Protectionism Could Cripple the Economy
One should not confuse a level playing field in trade with
protectionism. Kenneth Dam, on leave from the University of Chicago to serve
as Undersecretary of the Treasury in the Bush Administration, recently wrote
the following in his book, The Rules of the Global Game …
"The antidumping proceeding always has been and is increasingly
a protectionist device." He describes the law as "arbitrary rules [that]
bias the procedure heavily toward a finding of dumping and [a] procedure
[that] puts a heavy and expensive burden on the foreign party to prove its
own foreign prices and costs." (1) "The
very invocation of the process," he writes, "is an important restraint."(2)
In many instances, the law itself is the source of unfairness
and illogic.(3) J. Michael Finger, writing
in 1994, says, "[a]ntidumping, as practiced today, is a witches' brew of
the worst of policy-making: power politics, bad economics, and shameful
public administration." Dumping between bordering countries in a free trade
arrangement makes neither logical nor legal sense.(4)
If a company were selling a product at less
than fair value across a border, the product would simply re-cross the border
for resale. Moreover, the treatment accorded foreign producers in the United
States under the antidumping laws violates the national treatment obligations
arising under the North American Free Trade Agreement and the World Trade
Organization.(5)
The dumping allegations are creating more
trade distortion, not less. It is tilting the playing field. The period
of investigation ("POI") for the current softwood lumber dispute coincides
with the Softwood Lumber Agreement Between Canada And The United States
("SLA"), a period of deliberately distorting managed trade. Canadian producers
of softwood lumber, on a quarterly basis over a five-year period, were limited
by international agreement in the quantity of softwood lumber they could
ship to the United States, regardless of demand. The application of trade
laws designed for "normal" times is inherently inappropriate when the marketplace
has been distorted by an artificial elimination of free trade.(6)
Yet, to find dumping, the U.S. Department of Commerce relied
on trading patterns during the SLA.
There is no claim, nor any finding, that there has been any
dumping in the conventional or colloquial sense. Prices for Canadian products
have always been higher in the United States than in Canada, so no one could
say that Canadian products are "dumped" in the United States. And Canadian
companies have been making a profit on their sales in the United States,
and in their overall operations, so they have not been selling in the United
States below cost.
The alleged dumping arose because, with restrictions on the
quantity of Canadian goods that could be sold in the United States, supplies
built up in Canada, driving down prices there. Through a Byzantine methodology,
the Department of Commerce discards those lower prices in Canada from its
calculations, which then produces results that Commerce calls "dumping."
The supposed dumping then represents about one-third of the current total
margin.
At this particular moment, it is difficult to sort out what
is happening in the marketplace. Prices for softwood lumber are at levels
dangerously low for the survival of producing companies, despite the high
duties. Demand remains healthy. The low prices probably are helping fuel
demand, along with low interest rates. And Canadian exports to the United
States are down, more than ten percent from a year ago. So what is happening?
No one quite knows for sure, but at least one factor is certain.
Because of the crippling duties on Canadian products, Sweden, Finland, Russia,
Latvia, Austria, even Chile and New Zealand, are penetrating the U.S. market.
It is at best ironic to see the United States' best friend and most important
trading partner discriminated against in favor of Russia and Latvia.
Lumber is heavy and very expensive to transport, yet it now
appears cheaper in some instances to ship lumber from New Zealand than to
buy it from next door. Eventually, as Canadian mills close and supply reduces,
the United States will become truly dependent on the supply from distant
shores for some not-insignificant percentage of its supply. At some point,
the price from those distant shores will have to reflect the real transportation
costs. That's when the American consumer will discover that the price of
a home has gone up substantially because framing lumber is much more expensive,
and harder to get.
A 28% premium on framing lumber inevitably will lead to much
higher home prices, even if the immediate aberrational market has kept prices
down. Americans then will see an economic pressure on housing that could
crack the entire American economy. Maybe that is why the Vice President
is now interested.
Large Landowners are the Beneficiaries of This Trade Action
The 28 percent duties are a combination derived from allegations
about subsidies and dumping. As I've described already, the dumping laws
in the U.S. are generally used for protectionism and-in the North American
market, particularly for commodities-can make no logical sense. Through
simple arbitrage, any price advantage selling across the border would be
wiped out by selling the commodity back across the same border. Consequently,
as long as there is free trade there cannot be dumping. This condition explains
why there has never before been a dumping case, and why no one seems to
know what to do about it now.
