TRADE CLASS MARCH 26, 2015

Transcription

1 TRADE CLASS MARCH 26, 2015

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4 SOFTWOOD IN THREE MINUTES

5 TRADE THEORY (1) Absolute Advantage Canada can produce lumber more cheaply while the US can produce tomatoes more cheaply (costs are lower) Benefits from trade are obvious-each country will specialize Example of Absolute Advantage Commodities Unit Costs of Production in terms of labour Canada US Lumber 4 6 Tomatoes 8 3 So 4 units of labour needed to produce one unit of lumber in Canada

6 TRADE THEORY (2) Comparative Advantage Canada can produce both lumber and tomatoes more cheaply than the US But here trade will still be beneficial (Ricardo) Example of Comparative Advantage Commodities Unit Costs of Production in terms of labour Canada US Lumber 4 6 Tomatoes 8 10

7 BENEFITS OF SPECIALIZATION How Comparative Advantage Works Commodities Production (outputs) per 10 units of labour Canada US Lumber (railcars) Tomatoes (bushels) Ratio (opportunity cost) Inverse of previous slide; if 4 units of labour are needed to produce one unit of output, then one unit of input yields 0.25 units of output (inverting the ratio). Multiplying by 10 yields 2.5 and so on for other values. This tells you how much lumber you have to give up to get one unit of tomatoes This tells you how many tomatoes you have to give up to get one unit of lumber So long as you can trade between 1.7 to 2.0 units of tomatoes for lumber, trade will take place and benefit both countries

8 BENEFITS OF SPECIALIZATION How Comparative Advantage Works Commodities Production (outputs) per unit of labour Canada US Lumber (railcars) Tomatoes (bushels) Ratio (opportunity cost) No trade bushels and 2.5 railcars 1.7 bushels and 1 railcar Total Output 2.95 bushels and 3.5 railcars Specialization 5 railcars 3.4 bushels 3.4 bushels and 5 railcars

9 FREE TRADE IN PRACTICE Free trade is well understood to offer these benefits from trade There are also legitimate concerns that influence trade These include safety regulations Environmental regulations Controls over illegal activities

10 STRATEGIC TRADE It also turns out that it can be in a country s interest to influence the terms of trade By imposing tariffs it can improve its welfare There may also be other reasons for protectionism Protecting a domestic industry or developing an infant industry And there may also be non-economic motives National defense Foreign policy National pride

11 THE SOFTWOOD LUMBER DISPUTE We can compete against any lumber industry in the world, but we can t compete against their government, too. Steve Swanson, President, Swanson Group, Inc. and Past Chairman of the Coalition for Fair Lumber Imports

12 US LUMBER COALITION POSITION Canadian Lumber Is Heavily Subsidized and Unfairly Displaces U.S. Manufacturing One effect of Canada's lumber subsidies on U.S. business. Canadian provincial governments maintain timber-sale programs designed to sustain artificially high employment and production levels in their lumber industry. The provinces have been providing an estimated $3 to $3.5 billion U.S. dollars in annual subsidies to the Canadian lumber industry by underpricing government timber (a Canadian taxpayer resource worth billions of dollars that virtually is being given away to a single industry), and have maintained policies which effectively prevent Canadian lumber companies from adjusting their production levels based on actual demand. The subsidies programs are possible because the Canadian provinces own the vast bulk of merchantable timber in Canada. Managing these forests allows the provinces to set prices for public timber far below market value, thus lowering production costs for Canadian lumber companies. The government-set price of Canadian timber is only a fraction of the marketdetermined price of identical timber in U.S. border regions.

13 CANADIAN POSITION (2012) The Softwood Lumber Agreement (SLA) that settled a long-running dispute between Canada and the U.S. is being extended by two years. Canadian Trade Minister Ed Fast and U.S. Trade Representative Ron Kirk made the announcement at a ceremony in Washington, D.C. on Jan. 23, The agreement that ended many years of trade disputes over duties and other barriers to selling the wood was set to expire in 2013, but will be extended until 2015, and industry associations across Canada are pleased with the news. President and CEO of the Forest Products Association of Canada (FPAC), Avrim Lazar, says the softwood agreement provides stability and predictability in terms of getting access to Canada's most important market, the United States. "The industry is of the view that at a time of ongoing market uncertainty, it is a good idea to extend the deal by another two years to provide a degree of certainty in market access to the U.S.," he says.

