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The Impact of the Free Trade Agreement on the U.S. Forestry Sector: A General Equilibrium Analysis

INTRODUCTION On 1 January 1989, a U.S./Canadian bilateral |free trade' agreement (FTA) became effective. This historic pact will phase out most of the tariff barriers between the United States and Canada over the next ten years and will liberalize quantitative restrictions in a number of specific cases. Although the trade in forest products accounts for a relatively small component of total U.S.-Canadian trade and, on average, receivers relatively low levels of tariff protection, the FTA will nonetheless have a measurable impact on the forest products industry and timber producers in the United States. The impact of the FTA on the forestry sector will be manifest directly through lower tariff protection and corollary product demand responses as well as indirectly through general equilibrium linkages that the forestry sector has with other segments of the general economy. This paper specifically assesses the impact of the FTA on the forest products and timber industries in the United States. The paper employs a computable general equilibrium of the U.S. economy, which captures both direct, sector-specific and indirect impacts of the FTA on the forestry sector.(1) BACKGROUND The U.S./Canadian FTA was negotiated against the backdrop of a rapid expansion in the bilateral trade between the United States and Canada. The value of U.S./Canadian trade increased by close to 50 per cent between 1980 and 1986. The trade in forest products increased by some 40 per cent over the same period but remained a relatively small component of the total value of trade, between 4 per cent and 6 per cent of the total (Table 1). The growth in trade between the United States and Canada has coincided with a worsening overall trade balance for the United States and a depreciation in the Canadian exchange rate relative to the U.S. dollar. The U.S. trade deficit in forest products in 1986 was $2.8 billion out of a total forest products trade of approximately $3.9 billion. TABLE 1 U.S. trade with Canada (million of U.S. dollars) Year Total trade Forest products (% total) 1980: U.S. exports 41,581 431 (1.0) U.S. imports 40,874 2,282 (5.6) 1981: U.S. exports 45,469 492 (1.1) U.S. imports 45,776 2,218 (4.8) 1982: U.S. exports 38,833 333 (0.9) U.S. imports 46,329 2,050 (4.4) 1983: U.S. exports 43,897 481 (1.1) U.S. imports 51,982 3,118 (5.9) 1984: U.S. exports 52,903 497 (0.9) U.S. imports 66,343 3,374 (5.1) 1985: U.S. exports 54,505 496 (0.9) U.S. imports 68,884 3,544 (5.1) 1986: U.S. exports 55,633 557 (1.0) U.S. imports 68,163 3,351 (4.9) SOURCE: Normile and Goodloe (1988) Due at least in part to the trade imbalance, the bilateral trade relationship between Canada and the United States has suffered a number of recent conflicts. In the forest products sector, Section 201 of the U.S. Trade Act was invoked in 1986 to impose a U.S. tariff of 35 per cent on red cedar shingles and shakes imported from Canada. Softwood lumber, as is well known, has also been the subject of controversy. After simmering as a political issue for a number of years, the U.S. initiated a countervail action against Canadian lumber of 15 per cent in October of 1986.(2) This was followed by a retaliatory trade action by the Canadians in the form of a 67 per cent ad valorem tax on corn imported from the United States. This sequence of actions, in turn, stimulated negotiations between the two countries which led to a Memorandum of Understanding (MOU), in which the Canadians agreed to a 15 per cent markup on the price of exported lumber, in the form of an export tax, as a substitute for the U. …