The traditional, long-standing American complaint is that
Canadian provinces, custodians of the forests and owners of the natural
resources, sell standing timber to lumber companies below market values.
The current dispute in litigation is how to determine market values. The
U.S. is arguing that the applicable market values are in the U.S.; the World
Trade Organization has already ruled that the applicable and appropriate
market must be in Canada.
The dispute over values for standing timber means that the
product subject to duties is lumber, for which only the input values are
in question. I won't tarry over the legal complexities arising from allegations
focused on the input and not the downstream, exported product. But I must
note this problem to lay the predicate: by seeking to raise the cost to
Canadian lumber producers of their input timber, U.S. companies are raising
the value-on their books and in fact-of their own standing timber. So, the
real beneficiaries of the trade action are American private timberland owners,
much more than lumber companies. Maybe that's why Jimmy Carter last year
weighed in on the side of the American producers, in the New York Times.
He is, after all, a timberland owner.
The most strenuous force behind the U.S. industry push for
punitive duties on Canadian softwood lumber is International Paper. International
Paper is also the largest timberland owner and producer in North America,
with 10.4 million acres. International Paper's operating profit in 2000-2001,
in its Paper Wood Products Division, was more than $1.2 billion- more than
three times the operating profit of Canada's eight largest lumber producers
combined.
Other active members of the U.S. lumber industry in these
trade cases are Plumb Creek Timber, which owns 7.8 million acres of timberland;
Potlatch, with 1.5 million acres; Temple Inland with 2.2 million acres,
and the closely-held Sierra Pacific, with another 1.5 million. It is more
than mere coincidence that the leading forces against Canada are, above
all, timberland owners. By demanding higher prices on Canadian timber-not
lumber-they are increasing the value of their landholdings.
It is therefore also more than mere coincidence that their
position in negotiations is that Canadian provinces ought to rewrite their
forest laws to raise substantially the costs of standing timber in Canada.
During the proceedings before the International Trade Commission
last spring, we learned that the U.S. companies had not reported their financial
situation in the manner requested by the Commission. They all showed themselves
in deficit, losing money, but they were recording their costs of standing
timber at so-called "market prices." The Commission obliged them to report
their actual costs-and when the conversion was made, almost the entire U.S.
lumber industry turned out to be in the black. Only the smaller companies
that typically have to buy their timber from the bigger companies were in
the red. These data were an important reason why the Commission was unable
to find that the U.S. industry was suffering any injury from Canadian imports.
The timberland owning lumber producers in the United States
have tried to hide huge profits from timberlands. However, as long as they
can raise these input costs for their Canadian competitors, they can increase
their profits and the value of their holdings. Meanwhile, U.S. lumber producers
who have to buy their timber often are buying from the big landowners, who
are their lumber-producing competitors. They pay a premium that makes them
less competitive.
In the U.S. south, wood costs for those having to buy their
timber (because they do not own it) have risen 635 percent since 1970 (258
percent in the Pacific Northwest). Companies such as International Paper
are the profiteers. Log costs have risen 633 percent in the south, while
lumber prices have risen 253 percent. Consequently, southern timberland
owners have raised their prices 6.3 times over the 1970 prices (2.6 times
in the Pacific Northwest). Southern lumber producers purchasing timber are
seeing profits squeezed by rising timber costs; timberland owners making
lumber are seeing their profits soar. In general, owning timber is much
more profitable than manufacturing lumber, and that disparity grows with
duties on Canadian lumber.
The Case About Lumber is a Case About Canada and the United
States
Much of the privately owned timberland in the United States
was never bought by private interests. The Homestead Act delivered vast
tracts of public lands into private hands-and reflected the basic American
belief in private property.
Canadians, on the other hand, believe that the state, or "Crown,"
should own and maintain responsibility for land. These values trace to feudal
times in England, passed on to Canada, when the king protected peasants
on his own lands, and peasants counted on the king's protection.
The U.S., with no history of feudalism and a revolution against
England, never accepted a king or the state as a protector, and always preferred
land to be owned by private parties.
