Evaluation of the Substitutability between U.S. and Canadian. Softwood Lumber

Transcription

1 Evaluaton of the Substtutablty between U.S. and Canadan Softwood Lumber Angel H. Aguar-Román 1 Department of Agrcultural Economcs Purdue Unversty 403 W State Street West Lafayette, IN Tel: Fax: aaguar@purdue.edu Kenneth A. Foster Department of Agrcultural Economcs Purdue Unversty 403 W State Street West Lafayette, IN Tel: Fax: kfoster@purdue.edu Steve R. Shook Department of Forest Products Unversty of Idaho PO Box Moscow, ID Tel: (208) Fax: (208) shook@udaho.edu Selected Paper prepared for presentaton at the Amercan Agrcultural Economcs Assocaton Annual Meetng, Long Beach, Calforna, July 23-26, 2006 Copyrght 2006 by Aguar-Román, Foster, and Shook. All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copyrght notce appears on all such copes. 1 Angel H. Aguar-Román s a Ph.D. student n the Dept. of Agrcultural Economcs at Purdue Unversty, Kenneth A. Foster s a Professor n the Dept. of Agrcultural Economcs, Purdue Unversty, and Steve R. Shook s an Assocate Professor, Dept. of Forest Products at the Unversty of Idaho. 1

2 Evaluaton of the Substtutablty between U.S. and Canadan Softwood Lumber Abstract: Softwood lumber trade between the Unted States and Canada has worldwde attenton due to ts economc mportance and for lengthy dspute. Most studes have focused on welfare effects of the dspute, whle few studes have evaluated the queston of lkeness of product. Ths study evaluates the substtutablty between U.S. and Canadan softwood lumber ncludng other countres softwood lumber. Prce elastctes are derved from the lnear approxmaton of the Almost Ideal Demand System. The results show that softwood lumber mports to the U.S. from varous countres are ndeed substtutes for U.S. softwood lumber. The Morshma elastctes of substtuton ndcate that other countres have a hgher degree of substtutablty than Canadan softwood lumber. Key words: U.S.-Canada softwood lumber dspute, Lnear Approxmate Almost Ideal Demand System, Morshma elastcty of substtuton 2

3 Evaluaton of the Substtutablty between U.S. and Canadan Softwood Lumber Worldwde, the Unted States s the largest consumer of softwood lumber and Canada s the largest producer. In 2004, these countres consumed and produced 44% and 28% respectvely of the world s total producton and consumpton of softwood lumber (USDA, 2006). The bulky nature of softwood lumber and the proxmty of the two countres have made the Unted States and Canada mportant tradng partners. In 2004, the Unted States mported approxmately $7.4 bllon worth of softwood lumber, 90% of whch was mported from Canada (USITC, 2006). Imported Canadan softwood lumber represents 41% 1 of softwood lumber consumed n the Unted States. Overshadowng the economc mportance of ths trade relatonshp, however, has been the decades-long lumber trade dspute. Snce 1981, four softwood lumber dsputes between Canada and the Unted States have focused on the U.S. clam that Canadan softwood lumber s subsdzed and sold n the U.S. at below the cost of producton. To address ths clam, the Unted States establshed countervalng and antdumpng dutes on Canadan softwood lumber based on the determnatons of the U.S. Department of Commerce. The Dspute In Canada, stumpage fees are not determned by the market; nstead the Canadan government grants softwood lumber companes the harvest rghts to the standng tmber on Crown Lands n exchange for servce and mantenance oblgatons (e.g., roadbuldng, protecton aganst fre, dsease, and nsects) (WTO, 2003). The Unted States consders ths practce to be a subsdy to Canadan lumber producers who ultmately export ther lumber to the Unted States. The Unted States clams that sellng the 3

