ECONOMIC IMPACTS OF FOREST STEWARDSHIP COUNCIL CERTIFICATION ON INTERNATIONAL TRADE OF FOREST PRODUCTS

Transcription

1 ECONOMIC IMPACTS OF FOREST STEWARDSHIP COUNCIL CERTIFICATION ON INTERNATIONAL TRADE OF FOREST PRODUCTS by Mingli Sun A thesis submitted in conformity with the requirements for the degree of Master of Science in Forestry Faculty of Forestry University of Toronto Copyright by Mingli Sun 2012

2 ECONOMIC IMPACTS OF FOREST STEWARDSHIP COUNCIL CERTIFICATION ON INTERNATIONAL TRADE OF FOREST PRODUCTS Mingli Sun Master of Science in Forestry Faculty of Forestry University of Toronto 2012 Abstract The objective of this study is to investigate the economic impacts of Forest Stewardship Council (FSC) certification on global trade of forest products. Global Forest Products Model (GFPM) is used to predict export, import and net trade quantity of several forest products from year 2006 to The simulation findings suggest that: (1) Under the assumption that FSC certification plays negative effects on forest stock, Europe reduced sawnwood export; while Ireland became the net importer of sawnwood and wood pulp for next fifty years. (2) Under the assumption that FSC certification has no effects on forest stock, North America, Europe and Asia became the three major sawnwood importers; Europe and North America dominated sawnwood export; Africa significantly expanded its market share of sawnwood export from 1.3% in 2006 to 8.8% in Africa and Asia became the two largest importers of fuelwood. (3) Under the assumption that FSC certification plays positive effects on forest stock, Europe increased its export of sawnwood; Ireland became the net exporter of sawnwood and wood pulp since However, FSC certification has no impact on the trend of forestry stocks and products in Canada. ii

3 Acknowledgments I would never have been possible to finish my thesis without the guidance of my committee members, help from friends, and support from my family. First and foremost I would like to offer my deepest gratitude to my supervisor, Professor Shashi Kant. I would not have been able to complete this research without his invaluable guidance, knowledge, suggestions and consistent support throughout the study. I am also indebted to the other members of my supervisory committee members, who are Dr. Sen Wang and Dr. David Nanang, both from Natural Resources Canada, for their contribution and time for the improvements of my thesis. I would like to thank my good friends: Xiao Han, Muqing Huang, Crystal Wu, and Dr. Tajinder P. Singh, their encouragement and assistance during my study make me feel more confident on carrying this research. Also, thanks go to my classmates from the Department of Economics, University of Toronto, for their kind help and professional advices. Without them, the thesis cannot be completed. My special appreciation goes to my husband, Dr. Jiang Tang. Because of his endless, unconditional, deep love and support, I was not defeated by the difficulty and pain which I encountered in the past few months. My heartfelt thanks go to my mother, Guilian He, for her greatest love ever since I was born. I would also like to share my work with my brother Mingcheng Sun and my dear son Kevin Jiarui Tang. iii

4 Table of Contents Abstract... ii Acknowledgments... iii List of Tables... vi List of Figures... vii List of Appendices... ix List of Abbreviations...x Chapter 1 Introduction Background The Emergence of Forest Certification Main Certification Schemes Forest Certification and Sustainable Forest Management Objectives and Organization... 5 Chapter 2 Literature Review Impacts of Forest Certification Forest Products Global Trade Models Timber Assessment Market Model (TAMM) Center for International Trade in Forest Products Global Trade Model (CGTM) North American Pulp and Paper Model (NAPAP) Global Forest Products Model (GFPM) Summary...15 Chapter 3 Methodology Model Structure and Parameters Forest Products Studied by GFPM...17 iv

5 3.1.2 Spatial Equilibrium Market Dynamics Application of the GFPM to Study Forest Certification s Impact on Forest Products Trade Data preparation Incorporating the Impact of Forest Certification on Forest Stock Forest Stock Calculation Data processing Analysis of the GFPM Outputs Summary...30 Chapter 4 Results and Discussion Model Validation Effects of FSC Certification on Regional Imports and Exports of Sawnwood and Fuelwood FSC Certification s Effects on Regional Import and Export of Sawnwood under base scenario (AF=1.0) FSC Certification s Effects on Regional Import and Export of Fuelwood Comparative Analyses of the Impacts of FSC Certification on Sawnwood and Fuelwood Trade for the Regions of Africa and Europe Country-level Impacts of FSC Certification on Trade of Sawnwood, Wood-based panels, Wood Pulp, and Newsprint Conclusion Implication of FSC Certification Summary...52 Chapter 5 Summary and Future Work Summary Future Work...56 Reference...58 v

