Trade tariffs bring unintended consequences

Both sides often lose, write Naomi Christensen and Jahangir Valiani.

Starting this month, Canadian softwood lumber producers exporting to the U.S. will be slammed with a duty averaging 20 per cent. While U.S. producers are celebrating, American homebuyers are about to get a nasty taste of what happened to Canadian homebuyers last year.

In September, at the request of the only gypsum manufacturer in Western Canada, the Canada Border Services Agency investigated the dumping of drywall boards into Canada. It found U.S. exporters were sending gypsum into Canada at prices ranging from 95 to 324 per cent below what they would sell it for in their domestic U.S. market.

In response, Canada imposed provisional anti-dumping duties of 105 per cent to 276 per cent on U.S. exports of drywall entering our country. By December, the dollar value of imported U.S. drywall dropped almost 30 per cent.

The duties on gypsum board were appropriate, designed to counteract unfair trade practices of American exporters, and would likely survive any challenge. However, the example illustrates that the use of blunt instruments such as duties, even when proper, can cause significant unintended consequences.

The predictable result of Canada’s gypsum duty was higher prices for drywall. Importers raised their prices to construction consumers by about 55 per cent once duties were imposed. However, the price pressures on imports didn’t automatically benefit Canadian manufacturers.

Canadian retailers, facing increased costs, opted to substitute their U.S. supply with drywall from Mexico. The value of drywall imports from Mexico more than doubled between September and November. Although the complaint was initiated to protect the western Canadian producer of drywall from being unfairly undercut, it is unclear there was any benefit to its market share.

The increase in drywall prices occurred as Fort McMurray began rebuilding after last May’s wildfire destroyed nearly 2,000 homes and buildings. The resulting devastation was compounded by the increased cost of rebuilding.

The pushback within Western Canada about the rising costs of drywall caused the federal government to reduce the duties to a maximum of 43 per cent as well as make exceptions for Fort McMurray.

There are important distinctions between the U.S. softwood lumber and Canadian gypsum duties. Since the 1980s, each time the U.S. imposed duties on Canadian lumber, reviews by NAFTA and the World Trade Organization dispute-resolution panels have ruled in Canada’s favour, finding Canadian lumber is not subsidized or being dumped into the U.S. market at lower costs. That won’t happen with gypsum.

The impact of higher softwood prices in the U.S. is likely to be far more painful than higher drywall prices in Fort McMurray as it will raise overall costs throughout the entire U.S. for new homes, renovations, furniture and mattress box springs. It is not just the cost of a new home that will increase, it is also the cost of almost everything that goes in it.

The U.S. National Association of Home Builders estimates that for every $1,000 increase to the price of an average home, about 153,000 families are priced out of the housing market. The NAHB also calculates that a 25-per-cent tariff on Canadian lumber will cause about 8,000 U.S. job losses — or US$450 million in lost wages. While the duty is currently about 20 per cent, in June the U.S. Commerce Department is expected to tack on an additional antidumping duty.

Blunt instruments like import duties can quickly become unpopular in the country imposing the duty as negative impacts trickle down to consumers. Western Canadians may now be even more aware of this than our American neighbours but it is a lesson Americans will soon learn.

And that may be the best hope for resolving the current conflict.

There is no doubt Canada will appeal the latest round of softwood lumber duties. The problem is, the international dispute resolution is a lengthy process. While the outcome will likely be in Canada’s favour, for the years that it takes the process to play out, companies exporting softwood into the U.S. will still have to pay the duties.

Builders and their customers — all voters — may encourage a speedier solution. Naomi Christensen is the senior policy analyst and Jahangir Valiani is a policy analyst at the Canada West Foundation.