Mintz … The new, old trade issue: forestry.
With fast-track approval by the U.S. Congress, President Barack Obama moves ahead with one of his most important initiatives of this second term: the negotiation of the Trans-Pacific Partnership (TPP). For Canada, a successful conclusion of the TPP will mean access to markets with 792 million people and $28.2 trillion in GDP, 40 per cent of the world economy. It would be a successful step to diversifying our trade with the U.S., Japan and growing, emerging economies.
No doubt our pathetic supply management policies for dairy, poultry and eggs will be under the microscope. Virtually no argument can be given in favour of a policy that hits most heavily the poor with higher staple product prices, circumscribes the export of dairy and other products due to high input prices and undermines our ability to participate in new trading partnerships. Australia and New Zealand have successfully dismantled their policies, resulting in these two countries becoming major exporters of dairy products as well as leading to a more efficient agriculture sector and ultimately lower consumer prices.
Supply management is not the only issue that the TPP could address to Canada’s benefit. We have engaged in other tradedistorting policies that have diminished our standard of living. Federal and British Columbia policies that restrict log exports are another example.
With the advent of another round of softwood lumber negotiations with the Americans this fall, Canada could use TPP as an opportunity to rid itself of a policy that restricts exports. The current system has federal and B.C. governments in cahoots with each other to restrict log exports so that logs are sold to B.C. wood producers at a discounted price.
The federal government restricts log exports from federal lands, including Aboriginal holdings and private land granted before March 12, 1906. The B.C. government regulates Provincial Crown Land and private land granted after March 12, 1906. Currently, most log exports come from the B.C. coastal region.
Log exports are restricted by a “surplus test,” which applies in British Columbia and not other provinces (the federal government has a memorandum of understanding with B.C.). An exporter advertises logs on a bi-weekly notification to give opportunities for log processors to offer a domestic price for the logs. If no offer is made, the logs are determined to be surplus
Log export restrictions do not improve economic performance
and could be sold to the international market. B.C. further restricts exports from its land by applying an export tax that is 12 to 16 per cent of the domestic selling price.
Logs are not auctioned off to processors. Instead, a government-appointed committee determines whether an offer is “fair.” This Soviet-type approach to price determination is largely based on historical prices and is advantageous to the processors.
For some forest companies, domestic sales are below cost today — they make money only on exported logs. Chinese landed prices in Vancouver have been twice domestic prices in the past three years. Both federal and B.C. export restrictions have therefore imposed a large “tax” on value-added that would accrue to workers and owners of B.C. forestlands.
An argument in favour of restricting log exports is that it subsidizes the forest processing industries and employment. However, Peter Pearse, who headed a Royal Commission on forest industry, argued in 2006 testimony that log export restrictions do not improve economic performance. As he states, “in a predominantly market economy, you cannot get more value out of something by restricting the market for it.”
My colleague, Trevor Tombe at the University of Calgary Economics, made a similar observation in a must-read 2015 paper on “value-added jobs.” Some of the lowest value-added industries in Canada are wood products and paper (forest and logging actually has higher value-added per dollar of output despite the B.C. trade distortion). These processing industries also produce less value-added per job than the national average. Providing these processing industries with “subsidized” logs is shooting the B.C. economy in the foot by shifting production from higher to lower value-added jobs.
Such clear thinking by Pearse and other economists will not be found at the table of committees determining fair prices for logs sold to domestic processors. Restricting log exports by both federal and B.C. governments is as nonsensical as supply management policies.
A TPP agreement should do away with these trade-distorting policies used by Canada and our treaty partners that encourage processing, whether forestry, mining or oil and gas. For example, some U.S. states impose regulations requiring forest companies to sell to domestic processors first, similar to federal and provincial rules in B.C.
If TPP cannot be employed to rid us of these trade distortions in B.C. forest products, perhaps some changes consistent with U.S. policy could be used. If B.C. had a regime similar to that in the United States, the Canada-U.S. Softwood Lumber Agreement expiring October 2015 could be easily settled in Canada’s interests (as opposed to the interests of the B.C. wood processors).
Unlike Pacific Northwest states, the U.S. federal government does not impose restrictions on private timberland log exports. Canada could mimic the U.S. regime by the federal government eliminating its limitations on log exports, which would primarily assist companies operating on private lands. If B.C. decides to maintain its value-added reduction scheme, so be it. At least the federal government does not need to participate in a trade-restricting regime.
TPP provides an opportunity to improve trade opportunities for Canada. Canada also can rid itself of some of its worse trade distortions. Log export restrictions should be on the hit list.