14 THE DISPUTE IS AN OLD ONE. 19th Century : American tariff introduced of 20-30% Free trade briefly ( ; ) In 1866 Canada introduces export duty on sawlogs in response to US duties on lumber Century ends with US duty and Canadian restrictions on log exports 20th Century Duties remain in place In 1932 revenue tax imposed (triple existing tariffs) and Canadian exports drop to 1890 levels 1950 s tariffs and taxes approximately 1% In 1962 group of US lumber producers propose market sharing agreement with 10%tariff in both countries when imports exceed 10%

15 Lumber I ( ) Lumber II ( ) Lumber III ( ) SLA I ( ) Lumber IV ( ) SLA II (2006 to current) Recently extended to 2015 RECENT HISTORY

16 LUMBER I In 1982 complaint filed-stumpage conveys a subsidy In 1983 Determination-Department of Commerce investigates and finds it does not

17 LUMBER II Complaint: stumpage conveyed a subsidy Initial findings: subsidy of 15% against lumber exported from BC, AB, ON and PQ Resolved through MOU BC increases stumpage and no export tax PQ introduces phased increases in stumpage and corresponding phased decreases in tax AB & ON make no changes and pay tax In 1991 Canada withdraws from MOU Free Trade Agreement signed in 1986 and enters into force in 1989

18 LUMBER III Department of Commerce initiates complaint on October 31, 1991 (Canada had withdrawn as of September 3, 1991) DoC finds stumpage and log export control convey subsidies In July 1992 DoC imposes final countervailing duties of 6.51% on all provinces except Maritimes series of decisions in Canada s favour that end up in duties being refunded December 15, 1994

19 SOFTWOOD LUMBER AGREEMENT (SLA I) May 1996 to March 2001 Tariff Rate Quota system Can ship up to 14.3 billion board feet feet duty free; above that amount, incur costs of either $50; above 14.7 billion bf; $100/mbf (adjusted for inflation over period) Four provinces assigned quota Companies within provinces receive quota

20 LUMBER IV Canada can t agree on what is next and we are back in a world of litigation April 2, 2001 to September, 2006 Initial allegations allege subsidies of 39.9% and anti-dumping margins of 22.5% to 73.9% August 2001 DoC makes a determination of a 19.31% subsidy, retroactively payable back to May October 2001 DoC determines dumping margins for six companies, ranging from 5.9% to 19.2%, with average margins applied to all others of 12.6% Companies are Abitibi, Canfor, Slocan, Tembec, West Fraser, Weyerhaeuser

21 LUMBER IV (2) February 2002 Canada starts NAFTA challenges (WTO consultations initiated earlier) March 2002 CVD set at 19.34%; dumping reduced to 9.7% April 2002 CVD reduced to 18.8% and 8.4% June 2004 first administrative review: CVD now 9.2%; dumping 4% December 2005 second administrative review: CVD now 8.7%; antidumping 2.1% Cost US industry astronomical sums of cash-$ hundreds of millions

22 SOFTWOOD LUMBER AGREEMENT II April 27, 2006 Canada and US agree in principle to negotiated deal July 1, 2006 Canada and US conclude negotiations September 26, 2006 deal signed

23 SLA II (2) Seven year deal extended to nine years (October 2015) Covers all provinces except Maritimes Two options Option A has three-tiered tax, based on lumber prices, but no volume restriction (but surge tax) BC and AB selected this option Option B has three-tiered tax but at lower levels for given prices and volumes capped All the other provinces selected this option

24 SLA II (3) Canadian Tax Levels Prevaili ng Monthly Price* Over $US355 $US $US $US315 or under! Option A 1 - Export Charge (Expressed as a % of Export Price) No Export Charge 5% 10% 15% Option B 2 - Export Charge (Expressed as a % of Export Price) with Export Allocation No Export Charge and no volume restraint 2.5% Export Charge + maximum volume that can be exported to the United States cannot exceed the Region's share of 34% of Expected U.S. Consumption for the month 3% Export Charge + maximum volume that can be exported to the United States cannot exceed the Region's share of 32% of Expected U.S. Consumption for the month 5% Export Charge + maximum volume that can be exported to the United States cannot exceed the Region's share of 30% of Expected U.S. Consumption for the month *Four-week average of Random Lengths Framing Lumber Composite Price. 1 - Applies to B.C. and Alberta. 2 - Applies to Quebec, Ontario, Manitoba, and Saskatchewan.

25 SWLSLA_RUP FOREIGN AFFAIRS AND INTERNATIONAL TRADE CANADA / AFFAIRES ÉTRANGÈRES ET COMMERCE INTERNATIONAL CANADA TRADE CONTROLS & TECHNICAL BARRIERS BUREAU /DIRECTION GÉNÉRALE DE LA RÈGLEMENTATION COMMERCIALE ET DES OBSTACLES TECHNIQUES Date:19-Sep CANADA-US SOFTWOOD LUMBER AGREEMENT SOFTWOOD LUMBER EXPORTS REPORT Date of Revision September 19, :07:28 AM EDT Period August 1, August 31, 2012 Expected US Consumption Adjusted Expected US Consumption** Monthly Trigger Price Canadian Share of US Consumption 3,056,000,000 bfm 3,312,000,000 bfm $323 US Option A Regions 34% Option B Regions 32% Region Option Regional Share (bfm) Surge Trigger (bfm)* Quota Volume (bfm) Exports (bfm) Surge Trigger (bfm)* BC Coastal A 58,021,628 63,823,790 32,567, % BC Interior A 532,660, ,926, ,600, % Alberta A 76,094,400 83,703,840 81,633, % % Quota Volume Remainder Pool Balance (bfm)*** Saskatchewan B 14,339,012 10,982, % 3,090,837 Manitoba B 9,663, , % 5,410,923 Ontario B 104,113,694 61,017, % 1,523,354 Quebec B 151,494,776 85,633, % Maritime Total 86,067,202 Territory Total 0 Excluded Companies 34,608,955 Total: 862,867,605 Notes: Export volumes are based on export permit data and are subject to corrections and final reconciliation. * Represents 110% of Regional Share **For purposes of calculating Regional Quota Volumes under Option B, the EUSC is adjusted in accordance with paragraph 14 of Annex 7D of the Softwood Lumber Agreement *** Based on export permit data as of the date and time of revision and subject to corrections and final reconciliation. SWLSLA_RUP Date: September 19, 2012

