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Softwood lumber: A shot across the bow?
May 2017
During last year’s U.S. election campaign, much of the trade talk focused on Mexico and China. But the administration’s first
major import duties were against Canada—the latest salvo in the long-running softwood lumber dispute between the two countries. The trade action didn’t come as much of a surprise, and is likely to have a limited impact on the broader Canadian economy. But with the U.S. even threatening a full withdrawal from NAFTA, further signs of a breakdown in the bilateral trade relationship are significant.
A sign of things to come?
The October 2015 expiration of the 2006 Softwood
Lumber Agreement, and the termination of a subsequent 12-month ‘standstill’ period, enabled the U.S. to
again allege unfair practices in the Canadian lumber
industry. On April 24, it slapped 20% average duties
on softwood lumber imports from Canada, with fees to
be collected retroactively for the past 90 days. The
U.S. asserts that the ‘stumpage fees’ charged to Canadian producers for use of provincial Crown lands are
artificially low, and allows Canadian producers to sell
their product at below ‘fair value’ into the U.S. market.
Canadian softwood lumber exports to the United States
% of total nominal exports to the United States
6.0
5.0
4.0
3.0
2.0
1.0
0.0
The Canadian government contends that this view has
been disproved repeatedly by international tribunals Source: Statistics Canada, RBC Economics Research
since the 1980s. While softwood lumber accounts for only a small share of Canadian economic activity and overall exports to
the U.S., the shift in tone from our largest trading partner could be a sign of how aggressive the new administration will be in
any NAFTA renegotiation. A deterioration in the long-standing bilateral trade relationship could have significant implications
across industries.
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Lumber activities
First, sizing softwood
%
2.0
1.8
1.6
1.4
% of Total Employment
1.2
1.0
0.8
% of GDP
0.6
0.4
0.2
0.0
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Statistics Canada, RBC Economics Research
* Forestry & logging, wood product manufacturing
Laura Cooper
Economist | 416-974-8593 | [email protected]
Nathan Janzen
Senior Economist | 416-974-0579 | [email protected]
Countervailing and anti-dumping duties raise the price
of Canadian lumber in the U.S. market, dampening demand and adding to the headwinds Canada’s forestry
sector has faced over the past two decades. Softwood
lumber accounted for nearly 5% of total Canadian exports to the U.S. in the early 1990s when NAFTA came
into force, but dropped to 1% when the bottom fell out
of the U.S. housing market during the 2008/09 recession. Exports gradually recovered, and Canada shipped
C$9 billion of softwood lumber products to the U.S. in
2016. This represented 2% of total exports to the U.S.
and about 0.4% of Canadian GDP.
Trade | May 2017
The impact on the broader Canadian economy is likely to be minor, given that forestry, logging and wood
manufacturing production represents 1% of Canadian
GDP. The share is larger in British Columbia—where
more than half of Canadian softwood exports to the
U.S. originate—although softwood exports to the U.S.
account for just 2% of B.C.’s economy. The shares are
even smaller in New Brunswick, Quebec and Ontario.
Softwood lumber exports destined for the United States
% , 2016
60
55.4
50
40
30
21.3
20
U.S. homebuilders rely heavily on our lumber
One-third of the lumber used in the U.S. in 2016
was imported, 95% of it from Canada. As a result,
the imposition of 20% tariffs on wood products
from Canada will drive prices higher for U.S.
homebuyers, consumers and businesses. The National Association of Home Builders estimates that the increase in the
price of lumber will add close to US$3,600 to the price of a home in the U.S.
9.0
10
6.1
5.9
New Brunswick
Alberta
1.0
0.9
0.2
0.1
Nova Scotia
Saskatchewan
Manitoba
Newfoundland
and Labrador
0
Britis h Columbia
Quebec
Ontario
Source: Statistics Canada, RBC Economics Research
More worrisome: broader trade implications
The April 24 announcement of tariffs on softwood lumber has raised some concern that the new administration will take a
more aggressive stance in NAFTA renegotiations. Those concerns were exacerbated by reports that the Trump administration was preparing an executive order to withdraw the U.S. entirely from NAFTA, although the White House moved to
play down that possibility.
