What’s Next in the U.S.-Canada Softwood Lumber Dispute? An Economic Analysis of Restrictive Trade Policy Measures

A new chapter of an everlasting softwood lumber trade dispute between the U.S. and Canada begins with an imposition of the countervailing duty (CVD) and anti-dumping (AD) tariffs on Canadian softwood lumber supply to the U.S. By using a 20-region global softwood lumber trade model, we examine the regional welfare impacts of CVD and AD tariffs on U.S. imports of Canadian softwood lumber in both countries. We also evaluate the welfare implications of alternative restrictive trade policies relevant to the softwood lumber trade dispute. Simulation results from a mixed complementary problem model calibrated using positive mathematical programming reveal that a 26.75% CVD and AD tariff curtails Canadian lumber shipments to the U.S. by 4.9 million cubic meters (m3), reduces Canada’s market share in the U.S. by nearly 5%, and encourages the U.S. domestic lumber industry to produce an additional 2.6 million m3. The government tax revenue and the U.S. producers’ gain clearly outweigh the loss incurred by U.S. consumers. However, Canadian producers have an economic incentive to voluntarily reduce their share of the U.S. market by voluntarily restricting exports and capturing quota rents. Additionally, the foreign exchange rate has the ability to alter the effects of protectionist policies.

This figure depicts the change in Canada to U.S. lumber shipments associated with changes in the CAD/USD exchange rate, for three scenarios: free trade, a 10% tariff, and the current 26.75% tariff. The figure can be read two ways. First, viewing vertically and holding exchange rates constant, an increase in the tariff on Canadian softwood lumber shipments to the U.S., leads to a reduction of those shipments. Alternatively, viewing horizontally and holding tariff rates constant, an increase in the CAD/USD exchange rate makes Canadian lumber relatively more expensive for U.S. consumers, driving U.S. imports down. Likewise, if the Canadian dollar depreciates against the USD, we move left within Figure 4, driving up U.S. imports of Canadian lumber. The bars indicate the sensitivity of results to plus or minus one standard error in the U.S. price elasticity of demand.

Brexit: Assessing the Potential Impact on Global Wood Products Industry

Screen Shot 2016-08-30 at 1.15.32 PMOn June 23rd, 2016, the United Kingdom (UK) voted to end its membership with the European Union (EU), creating widespread uncertainty in global financial markets; the S&P 500 fell 3.59% in the U.S., the FTSE 100 fell 3.15% in Britain, and the DAX index fell 6.82% in Germany. These bearish reactions reflect larger concerns that may contribute to reduced growth of the UK economy including increased uncertainty about future levels of household income, a deteriorating terms of trade, and a discouragement to invest among UK firms. Together, these factors may lead to reduced consumption, production, trade, and value added within the British economy. Furthermore, Britain’s exit means the EU loses economic power as Britain represented 16.2% of the EU’s economy in 2015; an important implication as the EU will likely remain Britain’s most important trading partner

The forest products industry may be vulnerable to such developments. Wood products are normal goods, such that declines in relative income negatively affect consumption. Furthermore, the industry is an increasingly complex market, as wood products are interlinked and traded internationally to capture comparative advantage. As a result, economic shocks within the EU are likely distributed across wood product markets and regions, as observed in recent renewable energy policies within the EU and the UK. Nonetheless, the impact on the forest products industry has the potential to be significant as the UK relies heavily on imports. In 2014, the UK had a net trade deficit of $2.2 billion in lumber, $0.8 billion in wood pulp, and $1.4 billion in wood based panels. Clearly, declining consumption and an eroding terms of trade will affect the UK wood products industry, and may have implications in international markets (See Fig. 2)

Assessing the Effects of Increased Internet Adoption on Global Paper Based Media Markets.

Screen Shot 2016-01-14 at 11.17.47 AMThe demand for paper products has received considerable attention in recent years as we continue to observe declining demand for newsprint and printed materials after decades of growth (see Fig. 1). The Internet, together with other technological advances, have provided an electronic substitute to newspapers and printed materials. During the 1990’s, the demand for paper in communication was thought to be independent of these electronic substitutes (e.g. Miller Freeman inc. 1995, p. 146; Zhang & Buongiorno 1997). In more recent years, however, there is increasing evidence that a structural shift has occurred in communication consumption patterns (Hetemäki & Obsersteiner 2001; Hetemaki 2005, 2008; Szabo et al. 2009), as preferences have shifted away from paper products and toward electronic media as populations adopt the Internet (Hujala 2011; Latta et al. 2015). Failure to account for this shift in preferences is likely to bias estimates of the evolution of the paper products industry.