6 List of Tables Table 1. Comparison of the percentages of import and export quantities of sawnwood...31 vi

7 List of Figures Figure 1. Products transformation within a country studied in the GPFM...18 Figure 2. Data flows in GFPM model Figure 3. Implementation components in GFPM model Figure 4. Comparison of sawnwood import data from FAO and GFPM...33 Figure 5. Comparison of sawnwood export data from FAO and GFPM Figure 6. GFPM simulation of sawnwood import for the seven regions from year 2006 to year 2056 for base scenario (AF =1.0)...35 Figure 7. GFPM simulation of sawnwood export for the seven regions from year 2006 to year 2056 for base scenario (AF =1.0)...36 Figure 8. GFPM simulation of sawnwood net-trade for the seven regions from year 2006 to year 2056 for base scenario (AF =1.0)...36 Figure 9. GFPM simulation of fuelwood import for the seven regions from year 2006 to 2056 for base scenario (AF=1.0)...37 Figure 10. GFPM simulation of fuelwood export for the seven regions from year 2006 to 2056 for base scenario (AF=1.0)...38 Figure 11. GFPM simulation of fuelwood and net-trade for the seven regions from year 2006 to 2056 for base scenario (AF=1.0)...38 Figure 12. Simulated data of sawnwood import and export in Africa from 2011 to 2056 under three scenarios: AF=0.8 (horizontal line), AF=1.0 (vertical line), AF=1.2 (upward diagonal line)...39 vii

8 Figure 13. Simulated data of sawnwood import and export in Europe from 2011 to 2056 under three scenarios: AF=0.8 (horizontal line), AF=1.0 (vertical line) and AF=1.2 (upward diagonal line)...40 Figure 14. Simulated data of fuelwood import and export in Africa from 2011 to 2056 under three scenarios: AF=0.8 (horizontal line), AF=1.0 (grid), and AF=1.2 (upward diagonal line)...41 Figure 15. Simulated data of fuelwood import (A) and export (B) in Europe from 2011 to 2056 under three scenarios: AF=0.8 (horizontal line), AF=1.0 (grid), and AF=1.2 (upward diagonal line)...42 Figure 16. Projected Net-trade of sawnwood in Canada when AF=0.8 (horizontal line), 1.0 (vertical line) and 1.2 (upward diagonal line) using GFPM simulation...43 Figure 17. Projected Net-trade of wood based panels in Canada when AF=0.8 (horizontal line), 1.0 (vertical line) and 1.2 (upward diagonal line) using GFPM simulation Figure 18. Projected Net-trade of total wood pulp in Canada when AF=0.8 (horizontal line), 1.0 (vertical line) and 1.2 (upward diagonal line) using GFPM simulation...44 Figure 19. Projected Net-trade of newsprint in Canada when AF=0.8 (horizontal line), 1.0 (vertical line) and 1.2 (upward diagonal line) using GFPM simulation...45 Figure 20. Projected Net-trade of sawnwood in Ireland when AF=0.8 (horizontal line), 1.0 (vertical line) and 1.2 (upward diagonal line) using GFPM...46 Figure 21. Projected Net-trade of wood based panels in Ireland when AF=0.8 (horizontal line), 1.0 (vertical line) and 1.2 (upward diagonal line) using GFPM...47 Figure 22. Projected Net-trade of total wood pulp in Ireland when AF=0.8 (horizontal line), 1.0 (vertical line) and 1.2 (upward diagonal line) using GFPM...47 Figure 23. Projected Net-trade of newsprint in Ireland when AF=0.8 (horizontal line), 1.0 (vertical line) and 1.2 (upward diagonal line) using GFPM...48 viii

9 List of Appendices Appendix 1. Forest Products in GFPM...67 Appendix 2. Countries and Regions in GFPM...68 Appendix 3. Definition of Fourteen forest products studied in GFPM...70 Appendix 4. Parameters used in GFPM...72 Appendix 5. Price elasticities of demand for final products...73 Appendix 6. Modified forest stock for 180 countries...74 ix

10 List of Abbreviations AF ATFS ATL CGTM CSA FAO FSC GDP GFPM ISO ITTO NAPAP NGO PEFC SFI TAMM WWF YFOC Adjust Factor American Tree Farm System Accelerated Tariff Liberation Center for International Trade in Forest Products Global Trade Model Canadian Standards Association Food and Agriculture Organization Forest Stewardship Council Gross Domestic Product Global Forest Products Model International Organization for Standardization International Tropical Timber Organization North American Pulp and Paper Model Non-government Organization Programme for the Endorsement of Forest Certification Sustainable Forestry Initiative Timber Assessment Market Model World Wide Fund for Nature Yusuhara Forest Owners Cooperative x

