Commentary

Against the Grain: How Lumber Quotas Hammer Home Buyers

This article appeared in the Wall Street Journal on August 11, 2000.

At the GOP convention last week Republicans stressed the need to revitalize flagging efforts to expand world trade. It’s a worthy goal, but it won’t be realized unless the next occupant of the White House, whoever he is, can sell Americans on the benefits of open markets. A promising approach to making that sale is now taking shape, surprisingly enough, in the midst of one of America’s oldest and most intractable trade disputes.

The long-running feud with Canada over softwood lumber is the U.S.’s largest single trade dispute, with its largest trade partner. The stakes are huge: Canadian firms export some $7 billion worth of lumber annually to U.S. customers. In other words, the dollar value of U.S. lumber imports from Canada is almost equal to that of its carbon steel imports from the whole world.

For nearly two decades, the lumber dispute has followed a drearily repetitive pattern. First, some U.S. lumber producers accuse their Canadian rivals of receiving government subsidies — in particular, they allege that the Canadians pay unfairly low “stumpage” fees to harvest timber from Canadian Crown lands. The Canadians respond that their timber pricing policies are not market-distorting, and they generally win on the technical merits — whether at the U.S. Commerce Department, which investigates subsidies, or before special binational panels that review Commerce Department decisions. Despite losing those battles, the American lumber lobby usually ends up winning the war: Its relentless political pressure forces Canada to accept some form of trade restriction just to buy commercial peace.

The latest “truce” is the Softwood Lumber Agreement, or SLA, which sets export quotas for Canada’s largest lumber-producing provinces and then imposes punishing surcharges on above-quota shipments. That agreement, signed back in 1996, is due to expire on March 31, 2001. And so, inevitably, American and Canadian lumber producers are girding for battle once again. But this time a new belligerent has entered the fray, and its appearance on the scene promises to break the dismal cycle of protectionism. This time, American lumber users are making their voices heard.

Frustration with years of costly trade barriers has finally stirred the American victims of those barriers into action. A broad coalition of lumber-using interests — including the National Association of Home Builders, the National Lumber and Building Material Dealers Association, Home Depot and affordable housing groups — has banded together to demand that the SLA be allowed to expire next year and that no new restrictions be erected in its place. Its pitch is that free trade will benefit not only lumber-using businesses but millions of American home buyers as well.

The facts support the lumber users’ position. A recent Cato Institute study, which I co-authored with Cato colleague Mark Groombridge and IMF economist Prakash Loungani, finds that trade restrictions have jacked up the price of lumber between 20% and 35%, or $50-$80 per thousand board feet. As a result, the cost of the average new home is between $800 and $1,300 higher than it would be if free trade prevailed. And according to an analysis by the Bureau of the Census, every $1,000 increase in housing prices means that an additional 300,000 families are unable to purchase a home. Trade restrictions thus act as a regressive tax that keeps the dream of homeownership out of reach for many lower-income Americans.

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The cost of the average new home is between $800 and $1,300 higher than it would be if free trade prevailed.

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Yes, barriers against Canadian imports do benefit some U.S. lumber producers and their workers. But in 1999 there were only 217,000 American jobs in logging and sawmills. Compare that to 510,000 jobs in lumber-using manufacturing industries, 744,000 jobs in the wholesale and retail lumber trade, and more than 4.7 million jobs in homebuilding. If jobs are the currency of trade politics, let it be noted that lumber-using workers outnumber lumber-producing workers by better than 25 to 1.

The organization of lumber users into an active coalition has wrought a dramatic change in the politics of the lumber dispute. Protection-seeking lumber producers no longer enjoy a lobbying monopoly at home. Now when they prowl the halls of Congress or the U.S. Trade Representative office, they keep running into their disgruntled customers.

And not only are there new participants in the debate, the terms of the debate have shifted as well. The traditional battle lines centered on the question of “fair trade”: Is there a “level playing field” or do Canadian firms compete unfairly? Analytically, the Canadians have always had the better of that argument. While the Canadian system of government-owned forests leaves much to be desired from a free-market perspective, there is no compelling evidence the system gives Canadian lumber producers any artificial or unfair advantage over their rivals to the south. Nevertheless, the whole controversy put the Canadian side — and free trade — on the defensive.

By redirecting attention away from alleged subsidies and onto the issue of affordable housing, the new lumber-using lobby has turned the tables and put its opponents on the defensive for a change. After all, who could be against removing barriers to homeownership? This seize-the-moral-high-ground strategy has already begun paying dividends for the free-trade cause. Over 100 members of the U.S. House of Representatives have signed on as co-sponsors of a resolution calling for termination of the SLA; a companion resolution is picking up steam in the U.S. Senate. This level of congressional support for free trade in lumber is absolutely without precedent. What is even more striking is the extent to which that support draws from outside the usual free-trade ranks: Of the 116 current House co-sponsors, 38 voted against permanent normal trade relations with China.

It’s far too early to tell how the latest round of the softwood lumber dispute will ultimately be decided. The vested interests that profit from protectionism will fight back hard; don’t count them out yet. But already the American lumber-using coalition has won an important victory: It has altered the political landscape of a major trade issue. There is a lesson in that success for the larger free-trade cause: A populist, pro-consumer campaign for open U.S. markets can sell on the home front.

Brink Lindsey is vice president for research at the Cato Institute