Americans insist that Canadian provinces should privatize
their forests or, in the alternative, should sell them off on a continuing
auction basis. All the American proposals revolve around short-term propositions.
Further, American private timber owners do what they please with their lands.
They can regenerate the forest-or not. They can clearcut-or not. It's up
to them. Canadians, by contrast, operate under very strict government controls.
They must restore the forest, and harvesting practices must meet rigorous
standards for sustainability.
Speaking abstractly, when American companies exploit publicly
owned forests, they expect the government to act the way they'd like private
parties to act. They expect the government to build forest roads, fight
forest fires, protect trees against insects and disease. By contrast, the
Canadian Crown expects private companies operating on public lands, to meet
all these expenses themselves. When a wilderness road is built in Canada,
the government receives ownership, but the company pays for the road and
has responsibility for its maintenance in perpetuity.
Despite considerable propaganda, the environmental record
resulting from these different systems is much better in Canada. Every provincial
government enforces policies for sustainable yield, and all operations are
monitored. Canada's forests are, indeed, expanding.
In the American south, clearcutting is exceeding reforestation
by 25 percent. American lumber companies are denuding the U.S. Yet, they
insist upon limiting Canadian supply so they can cut down more trees south
of the border.
The United States arrived at a calculation of some 19 percent
in duties based on the alleged subsidy related to the price of standing
timber by very selective consideration. It compares the price a Canadian
company may pay for a tree in the far north to what International Paper
might pay for a tree in Alabama or Georgia. The Canadian tree on average
will be much further from market and mill and will be much smaller. Because
of the expense to harvest the tree, borne entirely by the company, and the
inherent value of the tree in large part because of its size, the Canadian
tree itself is of less value than the tree in Georgia. However, the United
States doesn't see it this way and has practically ordered Canada to change.
As long as Canadians believe that the Crown is the steward
of the public patrimony and Americans think all property should be private
… as long as the U.S. government pays for roads and forest activities for
which Canadian companies pay in Canada … and as long as the United States
insists that Canadians must manage their natural resources the American
way, there will be lumber wars. In some form or another. There is no end
in sight.
There is one more special wrinkle this time around, the Byrd
Amendment. According to the Byrd Amendment, U.S. companies that publicly
bear witness in support of a trade petition are entitled to receive the
duties paid. Here is privatization in the extreme: the U.S. Treasury used
to collect and keep tariffs paid at the border, but now even those monies
go into private hands. So virtually any company with the potential for such
a windfall will sign up, especially when a few big companies will foot the
bill to get duties imposed.
A panel of the World Trade Organization has declared that
the Byrd Amendment does not conform with U.S. international obligations,
but the United States has not yet agreed to get rid of it. Byrd money has
been a major motivator for U.S. companies pursuing this case against Canada.
Where We Are Now
There are now seven judicial appeals underway arising from
the decisions taken by the Department of Commerce and the International
Trade Commission. Canada has challenged the final agency determinations
for antidumping and for countervailing duties, and for injury, before both
NAFTA panels (to judge whether the United States conformed in those decisions
to its own laws), and before panels of the World Trade Organization (to
determine whether in each instance the United States lived up to its international
obligations). In addition, Canada has challenged the preliminary determination
of the Department of Commerce in the countervailing duty case.
This latter case is the first to reach a decision. The WTO
panel found almost entirely in Canada's favor. The United States has denounced
the decision: that it was premature, referring only to a preliminary, not
a final determination; that in fact the results were mixed with some judgments
for the United States (the U.S. prevailed on one issue that is not important
for Canada's case); that the panel was simply wrong in applying the law.
The U.S. will appeal.
In all the other cases the United States has done everything
it possibly can, inside and outside the rules, to stall and delay. The United
States is desperate to avoid litigated outcomes.
The United States is hoping for a negotiation. Canada encouraged
a free trade agreement with the United States to routinize and depoliticize
the resolution of trade disputes. But, with the United States ten times
greater in almost every respect than Canada (population; GNP; exports),
it is difficult for Canada to protect its interests through negotiation
and conversation. Canada needs judicial neutrality. Through stalling and
delaying, the United States hopes to force Canada to negotiate a bad deal.
The United States, on the record of these cases, would much prefer to avoid
its day in court.
