Shashi

Dynamics of Trade and Economic Theory of Trade: 

Dynamics of Trade and Economic Theory of Trade Shashi Kant Faculty of Forestry University of Toronto

Overview of Presentation: 

Overview of Presentation US Canada Softwood Lumber Trade Global Overview of Forest Industry Conventional Trade Theory Recent Developments in Trade Theory Linkages between Trade Theory and Patterns of Forest Products Trade

US Canada Softwood Lumber Trade: 

US Canada Softwood Lumber Trade

American Consumers for Affordable Homes: Four Powerful Senior House Members Initiate Letter Urging Bush Compliance with NAFTA, WTO Canadian Lumber Decisions (Wed, Feb16, 12.49 PM ET): 

American Consumers for Affordable Homes: Four Powerful Senior House Members Initiate Letter Urging Bush Compliance with NAFTA, WTO Canadian Lumber Decisions (Wed, Feb16, 12.49 PM ET) A letter signed by House Rep Whip Roy Blunt (R-Mo), House Minority Whip Steny Hoyer (D-Md.), House Appropriation Committee Chair, Jim Kolbe (R-Ariz), and House Ways and Means Committee Member Richard Neal (D- Mass.) cites the importance of a reliable supply of lumber for domestic housing industry in light of the fact that the US cannot provide sufficient quantities of the type of wood needed for homebuilding from Canada “ Imposing duties on Canadian lumber is a tax on American Homebuyers.” the letter says.

WTO Sets Panel to Rule on Softwood Lumber Dispute (Feb 25, 2005, 12.02PM ET): 

WTO Sets Panel to Rule on Softwood Lumber Dispute (Feb 25, 2005, 12.02PM ET) Geneva: The WTO set up a panel Friday to decide if Canada can apply $4,25b in sanctions against the USA in the long-running lumber dispute between the two NA neighbors, official said. The second panel, also created Friday, will examine whether Washington has complied with an earlier ruling that said some U. S. duties on Canadian lumber were illegal under international trade rules.

Minister to Lead Trade Lobbying Effort in U.S. (Feb 27, 2005, 11.45ET) : 

Minister to Lead Trade Lobbying Effort in U.S. (Feb 27, 2005, 11.45ET) Washington: International Trade Minister Jim Peterson is leading a delegation of Canadian MPs, provincial officials and business leaders this week to lobby key U.S. politicians on major trade issues. The group is planning an advocacy day Tuesday on Capital Hill that will target influential legislators on trade committees in the Senate and House of Representatives. The group will reinforce the importance of the Canada-U.S trading relationship but also portray nagging disputes like the one over softwood lumber as costly to jobs, investment and the global view of competition in North America.

Lumber producers: Another strong year thanks to housing starts (12:21 PM, EST Mar 02, ALLAN SWIFT: 

Lumber producers: Another strong year thanks to housing starts (12:21 PM, EST Mar 02, ALLAN SWIFT Despite the softwood lumber dispute with the U.S., the Canadian lumber industry is looking forward to another good year thanks to the ongoing construction boom in North America, the chairman of the Canadian Lumbermen's Association (Martin Michaud) said Wednesday. "It was a very good year for softwood producers," he said in an interview with The Canadian Press during the association's annual convention. "We had record prices and a buoyant market." "The only cloud was the countervailing duties that are still there after so many positive decisions; we are still being dealt in an unfair way with our neighbours to the south," he said.

Lumber producers: (cont.) : 

Lumber producers: (cont.) Michaud's comments came as provincial trade officials met Wednesday in the Toronto area with U.S. Commerce Undersecretary Grant Aldonas. A federal trade spokesman said the meeting was constructive and was aimed at possibly resuming full negotiations to end the softwood dispute. CMHC estimates residential construction in Canada will moderate from 2004's 17-year high of 233,431 new housing units to reach 216,300 starts this year and residential construction will continue to ease in 2006 with national housing starts dipping seven per cent to 201,100 units, as a result of higher interest rates and higher housing costs. Lumber prices also reached record levels, helping to compensate for the duties. The price of western construction studs, an industry benchmark, was on average $393.35 US per 1,000 board feet in 2004, according to a spokesman at Madison's Canadian Lumber Reporter, an industry newsletter. This is well above the average price of $269.15 US in 2003.

