Point / Counterpoint: Tariffs on Canadian Softwood Lumber

By / 2 weeks ago

Tariffs on Softwood

There is no shortage of strong opinions about the recently announced tariffs on Canadian softwood lumber imported into the U.S. To present both sides of this issue, LBM Journal reached out to the National Association of Home Builders, which has voiced strong opposition to the tariffs, and to the U.S. Lumber Coalition, which lobbied for and supports the tariffs, to answer one question:

“Are U.S. duties on Canadian lumber good or bad for America’s lumber/ building material industry?”

Point

American home builders need reasonably priced lumber to build homes that average working families can afford. This is why the National Association of Home Builders (NAHB) strongly opposes the decision by the Department of Commerce to impose a duty of nearly 20% on Canadian softwood lumber exports to the U.S.

Barriers that restrict trade on softwood lumber from Canada not only harm U.S. home builders, but also U.S. home buyers and other consumers of softwood lumber products. Protective duties or tariffs are basically government subsidies to American lumber producers that allow them to sell their products at a higher price. Ultimately, the duty on softwood lumber from Canada is little more than a thinly disguised tax on American home buyers.

NAHB economists found that the proposed duties will increase lumber prices by 6.4% and will add $1,236 to the price of an average single-family home. The economists used estimates published in academic literature to calculate how Canadian imports, domestic production and domestic demand will react to the duty. This was applied to the amount of softwood lumber in a typical home, based on the annual Builder Practices Survey produced by Home Innovation Research Labs, to calculate the $1,236 impact on home price.

By contrast, the U.S. Lumber Coalition has said the tariffs will add about $287 to the price of a home. However, the Coalition did not provide the economic analysis underlying this figure. It might as well have been pulled out of thin air.

For decades, whenever the housing market has shown signs of picking up momentum, domestic lumber producers have complained that Canada unfairly subsidizes lumber exports to the U.S. This issue has repeatedly been adjudicated. Multiple NAFTA panels and even the World Trade Organization have concluded each time that the Department of Commerce improperly calculated any benefit conferred by subsidies. Significantly, they also determined that the Department of Commerce’s calculations were done in a way that did not comply with U.S. international obligations.

The U.S. lumber lobby continues down this well-worn path because it knows it can ultimately restrict the amount of lumber imported from Canada. Why? Because the Canadian economy is much more dependent upon the lumber industry compared to the U.S. As a result, the Canadian government in the past has often been coerced into settling on negotiated agreements that are bad for their industry and bad for American lumber users.

The U.S. should not punish Canada—and by extension, American home buyers, lumber consumers and businesses that use lumber—for producing this product more efficiently than their American counterparts. Trade policy should reflect the interests of consumers and businesses alike who rely on a stable, steady supply of goods and services (in this case, lumber). U.S. trade policy and actions should not be predicated on protecting inefficient producers. There are some businesses that benefit when competition is restricted. However, the interests of the nation as a whole, for both consumers and workers, are best served when artificial barriers to free competition, including international trade, are eliminated.

NAHB estimates that the increase in lumber prices resulting from the duty would reduce spending on new singlefamily construction by $945.1 million and new multifamily construction by $146.1 million in 2017. The effect would be a loss of nearly $500 million in wages and salaries for U.S. workers, $350 million in taxes and other revenue for governments and more than 8,200 full-time U.S. jobs. And these are net losses that prevail even after taking increased production and employment in U.S. sawmills into account.

More than one-third of the lumber consumed in the U.S. last year was imported, and more than 95% of the imports came from Canada. The fact that America cannot meet the nation’s demand for lumber is all the more reason to move forward on an equitable U.S.-Canada trade agreement that will provide a reliable and affordable supply of lumber and meet the housing needs of American consumers.

–Granger McDonald
Chairman, National Association of Home Builders


“Are U.S. duties on Canadian lumber good or bad for America’s lumber/ building material industry?”

CounterPoint

Last month the U.S. Department of Commerce announced tariffs to offset subsidies on Canadian lumber exports to the United States. The National Association of Homebuilders (NAHB) objected to this decision and purports to be defending American homebuyers in making several curious arguments that have little to do with NAHB’s self-interest in this case—its members’ profit margins.

PointCounterpoint

First, NAHB claims that the tariff will add more than $3,000 to the cost to building a new home. Readers of LBM Journal have the background to see for themselves that the NAHB numbers cannot be right. Consider a typical house that uses 15,000 board feet (MBF) of framing lumber, the product at issue. The Random Lengths composite, which NAHB itself uses as a guide for framing lumber prices, prior this legal case was around $400 per MBF, or $6,000 for that house. Only a third of U.S. lumber is from Canada, so that’s $2,000 of the cost. Multiplying the Canadian portion by 20% tariff implies $400—a small fraction of the NAHB claim.

Yet even this assumes that all of the tariff cost will passthrough to the homeowner. Yet independent analysts note that excess U.S. lumber capacity to meet demand and the lack of alternative markets for Canadian lumber means that most of the tariff will be “absorbed” (paid for) by Canadian exporters—not U.S. consumers. This is exactly what happened the last time there were tariffs on Canadian lumber, and some major Canadian companies are suggesting to market analysts that they will again absorb the tariff. If Canadian exporters absorb even half the tariff, the cost to build a new home would rise less than $200 to cover the tariff passed through.

This math is why Bob Wetenhall, the homebuilding analyst at RBC Capital Markets (Canada’s largest investment bank), said that the tariff’s effect on the U.S. housing market would be no more than a “papercut” and that, “It’s not going to affect the real estate market, [and] it’s not going to impact housing prices.”

NAHB’s second argument is that the U.S. housing market “needs” Canadian lumber. Yet in 2005, U.S. sawmills shipped 40.5 billion boardfeet of lumber, 24% more than in 2016. If last year U.S. sawmills had shipped at their 2005 levels they could have supplied about 84% of the U.S. market, leaving only 16% for imports, rather than onethird Canada actually had. And U.S. timber harvests have long been less than their full potential. As the U.S. Forest Service has concluded, “Growth has exceeded removals on U.S. timber lands for several decades…,” and concluded that with proper incentives, timber inventories could grow even faster. Third, NAHB says 150,000 people would lose “home affordability” for “each $1,000 increase” in homebuilding costs. But what does “affordability” mean to NAHB?

Certainly not how many homes are actually built, sold, or lived in. How do we know this? NAHB’s own technical documents tell us: they admit that the “analysis doesn’t answer… what the differences in home sales or housing starts would be….” Instead, it simply means 150,000 people— whether or not they are even in the market for a house— would have to settle for a “typical” house worth $1,000 less than they could afford before the $1,000 price increase. Well, of course.

NAHB’s real concern appears to be that the small portion of its members’ profits that have been supported by Canadian government subsidies might be withdrawn by a legal finding in favor of a petitioner that has been trying to compete against those same Canadian subsidies for decades. But homebuilder profits are robust and their stock values are near ten-year highs. For the U.S. forestry industry, leveling the playing field against unfairly traded subsidized Canadian lumber by President Trump’s enforcement of the WTO consistent U.S. trade laws means adding U.S. jobs to supply our own market with American made softwood lumber.

–Zoltan van Heyningen
Executive Director, U.S. Lumber Coalition

LBM Journal

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