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Point • Counterpoint: Tariffs on Canadian softwood lumber

By / September 10, 2018

Point Counterpoint

Canada Tariffs

POINT

 

Tariffs on Canadian softwood lumber hurt the U.S. homebuilding market

True. Millions of first-time home buyers and young families struggling to gain a toehold on the homeownership ladder are being left out in the cold or feeling the pain of sticker shock thanks in large part to soaring lumber prices that are being exacerbated by tariffs on Canadian lumber imports into the U.S.

Lumber is a critical building material used extensively in single-family construction and framing lumber prices have jumped since the beginning of last year. Prices skyrocketed to a record $582 per thousand board feet in June and, even after falling recently, remain at historically high levels. The tariffs have caused huge uncertainty in the market, and the resulting price volatility has added thousands of dollars to the price of an average new home.

The typical builder operates on margins averaging less than 6%. When the price of their lumber package goes up, they are often forced to absorb these added costs. Further, the rate of return on the S&P homebuilders index is half that of the S&P 500 since the U.S. Lumber Coalition filed its trade case. This shows how the home building sector has fared far worse than other industries since the tariffs went into effect.

Meanwhile, the U.S. lumber cartel is profiting handsomely off this market disruption, raking in record earnings at the expense of American home builders and home buyers. Domestic lumber producers asserted that the tariffs were needed because the domestic timber industry faced an unfair competitive advantage from Canada. But a closer look at the facts tells a different story.

In 2017, the U.S. home building industry consumed 47.62 billion board feet while the U.S. lumber industry produced only 33.86 billion board feet. The U.S. must rely almost exclusively on Canadian lumber to make up the difference.

The U.S. has imposed tariffs and quotas in the past to protect the domestic lumber industry and in every instance, it has been rebuked by independent bodies such as the World Trade Organization.

When NAHB leaders met with Commerce Secretary Wilbur Ross in June to discuss the situation, even the secretary expressed surprise how lumber prices have risen sharply higher than the 20% tariff rate. Citing these record lumber prices, Secretary Ross agreed to explore the possibility that other forces may be manipulating the market.

Which brings us back to the U.S. lumber cartel. Since the tariffs were enacted, domestic lumber production has not kept pace with growing demand, and U.S. logging and sawmill employment has been relatively flat. In a normal economic scenario, tariffs coupled with a steadily growing housing recovery would encourage domestic lumber producers to ramp up production and hiring to meet a growing demand for lumber.

One can only conclude that major lumber firms are taking advantage of the situation, content to sit back and reap bigger profits off the backs of American home owners. And it appears to be oddly coincidental that shortly after NAHB’s meeting with Secretary Ross, prices began retreating from their peak.

Clearly, the U.S. Lumber Coalition, which urged the Commerce Department to act against Canada, has no incentive to ask the agency to rescind these unfair, punitive tariffs. Yet, a status quo that keeps in place protectionist policies that further line the pockets of the domestic lumber companies at the expense of millions of potential home buyers and the many industries that depend on a reliable supply of softwood lumber at reasonable prices is not the answer.

This is why 171 bipartisan members of Congress sent a letter to the administration urging the U.S. to quickly resume negotiations with Canada. A new softwood lumber trade agreement that will be equitable for all parties—including the industries and consumers that rely on softwood lumber for their economic well-being—is an important step to restore price stability to the lumber market.

Randy Noel
Randy Noel, Chairman
National Association of Home Builders


COUNTER
POINT

 

Tariffs on Canadian softwood lumber hurt the U.S. homebuilding market

False. The notion that the “Trump tariffs” pose a threat to the U.S. housing recovery does not stand up to close scrutiny. For starters, the U.S. trade restrictions are merely the latest round of a long-standing dispute between the U.S. and Canada that goes back more than 35 years. In fact, the U.S. position was supported by all four Democratic Senators from Washington and Oregon and would have changed very little had Hillary Clinton won the 2016 election.

To be sure, the trade restrictions have had a hand in the recent increase in lumber prices. Lumber market participants started to price in the effects of these restrictions starting in the first quarter of 2017. Western Spruce Pine Fir 2×4 mill prices entered 2017 at $310 per MBF and climbed to $403 by July. The rise in the Random Lengths Framing Lumber Composite price at the mill was less dramatic; it increased from $358 per MBF in January to $396 in July (and $421 in August). On the whole, we estimate that the U.S. trade restrictions account for about a third of the runup in lumber prices between 2016Q4 and 2018Q2.

The following other factors played a major role in the run-up in lumber prices in the first half of 2018:

• General market tightness caused by the failure of supply to keep pace with demand.
• A massive reduction harvestable timber in British Columbia due to the Mountain Pine Beetle infestation.
• A severe fire season in British Columbia, Washington and Oregon.
• An abnormally cold winter which wreaked havoc with Canada’s rail network. Rising trucking costs in the U.S. added to the transportation woes.
• These supply constraints were concurrent with steadily increasing demand from the U.S. housing sector (both from starts and improvements).

Finally, it should be noted that structural panel prices, which are subject to many of the same supply and particularly demand drivers as lumber have also risen sharply. There are currently no trade restrictions between the U.S. and Canada on OSB and plywood.

Now, let’s look at the lumber costs of building the average new single-family home in 2018. We assume an average home size of 2,650 square feet. We’ll consider the period between 2016Q4 (before President Trump took office) and 2018Q2.

Our analysis shows that the average new home will use about 15,000 board feet of lumber and that dealers typically command a 15% to 20% markup on lumber.

Now all we need to do is take the delivered price for lumber, apply the mark-up to it and then multiply by the usage rate in a typical home and we get a very good idea of how much each product contributes to the cost of a home. We used the Random Lengths Framing Composite price and we applied a 18% markup. We estimate 2016Q4 lumber delivery costs at $50 per MBF; for 2018Q2, delivery costs were estimated at $75 per MBF.

With 2016Q4 prices, the lumber required to build a typical home would cost $7,115. When we applied the average 2018Q2 price, the per-home lumber cost increased to $10,939. Thus, the total change in lumber prices between 2016Q4 and 2018Q2 added $3,823 to building costs.

The average price of a new home over the first four months of 2018 was about $326,000. The total increase in lumber costs from 2016Q4 to 2018Q2 is only 1.2% of that price—and it’s amortized over 30 years. If we assume a 4.75% mortgage rate and a 30-year term, the total increase in lumber costs adds less than $20 a month to a typical mortgage payment.

If one accepts our estimate that a third of the run-up in lumber prices is due to trade restrictions, then the “cost” of the trade restrictions come to about $1,262 per home or $6.58 on a monthly payment.

It’s safe to say that though the housing recovery may have 99 problems, rising wood products prices ain’t one.

Brendan Lowney
Brendan Lowney, Principal
Forest Economic Advisors LLC

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