11 Chapter 1 Introduction 1.1 Background Forest is an indispensible resource for animals and human beings. It supplies food, habitats and shelter for wide animals; provides fiber, wood, spiritual and recreational benefits to the human beings (Grime 1998, Foley et al. 2005). Globally, it acts as sinks capturing and storing carbon (Valentini et al. 2000), prevents soil erosion and supports water cycle (Malmer and Grip 1990). Without the forest, the planet will be like a desert and human beings cannot survive. Asides from its ecological, social and environmental importance, forest is equally important in the economical sectors - it is an important contributor to modern human economy. According to the latest data from Food and Agriculture Organization (FAO) of the United Nations, the annual turnover of roundwood, sawnwood, panels, pulp and paper exceeded US$200 billion in 2010, which translate to one percent of world gross domestic product (GDP) and three percent of international merchandise trade come from the forest products sector (FAO 2011). Unfortunately, as global trading between forest products become more substantial and popular, forest resources are becoming increasingly depleted and the acreage of forest is diminishing at an astonishing accelerating rate. Take the tropical rain forest loss in Brazil as an example; it loses 2.3 km 2 per hour on average (Butler 2011), which is equivalent to 20,148 km 2 per year since 1988, due to commercial exploitation of forest resources by lumber harvesting companies. If the similar rate of loss is observed around the world, global forest stock would decrease rapidly. As a result of this alarming rate of disappearance, the public s desire to protect world forests and protest against forest destruction and degradation intensifies. In an attempt to build a mutually supportive relationship between forest exploitation and environment protection, forest certification systems have grown remarkably during the last few decades. Forest certification is a process in which an approved independent organization creates standards for how forests should be managed, sets rules for verifying and certifying whether being certified forests have met such 1

12 standards, and establishes guidelines for what product labels, advertisements and other marketing claims can say about forest products produced from such forests. 1.2 The Emergence of Forest Certification Forest certification can be traced back to rapid tropical deforestation in 1980s and 1990s (Kiekens 2003). Tropical forests had half of terrestrial biodiversity, however, as the human population increased, the strain on forest resources coming from expansion of agriculture and mining, uncontrolled fires and others, put huge pressure on the forests and caused severe tropical deforestation. As a result, approximately 17 million hectares of tropical forests were cleared at a rate of 0.4 hectares per second in 1990 (Alonso 2001). At the same time, poor forest management practices created additional threats to biodiversity and the environment. Given this background, stepping up efforts in maintaining biodiversity and environmental quality through improved forest management had emerged as an important part of an overall strategy (Rametsteiner and Simula 2003). In order to find a solution to the tropical deforestation, the International Tropical Timber Organization (ITTO) implemented a labeling program to identify sustainably produced tropical timber in In 1992, the United Nations Conference on Environment and Development, also known as the Earth Summit, was held in Rio de Janeiro to wrestle with environmental and sustainable development issues. In the same year, the Agenda 21 Forestry Principles was set to delve into sustainable forestry issues (FSC 2011). While these formal processes of developing criteria for sustainable forest management were in progress, forest certification started to take shape through a non-governmental organization (NGO) channel. This innovative idea was developed during the parallel NGO Rio meetings. The concept was to develop a system for certifying and labeling forests and forest products. As a result, a voluntary non-profit organization called the Forest Stewardship Council (FSC) was launched in 1993 (FSC 2011) with the coalition of World Wide Fund for Nature (WWF) and other leading environmental organizations. Since then, several forest certification organizations have come to the picture. Presently, there is a growing competition among these certification programs to become the global leader in forest certification. 2

13 The scope of forest certification was originally focused on tropical forests, but has now broadened to include temperate and boreal forests. 1.3 Main Certification Schemes Forest certification systems have grown explosively within the past three decades. At present, several leading forest certification programs are in operation. Sustainable Forestry Initiative (SFI), a charitable organization dedicated to promote sustainable forest management, is used widely across North America., It also has strong acceptance in the global marketplace. By the end of 2010, about million hectares of the world s forests are SFI certified (SFI 2010). Canadian Standards Association (CSA), a non profit association, serves industry, government, consumers and other interested parties in Canada and the global marketplace. As of June 2007, about 79.3 million hectares of Canadian forests had been certified under the CSA standard (CSA 2010). International Organization for Standardization (ISO) is the world's largest developer and publisher of International Standards. The ISO family addresses various aspects of environmental management. By 2010, there are 14,000 companies certified to ISO14000 worldwide (ISO 2010b). The Programme for the Endorsement of Forest Certification (PEFC) is an international non-profit, non-governmental organization. With about 30 endorsed national certification systems, it is dedicated to promote sustainable forest management through independent third-party certification. To date, more than 220 million hectares of forest have been certified by PEFC (PEFC 2010). The American Tree Farm System (ATFS), a program of the American Forest Foundation's Center for Family Forests, is committed to sustaining forests, watershed and healthy habitats through the power of private stewardship. It promotes the growing of renewable forest resources on private lands while protecting environmental benefits and increasing public understanding of all benefits of productive forestry. By 2010, ATFS has certified 9.7 million hectares of privately 3