What are Main Issue(s)? : 

What are Main Issue(s)? Is Factor (Timber) Pricing in Canada main issue? OR Are Politics and Relations between Industry and Government main issues? Who is benefiting from trade restrictions (CVD and AD)? Can the USA design an economic mechanism to its own benefit?

Factor Pricing in the USA and Canada: 

Factor Pricing in the USA and Canada Timber Pricing Canada: Current Pricing System Market Pricing in the case of Autarky USA: What is the proportional contribution of timber from small private woodlot owners (not from industry owned forestland) to total timber supply of the USA? Are there imperfections in the market of standing timber on small private woodlot owners?

Factor Pricing in the USA and Canada (cont.): 

Factor Pricing in the USA and Canada (cont.) USA (cont.) What about sales from government lands (below cost sales)? What about timber from industry owned forestland? Other Factor (Capital) Pricing The most critical factor for every sector of the economy?

Who is Benefiting From Trade Restrictions?: 

Who is Benefiting From Trade Restrictions? The main outcome of any trade-restriction (Quota, import duties, export duties) – increase in prices of imported good in the importing country. So, who is the loser – consumers of importing country, and who is the winner – producers of the importing country. What about the producers of the exporting country (depends)?

Some Impact Results: 

Some Impact Results Myneni et al. (1994): Impact of MOU (1982US$) the US consumer loss : $147.4 m/yr the US producer gain : $109.5 m/yr Wear and Lee (1993): MOU (1982 US$) the US consumer loss : $947.4 m/yr the US producer gain : $658.1 m/yr Lindsay et al. (2000) Both the MOU and SLA – lumber prices went up by $50-80/MBF, $800 to $1,300 to the cost of new home, and 300,000 families being priced out of the housing families each year

Some Impact Results (cont.): 

Some Impact Results (cont.) Zhang (2001): SLA (1997 US $), first 4 years The average price impact: $59/MBF The US producers gain: 7.7 billion The Canadian prod gain: 2.9 billion The US consumers loss:$12.3 billion Yin and Back (2002) MOU: Canadian exports drop by 10% during 1996:2 to 2001:1,pushed US prod, no price change SLA: No significant impact on Canadian supply, lumber prices, and U.S. production Other factors, such as exchange rates, housing starts, and log prices have played major roles in shaping the lumber markets.

What is the main purpose of trade restrictions? Probably to reduce the Canadian supply of lumber in the USA market.: 

What is the main purpose of trade restrictions? Probably to reduce the Canadian supply of lumber in the USA market.

Softwood Lumber Export to the USA: 

Softwood Lumber Export to the USA

Why this Outcome?: 

Why this Outcome? Simple Economic Reasons The expected price relationship between D & S for any good is for static conditions. The softwood lumber demand in the USA is a derived demand – mainly housing construction – which depends on many other economic factors such as Overall economic performance Mortgage Rates and Interest Rates Exchange rate

Housing Starts in the USA (1000 Units): 

Housing Starts in the USA (1000 Units)

Mortgage Rates in the USA: 

Mortgage Rates in the USA

What is the Problem?: 

What is the Problem? Simple: Non-recognition or non-understanding of difference in the Economic Incidence and Legal Incidence of Trade Restrictions Simple text book argument: In the case of perfectly price-inelastic demand – total economic incidence will be shifted to buyers What is price elasticity of lumber? However, this analysis is also in the case of ceteris paribus conditions. Other conditions – income, exchange rate, mortgage rates, population structure - change

Can current duty regime be worse, to the USA, than quota regime? : 

Can current duty regime be worse, to the USA, than quota regime? Why not? Increase in lumber prices No decrease in lumber demand/ imports ? Duties are Illegal – so either return it or face counter duties on your products? Outcome: U.S. Consumers pay high prices, and the U.S. and Canadian producers gain due to artificially created high prices. Does not mean that it will not have some losses to Canada, but it may be more harmful than the quota system to the USA

Can the USA design an economic mechanism to its own benefit?: 

Can the USA design an economic mechanism to its own benefit? Probably not given the demand structure of softwood lumber in the USA? May be – by intervening in the domestic market of lumber, Example Japan Or Total Government Control of the Lumber Market