Which sectors could be at risk?
U.S. Housing Activity and Canadian Wood Exports
Millions of C$
Thousands of units
2500
1600
Canadian Wood Product Exports to the U.S. (LHS)
1400
U.S. Housing Starts (RHS)
2000
1200
1000
1500
800
1000
600
400
500
Many Canadian industries are highly exposed to U.S.
demand for intermediate inputs. They tend to be concentrated in goods-producing sectors, although natural
resources sectors also export products that serve as
inputs in U.S. finished goods. Services from Canada
to the U.S. could also be at risk, since services trade
between the two countries has more than doubled
since the implementation of NAFTA, exceeding
C$123 billion in 2015.
200
The U.S. administration’s anti-free-trade rhetoric has
centered on industries that run large trade surpluses
Source: Census Bureau, RBC Economics Research
with the U.S. Canadian industries that run an annual
trade surplus of C$1 billion or more—and thus highly exposed to trade renegotiation—are predominantly manufacturingrelated and include some components of mining activity as well.
0
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
The motor vehicle sector is one target, given its significant trade surplus with the U.S. The U.S. administration is likely to
push for at least some changes, particularly around ‘rules of origin’. But deeply integrated supply chains that run across the
border limit the chances that a significant trade disruption will emerge, given the attendant harm on U.S. industrial counterparts.
Dairy trade is a longstanding point of contention in Canadian international trade negotiations. But the Canadian dairy sector
produces primarily for the domestic market and does not significantly export or import (dairy products account for ~0.1% and
~0.2% of Canadian merchandise exports and imports with the U.S. market, respectively). That limits the extent to which the
U.S. can target the Canadian dairy industry directly. More likely: U.S. retaliatory action against other industries.
In recent comments, President Trump lumped energy in with dairy and lumber as sectors where Canada is unfairly competing.
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Trade | May 2017
The likely source for the comments is the large energy
trade surplus that Canada has with the U.S. (C$50
billion in net oil & gas trade in 2016) as the vast majority of Canada’s oil production is exported south of
the border. That said, targeted import tariffs on Canadian oil output would generate sharply higher gasoline
prices for U.S. consumers in the Midwest, where oil
supply is more dependent on Canadian production.
Canada/U.S. Trade Balance by Industry (Canada Perspective...)
$C, billions
-20
-10
10
20
30
40
50
60
Oil and Gas Extraction
Motor Vehicle Manufacturing
Primary Metal Manufacturing
Sawmills and Wood Preservation
Pulp, Paper and Paperboard Mills
Furniture and Related Product Manufacturing
Veneer, Plywood & Engineered Wood Product Manufacturing
Gold and Silver Ore Mining
Other sectors that are both relatively trade-sensitive
and ran a significant trade surplus with the U.S. in
2016 include primary metals, plastic products, chemicals, pharmaceuticals and seafood products.
Other Non-Metallic Mineral Mining and
Utilities
Grain and Oilseed Milling
Animal Production
Pharmaceutical and Medicine Manufacturing
Plastic Product Manufacturing
Canada: on guard
Seafood Product Preparation and Packaging
Bakeries and Tortilla Manufacturing
Canadian goods and services exports to the U.S. have
more than doubled in size since NAFTA’s inception
Source: Statistics Canada, RBC Economics Research
in 1994. The U.S. and Mexico were also beneficiaries
with trilateral trade increasing more than three-fold over the period, clocking in above US$1 trillion in 2015. Over this time,
businesses have benefitted from lower tariffs, greater clarity on trade rules and lower technical barriers to trade, making the
outright dissolution of NAFTA a scary proposition. The consequences would be significant across all three countries. The softwood lumber development may have been a shot across the bow. But President Trump has shown a willingness to reverse an
earlier position. He may have a change of heart once again.
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