14 owned forestland and over 90,000 family forest owners who are committed to excellence in forest stewardship, in 46 states (ATFS 2010). In 1992 Rio Summit, Forest Stewardship Council (FSC) was established by business representatives, social groups and environmental organizations to improve forest management worldwide. As world s leading forest certification system, FSC certification is trying to make the world s forests meet the social, ecological, and economic rights and needs of the present generation without compromising the needs of future generations (FSC 2010a); it also promotes environmentally appropriate, socially beneficial, and economically viable management of the world's forests (FSC 2010a). FSC certification provides internationally recognized standard-setting, trademark assurance and accreditation services to companies, organizations, and communities interested in responsible forestry, and a labeling system that consumers could use to make informed choices regarding the sustainability of their purchases. As of March 2010, 81 different countries have FSC certification certified forests; more than 106 million hectares are FSC certification certified worldwide; over 40 million of those hectares are located in North America (FSC 2010b). 1.4 Forest Certification and Sustainable Forest Management From the above description, it is clear that promoting sustainable forest management is the ultimate goal of all the certification systems. The related question that is highly interesting to any forest researcher is: do the forest certifications effectively promote sustainable forest management worldwide, including the social, environmental, economic, cultural and spiritual values? Social benefits brought by forest certification systems have been studied by a few researchers (Haener and Luckert 1998, Kiker and Putz 1997, Takahashi and van Kooten 2003, Segerson and Miceli 1998, van Kooten et al. 2005). Their study revealed that forest certification offers a number of benefits to the society, these benfits include preservation of cultural assets, protection of livelihood and demonstration of third-party verified sustainable forest management. In addition to social benefits, many researches have examined the environmental impacts associated with forest certification, such as Kelting et al. (1999), Khanna 4

15 (2001), Amateis et al. (2003), Volz (1997), Watt et al. (2005). Their research concluded that gaining environmental benefits of forest certification is the main reason for seeking certification by companies. The environmental benefits can be classified into four aspects: (1) improved forest management practices; (2) improved wildlife habitat; (3) more healthy forests; and (4) protection of soil and water resources. Economic impacts of forest certifications at country level have also been analyzed by a number of studies (Kiker and Putz 1997, Hayward and Vertinsky 1999, Hartsfield and Ostermeier 2003, Johnson and Walck 2004, Hughell and Butterfield 2008, Espach 2006, Nebel et al. 2005). While some of the research indicated that forest certification has failed to create the higher prices and new markets it implicitly promised, some showed that most forest owners were positive about their decision to certify and reported that certification has helped them to improve and gain recognition for their forest practices although timber production costs are increased and output is decreased. Thanks to globalization, international trade of forest products grows rapidly in the modern days. As stated above, forest certification has a huge influence on the activities associated with forest products including forest management, timber production and final product consumption. Naturally, we expect to see an impact of forest certification on global trade of forest products. However, to the best of my knowledge, the researches on economic effects of FSC certification are limited to local level study, analyses of the economic influence brought by FSC certification on global forest product trading have not been done by any study. In order to fill this gap and contribute to a more comprehensive understanding of the impacts of forest certification, my thesis is focused on studying the impacts of forest certification on the international trade of forest products by using hypothetical changes on forest stock as a media. My study aspires to reveal hidden connections between forest certification and global trade and make some contribution to the field. 1.5 Objectives and Organization The main objective of my research is to analyze the economic impacts of FSC certification on international trade of forest products. Three scenarios are examined: 5

16 (1) FSC certification has no impacts on forest stock; (2) FSC certification has positive impacts on forest stock, and (3) FSC certification has negative impacts on forest stock. The economic impacts of certification are analyzed in terms of changes in exports, imports and net trade of forest products of the countries that have and do not have FSC certified forests. The analyses are conducted at two levels: (1) regional level, which includes seven regions of the world: Africa, North/Central America, South America, Asia, Oceania, Europe, and Former USSR; and (2) country level, which contains 180 countries, but my focus is only on two countries Canada and Ireland. At regional level, I first examine the import and export quantity of sawnwood and fuelwood under the base scenario (no impacts on forest stock) in the seven region, followed by a comparative study of the impacts of FSC certification on net trade of sawnwood and fuelwood for the regions of Africa and Europe. At country level, I choose two countries: Canada, which has large forest area (310,134 thousand hectares), but relatively small FSC certification certified forest percentage (8.3%); and Ireland, which has a small forest area (682 thousand hectares) but high FSC certification certified forest percentage (95.4%). With data analyses of import, export and net trade quantity of sawnwood, wood based panels, wood pulp, and newprint in Canada and Ireland under the three scenarios, I demonstrate how certification affects trade flows in these two nations. The rest of the thesis proceeds as follows. In chapter 2, existing research related to international trade of forest products and forest certification is reviewed. In chapter 3, methodology and assumptions are discussed. Chapter 4 describes model simulation results and their implications. In chapter 5, summary of research findings and suggestions for future research are presented. 6

17 Chapter 2 Literature Review Forest certification and its economic impacts on trade of forest products are the two key elements of my research. Next, I provide an overview of the literature related to various impacts of forest certification and forest products trade models. 2.1 Impacts of Forest Certification The impacts of the forest certification can be grouped into three broad categories environmental, social, and economic impacts. A large number of papers and reports studying the impacts of forest certification have been published. The major research findings of these studies are summarized in the following paragraphs. The main mission of forest certification is to support environmentally appropriate forest management ensuring that the harvest of timber and non-timber products maintains the forest s biodiversity, productivity and ecological processes (Kelting et al. 1999, Khanna 2001, Amateis et al. 2003). Multiple studies show that responsible forest management and effective natural resources conservation were observed in certified forest areas (Volz 1997, Amateis et al. 2003, Watt et al. 2005). In terms of social impacts, forest certification significantly improves the welfare of employed workers. One principle of forest certification is to respect the forest workers legal rights and to maintain and enhance their long-term social and economic well-beings. Many in-field investigations done by international researchers pointed to the fact that certified forest companies had a better compliance with work laws as compared to local forest company controls without forest certification (Haener and Luckert 1998). The employees in a certified corporation generally enjoy better salaries per hour, shorter working hours, improved working conditions including food, transportation, accommodation and sanitation. Furthermore, they are provided with more forest equipment safety training, encouraged to participate in labor unions and supported with better career and formal education (Kiker and Putz 1997, Takahashi and Van Kooten 2003). 7