The Softwood Lumber Dispute as Symbol and Symptom
Recently the same two U.S. agencies, the Department of Commerce
and the International Trade Commission, initiated antidumping and countervailing
duty investigations against Canadian wheat. More recently still, the International
Trade Commission initiated an investigation into wood products, such as
roof trusses, I-joists, and I-beams, not currently within the orders on
softwood lumber. These actions all involve areas where there is public ownership
in Canada and private ownership in the United States. As with softwood lumber,
the American perception of a solution is to make Canadians be more American.
You may all be familiar with the popular nostrums: largest
trading relationship in the history of the world; longest undefended border;
greatest cooperation. Canada, with only 30 million people but a vast land
mass and the blessings of natural resources, exports a great deal of its
products, which themselves often are derived from the wealth of the land,
in order to succeed economically. Eighty-six percent of those exports go
to the United States. Canada depends on the U.S. market, and knows it. The
United States depends on Canadian products, but Americans generally do not
know it. So, to every disagreement there is a common and easy solution:
be more like us.
As long as Canada is determined to remain a sovereign state,
it will be in trade disputes with the United States. It can resort to the
days before the Free Trade Agreement and try to make deals, or it can use
the institutions of NAFTA and the WTO.
The United States, by squeezing the use of the institutions,
is trying to restore pre-NAFTA, pre-WTO days, and the United States has
found many sympathetic Americans and frightened Canadians. But the challenges
facing these institutions and respect for them are the stuff of another
speech at another time. One day perhaps we will have time to talk about
them. Meanwhile, I am happy to take your questions on the topics I have
tried to cover today.
ENDNOTES
1. Kenneth W. Dam, The Rules of the Global
Game: A New Look at US International Economic Policymaking (Chicago:
The University of Chicago Press, 2001), at 155.Back to Text
2. Id. Dam concludes his discussion on antidumping by
referencing "a Washington trade lawyer as characterizing the trade practice
of Dewey Ballentine's [sic] Washington office as 'the perfection of special-interest
lobbying, or rent-seeking,' observing that, 'U.S. industries stand to gain
many times what they spend to hire lawyers to bring unfair-trade cases,
even if the cases are ultimately unsuccessful' and 'as with most other things
in Washington, rent-seeking behavior has a higher return than investment
in plants and equipment.'" Id. at 160-61.Back to Text
3. There is a significant literature advancing this view,
in addition to Dam's The Rules of the Global Game. See, e.g., Robert W.
McGee, A Trade Policy For Free Societies: The Case Against Protectionism
(Westport: Quorum Books, 1994); Gabrielle Marceau, Anti-Dumping and Anti-Trust
Issues in Free-trade Areas (Oxford: Clarendon Press, 1994); Brink Lindsey,
The U.S. Antidumping Law: Rhetoric Versus Reality (Cato Institute, 1999);
Thomas Klitgaard and Karen Schiele, Free Versus Fair Trade: The Dumping
Issue, in Current Issues In Economics and Finance, Vol. 4, No. 8 (Federal
Reserve Bank of New York, Aug. 1998); N. David Palmeter, The Antidumping
Law: A Legal and Administrative Nontariff Barrier, in Down in the Dumps:
Administration of the Unfair Trade Laws (Richard Boltuck and Robert E. Litan,
eds.) (Washington, D.C.: The Brookings Institution, 1991); Antidumping:
How It Works and Who Gets Hurt (J. Michael Finger, ed.) (Ann Arbor: The
University of Michigan Press, 1993). Back to Text
4. We incorporate here by reference the more extensive
discussion offered in the case brief of the Ontario Forest Industries Association
and the Ontario Lumber Manufacturers Association.Back to Text
5. Gabrielle Marceau, Anti-Dumping and Anti-Trust Issues
in Free-trade Areas (Oxford: Clarendon Press, 1994), Chapter 3.Back
to Text
6. The voluntary restraints, through the quota and export
tax, enshrined in the SLA were undisputed violations of the prohibition
on quotas in the General Agreement on Trade and Tariffs of the World Trade
Organization. The Department of Commerce exploited in the investigation
some of the consequences of five years of an internationally illegal trade
arrangement. Canada has challenged this conduct both in NAFTA and at the
WTO.Back to Text
