On Canadian lumber tax, builders worried about profits, not buyers

May 2, 2017

By: The Hill

Following a lengthy, detailed investigation initiated in November 2016, the U.S. Department of Commerce last week determined that Canadian lumber exports to the U.S. market are subsidized and set an average tariff of 20 percent to offset these subsidies.

For the U.S. forestry industry, the full and effective enforcement of the U.S. trade laws by the Trump administration means that more softwood lumber will be produced in the United States by U.S. workers. Trade law enforcement brings about a shift in production volume to satisfy the U.S. market — away from Canada and to U.S. companies, workers and their communities.

The fact is that the strong action taken by the Trump administration means that Canada’s unfair trade practices will be offset and that there will be more U.S. investment, U.S. production and U.S. jobs in the lumber industry.

 

Homebuilders, however, expressed concern that lumber costs would rise, and they would be unable to pass these costs onto new home buyers, thus reducing their near-record profits. In response to their member’s concerns, the National Association of Home Builders (NAHB) launched a public relations campaign, including an op-ed piece in The Hill last week, claiming the tariff would reduce something it calls “home affordability,” a curious index the NAHB appears to have invented for PR purposes.

Importantly, a careful reading of the NAHB editorial finds no argument that the tariff would significantly affect the actual number of homes built or result in a meaningful increase in new home prices. The reason? As independent industry analysts have concluded, the tariff has no significant effect on the cost of home construction.

As the duties were announced, Bob Wetenhall, a homebuilding analyst at RBC Capital Markets (Canada’s largest investment bank), told CNBC that the 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.”

Nor does the NAHB editorial even venture a guess as to what the tariff’s effect will be on lumber prices or, in turn, homebuilding costs. Instead, a close reading shows that the NAHB only asserts that an increase in lumber prices earlier this year was “largely” due to the yet-to-be-imposed tariffs.

Then, the NAHB uses the full amount of that price increase‚ which the editorial had just acknowledged occurred for a variety of reasons, to assert that the cost of an average new home rose $3,600. That would be about a 50-percent rise in lumber costs in a home. This is simply unsupportable.

To straighten-out this grab-bag of ill-defined NAHB numbers, first consider the cost of the tariff: The 20-percent tariff covers $5,600 million in subsidized Canadian lumber exports in 2016, or, before applying any real economics, about $1,120 million in tariff costs. But homebuilding uses only about 30 percent of lumber produced, so only $336 million of those costs fall on homebuilding.

Last year, there were 1.17 million housing starts, so that’s $287 per house. A far cry from the $3,600 figure put forth by NAHB. That $287 equates to about $1.36 a month on a 30-year mortgage.

But now let’s introduce some simple economics. The arithmetic above assumes 100 percent of the tariff is paid for by the new homeowner. But that’s not how the burden of a tax works. The share of a tax’s cost is split between the seller (here, Canadian lumber producers) and the buyer (homebuilders and new homeowners), depending on each side’s relative economic circumstances. To confirm this, consult any Econ 101 text.

In the case of lumber, independent analysts note that excess U.S. lumber capacity to meet demand (U.S. producers shipped 24-percent more lumber in 2005 than they did last year, and the Forest Service says there are plenty of trees for growth even beyond that) 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 — a conservative assumption — the cost to build a new home would rise $143, or 68 cents on the mortgage, given the math shown above.

This is the “papercut” mentioned by the RBC analyst. Applying the full economics of supply response by all producers over time, there will be a small price increase on all lumber (not just Canadian), but mostly, consumption will simply shift from subsidized Canadian product to U.S.-made product.

What about NAHB’s “Home Affordability Index”?  As noted above, NAHB never makes an estimate of the tariff’s role in homebuilding costs. For its “index” NAHB merely says 150,000 people would lose “home affordability” for “each $1,000 increase” in homebuilding costs. So, taking the NAHB at its word, the $143 increase shown above implies an “affordability” effect on 21,500 people.

But what does “affordability” mean to the NAHB? Certainly not how many homes are actually built, sold, or lived in. How do we know this? The NAHB’s own technical documents tell us. It says the “analysis doesn’t answer … what the differences in home sales or housing starts would be.”

What the “index” actually shows (and mostly doesn’t show) is a long story, but the important thing is that the index has no relevance to questions of the tariff’s effect on homebuilding.

The NAHB also has a slew of numbers on the tariff’s supposed effect on jobs and wages, but, as can be seen from the specious NAHB arithmetic above, these claims — for which no supporting calculations can be found anywhere — are clearly baseless. If the NAHB cannot say what the tariff’s effect on homebuilding costs is, or how many fewer homes will be built, how can it estimate the impact on homebuilding jobs and wages?

We know the cost effect of the tariff is small, as independent analysts confirm, so the effect on wages and jobs cannot be significant. There is a reason the NAHB numbers have emerged from a black box.

So what is the NAHB’s real concern? Its newsletter for its own members, “NAHB Now,” provides a clue. A recent article notes the effect on homebuilders’ own costs and quotes a builder as saying, “If it [lumber price] jumps 10 percent or 20 percent, you can’t pass on the cost. You have to absorb it — and when lumber gets out of hand, it makes it more difficult to cover your costs.”

Such concerns have been voiced by homebuilders across the country as a result of the unfounded belief that the tariff would be higher than it was and would have price effects far greater than it possibly could (listening to the echo chamber of their own association’s PR campaign). It also should be noted that some homebuilders report that they see little effect on their business.

Twenty years ago this spring, contractors paid 44 cents for a board-foot of lumber. In spring of 2004, during the housing bubble, contractors paid 44 cents for a board-foot of lumber. This week, after the tariff announcement, that same board-foot of lumber costs 44 cents. That is with no adjustment for inflation.

Yet homebuilder profits are robust and their stock values are near 10-year highs. The NAHB’s op-ed concludes with the plea: “We can’t let special interests hijack the national interest.”  Yet the NAHB concern appears to be that the small portion of its members’ profits that have been supported by Canadian government subsidies might be reduced by a legal finding in favor of a petitioner that has been trying to compete against those same Canadian subsidies for decades.

For the U.S. forestry industry, leveling the playing field against unfairly traded, subsidized Canadian lumber by enforcing the U.S. trade laws means adding U.S. jobs to supply our own market with American made softwood lumber.

 

Zoltan van Heyningen is the executive director of the U.S. Lumber Coalition.

By: The Hill

Your comments.

Your #1 source for forestry and forest industry news.

Built by Sofa Communications