Global Overview of Forest Industry: 

Global Overview of Forest Industry

Slide30: 

Production, Trade & Consumption Industrial Round wood (m m3)

Slide31: 

Production, Trade, & Consumption pulp for paper (m m3)

Slide32: 

Production, Trade & Consumption: Selected Countries

Financial Information by Country/Region (US$ million) (PWC, 2004): 

Financial Information by Country/Region (US$ million) (PWC, 2004)

PWC Top 12 (PWC 2004): 

PWC Top 12 (PWC 2004)

Top Two from Different Regions/Countries: 

Top Two from Different Regions/Countries

Canada (US $ Million) (PWC, 2004): 

Canada (US $ Million) (PWC, 2004)

ROCE Leaders (PWC, 2004): 

ROCE Leaders (PWC, 2004)

Conventional Trade Theory: 

Conventional Trade Theory

The Ricardian Theory (Mainly Technological Differences) : 

The Ricardian Theory (Mainly Technological Differences) Single Factor of Production – Labor Constant Returns to Scale Technological Differences (in terms of labor productivity) Outcome: Likelihood of complete specialization and gains from trade to all workers in both countires

The HOV Theorem: Factor Endowments : 

The HOV Theorem: Factor Endowments Model: Two goods, two factors, two countries model Assumptions: Constant Returns to Scale Preferences in both countries are identical and homogenous Fixed supplies of two factors (K & L), homogenous, and perfectly mobile between industries within each country, but perfectly immobile between countries No market distortions Goods are identical Countries differ in their relative factor endowments

The HOV Theorem: Factor Endowments: 

The HOV Theorem: Factor Endowments The HO Theorem: A country will export the commodity that intensively uses its relative abundant factor. The Factor-price-equalization Theorem: Under CRS technologies, free trade in commodities will equalize relative factor prices through the equalization of relative commodity prices, so long as both countries produce both goods. The Stopler-Samuelson Theorem: Under CRS, and production of both goods, a relative increase in the price of a commodity will increase the real return to the factor used intensively in that industry and reduce the real return to the other factor.

The HOV Theorem: Factor Endowments: 

The HOV Theorem: Factor Endowments The Rybeznyski Theorem: If relative commodity prices are constant and if both commodities continue to be produced, an increase in the supply of a factor will lead to an increase in the output of the commodity using that factor intensively and a decrease in the output of the other commodity. The Factor Content Theorem: For an arbitrary but equal number of goods and factors, a ranking of the content of any factor in net exports divided by its content in total output will duplicate the ranking of relative factor endowments.

The HOV Theorem: 

The HOV Theorem Problems: Almost All the Assumptions Constant Returns to Scale Identical and homogenous preferences Homogenous, and perfectly mobile factors between industries within each country, but perfectly immobile between countries No market distortions Goods are identical Countries differ in their relative factor endowments

Developments in Trade Theory: 

Developments in Trade Theory

The Specific-Factors Model: 

The Specific-Factors Model Assumption: One factor (K) is specific to industry, but other (L) is homogeneous Some Results: Presence of specific factors means that they will have different prices within the economy. Trade does not equalize factor prices across countries. The returns to the specific factors are unambiguously related to commodity price changes, such is not the case for the return to labor. Any Relevance to Softwood Lumber Trade

The Increasing Returns to Scale Model: 

The Increasing Returns to Scale Model Some Results: With IRS, trade and gains from trade can arise between two identical (in terms of factor endowments) economies (without any comparative advantage) – Non-comparative Advantage Trade Gains from trade are not necessarily distributed evenly, even between identical countries. Strong conclusions about gains from trade are, however, impossible to draw because scale economies are generally associated with market distortions. The result is that a country’s prices may not accurately reflect underlying costs and the pattern of comparative advantage. Any Relevance to SFL trade

Other Determinants of Trade: 

Other Determinants of Trade Different Tastes and Diversity of Products Per Capita Income and Non-homogenous Preferences Theories of Trade Based on: Life Cycle of New Products Life Cycle of New Technologies.

Conclusions: 

Conclusions Linkages between current and future trade of forest products and emerging trade theories Where should we go – as academicians, policy makers, producers?