18 One impact of forest certification is to increase social welfare through the environmentally appropriate and economically viable forest management practices. The social benefits of forest certification are embodied in many aspects: the preserved environment avoids endangering of the living and culture of indigenous people; the enhanced benefits of employed workers prosper the whole local community; and the responsible forest management releases the public s concern over global deforestation, wild life extinction and environmental damage (Segerson and Miceli 1998, Rametsteiner and Simula 2003, van Kooten et al. 2005). In other words, forest certification provides a credible link between responsible production and consumption of forest products, creating a synergic win-win outcome between consumers and producers with an overall improved social welfare (Takahashi and van Kooten 2003). In terms of economic impacts, forest certification dramatically increases certified forest companies competitiveness. Forest certification is aimed at promoting economically viable forest management in certified enterprises. One may be concerned that the forest companies suffer from heavier financial burden due to the cost of environmental conservation such as reforestation and forest protection, and the cost to better support their employees such as the increased payroll and safety training expense. However, solid scientific analysis indicated the certified forest companies substantially gain in their revenue: the yield and quality of timber and non-timber product are improved due to the sustainable forest management; the productivity and morality of their workers are augmented due to the better benefit; the market share and reputation are strengthened due to the trust and respect among their customers for the forest certification (Kiker and Putz 1997, Hayward and Vertinsky 1999, Hartsfield and Ostermeier 2003, Johnson and Walck 2004). All these benefits outweigh the increased cost of forest certification, serving as the main driving force for the forest enterprise to seek forest certification. Hughell and Butterfield (2008) stated that non-fsc certification certified lands in Maya Biosphere Reserve have significantly more deforestation and incidence of wildfires when compared with the FSC certification certified concessions. By investigating the effects of FSC certification in Estonia, Germany, Latvia, Russia, Sweden and the UK, Hirschberger (2005), it can be concluded that: in all six countries, FSC certification improved the conservation status, management planning, 8

19 marketing of forest products, recreational benefits of forests, social conditions of forest workers and enhanced biodiversity levels in forests. Gaining access to markets and clients in European and North American markets is the chief motivation for firms in Argentina to seek FSC certification. Espach (2006) found that FSC certification label had proved as a key advantage for firms holding FSC certification in tapping into those markets. While no domestic demand for certified wood or wood products has been found, the greatest market benefits from the label were found in the refined wood products sector (Espach 2006). Incentives for firms in Bolivia seeking FSC certification are market oriented, such as gaining access for timber products to export markets and price premiums for certified products. The FSC certification is an important driving and supporting force in the implementation of a new and more sustainable forest management model (Nebel et al. 2005). Some reports indicate that forest certification strengthened the market competiveness of certified companies. For example, Tysiachniouk (2005) stated that FSC certification brings the Russian forest industry into European markets and simultaneously brings European practices and technologies into Russia. The study also found that many certified companies claimed to have gained stability and security in the marketplace due to FSC certification. In two particular cases, certified companies claimed that their income grew by 10% (Tysiachniouk 2005). Another example to support the positive economic effect of forest certification is Yusuhara Forest Owners Cooperative (YFOC), which had 11,000 hectares FSC certification certified forests in 2007 in Japan. With the continuous efforts of selling FSC certification certified wood in the domestic housing construction market, YFOC has substantially increased their timber sales in recent years. It is a noteworthy event in Japanese small-scale forestry, which has been struggling with declining economic performance for many years. With the FSC certificate, YFOC has direct access to environmentally aware builders who demand certified timber directly from sawmills. FSC certification is believed to be a tool to revitalize Japanese small-scale forestry (Ota 2007). 9

20 In contrast to these positive economic findings, there are also many papers stating negligible, if not negative, benefits of forest certification. Kais et al. (2003) empirically examined the impact of forest certification on firm financial performance in Canada and in the U.S.A. They mainly focused on the stock price response to the certification announcement, as well as the impact of forest certification on the longrun ex-post firm financial performance. They found out that the certification costs are not compensated by the associated consequent benefits. They concluded that in the short term, forest certification did not have any significant impact on firm financial performance regardless of the certification system carried out by firms; in the long term, forest certification had, on average, a negative impact on the financial performance of certified companies (Bouslah et al. 2009). These findings were supported by other researchers (Guillison 2003, Vlosky et al. 2003, Anderson and Hansen 2004). From the above review, it is clear that previous studies mostly concentrated on analyzing the forest certification impacts at regional or country level, but global level analysis is missing. In addition, there is hardly any study evaluating the economic impacts of FSC certification on global trade of forest products. 2.2 Forest Products Global Trade Models Forest economists have developed and used international trade models for policy analysis, price and harvest projections, and other questions related to the future of the forest sector. Models relevant to international forest product trade can be classified into five categories (Thompson 1981): (1) two region, non-spatial models; (2) multiregion, non-spatial models; (3) spatial equilibrium models; (4) trade flow and market share models; and (5) transportation models. After three decades of development and competition, the spatial equilibrium models, based on the original work by Samuelson (1952) and Takayama and Judge (1971), gradually dominate forest sector analysis. In the following section, I will review four typical spatial equilibrium models and examples of their application Timber Assessment Market Model (TAMM) 10