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28 WE HAD FREE TRADE FOR A WHILE Random Lengths

29 BILATERAL TRADE BETWEEN COUNTRIES P Canada domestic lumber market S can Canadian exports ( derived excess demand and supply ) US domestic lumber market P in Canada D can ES P* under Free Trade Q d-c Q s-c Q Q es Can A Q d-c refers to Q demanded in Canada, s for supply, US for US. Q es equals exports. B Q exports Excess supply in Canada is exported to meet US excess demand C

30 BILATERAL TRADE BETWEEN COUNTRIES P Canada domestic lumber market Canadian exports ( derived excess demand and supply ) US domestic lumber market D US ES Price in US ED S US Q Can Q es Q Q s-us Q exports d-us Q US A Q d-c refers to Q demanded in Canada, s for supply, US for US. Q es equals exports. B Excess supply in Canada is exported to meet US excess demand C

31 BILATERAL TRADE BETWEEN COUNTRIES P P in Canada Canada domestic lumber market D can S can Canadian exports ( derived excess demand and supply ) ES Price in US US domestic lumber market D US P* under Free Trade ED S US Q d-c Q s-c Q Q es Q s-us Q Can Q exports d-us Q US A Q d-c refers to Q demanded in Canada, s for supply, US for US. Q es equals exports. B A = B =C or excess supply in Canada is exported to meet US excess demand C

32 P in Canada P* Free Trade Canada domestic D can THE EFFECT OF A TARIFF S can Canadian exports ES +tariff/tax ES Price in US P us with export tax US domestic S US D US P can with export tax ES Q d-c Q d-c Q es-new Q d-c Q es Q s-us Q d-us Q d-c Note that under a tariff, there are different prices between the US and Canada; exports go down, and there are changes in production and consumption within each country

33 THE EXPORT MARKET tax Deadweight loss The export tax (or tariff, or duty) opens up a wedge between Canadian and US prices US prices are now higher than in Canada, and Exports fall; A deadweight loss is created; And someone collects a lot of tax revenue. Q tax Q ft

34 THE US DOMESTIC MARKET The US domestic price goes up and US supply goes up US consumer surplus goes down But US producer surplus goes up

35 THE CANADIAN MARKET In Canada the domestic price drops Quantity supplied drops Canadian consumer surplus goes up And Canadian producer surplus drops

36 The Effect of a Quota Canada domestic Canadian exports US domestic ES with quota Price in US S US P in Canada D can S can P us with export tax P* Free Trade P can with quota ED D US Q d-c Q d-c Q es Q s-us Q d-us Quota amount

37 EFFECT OF A QUOTA In the export market quantities drop and a wedge is created between US and Canadian price A deadweight loss is created again In this case however it is payments that accrue to quota holders (this is now economic rent!)

38 DIFFERENCES BETWEEN THE QUOTA AND TAX Besides who might appropriate tax revenues or quota rent A hard quota fixes how much can be exported so increases in US demand will not translate into increases in Canadian prices beyond a certain point But at low enough US demand, prices may equilibrate Under a tax however, wedge is maintained regardless of whether US demand is high or low

39 WHY? Political economy of the dispute: who wins? How concentrated are benefits and losses? One estimate (van Kooten 2002) pegs the gains from quota (relative to free trade)as follows: Canadian producers US producers Canadian consumers US consumers Deadweight loss + $190 million +$1.2 billion +$250 million - $1.8 billion - $160 million

40 DYNAMICS OF THE DISPUTE Market share Historically 30-35% Now in low 20 s Agreement designed to manage market share

41 CHRONOLOGY 1980 TO % SLA ( ) 40% Lumber II & MOU ( ) Lumber IV ( ) % 400 Percent Lumber I ( ) US$/MBF 20% % 0% Lumber III ( ) Canada's share of U.S. market Year Framing Lumber Composite Price SLA ( )

42 WILL IT GO AWAY? The financial returns are considerable Political and legal machinery in place to continue Different perspectives by Canadian and American public contribute to persistence of dispute 25 cent stumpage-wouldn t happen under private system