4 standng tmber n the open market, as s done n the U.S., would fetch hgher stumpage prces than the current exchange polcy used n Canada. Hgher stumpage fees would reduce the Canadan share of the U.S. softwood lumber market allowng U.S. lumber producers to have a hgher share of the market. In response, Canada argues that the servces provded by the softwood lumber companes should be taken nto account n computng the stumpage fees. In addton, Canada contends that ts vast endowment of forest land provdes a natural compettve advantage over ts compettors, that U.S. frms are not effcent, and furthermore t opposes U.S. nterventon nto Canadan soveregnty. The U.S. softwood lumber producers clam that mports from subsdzed Canadan softwood lumber cause loss of sales and jobs. U.S. consumer groups assert that such detrment could not occur because Canadan softwood lumber s not a substtute for U.S. softwood lumber (ACAH, 2002). Currently, all softwood lumber mports from Canada fallng under the Harmonzed Tarff Schedule (HTS) code are subject to a tarff of 22 %. Ths s a hgh level of aggregaton whch arguably protects some U.S. lumber producers unnecessarly. Objectve Ths study evaluates the substtutablty between U.S. and Canadan softwood lumber by computng prce elastctes derved from the lnear approxmaton of the Almost Ideal Demand System (LA/AIDS). Whether or not Canadan lumber s subsdzed falls outsde the scope of ths study. But f subsdes exst, Canadan lumber can only be detrmental to the U.S. lumber producers to the extent that ther products are substtutes. Absent 4

5 close substtutablty, U.S. producers cannot be njured and therefore the case for protectve polces s weakened. Lterature Revew A myrad of artcles relate to ths very trade dspute, however two specfcally address the ssue of substtutablty. Nagubad et al. use a translog cost functon for the housng ndustry by accountng for sx speces of lumber whch nclude: Spruce and Fr (and Lodgepole Pne, and Spruce), Southern Pne, Douglas Fr, Hem Fr (and Whte Fr, and other fr), Cedar, and others (Ponderosa Pne, other pne, Redwood, Eastern Whte Pne, other eastern softwoods, Western Whte Pne, Sugar Pne, other western softwoods). Ther results show that substtutablty exsts between Canadan Spruce-Pne-Fr (SPF) and the untreated U.S. Southern Yellow Pne (SYP). Other products appear to be ndependent markets, and some are even complements of U.S. products. In contrast, Lewandrowsk et. al., by developng a short term stochastc model usng mathematcal programmng from an nventory approach, found that mports of Canadan lumber do compete wth U.S. lumber n the U.S. market. Ths study adds to the small lterature by utlzng the LA/AIDS and calculatng prce elastctes to analyze the substtutablty of U.S. softwood lumber wth that from countres other than Canada (Mexco, Brazl, and New Zealand). Methodology The lnear approxmaton to the AIDS model arose followng the recognton that the estmaton of non-lnear models can be troublesome. Deaton and Muellbauer argued that wth collnear prces, t may be approprate to use the Stone Prce Index to approxmate the varable for commodty prces (P j ). The budget-share equaton for each country s: 5

6 M = α + γ j ln( P ) + β ln (1) j P S * where α s the constant coeffcent n the th share equaton, γj s the slope coeffcent assocated wth the jth good n the th share equaton, p j s the prce on the jth good. M s the total expendture on the system of goods gven by M = n = 1 p q (2) n whch q s the quantty demanded for the th good. P* s the prce ndex defned by the Stone Prce Index s ln P * = S j ln P j (3) j The Stone Prce Index does not nvolve model coeffcents; then t s not nvarant to scalng n prces and therefore we normalze them by the mean of prces. After substtutng the stone prce ndex n (1) and wth some smplfcatons we obtan the expresson to be estmated: S = a + γ ln( P ) + β ln( M ) β ln( S ln( P )) (4) j j j Notce that the share equatons are lnear n the parameters. Usng Monte Carlo smulaton, we estmate ths seemngly unrelated regresson (SUR). When estmatng the parameters of ths system we need to mpose certan restrctons: symmetry, addng up, j j j and homogenety. In the same order these are: γ k = γ k ; α = 1, β = 0, γ k n = 1 n = 1 n = 1 = 0 n k ; and γ k = 0. k= 1 6