21 TAMM is a spatial equilibrium model that simulates behavior in the markets for solid wood products (lumber and wood-based panels) and sawtimber stumpage (Adams and Haynes 1980). Equilibrium solutions are found using a net revenue maximization approach constrained to meet conditions for a spatial equilibrium. TAMM makes great contributions to economic analysis of timber market trade by employing two factors into its calculation. First, it captures the transportation costs necessary to move products from manufacturing facilities to demand centers. Since the most productive forests are located remotely from the urban centers where most wood is demanded, transportation costs are important in the overall value of wood. Second, TAMM simultaneously captures both end-product and stumpage market behavior by solving a model in which all market levels in all regions must be in equilibrium in each period. Total timber supply in any period must equal the derived demand. Product supply is derived from a restricted production function form to allow exogenous projection of product recovery factors. Capacity change over time is based on an accelerator approach adjusted for expected future returns. Sawtimber-stumpage supply relations derive from intertemporal profit and utility maximization objectives for industrial and nonindustrial private owners, respectively (Adams and Haynes 1980). TAMM has been used extensively for policy analysis of forestry sector issues within the US (Adams and Haynes 1990, Winnett et al. 1993, Sohngen and Haynes 1997). Tredinnick and Carter (1995) used TAMM model to study the economic impacts of timber supply restrictions in 1990s in the western United States on both product and stumpage markets, and made a few decision making suggestions for policy makers in Florida, Georgia, North Carolina, South Carolina and Virginia. State level resource and market conditions have been forecast within the spatial equilibrium, multi-market framework of the model. They found that reductions in timber supply would result in increasing lumber prices nationally, and stumpage prices in western states would immediately increase; lumber production in southern states was projected to double from 1990 to 2010; rising stumpage prices were expected to result in reductions in plywood production from 1990 to Adams and Haynes (1996) used TAMM to provide annual projections of volumes and prices in solidwood products and sawtimber stumpage markets and estimates of total 11

22 timber harvest and inventory in the United States up to Many conclusions were drawn from the model simulation. For example, softwood lumber prices would rise from 1990 to 2015; after 2015, softwood lumber prices remain roughly stable as growth in demand and supplies are in balance Center for International Trade in Forest Products Global Trade Model (CGTM) As timber markets became increasingly global, a model called the Center for International Trade in Forest Products Global Trade Model (CGTM) is developed in the 1980 s by the International Institute for Applied Systems Analysis. The CGTM model is a spatial equilibrium market model with multiple market levels. It advances the TAMM in two aspects. First, it includes trading between more than forty regions of the world, trading can occur in both end product and log markets. Second, it simultaneously models both solid wood and pulp and paper markets. CGTM is the first of the timber market models used in the paper to model these markets (Cardellichio et al. 1989). CGTM was used by Perez-Garcia and Backman (1995) to determine possible policy strategies needed to forestall a decline in output in the forest sectors of the republics of the former Soviet Union when the deterioration of the country s infrastructure, political stability and effective market mechanisms constrained its wood supply for European markets North American Pulp and Paper Model (NAPAP) The North American Pulp and Paper Model (NAPAP) was developed to predict future economic trends in the US and Canadian pulp and paper sectors, as those markets had not been included explicitly in the TAMM model. The theoretical structure of NAPAP is similar to TAMM and CGTM in that it is a spatial equilibrium and static simulation model, but it links solid and pulpwood markets through price effects, the use of residual outputs, and other factors (Ince 1994a and 1994b). The first use of the NAPAP model in the US pulp and paper industry showed that market conditions were driving major changes in fiber use. Recognizing that 12

