Impact of the Duty on Canadian Lumber Announced April 25

On April 25, the Department of Commerce levied a 19.88% duty rate against Canadian softwood lumber exports to the United States. Due to “special circumstances,” the duties will be retroactive 90 days from the date that the rates are officially published in the Federal Register, likely back to the beginning of February. Five Canadian lumber producing companies will face specific duty rates, the highest of which (24.12%) will be levied on West Fraser Timber (Random Lengths Special Report 4/24/2017).

NAHB estimates that the annual impact of the 19.88 percent duty, if in effect throughout 2017, would be a loss of

  • $498.3 million in wages and salaries for U.S. workers,
  • $350.2 million in taxes and other revenue for governments in the U.S., and
  • 8,241 full-time U.S. jobs.

Many of the jobs are in construction, but the effects are not limited to a single industry, as wages and jobs are also lost in businesses that sell and transport building materials, provide architecture and engineering services, etc. Some jobs are gained in the U.S. sawmill industry, but this is almost entirely offset by losses in other manufacturing industries.  In total, 25 or more jobs are lost in 31 different detailed (6-digit NAICS code) industries.

The losses of wages, jobs and taxes shown in the above bullets are net losses, that take the increases in wages, jobs and taxes in the domestic sawmill industry into account.  Jobs are measured in Full Time Equivalents (enough work to keep a worker employed full-time for a year).

The analysis is for calendar year 2017, assuming that some of the impacts have already occurred as markets have anticipated the Commerce Department’s announcement.

The 2017 baseline that would prevail in the absence of the duty is based on 2016 lumber production and consumptions statistics, mid-2016 prices adjusted for inflation, and construction spending in 2016 adjusted for inflation and anticipated real increase, and wages per job adjusted for inflation. The adjustment factors are taken from NAHB’s 2017 forecast for the Consumer Price Index, Residential Fixed Investment, and Housing Starts for 2017.  In addition, wages per job are inflated using HUD’s estimate of Median Family Income for 2017.

Starting from this baseline and applying average measures (elasticities) of the way markets respond to price changes taken from a  2011 technical article by Baek produce estimates that, in 2017, the average 19.88 percent duty would result in a

  • reduction of 1.2 billion board feet in Canadian imports,
  • increase of 834.4 million board feet in output of U.S. producers for the domestic market, and
  • 6.4 percent increase in the price paid by U.S. customers.

It is well known that home builders are among the major U.S. consumers of softwood lumber. The effect of the increased price the duty would cause them to pay for lumber (assuming the conventional price elasticity for housing demand of -1) include a

  • $1,236 increase in the price of an average single-family home
  • $424 increase in the market value of an average multifamily home
  • $945.1 million reduction in investment in single-family structures, and
  • $146.1 million reduction in investment in multifamily structures.

NAHB’s National Impact of Home Building model can then be used to translate the reduced investment in residential construction into net impacts on the U.S. economy. The resulting impacts by major industry group and type of tax (or other government revenue) lost are shown in the following table:

Note: the above considers only the impacts of increased output by U.S. sawmills and reduced investment in new residential construction. It does not include any upstream impacts of inputs used by U.S. sawmills, such as timber; nor does it include negative impacts of higher prices on other industries that use lumber, such as residential remodeling.

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2 replies

  1. A very interesting analysis sir. However, if it’s the case that if the tariff is 19.88%, but the predicted increase in price is only 6.4%, that would entail that Canada must lower their prices, does it not? E.g., assuming a base price of $400/MBf, then the post-tariff price is $425.60, implying that Canada lowers its price to $355 ($355 + 19.88% = $425.60). Then using your estimates of changing Q (Canada sells 1.2 billion less Bf; USA produces 834.4 more Bf), one can calculate the following:

    Producer surplus gain = $849M
    Consumer surplus loss = $1,230M
    Deadweight loss = $26M
    Tax paid by US consumers = $354M
    Terms of Trade gain = $623M

    The latter figure is the lost profit of Canadian producers that gets transferred to the US treasury. And according to mainstream trade theory, if the terms of trade gain exceeds the deadweight loss, as it does big-league in this case, then net welfare for the imposing country goes up, and is thus said to be “better off”–assuming a trade war isn’t sparked! A graphical analysis can be found here:

    • You can do this type of calculation. A couple of things to keep in mind, though. The resulting analysis shows that (in addition to U.S. lumber producers) the entity in the U.S. that benefits is the U.S. Treasury. Consumers of lumber–in particular, the home building industry–still emerge as losers, which is the main point of the post. Also, as residential investment in the U.S. declines due to the higher lumber prices, federal taxes paid by the residential construction sector also decline, offsetting part of the revenue the Treasury gains from the tariff.

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