President Trump's Tariff On Canadian Softwood Lumber Imports Will Hurt America Most
President Trump's Tariff On Canadian Softwood Lumber Imports Will Hurt America Most
Apr 25, 2017 @ 12:32 AM 6
Frances Coppola,
Contributor
I write about banking, finance and economics.
The Trump administration has fired the first broadside in its insane battle against bilateral trade imbalances. And its aim was not what most people expected. Canada, not China, is the target of the Trump trade team’s wrath.
Commerce Secretary Wilbur Ross has just announced a new 20% tariff on imports of Canadian softwood lumber. The US currently imports about $5.66 billion worth of softwood lumber from Canada every year. It is an essential input for the American construction and home repair industries.
This move is ostensibly in response to a petition from American lumber producers, who have long complained that Canada’s system of “stumpage” (charges for logging on Canada’s government-owned lands) amounts to an unfair subsidy. The US has never managed to prove that Canada’s pricing is unfair: it has lost legal challenges at the World Trade Organisation and under NAFTA. But American lumber producers continue to complain, and American governments continue to launch futile legal action against Canada in response to their complaints. Viewed in this light, this move simply looks like yet another attempt to pacify American lumber producers.
But anyone who was paying attention to Trump’s pronouncements even before he was elected would have seen this coming. Canada was the first of six countries listed by Peter Navarro and Wilbur Ross as the primary “cause” of the USA’s trade deficit:
Consider that roughly half of our trade deficit is with just six countries: Canada, China, Germany, Japan, Mexico and South Korea. If we look at the bilateral relationships of America with each of these countries, improvement in our trade balance is clearly achievable through some combination of increased exports and reduced imports, albeit after some tough, smart negotiations – an obvious Trump strength.
The paper from which this quotation comes was issued in September 2016. It is the blueprint for President Trump’s trade policy. It was therefore always inevitable that Canada would be targeted for protectionist measures. And given the long-running dispute between Canada and the USA over softwood lumber pricing, the lumber industry was bound to be first in line. It will not be the last.
Of course, anyone who has a basic grasp of international trade economics knows that the USA’s trade deficit is not “caused” by any country, however large its trade surplus versus the USA. The USA’s trade deficit arises from the interplay of finance and trade among all the countries in the world. In particular, as I have explained elsewhere, it is an inevitable consequence of the dominance of the US dollar in international trade. The USA’s trade deficit, like its fiscal deficit, reflects the global hegemony of the USA.
But Trump’s trade team doesn’t have even a basic grasp of international trade economics. Peter Navarro has a Ph.D in economics from Harvard, but that doesn’t make him an expert on trade: his doctoral thesis was on why corporations donate to charity. And Commerce Secretary Wilbur Ross’s background is in business, not economics. Both are protectionist to the core, as is Trump himself. All three are practising voodoo economics of the worst kind, to the detriment of the people they claim to serve.
Canada’s response to Secretary Ross’s announcement was prompt and robust:
The Government of Canada disagrees strongly with the U.S. Department of Commerce’s decision to impose an unfair and punitive duty. The accusations are baseless and unfounded…..
The Government of Canada will vigorously defend the interests of the Canadian softwood lumber industry, including through litigation. In ruling after ruling since 1983, international tribunals have disproved the unfounded subsidy and injury allegations from the U.S. industry. We have prevailed in the past and we will do so again.
Battle is joined. Though given the US’s stated intention to renegotiate NAFTA, and its threat to bypass WTO dispute resolution, it is difficult to see which international tribunals could now arbitrate. Canada could end up having to tolerate a level of tariff that it considers unfair, because the alternative is a highly damaging trade war. Sometimes it is better to put up with bullying.
But sometimes it is better to dig your heels in. This policy promises to be extremely costly for Americans – as Canada was quick to point out:
This decision will negatively affect workers on both sides of the border, and will ultimately increase costs for American families who want to build or renovate homes. The U.S. National Association of Home Builders has calculated that a $1,000 increase in the cost of a new house would put home ownership beyond the reach of more than 150,000 American families, and jeopardize thousands of jobs in the American home construction industry.
Lumber, of course, is a global commodity: it is as yet unclear exactly how global prices will respond to the tariff. But these estimates are similar to those produced by the Cato Institute in 2000 (I told you this was a long-running dispute):
We calculate that trade restrictions add an estimated $50 to $80 per thousand board feet to the price of lumber, which drives up costs and shrinks profits for lumber users. The resulting addition of $800 to $1,300 to the cost of a new home prices some 300,000 families out of the housing market, denying them the dream of home ownership.
It is not just homebuyers who suffer from trade restrictions, either:
Protectionist trade barriers in the softwood lumber industry impose great costs on businesses and consumers here in the United States in order to enrich a few lumber producers. To put employment figures in perspective, it is noteworthy that workers in the major lumber-using sectors outnumber logging and sawmill workers by better than 25 to 1.
The “major lumber-using sectors” include home construction and repair, industries which together employ thousands of Americans.
Nor is the impact limited to lumber-using industries. The Canadian dollar has already dropped sharply versus the US dollar: the weakness of the loonie, if sustained, will mitigate the impact of the tariff on Canadian producers, while the dollar’s strength will make all imports from Canada – not just softwood lumber – more expensive. The tariff will therefore raise input costs not just for lumber users, but for all American businesses relying on imports from Canada. This is bound to raise both unemployment and consumer prices.
Effectively, this policy subsidises one industry while imposing higher costs on all the rest. It is obviously intended to hurt Canada, and it will of course have some impact there: but the principal pain will be felt by American citizens. The Cato Industry dubbed it a “beggar-my-consumer policy”. But it is also a "beggar-my-industry" policy - and that is much more harmful. Subsidising one small industry at the expense of other industries that employ far more people and contribute much more to American GDP makes no economic sense at all.
Protectionism always most hurts the people it aims to protect. Please, Mr. Trump, buy yourself some sensible trade advice – before you wreck the lives of the people who elected you. You promised them a better future. They are not likely to forgive you if you let them down.
https://www.forbes.com/sites/frances.../#5cfce8d84892