7 In the estmaton process, we omtted one share equaton to avod sngularty of the error covarance matrx. Also, we do not need to mpose all the addng up restrctons because we only estmate fve equatons out of sx. However, we wll use these restrctons to recover the coeffcents for the omtted equaton. One advantage of the AIDS model s that the homogenety and symmetry restrctons are easly mposed and tested. In the HTS system, mports of softwood lumber are assgned the followng 6 dgt code The descrpton at ths level of aggregaton s labeled: wood sawn or chpped lengthwse, slced or peeled, whether or not planed, sanded or fnger-jonted, of a thckness exceedng 6 mllmeters, conferous (USITC Database). Softwood lumber quantty and prce data for the Canada, Mexco, Brazl, and New Zealand was retreved from the USITC database usng the HTS number. Prces were obtaned by dvdng customs values of mports by the mported volume. These prces do not nclude tarffs. Quanttes for the Unted States were retreved from Producton, Supply and Demand tables from the USDA. U.S. prces were obtaned by dvdng export values by quantty exported. These data was obtaned from the Onlne Statstcs Database of the Food and Agrcultural Organzaton of the Unted Natons. Quanttes are measured n cubc meters, and prces are measured n US dollars. Results Table 1 reports the results of our estmaton. The R-square for the system of equatons s In ths experment, the tests of overall sgnfcance and lkelhood rato also show low p-values whch reject the null hypotheses. 2 These encouragng results strongly explan the demand behavor of softwood lumber for the Unted States. In Table 1, 7

8 LNSP1, LNSP2, LNSP3, LNSP4, LNSP5, and LNSP6 correspond wth the natural logarthm of the U.S. lumber prce, Canadan lumber prce, Mexcan lumber prce, Brazlan lumber prce, and the prce of lumber form New Zealand respectvely and the expendture shares are ndexed n a consstent manner. Usng these results, we compute the own and cross prce elastctes for the compensated and uncompensated case usng the formulas developed by Alston and Green for the LA/AIDS. Table 1. Estmaton Results a VARIABLE LNSP1 LNSP2 LNSP3 LNSP4 LNSP5 LNSP6 LNX LNP Share Share Share Share Share a Coeffcents are n bold, t-statstc s n talcs The uncompensated prce elastctes can be found n Table 2. These own prce elastctes are negatve, whch s consstent wth demand theory. The uncompensated prce elastctes of demand show that other countres softwood lumber s a complement to U.S. softwood lumber wth the excepton of New Zealand. Table 2. Uncompensated Prce Elastctes Unted States Canada Mexco Brazl Chle New Zealand Unted States Canada Mexco Brazl Chle New Zealand

9 When adjustng for ncome effects, compensated prce elastctes n Table 3, we fnd that all countres under ths study become substtutes for U.S. softwood lumber. The results of Table 3 ndcate that U.S. demand for softwood lumber from these exportng countres s more responsve to changes n U.S. prce than the U.S. demand for domestc softwood s to changes n prces of mported softwood. Ths s suggestve of strong demand for domestc wood n the U.S. whch s lkely a functon of the logstcal dffcultes of mportng softwood. Addtonally, when U.S. prce changes, cross prce elastctes for Brazl, Chle, and New Zealand are greater than Canada s and Mexco s. Ths would ndcate a hgher substtutablty for softwood lumber comng from Brazl, Chle, and New Zealand. Table 3. Compensated Prce Elastctes Unted States Canada Mexco Brazl Chle New Zealand Unted States Canada Mexco Brazl Chle New Zealand Allen and Morshma elastctes of substtuton where also computed. However, only the latter are presented n ths paper. We do not report the Allen elastctes because they were senstve to the small expendture shares of Mexco, Brazl, Chle, and New Zealand as compared to Canada. That s, the expendture shares predetermned the relatve magntudes. The Morshma elastcty of substtuton, reported n Table 4, s used to measure the change n relatve softwood lumber demand from dfferent countres for a change n a prce. In the frst column, Morshma elastctes confrm the prevous compensated cross 9

