It’s hard to think of a dumber thing for a president than raising tariffs on a product, of which consumers and businesses are very aware, just at a time when that same president is
under intense political fire from rising inflation. Still, that’s what the Biden administration did last week, with little fanfare in a holiday week, by increasing taxes on imports of Canadian softwood lumber to 17.9 percent from 8, 99 percent.
Of course, there is also politics there. U.S. producers of forest products, including those in northern Minnesota, want tighter restrictions on imports because imports drive down prices there. This is the Econ 101.
Wood users, especially home builders, want lower prices, regardless of where the wood comes from. However, unlike raw steel, which most households buy little from, many families buy wood for projects large and small. So the price increases for building boards and panels like plywood are very noticeable to consumers, unlike rebar, which is sold in the same big box stores.
Politicians juggle pressures from these two groups. Over the past several decades, the US lumber industry appears to have outweighed users of lumber, whether consumers or businesses.
Timber prices have experienced a historic peak. In early 2021, builders’ associations claimed that higher lumber prices added $ 38,000 to the cost of an average new home in the United States. Always take industry numbers with a lot of salt, but there has been an all-time high.
Prices had moved sideways after around 2012, but fell 30% from June 2018 to June 2019. They then stayed roughly at the level until COVID hit in 2020. Initially, prices then fell into a hole, falling to 2017 levels in April of last year. That short drop reversed into a tear, roughly quadrupling in the 14 months to June 2021. The collapse was almost as rapid, dropping two-thirds in three months. For October 2021, they were exactly where they were in the spring of 2018.
Much of the extreme spike results from millions of DIY enthusiasts, confined to their homes by COVID, purchasing equipment for projects. The rush intensified as the epidemic appeared to subside in 2021. Soaring real estate markets boosted housing construction.
Timber producers here and in Canada, by far our largest foreign source, were initially unable to revive production quickly enough to avoid shortages. However, as production increased, prices fell again. Caution in the face of the wave of cases caused by the delta variant added to the slowdown.
In the past two days, prices have risen again due to the newly announced import duty increases. Canadian lumber has a substantial market share, usually between a quarter and a third of the total use in our country. Thus, tariffs can strongly 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 considered “inelastic”, especially in the short term. This means that production increases slowly in response to increases in market prices, and the quantities that users are willing to buy do not change much. That’s part of why we’ve seen the extreme swings over the past three years – rising or falling prices haven’t disrupted demand.
Hundreds of Minnesota forest products workers will benefit from the tariffs. Hundreds of thousands of Minnesota consumers will pay more. Economists almost always calculate a loss in general welfare because of events like this. But politics is politics.
The kerfluffle set raises a few wider points. Canada is our closest ally in many ways and its economy is the most integrated with ours. The cultural and social overlaps between the two nations are enormous. But trade always has its irritants, and these work both ways.
The Conservative Party of Canada won a pivotal election in 1911 on the slogan “No Truck, No Trade with the Yankees!” One of the results was the absence of a specific trade agreement between the United States and Canada for 65 years. However, during this period the US and Canadian auto industries, then concentrated almost entirely on a Michigan-Ontario axis, had become highly integrated. We have always been very dependent on imports of Canadian aluminum.
So we weren’t cut off from each other. We became more integrated with CUSTA, the Canada-US trade agreement, negotiated at Canada’s request, which quickly turned into NAFTA when Mexico wanted to join.
But President Donald Trump quickly slammed the door to cordial trade with our neighbor to the north by unilaterally imposing tariffs on steel and aluminum on the basis of specious “national defense” considerations. It was scandalous. Canada has been a staunch supplier of these metals through five major American wars beginning with World War I until our 1991-2021 adventures in the Persian Gulf region and Southwest Asia.
Yet Joe Biden left almost all of the Trump tariffs in place. This raises the very broad question of whether the World Trade Organization is dead, strangled in its cradle by its midwife.
From the 1960s to the 1990s, the United States drummed globally to transform the weak General Agreement on Tariffs and Trade into a stronger, more comprehensive World Trade Organization. The latter would have real power to settle trade disputes and impose sanctions. We wanted it to cover agriculture, which we ourselves wanted to exclude from GATT originally.
We have it all – and no sector of the US economy has benefited more than agriculture. However, at the same time, China’s economy has grown exponentially, doubling roughly every eight years from 1980 to 2020. This has placed political pressures on world trade.
In 2016, candidate Trump’s platform promised an effective one-sided repudiation of what seven previous presidents of both parties had struggled to achieve. Once elected, Trump did.
The irony of the ongoing softwood lumber disputes with Canada is that Canada has won the most recent in a series of badminton-type complaints filed with the WTO. We could appeal, but Trump had neutralized the appeals court by refusing to approve candidates. We are therefore in a position where we have unilaterally broken almost all of the contractual trade commitments we have made to other countries over the past 30 years.
We need a national, bipartisan conversation about what kind of trade regime we want. And there is no chance that such a conversation will be raised by either party.
St. Paul’s economist and writer Edward Lotterman can be contacted at [email protected]