23 increased paper recycling was being driven by a glut of cheap recovered paper and rising landfill costs, future pulpwood needs and pulpwood prices were projected to grow more slowly than projected previously (Ince 1990). It was also recognized that the increased use of hardwood pulpwood was being driven by technical changes and lower prices for hardwood pulpwood (Ince 1989). The NAPAP model was further developed in the 1990s to provide more detailed projections of trends in paper recycling, wood use, and the likely impacts of technical change on the long-range timber market outlook. Ince (1994b) used NAPAP model to explain the reason for the decrease in wood pulp output in the early 1990s, as recycled fiber displaced wood pulp, particularly in softwood-based products such as newsprint and linerboard, this change was resulting at that time in stagnant US softwood pulpwood consumption, but expanded use of hardwood from the 1980s to 1990s Global Forest Products Model (GFPM) GFPM is based on the original work by Samuelson (1952) and Takayama and Judge (1971), it was later modified and improved by Adams and Haynes (1987) and Buongiorno and Manurung (1992). The model can be used to predict the consumption, production, trade and prices of fourteen forest products in 180 countries. The main characteristic of GFPM is that in this model, the demand, supply, bilateral trade flows and product prices are determined endogenously. It has two phases: the static phase, which calculates the quantities and prices of all commodities in a given year by solving the demand and supply equation in the spatial equilibrium problem; and the dynamic phase, which foresees the temporal evolution of the spatial equilibrium from year to year. The GFPM model has been used to study the effects of economic growth, tariff change, global trade liberalization, and new environmental policies on forest sector. Zhu et al. (2003) are the leading researchers using GFPM to investigate the impacts of various economic variables. They applied the GFPM model to study the effects of Accelerated Tariff Liberation (ATL) worldwide. They set up a scenario with implementation of the ATL agreement in the GFPM model; they presented the ATL effects on production, imports, and welfare for the main regions of the world and the United States, for the main product groups. Based on the calculation results, they 13

24 concluded that ATL would cause little changes in world and U.S. production, but dramatically change the international trade; product prices would decrease due to tariff cut and the total welfare would increase slightly (Zhu et al. 2000). They also adopted the GFPM model to investigate the impact of the 1997 Asian economic crisis on the international forest product trade and concluded that the Asian crisis would reduce world demand and prices but would stimulate the U.S. economy leading to an increase in all commodities. The conclusion drawn in these two examples were well supported by other researchers as well as real-world observations confirming the validity of GFPM model simulation (Buongiorno et al. 1999). Prestemon et al. (2008) applied the GFPM model to evaluate the effects of an invasion by the Asian gypsy and nun moths to the forest on the timber product market in the United States. In particular, they resorted to the GFPM model to predict how catastrophic forest loss would affect trade, production, and consumption and analyzed the tradeoff between policy actions and invasion risks to reduce the Asian gypsy and nun moths invasion. Based on their GFPM simulation findings, they suggested that the introduction of the forest pests into the United Sates had significant impacts on the timber product market, but the administrative ban on softwood log imports from the Russian Far East has little effect, if not at all, on the possibility of the introduction of pests into the country. Using the GFPM model, Li et al. (2008) estimated the impact of a significant elimination of illegal logging on the world forest sector from 2007 to They claimed that while in countries with great illegal logging activity, the changes in consumer expenditures would be more than double the changes in producer revenues; changes in producer revenues would be almost twice the changes in consumer expenditures in countries with little illegal logging and efficient industries. Without illegal logging, the world forest inventory would increase slightly, as the increase in developing countries would more than compensate the decrease in developed countries. In 2007, Russian government announced an increase in its export tax on softwood roundwood from 6.5% of export product value to 80% by January As the world s largest exporter of roundwood, the impacts of this policy on the world forest sector were simulated by Turner et al. (2008) with the Global Forest Products Model. 14

25 They suggested that the forest industries in the USA, Canada, Chile and Brazil would take advantage of the Russian tax by increasing its export of roundwood, sawnwood, wood pulp and paper respectively. However, the policy would fail to increase Russian domestic production and export of wood products as a result of the high manufacturing costs of the Russian wood products, higher global prices, a reduction in demand for wood products and increased supply from other regions (Turner et al. 2008). All the above examples clearly demonstrate the versatility of GFPM model for the study of influence of economic variables, particularly in the forest sector. In addition, comparing to the first three models, which can only be used to predict market behaviors of two or three forest products in two or forty nations, the GFPM model can predict the consumption, production, price, export and import of fourteen forest products in 180 countries. The model serves my purpose very well since my objective is to examine the economic impacts of FSC certification on international trade of forest products. It is a accommodating and well-accepted methodology; thus, I believe, applying GFPM model to investigate the economic effects of forest certification on global forest product trade is appropriate and feasible. 2.3 Summary The previous studies imply that the influence of certification in improving forest practices in a single country is either positive or not obvious. Further more, these studies mostly concentrated on analyzing the forest certification impacts at regional or country level. However, the economic impact of certification systems on international trade on forest products has not been done by any researchers. How will the certification change trading trends of forest products in different regions? Since the certification has a strict limit on the amount of wood permitted to be harvested in the certified forest area to ensure the sustainability of forests, will the limitation increase or decrease the forest stock of the certified area in a long term? What will be the impacts of forest certification on exports, imports, and net trade of different wood products from different countries? In order to answer the above questions, the investigation of forest certification s economic influence on global trade of forest products is needed, which is the objective of this study. I will use Global Forest 15

26 Products Model to answer these questions. In the next chapter, I will explain the econometric fundamentals of GFPM and its application to my study in details. 16

