During the US presidential campaign, George W. Bush repeatedly called for freer trade. His commitment to the cause is now being put to the test: the US and Canada are heading towards a full-scale trade war over softwood timber. This long-running issue has become the US's biggest trade dispute with its most important trading partner.
Although most goods flow freely across the border between the two countries, many in the US softwood industry continue to lobby successfully for the imposition of trade barriers. The most recent example is the 1996 Softwood Lumber Agreement, which imposes special fees on any softwood imports in excess of 14.7bn board feet.
That agreement has now expired and US timber interests have been mobilising to prevent an outbreak of free trade. For nearly two decades they have claimed - with great effect - that their Canadian rivals receive government subsidies in the form of low "stumpage" fees to harvest timber from Canadian crown lands. Even though investigations of these allegations by the US Department of Commerce and by special binational panels have generally found them to be without merit, the US timber industry keeps winning the lobbying war in Congress. As a result, Canada is forced to accept restrictions on trade in timber in order to avoid an all-out trade dispute.
The trade barriers in the softwood industry impose substantial costs on businesses and homeowners in the US. In a study conducted with Prakash Loungani of the International Monetary Fund, we estimated the likely impact of trade barriers on the price of timber, taking into account factors such as the strength of economic conditions measured by US housing starts, movements in the overall producer price index and changes in timber supplies.
Allowing for these, it is clear that trade barriers have added an estimated $50 to $80 (£35-£56) per 1,000 board feet to the price of timber. That is equivalent to placing a 20-35 per cent tax on users. Workers in the main timber-using sectors in the US outnumber logging and sawmill workers by more than 25 to 1. On balance, therefore, the restrictions penalise many more people in the US than they benefit.
The resulting increase in the price of timber also adds to the price of new homes. At the time of signing the Softwood Lumber Agreement, Mickey Kantor, then trade representative, said the trade restrictions would have a "negligible, if any" impact on prices of new houses. In fact, the reality is different. Construction wood is one of the principal materials used in housebuilding, and about 75 per cent of softwood use in the US is for new home construction or repairs. Although there is some potential for substituting other materials, such as steel framing, its extent is limited.
For these reasons, increases in timber prices almost always lead to an increase in the price of new or remodelled homes. In particular, the increases caused by the trade restrictions on Canadian timber have added between $800 and $1,300 to the cost of a new home. That has denied about 300,000 families the dream of home ownership.
The relief home-buyers would get from the elimination of these trade restrictions is of the same order of magnitude as the relief that Mr Bush's tax cut plan would give to a middle-income married couple with two children.
In spite of the damage caused by the restrictions, it is far from clear that free trade will prevail. A serious clash of opposing lobbies is now shaping up. On one side, the Coalition for Fair Lumber Imports, a lobby group for some US timber producers, has predictably filed complaints under the US anti-dumping and countervailing duty laws, alleging "unfair trade" and demanding duties of about 70 per cent against Canadian imports.
On the other side is an assortment of groups representing sectors that bear the cost of the trade restrictions. These include timber retailers and users such as Home Depot and the National Association of Home Builders. This side also has strong support in Congress: last year more than 100 members of the House of Representatives co-sponsored a resolution against the Softwood Lumber Agreement.
The US administration will have to weigh in on one side of the dispute. Specifically it has to investigate the dumping and subsidy claims of the US timber producers and perhaps defend its findings before the North American Free Trade Agreement and World Trade Organisation dispute panels.
The big question is how the investigators will use the considerable discretion that US trade laws afford them. If Mr Bush is as ardent a supporter of free trade as he claims, he will tell his subordinates to bury the agreement permanently and not impose any new barriers.