Prime Minister Paul Martin struck just the right notes with American business leaders this week, in a forceful but restrained speech arguing that Washington’s refusal to play by the rules on softwood lumber is a “breach of faith” between partners. While Martin drew bigger headlines in Canada than in the U.S., the Wall Street Journal, CNN and news agencies all carried his complaint that Washington has damaged free trade by hammering us with $5 billion in unfair tariffs.
While I have also been known to complain about this particular tariff, one of the arguments that U.S. trade representatives make for these tariffs is that the claim that the Canadian government subsidizes the production of softwood lumber through below market stumpage fees. While this argument might meet the legal criteria for counterveiling duties, it begs two economic questions. One is whether it is true that the stumpage fees charged to loggers for the use of publicly owned forests in Canada are indeed below market prices. The second economic question is whether a reduction in these fees represents a reduction in the marginal cost of producing lumber or simply a shift in who gets the economic rents from the forests.
For a discussion of the rent argument, see this discussion of stumpage fees from Brent Day. Another interesting discussion comes from Changyou Sun and Daowei Zhang in their “Market Structure and Timber Harvesting Margins in the U.S. South: A Temporal and Spatial Analysis”, where they begin their modeling discussion thusly:
Timber is one of the primary factors of production in the forest industry. Players in the timber factor market consist of forest industrial firms (processors), logging firms (loggers), and forest landowners. Processors purchase timber (x) as one of their inputs and produce output (y), according to the production function y= f (x, z) where z includes other factor inputs. Processors pay the delivered price (w) for timber to loggers in the form of logging service fees (HM), and to landowners in the form of stumpage price (wf), where HM= w – wf.
Finally, Clark Brinkley and Daowei Zhang in “Impact of timber-fee increases on British Columbia forest products companies: an economic and policy analysis” show that a 1994 increase in stumpage fees reduced the rents received by publicly owned suppliers of lumber.
The research of Dr. Zhang et al. suggests to this reader that this stumpage fee issue is really an issue of who collects the rent: Canadian taxpayers or Canadian suppliers of lumber. As a justification for imposing tariffs, this allegedly below market stumpage fee argument does not seem to be a very good economic position.