27 Chapter 3 Methodology In the previous chapter, the definition and qualitative description of the Global Forest Product Model (GFPM) were introduced. In this chapter, the theoretical foundation of the GFPM, fully explained by Buongiorno et al. (2003), will be introduced, then the applications of the GFPM to the objectives of research will be discussed. 3.1 Model Structure and Parameters Forest Products Studied by GFPM The GFPM is a spatial dynamic economic model. It predicts how the consumption, production, price, export and import of fourteen forest products (see Appendix 1) are likely to change in response to changing economic environments in 180 countries aggregated to seven regions including Africa, North/Central America, South America, Asia, Oceania, Europe and Former Union of Soviet Socialist Republics (see Appendix 2). The model contains static and dynamic phases. In the static phase, it obtains the quantities and prices which clear the markets for all products in all countries; then the model parameters, such as supply, demand, and trade et al., are updated to reflect exogenous and endogenous changes from one year to the next. New equilibrium with the clear market prices is obtained, thus changing from the static phase to the dynamic phase. Fourteen forest products are studied by the GFPM, they include: fuelwood, industrial roundwood, waste paper, other fiber pulp, mechanical pulp, chemical pulp, sawnwood, plywood, particle board, fiberboard, newsprint, printing and writing paper, and other paper and paperboard. Appendix 3 contains definitions of these fourteen forest products. Figure 1 symbolizes the flow and transformation of these fourteen forest products in each country. The intermediate products, mechanical and chemical pulp depend on the manufacturing of paper products, and induce a demand for industrial roundwood. The correlation and conversion of these products are considered in GFPM calculation. 17

28 Figure 1. Products transformation within a country studied in the GPFM Adopted from Buongiorno et al. (2003) Spatial Equilibrium The guiding principle of GFPM is to maximize social surplus, which is the sum of producers and consumers surplus. In the model simulation, the social surplus is the overall value to consumers of all end forest products from countries worldwide, subtracted by the cost of supplying the raw materials, transforming them and transportation among countries. This principle is reflected in the following objective function: MaxZ = ik ik ik Pik Dik ) ddik Pik ( Sik ) dsik mik ( Yik ) dyik i k D 0 i k 0 S ( c T [1] Y i k 0 i j k ijk ijk where: Z is social surplus, i,j are countries, k is product, P is price in US dollars of constant value, D is final product demand, S is raw material supply, Y is quantity manufactured, m is manufacturing cost, T is quantity transported, and c is cost of transportation, including tariff. The first summation of the right part of equation [1] is the sum of consumer value of end product k in different country i (price P ik times demand quantity D ik ); the second summation is the sum of cost of raw materials 18

29 supply (price P ik times supply quantity S ik ); the third summation is the sum of manufacturing cost of product k in country i (manufacturing cost of m ik times product quantity Y ik ); the last summation is the sum of transportation cost of product k among country i and j (transportation cost of c ijk times the quantity T ijk ). In other words, the first, second, third and fourth term of the equation correspond to the total consumer value, production cost of raw materials, the exogenous manufacturing cost and the total transportation cost, respectively. All these variables in the objective equation refer to a specific year. I now discuss each parameter included in equation [1]. End Product Demand D ik * ik P P ik ik = D ( ) [2] ik, 1 δ where: D ik is current demand of product k at country i, D * ik is current demand of product k at country i at last period s price, P ik is current price of product k at country i, P ik,-1 is last period s price of product k at country i, and is price elasticity of demand, respectively. The demand D ik depends on historical demand and price elasticity; D ik * depends on last period s demand, price elasticity, and the growth of GDP in the country. In the base year, D ik * is equal to the base year demand, and P ik,-1 is equal to the observed base year price. Primary Product Supply S ik * ik P P ik ik = S ( ) [3] ik, 1 λ where: S ik is current supply of product k at country i, S * ik is current supply of product k at country i at last period s price, and λ is price elasticity of supply, respectively. The demand S ik depends on historical supply and price elasticity; S ik * depends on last period s supply, price elasticity and forest stock. In the base year, S ik * is equal to the base year supply, and P ik,-1 is equal to the observed base year price. While the objective function of GFPM model is to maximize social surplus Z, it is subjected to the essential material balance constraints that for each product and 19

30 country the total supply of materials equals to the total demand, as stated in the following: Material balance: j T + S + Y D a Y T = 0 i k [4] jik ik ik ik ikn in ijk, n j Y b Y = 0 i, k l [5] il ikl ik, where: j T jik is sum of import quantity of product k from other country j into country T is sum of export quantity of product k from country i to other country j, a ikn i, ijk j is the sum of manufacturing input of product k to make a unit product n at country i, and S ik, Y ik, D ik is the supply, manufacturing quantity and demand of product k at country i, respectively. b ikl is the amount of by-product l that can be recovered per unit of production of manufactured commodity k. The total supply of material k at country i including import, supply and manufacturing is equal to the total demand of this material k at country i including export, demand and manufacturing consumption. Trade Inertia T L ijk ijk U ijk T T [6] where L and U refer to a lower bound, and upper bound, respectively. Prices The shadow prices of the material balance constraints [4] give the market-clearing prices for each commodity and country. Manufacturing Cost Y s = ( ) ik [7] * ik mik mik Y ik, 1 where: m ik is current manufacturing cost of product k at country i, m * ik is current manufacturing cost of product k at country i at last period s output, and s is price elasticity of manufacturing cost with respect to output, Y ik and Y ik,-1 is the 20