Acton Commentary

Selective Free Trade Harms the U.S. Economy


Later this year, the World Trade Organization (WTO) is due to rule on the softwood lumber dispute between the United States and Canada. At issue in this particular case is whether or not Canadian lumber companies are “dumping” their products in American markets and undercutting the ability of American companies to compete in the market. The more significant issue involved is whether or not free trade will be allowed to progress. In this situation the well-financed lobbying efforts of the American lumber companies and the misguided economic policy of the U.S. government, which often pursues only a selective form of free trade, are restraining the market forces of competition.

Lumber companies in the U.S. have accused Canadian suppliers of softwood lumber of “dumping,” or flooding American markets with lumber unfairly priced below market value. On behalf of U.S. lumber companies, the Commerce Department announced on August 10, 2001 that it had levied a 19.31 percent punitive tariff on Canadian softwood lumber imports retroactive to May 2001. In response to this action by the Commerce Department, the Canadian government petitioned the WTO to resolve the dispute.

U.S. lumber companies charge that the alleged dumping by Canadian lumber companies has resulted in the loss of American jobs and harm to the American lumber industry. Undoubtedly, increased Canadian lumber exports to the United States have come at the cost some American jobs and have caused a loss in the stock value of American lumber companies. The question remains, however, as to whether the root cause of these losses is Canadian lumber exports to the U.S. market or the inability of American lumber companies to produce a similar product at a competitive price. For a number of reasons, the implementation of the tariff on Canadian softwood lumber fails to recognize the complexities of the global marketplace and will result in the weakening, rather than strengthening, of the American lumber market.

A fundamental point of free trade is at stake here–if Canadian lumber companies are able to produce a high-quality product at a lower cost, then they should not be penalized for doing so simply to protect American interests. While the short-term effects of lower prices may cause job losses and a decrease in the stock price of American lumber companies, in the long run, lower prices will encourage competition and strengthen both the U.S. and Canadian markets. If the export of Canadian softwood lumber forces U.S. lumber companies to respond to the demands of the market by exploring ways to produce and market lumber at competitive prices, U.S. markets, as well as Canadian, will be strengthened. A further effect on U.S. lumber companies will be increased production efficiency and a more competitive posture in the global marketplace. If U.S. lumber companies cannot or will not make the necessary changes and respond positively to the demands of the global market, they should get out of the business altogether, rather than having the government erect protectionist barriers to free trade and artificially inflate the price of lumber.

Also, it is questionable whether or not Canadian lumber companies are, indeed, “dumping” products in American markets. The WTO defines dumping as a company exporting “a product at a price lower than the price it normally charges on its home market.” In the case of the Canadian softwood lumber dispute, this standard clearly has not been violated. WTO agreements “allow governments to act against ‘dumping' where there is genuine injury to the competing domestic industry.” The Commerce Department and U.S. lumber companies will attempt to illustrate injury to domestic interests by pointing to job losses and a decrease in stock prices. The unfortunate reality is that the “injury” they attempt to show is most likely attributed to the inability of U.S. lumber companies to respond to the demands of the global market than to the increase in low-cost Canadian lumber imports to the American market.

The approach of levying tariffs and erecting barriers to free trade fails to recognize the complexities of economic integration between American and Canadian markets. While decreased prices may cause short-term job losses in the American economy, it has the positive effect of creating jobs in the Canadian economy. As a result, market integration is not a zero sum game. It is in the long-term interest of a healthy U.S. economy to maintain a strong Canadian economy. Canada is the United States' largest single trading partner with over $1 billion worth of trade in goods and services crossing the U.S.—Canadian border each day. Creating high-paying Canadian jobs ensures the future long-term stability of this market for American products. Furthermore, such an approach fails to recognize the integration and co-operation of the lumber industry on both sides of the border. Weyerhauser, the third largest American lumber company, now owns MacMillan-Bloedal, the largest Canadian lumber company.

Finally, by levying tariffs on Canadian lumber and artificially inflating prices within the American market, the government has failed to realize some of the unintended consequences of its actions. Most notably, the artificial inflation of prices will lead to an increase in the cost of a new home on an average of $1,000, according to the National Association of Homebuilders. Clearly, it is in the interest of the American economy to keep this critical sector healthy and to ensure that home prices remain affordable for American families. In addition, the adverse effects of increases in the price of homes is likely to be felt most strongly by first-time and low-income home buyers, because the projected $1,000 increase in the average home price represents a greater percentage of the overall home price for these consumers. It is not only poor economic policy to levy tariffs, it is also a morally questionable social policy, because home ownership has been proven to stabilize communities and to encourage the virtues of thrift and responsibility which are necessary for a free society to flourish. The moral obligation of the government is not to protect select industries by levying punitive tariffs on their competitors, but rather to ensure that markets remain fair and competitive.

It is in the long-term interest of both the American and Canadian economies to allow the market, not the government, to determine fair prices for goods and services. The practice of selective free trade as evidenced in the softwood lumber dispute only serves to undermine the health of the global economy, whereas truly free trade encourages the competition, innovation, and creativity that is beneficial to all participants in the global economy.