Taken to the Woodshed

6 min read

Canadian lumber is integral to the U.S. housing market. Will sticking duties on it hurt U.S. homebuyers?

The Phoenix metro area may seem distant from Canada—both geographically and in other ways—but the two are interconnected. According to Glenn Williamson, CEO of the Canada Arizona Business Council, Canadians began moving en masse into the area in the 1960s, while seeking second homes for the winter. From there, multiple trade relationships formed between the metro and the nation, based around aerospace, agriculture and retail. Another trade that has emerged involves lumber, and it makes sense. Phoenix is often among the national leaders in housing starts. But “because of the lack of indigenous lumber in the region,” says Williamson, “most of this wood supply is shipped in from elsewhere.” Phoenix isn’t all that close to America’s timber-rich Pacific Northwest, nor to the somewhat-wooded U.S. South. So the metro has used its Great White North ties to support what Williamson calls a “lumber train” between British Columbia and the Valley of the Sun.

Yet Phoenix is not the only metro that relies on Canadian lumber, nor the only one that stands to be affected by recent federal policy. In April, the U.S. Commerce Department passed a tariff on Canadian softwood lumber, which generally fits the category of Spruce-Pine-Fir. The tariffs will range between three percent and 24 percent for various wood products, and will apply as both countervailing and anti-dumping duties. The tariffs were ordered by the Trump Administration, as part of the President’s America First policy to restore domestic job growth. But really, this issue goes way back.

The U.S. and Canada have been squabbling over lumber trade policy since the 1800s, and it has heated up in the last three decades, says Kevin Mason, a Canadian timber industry financial analyst for the firm ERA Forest Products Research. At the root of the conflict is a dispute about alleged subsidies and market distortions, based on who manages the industry in both countries.

In Canada, much of the harvesting and selling of lumber is from public lands; in the U.S., it mostly comes from private land. This has caused U.S. business interests to long assert that Canadian lumber must then necessarily be enjoying government subsidies. But this allegation appears to be false, says Mason.

“Just because the government controls the trees and sets the price [in Canada] doesn’t mean it’s not market-based.”

The courts have concurred. Over the years, the U.S. has brought legal challenges against Canada to the trade dispute courts of both NAFTA and the World Trade Organization. In both cases, the courts ruled that the Canadian government does not, in fact, improperly subsidize the industry.

The likelier cause for any possible price discrepancy is that Canada has various comparative advantages on lumber, such as more forest area and a renewed government emphasis on reducing deforestation. All the same, American denial about Canada’s advantages may be about politics more than anything else. The U.S. logging industry, according to the Bureau of Labor Statistics, is one in which workers without college educations earn a respectable median annual salary of $37,000. It’s also an industry where domestic employment figures are declining. If part of Trump’s economic platform is to shut off global competitors and restore jobs, the timber industry would be a good start.

The problem is that shutting off Canada, in particular, will inflict costs on many more Americans who don’t work in the timber industry. Canada is the world’s largest exporter of lumber. The U.S. is by far its largest market, accounting for 80 percent of these export sales, most of which go towards home construction. Depending on the year, Canadian lumber accounts for between a quarter and a third of the lumber used in the U.S. Only a few percentage points of America’s timber supply comes from overseas. And while some parts of the U.S.—namely the Pacific Northwest and northern California—have strong production, many other parts—such as the aforementioned southwest—are practically barren.

Given these figures, it’s easy to see how the duties on Canada could affect timber prices—and home prices at large. In fact, it’s already happening.

According to a recent report by the National Association of Home Builders, timber prices began skyrocketing at the beginning of 2017. This was in response to a U.S.-Canada trade agreement between 2006 and 2016 that had just expired, raising fears about possible retroactive duties. Prices have continued to climb following the Trump tariffs. Between January and mid-May, reports Bloomberg, timber prices jumped 18 percent, to $369.70 per 1,000 board feet.

The price surge has not been because Canadian timber supply fell off the market in response to the regulatory barriers but because the timber overcame these barriers, and is being bought at a premium by builders.

“You’re seeing the U.S. consumer really bear the brunt of the tax at this point in time, more so than the Canadian producers,” said Mason, “because we’ve seen the lumber prices go up quite a lot, and basically offset the cost of the duties.”

Considering that lumber accounts for roughly ten percent of construction costs already, these higher prices are significant. They come at a time of high housing demand in America, when all the more lumber is needed. Median home prices at the national level, and in many major metros, have risen from their 2012 dropoff, back up to around their pre-recession levels. After bottoming out in 2009, the number of new housing permits has increased each year since then. Goldman Sachs estimates that housing starts will jump by another nine percent this year.

The tariffs also come at a time when other regulations make the housing market that much more competitive and expensive than it already needs to be. These regulations range from lengthy approval periods, to zoning that limits supply, to immigration laws that cause construction labor shortages. Trump’s tariffs, while saving some jobs, will likely add to this government-imposed state of distortion, and to increased costs.

“Any time you add a tariff,” concluded Williamson, “the end consumer gets a bigger bill.”

Story Contacts:
Kevin Mason, Managing Director
ERA Forest Products Research
[email protected]

Glenn Williamson, Founder and CEO
Canada Arizona Business Council
[email protected]