Dynamics of Trade and Economic Theory of Trade

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Dynamics of Trade and Economic Theory of Trade

• Shashi Kant
• Faculty of Forestry
• University of Toronto

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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

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US Canada Softwood Lumber Trade
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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.

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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.

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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.

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Lumber producers Another strong year thanks to
housing starts (1221 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.

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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.

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What are Main Issue(s)?

• Is Factor (Timber) Pricing in Canada main
  issue?ORAre 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?

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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?

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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?

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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)?

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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

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Some Impact Results (cont.)

• Zhang (2001) SLA (1997 US ), first 4 yearsThe
  average price impact 59/MBF The US producers
  gain 7.7 billionThe Canadian prod gain 2.9
  billionThe US consumers loss12.3 billion
• Yin and Back (2002)MOU Canadian exports drop by
  10 during 19962 to 20011,pushed US prod, no
  price changeSLA No significant impact on
  Canadian supply, lumber prices, and U.S.
  productionOther factors, such as exchange rates,
  housing starts, and log prices have played major
  roles in shaping the lumber markets.

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What is the main purpose of trade restrictions?
Probably to reduce the Canadian supply of lumber
in the USA market.
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Softwood Lumber Export to the USA
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Why this Outcome?

• Simple Economic ReasonsThe 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

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Housing Starts in the USA (1000 Units)
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Mortgage Rates in the USA
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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

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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

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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 LumberMarket

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Global Overview of Forest Industry
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Production, Trade Consumption Industrial Round
wood (m m3)
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Production, Trade, Consumption pulp for paper
(m m3)
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Production, Trade Consumption Selected
Countries
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Financial Information by Country/Region (US
million) (PWC, 2004)
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PWC Top 12 (PWC 2004)
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Top Two from Different Regions/Countries
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Canada (US Million) (PWC, 2004)
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ROCE Leaders (PWC, 2004)
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Conventional Trade Theory
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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

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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

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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.

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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.

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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

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Developments in Trade Theory
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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

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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 countrys
  prices may not accurately reflect underlying
  costs and the pattern of comparative advantage.
• Any Relevance to SFL trade

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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.

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Conclusions

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