By: The Working Forest Staff
By Edward Lotterman
TWIN CITIES PIONEER PRESS — It is hard to think of a dumber thing for any president to do than increase tariffs on a product, the price of which consumers and businesses are very aware, just at a time when that same president is
under intense political fire for rising inflation. Yet that is what the Biden administration did last week, with little fanfare in a holiday week, in raising taxes on imports of Canadian softwood lumber to 17.9 percent from 8.99 percent.
Of course, there is politics in this as well. U.S. forest products producers, including ones in northern Minnesota, want greater restrictions on imports because imports lower prices here. That is Econ 101.
Users of wood, especially home builders, want lower prices, regardless of where the wood comes from. However, unlike raw steel, of which most households buy little, many families do buy lumber for projects large and small. So increases in the prices of boards and building panels like plywood are very apparent to consumers in a way that reinforcing rods, sold at the same big box stores, are not.
Politicians juggle pressures from these two groups. Over recent decades, the U.S. lumber industry seems to have had more clout than wood users, whether consumers or businesses.
Lumber prices had a historic spike. By early 2021, builders’ associations asserted higher wood prices were adding $38,000 to the cost of the average new U.S. home. Always take industry numbers with much salt, but there was a historic spike.
Prices had trended sideways after about 2012 but had dropped 30 percent from June 2018 to June 2019. They then stayed about level until COVID hit in 2020. Initially, prices then fell into a hole, falling to 2017 levels in April of last year. That short dip reversed up into a tear, roughly quadrupling in the 14 months to June 2021. The collapse was nearly as fast, falling by two-thirds in three months. For October 2021, they were right where they had been in the spring of 2018.
Much of the extreme spike resulted from millions of do-it-yourselfers, homebound by COVID, buying materials for projects. The rush accentuated as the epidemic seemed to wane into 2021. The spike in real estate markets spurred home building.
Wood producers here and in Canada, by far our largest foreign source, initially could not re-ramp production up fast enough to prevent shortages. As output rose, however, prices fell again. Caution in the face of the wave of cases caused by the delta variant has added to the slowing.
In the last two days, prices are again rising because of the just-announced import duty increases. Canadian lumber has a substantial market share, usually between a fourth and a third of total use in our country. So tariffs can sharply influence wholesale and retail prices.
Those who have studied econ understand that “elasticity” — or how production or purchases respond to price changes — always plays a role in situations like this. Both the demand for and the supply of lumber are deemed “inelastic,” especially in the short term. This means that production rises slowly in response to market price increases and amounts users are willing to buy does not change that much. That is part of why we saw the extreme fluctuations over the past three years — rising or falling prices did not disrupt demand.
Hundreds of Minnesota forest product workers will benefit from the tariffs. Hundreds of thousands of Minnesota consumers will pay more. Economists nearly always calculate a loss of overall wellbeing from events like this. But politics is politics.
The whole kerfluffle raises a few broader points. Canada is our closest ally in many ways and its economy is most integrated with ours. The cultural and social overlaps between the two nations are enormous. But trade always has its irritants and those work both ways.
Canada’s conservative party won a pivotal election in 1911 on the slogan of “no truck or trade with the Yankees!” One result was no specific U.S.-Canada trade agreement for 65 years. However, over this time, the U.S. and Canadian auto industries then concentrated almost entirely on a Michigan-Ontario axis, had become highly integrated. We have always been very reliant on imports of Canadian aluminum.
So we were not cut off from each other. We became more integrated with CUSTA, the Canadian-U.S. Trade Agreement, negotiated at Canada’s request, which soon morphed into NAFTA when Mexico wanted in.
But President Donald Trump quickly slammed the door on cordial trade with our northern neighbor by unilaterally imposing tariffs on steel and aluminum based on specious “national defense” considerations. This was outrageous. Canada had been a faithful supplier of these metals through five important U.S. wars starting with WWI through our 1991-2021 adventures in the Persian Gulf region and Southwest Asia.
Yet Joe Biden has left nearly all the Trump tariffs in place. This raises the very broad issue of whether the World Trade Organization is dead, strangled in its crib by its midwife.
From the 1960s into the 1990s, the U.S. beat drums globally to transform the weak General Agreement on Tariffs and Trade into a stronger, more encompassing World Trade Organization. This would have real power to adjudicate trade disputes and impose penalties. We wanted it to cover agriculture, which we, ourselves, had insisted on keeping out of the GATT originally.
We got all of this — and no sector of the U.S. economy benefited more than agriculture. However, at the same time, the economy of China grew exponentially, doubling about every eight years from 1980 to 2020. This imposed political stresses on world trade.
In 2016, candidate Trump’s platform promised an effective unilateral repudiation of what seven previous presidents from both parties had struggled to get. When elected, Trump did so.
The irony of ongoing softwood disputes with Canada is that Canada had won the most recent of a badminton-like series of complaints filed with the WTO. We could appeal, but Trump had neutered the appeals court by refusing to approve any nominees to it. So we are in a position where we have unilaterally broken nearly all of the contractual trade commitments that we made to other nations over the last 30 years.
We need a national, bi-partisan conversation on what sort of trade regime we want. And there is zero chance that such a conversation will be raised by either party.
St. Paul economist and writer Edward Lotterman can be reached at [email protected].
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