Tariffs often end up hurting rather than helping

Drywall, softwood tiffs serve as examples, write Jahangir Valiani & Naomi Christensen.

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 2016, at the request of the only gypsum manufacturer in Western Canada, the Canada Border Services Agency investigated the dumping of drywall boards into Canada. The investigation found that U.S. exporters were sending gypsum into Canada at prices roughly one-quarter to one-half of what they would sell it for in their domestic market.

In response, Canada imposed provisional anti-dumping duties of 105 to 276 per cent on U.S. exports of drywall entering our country. By December 2016, the value of imported drywall from the U.S. dropped almost 30 per cent.

The duties Canada applied on gypsum board were appropriate, designed to counteract the 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 own prices to construction consumers by about 55 per cent once the duties were imposed. However, the price pressures on imports didn’t automatically benefit Canadian manufacturers. Canadian retailers of drywall, facing increased costs, opted to substitute their U.S. supply with imports from Mexico. The value of drywall imports from Mexico more than doubled between September and November 2016. Although the complaint was to protect the western Canadian producer of drywall from being unfairly undercut, it is unclear whether there was any benefit to their market share.

What happened should provide a political lesson for our neighbours to the south. The increase in drywall prices occurred as Fort McMurray began rebuilding after last May’s wildfire destroyed nearly 2,000 homes and buildings in the city. The resulting devastation to residents was compounded by the increased cost of rebuilding, especially for the 300 or so properties that were under-insured.

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 the region of Fort McMurray.

There are, of course, important distinctions between the U.S. softwood lumber and Canadian gypsum duties. Canada and the U.S. have been locked in a dispute over softwood lumber since the early 1800s. Since the 1980s, each time the U.S. imposed duties on Canadian lumber, reviews by NAFTA and 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 effect 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 of the housing market. The NAHB also calculates that a 25 per cent tariff on Canadian lumber will cause about 8,000 job losses inside the U.S. — or US$450 million in lost wages. While the duty is about 20 per cent, in June the U.S. Commerce Department is expected to tack on an additional anti-dumping duty.

Blunt instruments like import duties can quickly become unpopular in the country imposing the duty as negative effects trickle down to consumers. Western Canadians may right 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.

Canada will appeal the latest round of softwood lumber duties and while the outcome will likely be in Canada’s favour, in the years that it takes for 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.