Dealing with Risk and Uncertainty in Forest Management under Climate Change

Societal interest in mitigating climate change has opened the door for forest management to play an integral role in reducing atmospheric CO2. Yet, uncertainties involving the effects of climate change can significantly affect forest planning and decision making. Literature concerning the role of risk in forest management is well established, but few have considered risk and uncertainty in forest carbon offset production. As climate change is expected to increase the frequency and severity of disturbances, future carbon removals in forests will inevitably become more uncertain.

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This research investigates the impact of risk and uncertainty on forest planning decisions for joint economic and ecological benefits. First, we propose to build a forest management model, taking into account stochastic disturbances to stand growth and carbon flux based on past behavior of ecological, climatic, and economic shocks. Next, we determine the viability of generating carbon offsets, and how sensitive this is to stochastic carbon prices. Finally, we will integrate the carbon stored in harvested wood products to round out the carbon budget of the forest. This research will better inform forest managers and policy makers of the economic and ecological effect of uncertainties resulting from climate change.

Europe’s Increasing Bioenergy Demand

European governments are rapidly turning to biomass to comply with the EuropeEU’s legislated renewable energy targets set out for 2020 and 2030. It is expected that EU member states will have to further rely on imports of biomass from timber rich regions, which will undoubtedly disrupt international wood product markets.

We develop and apply a global forest trade model to examine the global effects of expanded demand for wood pellets fired within European coal power plants. Positive mathematical p
rogramming is used to calibrate the model to bilateral trade flows. Preliminary results suggest renewable energy policies that increase the demand for wood pellets may harm consumers of electricity and/or taxpayers in the region implementing these policies. Additionally, there is need to account for the interconnections among forest products, globally. Further, although the EU renewable energy policies are beneficial to the forestry sector as a whole (assuming gainers can compensate losers), there may be winners and losers within this sector.

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Back to the Past: Burning Wood to Save the Globe?

Carbon flux from burning biomass is assumed (legislated) to be neutral because biomass growth sequesters CO2. Trees take decades to recover the CO2 released by burning, so assumed emissions neutrality (or near neutrality) implies that climate change is not considered a threat. When there is greater urgency to address climate change, less emphasis should be attached to future CO2 removals from (additions to) the atmosphere. Doing so reduces the benefits of substituting biomass for fossil fuels. In that case, co-firing wood biomass with coal to generate electricity reduces the emissions attributed to the use of wood to as little as 7% (32%) compared to coal for a 60-year (20-year) harvest cycle. Other factors related to forestry activities reduce the attractiveness of biomass energy even further.

Bioenergy Integration into Existing Grids

imagesIn an effort to reduce CO2 emissions from fossil fuel burning, renewable energy policies incentivize using biomass as an energy source. Co-firing biomass and coal in retrofitted power plants is viewed as an efficient means to reduce carbon dioxide emissions in the energy sector. Under IPCC reporting rules, the impacts of energy produced from biomass would not be reported in the energy sector, thereby effectively lowering the emissions intensity of a power plant. In this study, a carbon tax is compared to a feed-in tariff for incentivizing conversion of coal plants to co-fire with biomass. In the application, a model of an electrical grid is linked to a fibre transportation model. Prelimiary results indicate that there is an upper threshold on a carbon tax after which retrofitting of coal plants is less efficient than increasing natural gas generating capacity. This is not the case with a feed-in tariff as it specifically targets biomass energy. Although the optimal generating mix achieved with a carbon tax leads to lower aggregate emissions than the mix achieved using a feed-in tariff, it will result in higher average generating costs.

American Journal of Agricultural Economics: ENERGY

AJAEThe AJAE collected seven papers to highlight current research on emerging energy sources, and made them available open source in a special issue entitled Energy. Included in these seven papers is one I published with two colleagues back in 2013. Below is a description of the issue from the journal’s editor, Madhu Khanna:

“In this virtual edition of the American Journal of Agricultural Economics we highlight the recent research on emerging sources of energy, including biofuels, natural gas and wind and their economic and environmental implications. While these are potentially low carbon sources of energy that can contribute to energy security for the US, their production has led to controversies about their economic and environmental impacts and the trade-offs they generate between food and fuel production, energy security and environmental quality. This virtual issue includes both papers that provide original estimates and reviews of existing evidence on these topics.

These papers show the extent to which the expansion of biofuels has led to an integration of agricultural and energy markets and its implications for the link between energy prices, agricultural commodity prices and land values. They provide evidence of the positive and negative environmental impact of these alternative energy sources and ways to monetize these effects. They highlight the challenges for policies seeking to induce a shift in demand to low carbon energy sources and provide empirical estimates of the energy and carbon prices needed to induce production. This issue illustrates the significant role for economic analysis in drawing attention to the societal implications of emerging technologies and in designing policies to reduce unintended consequences.”