Softwood lumber dispute—dumping should not be a trade issue
This week the Trump administration escalated the softwood lumber dispute with Canada when the U.S. Commerce Department imposed a preliminary anti-dumping duty of up to 7.72 per cent on Canadian softwood lumber exports. (In this context, "dumping" takes place when the price of Canadian lumber on the U.S. market is lower than the cost of production or selling price in Canada.)
When combined with preliminary anti-subsidy duties issued by the U.S. in April, the combined trade measures could bring total U.S. duties on Canadian softwood lumber to as high as 31 per cent.
Both governments have indicated the will to strike a deal to settle the dispute. However, the Canadian government has threatened to respond with litigation while Scott Doherty, executive assistant to the president of Unifor National, has called for a new softwood agreement. The likelihood of the U.S. Lumber Coalition supporting a new softwood lumber agreement that does not involve substantial reductions in Canadian softwood lumber exports is very unlikely.
In addition, the prospect of continued litigation over Canadian softwood lumber exports offers no long-run solution to the issue, at least based on the long history of continued litigation and dispute-resolution procedures surrounding the industry.
The prospect of the U.S. administration taking aggressive trade actions against Bombardier underscores the growing risks facing Canadian exporters beyond lumber producers. These risks, in turn, threaten increased capital investment in Canada, as secure access to the U.S. market remains a critical issue for many firms thinking of expanding production facilities in Canada.
What should Canadian officials do in the face of increasingly aggressive U.S. trade actions?
It should be noted that Canada has initiated its own trade actions, perhaps in partial retaliation for the ongoing softwood lumber dispute. For example, the Canadian government has refused to lift duties on imports of gypsum drywall from the U.S. and is threatening to bring its own subsidies case against Boeing, in the event of a U.S. action against Bombardier.
To be sure, Canada cannot win a tit-for-tat trade action game against the United States. The bilateral trade relationship is simply too asymmetrical. The U.S. domestic market accounts for roughly 75 per cent of Canadian exports, whereas Canada accounts for only around 16 per cent of U.S. exports.
Nor is it likely the Trump administration will support a “grand bargain” where it agrees to limit the applicability of subsidy and anti-dumping actions as part of a new NAFTA. However, one potentially feasible policy goal of Canadian trade negotiators is to obtain agreement with its North American trading partners to deal with dumping as a competition policy issue.
That is, domestic competition authorities would hear complaints about foreign firms pricing below cost (e.g. the Competition Bureau in Canada). Economists are extremely skeptical about claims of predation, primarily because of the rare circumstances in which predation is likely to be profitable. Trade authorities are content to document that the foreign exporter is pricing below the domestic price it charges to pursue a dumping action. However, even if such price discrimination takes place, it could well be consistent with the exporter pricing above average incremental cost. For example, average incremental cost might decline with increasing output rates.
Competition authorities have the expertise to evaluate pricing policies in the market contexts in which they occur, and they are rightfully dubious of complaints about predation because the practise will rarely be profitable. For international predation, or dumping, to be profitable, it must be prohibitively expensive for new firms to enter the market in which dumping is alleged. Otherwise, such competitive entry will thwart the efforts of the predator to raise prices above competitive levels to more than make-up for losses incurred by selling below cost.
Simply put, the ability of a predator to drive rivals from the market for a sufficiently long period to enjoy monopoly profits is likely to be a rare exception.
On the other hand, inefficient firms have strong incentives to solicit the assistance of domestic trade representatives to increase the effective prices charged by their more efficient foreign competitors by petitioning for anti-dumping duties. The adverse results are wasteful litigation costs and reduced international competition, which is harmful to consumers.
Given the very small number of economically valid cases of predation, including international predation, it would arguably be efficient for trade authorities to do away with anti-dumping duties entirely. Since this is an unlikely development, making anti-dumping a competition policy issue is a worthwhile and possibly tenable objective for Canadian trade negotiators.