Marketize Western Forests to Stop the Lumber Wars

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Appeared in the National Post, April 2, 2002
At the risk of oversimplification, the root of the dispute is the public ownership of forests, particularly in British Columbia.

Historically, the publicly owned virgin forests of the United States and British Columbia have given rise to much economic rent, which is the difference between the market prices of trees and the cost of harvesting them. This economic rent properly belongs to the taxpayers. The US government obtains the rent through competitive bidding for cutting rights on public land. Winning firms in effect pay up front the present value of the rent.

In British Columbia, companies pay the rent after they have harvested the trees. They report to the government their revenues and costs under strict rules of disclosure and transparency. They pay the difference between the revenue and cost as something called “stumpage”.

In principle, the BC stumpage and US rent payments should come to the same. This has been the finding of the Yale economist William Nordhaus, whose paper is cited widely by the BC government and has been used is legal action with the WTO. The government mandated formulas used for the calculation of revenues and costs indeed do not contain any element of subsidy. To the contrary, the costs of the BC companies historically have been inflated by requirements to build excessively durable roads and the replanting of trees where self-regeneration would be economically superior.

The crucial difference between the US and Canadian system for collecting rent is that one is in advance and the other is after the fact. This difference is very important because firms maximizing profits in the private sector raise output when prices go up and lower it when they fall. Therefore, when the price of lumber falls, US firms reduce output. Canadian firms do not. The lower product price merely reduces the stumpage they owe. In effect, the BC taxpayer takes the brunt of the impact of lower prices.

It matters little to US producers whether the automatic absorption of the impact of lower lumber prices by the government is considered to be a subsidy in the traditional sense used by Nordhaus. What is important to them is that lower lumber prices cause them to reduce output, lay off workers and suffer reduced profits while BC producers keep up their supplies and maintain profits. In addition, the BC producers’ actions cause lumber prices to be even lower and to increase their market share in the United States.

There is no doubt that most recent US lumber tariffs have imposed serious hardships on Canadian workers and firms. This is deplorable since the present workers and firms are not responsible for the historic legacy of rent extraction in British Columbia. However, British Columbia does not have many ways to end this tragedy and settle the issue for good. The past appeals to the WTO obviously have failed and will again in the future. The high level appeals from Canadian with US politicians have not worked in the past and are mainly to score political brownie points with the Canadian public. The only permanent solution is to make changes to the way in which British Columbia collects the economic rent from its forests.

There are two ways. One is to follow the US example and sell very long-term cutting rights on public lands to the highest bidder while the ownership of the land remains with the government. However, since the bulk of US lumber comes from privately owned land in the South, these US interests might oppose this solution and instead fight for full privatization. That privatization is the preferred option for Americans may be inferred from the fact that lumber exports from the privately owned forestlands in the Atlantic Provinces have been exempted from the present tariffs.

The second method of full privatization is simple in principle. The ownership goes to the highest bidder. The open bidding process assures that the price paid equals the present value of the future rents from forest. Public opinion surveys suggest that privatization is politically risky since many see it as a loss of control over how the forests are managed in the public interest. Public opinion can be changed on these issues. Privately owned forests in countries like Sweden, Germany and the United States are managed in accordance with public regulations and have better records of compliance than BC forests.

Much more difficult opposition to privatization will come through the native land claims. Unless the claims are settled, bidders for the land will offer prices well below the value of the economic rent to compensate them for the risk that some court ruling in the future will nullify the deal. Some land may be impossible to sell. This problem can be dealt with by a government guarantee of a refund of the purchase price, plus interest and costs of improvement, if courts later assign the land rights to natives. The government can set aside the funds received in an escrow account so that is would be available for the refunds until land claims are settled. Some money might be lent to natives so that they can enter bids of their own.

The biggest opposition to the privatization of BC forestlands will come from those who have benefited from the stumpage system in the past – the workers and the politicians. Since wage increases only lowered stumpage incomes for the government, in the past companies granted such wage increases readily. BC forestry workers have long been the highest paid in the world. Workers like the idea that the stumpage system insulates them from the vagaries of world lumber prices.

Politicians welcomed the opportunity to please special interest groups demanding that the government require of logging companies economically unsound regulations like the construction of superb logging roads, replanting and other ecological measures. After all, the cost of these regulations never showed up in the government books. They simply reduced the size of stumpage revenues and created employment among unionized workers. Only time will tell whether the newly elected Liberal government of BC has the will break this historic practice and do what is right for the province.

The above description of stumpage as a residual is no longer fully accurate. The NDP government imposed a super stumpage due regardless of profits and it mandated that companies have to cut a certain amount of wood on lands they had leased or forfeit the right to do so altogether. The latter provision undoubtedly is another irritant to the Americans since it increases lumber supplies even during slackening demand.

In many regions of British Columbia access to timber now is so costly and its quality is so low that there is no longer any economic rent. The imminence of this condition has led unions to allow the introduction of labor saving technology in the knowledge that otherwise they would lose their jobs altogether. As a result, during the last 20 years the demand for labor in the forestry sector has shrunk dramatically while output has increased.

The Americans are also unhappy about the historic regulation, which prohibits the export of unfinished logs. As a result, the BC price of raw logs has tended to be below the world price and permitted BC processors of the logs to undercut their US competition in the market for lumber. Of course, the lower timber prices reduced the government stumpage income, so that in this sense, the BC government subsidized the timber processing industry and permitted workers to have higher wages than they would have had otherwise.

This fact is another irritant to US lumber companies, but they do not have a very strong case for its removal, since the United States has a similar regulation. Perhaps negotiators can agree that Canadian and US export restrictions are made identical. Canada already has recently modified its absolute ban by permitting exports after the availability of logs has been advertised widely for 30 days and no Canadian bids have been received.

The open bidding for forest harvesting rights, the privatization of crown timber lands and unrestricted bidding for raw logs by foreigners have been described as “marketization” of the forestry industry. The many who believe that the present “governmentization” of the industry necessarily always produces inferior results welcome the new BC government’s expressed interest in this marketization, which will not only solve the softwood lumber dispute with the Americans, it will have turned a challenge into an opportunity. It will have rid the people of British Columbia of the burden of future damage from public ownership and management. And as a bonus, marketization could speed the settlement of native land claims since it will become obvious that economic rents from remaining forests are much smaller than the natives and many others tend to believe.

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