fight, nor do most other states. We do have an industry in engineered products like oriented-strand board. But we still have sawmills producing conventional lumber, and they will see higher prices and increased sales. They may hire more people. The loggers who supply these mills will also benefit.. But given the number of potential home buyers versus workers in forest products, my state probably will be a net loser. So will most other states. The minority of states with much timber but few urban dwellers will be net winners.
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.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.