10 prce elastcty results. The Morshma elastcty for Canadan relatve to U.S. softwood lumber demand, wth respect to a change n the U.S. softwood lumber prce, s the second smallest elastcty arsng from a change n the U.S. prce. Furthermore, the smallest Morshma elastcty of substtuton arsng from a change n the Canadan prce s for the rato of demand for Canadan softwood lumber relatve to demand for U.S. softwood lumber. These results mply that softwood lumber from the countres other than Canada are closer substtutes for U.S. domestc softwood. Ths would appear to strengthen the Canadan case n the softwood dumpng dspute. Table 4. Morshma elastctes of substtuton Unted States Canada Mexco Brazl Chle New Zealand Unted States Canada Mexco Brazl Chle New Zealand Summary and Conclusons The softwood lumber dspute between U.S. and Canada s one of the longest and costlest n recent trade hstory. Arguments surroundng the mposton of trade barrers have centered on the role of Canada s unque approach to forest management. Most studes have focused on welfare effects, whle few studes have evaluated the queston of lkeness of product. As a contrbuton towards fllng ths gap n the lterature, we have evaluated the substtutablty between U.S. and Canadan softwood lumber usng the Lnear Approxmate Almost Ideal Demand System (LA/AIDS). The results show that softwood lumber mports to the U.S. from varous countres are ndeed substtutes for U.S. softwood lumber. Elastctes of substtuton usng the 10

11 Morshma defnton ndcate that other countres have a hgher degree of substtutablty wth U.S. domestc product compared to Canadan softwood lumber. The consequence to trade s that f the Unted States mposes trade barrers aganst Canada, other countres wth whom trade s not restrcted could easly substtute for Canadan lumber n the U.S. market. Ths would nullfy the protectve effect of the barrer from the U.S. perspectve. It s mportant, however, to note that there mght result n a substantal welfare effects whch would manfest n the form of a transfer of welfare from Canadan softwood exporters to softwood exporters from Brazl, Chle, Mexco, and New Zealand. U.S. consumers mght also experence some welfare losses due the mperfect substtuton between Canadan and other sources of softwood n the U.S. market. U.S. producers would beneft but less so than ther foregn compettors. Future research should make a dstncton between the dfferent varetes of Canadan and U.S. softwood lumber. U.S. producton would need to be categorzed along sde the HTS system used when mportng softwood lumber or a standard for comparson would need to be establshed. Then, the same procedure used n ths study can be appled, allowng us to better understand the market for dfferent softwood lumber varetes. 11

12 1 Authors calculaton based on mports data from the USITC Onlne Database, and consumpton data from the PS&D Onlne Tables. 2 Test of the overall sgnfcance = ; Ch-square wth 20 d.f.; p-value= Lkelhood rato test of dagonal covarance matrx = ; Ch-square wth 10 d.f.; p-value=

13 References Amercan Consumers for Affordable Homes (ACAH) Home bulders, manufactured housng, lumber dealers and retal ndustry tell ITC they select lumber based on need not prce. Retreved on December 7, 2005 from Deaton, A., and J. Muellbauer An Almost Ideal Demand System. Amercan Economc Revew 70: Food and Agrculture Organzaton of Unted Natons (FAO) Statstcs Database. Retreved on May 29, 2006 from Green, R., and J.M. Alston Elastctes n AIDS Models: A Clarfcaton and Extenson. Amercan Journal of Agrcultural Economcs 73: Elastctes n AIDS Models. Amercan Journal of Agrcultural Economcs 72: Nagubad R.V., D. Zhang, J.P. Prestemon, and D. N. Wear Softwood Lumber Products n the Unted States: Substtutes, Complements, or Unrelated? Forest Scence 50(4): Lemjandrowsk, J.K., M.K. Wohlgenantan, and T.J. Grennes Fnshed product nventores and prce expectatons n the softwood lumber ndustry. Amercan Journal of Agrcultural Economcs 78: U.S. Department of Agrculture (USDA) PS&D Onlne Database. Retreved on May 29, 2006 from U.S. Internatonal Trade Commsson (USITC) Onlne Database. Retreved on May 29, 2006 from 13

14 World Trade Organzaton (WTO) Unted States Fnal countervalng duty determnatons wth respect to certan softwood lumber from Canada. DS