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The truth behind Trump’s “trade war” with Canada

Trump didn't start the fight over Canadian softwood lumber

NurPhoto/Getty Images

For 35 years, the US and Canada have been locked in an endless fight about imported lumber — a cycle of tariffs and truces that has repeated itself under every president since Ronald Reagan.

President Donald Trump, though, has found a way to use this otherwise mundane issue for political gain.

On Tuesday, Commerce Secretary Wilbur Ross announced that the United States will slap a 20 percent tariff on most Canadian softwood lumber imports, the kind of wood commonly used to build homes. The move was applauded by the US timber industry and widely framed as the beginning of a trade war between America and its northern neighbor.

But this is hardly a trade war. It’s more like the latest chapter in a long-simmering squabble between siblings — a squabble Trump has seized on because it fits his political narrative.

Here’s how the cycle goes. The American lumber industry periodically gets upset that it can’t compete with cheap Canadian softwood imports. It files an unfair trade case with the Commerce Department. Commerce prepares to levy tariffs on Canadian softwood lumber imports. Then both countries negotiate a truce, which usually involves Canada limiting timber exports to the United States. The truce expires, and everything starts over again.

Since the 1980s, the complaint-tariff-truce cycle has repeated itself six full times. We’re now somewhere in the seventh cycle.

“It never ends; it’s like Groundhog Day,” says Ben Cashore, director of the Program on Forest Policy and Governance at Yale University. Cashore had been researching this dispute for years, he says, until he realized that it would go on forever. “I thought there had to be a better use of my time.”

The big difference this time around is the politicization of the spat. Presidents and Cabinet members don’t normally publicize their response to such a mundane trade dispute.

But Trump’s campaign was defined by blaming free trade for American job losses and economic woes, so his administration’s decision to publicize the move is a political calculation: It makes his team appear to crack down on trade abuses, even though it’s just more of the same.

The administration will likely use the lumber issue, as well as a dispute over dairy, as leverage in upcoming NAFTA negotiations. And acting to protect the American lumber industry gives Trump an easy victory to claim before his 100th day in office this week. If history holds, though, the most likely outcome is a truce during NAFTA negotiations.

The United States imports billions of dollars in products from Canada

Compared to US trade with other countries, the trade deficit between the United States and Canada is relatively small: The US imports about $15 billion more worth of Canadian goods than it exports. That’s because Canadian businesses and consumers are a major market for US goods, and in 2015 they bought about $289 billion worth of American products.

Most of the trade between both countries involves vehicles and machinery, but agriculture is big too. Canadian softwood lumber mills rely heavily on exports to the United States, where real estate developers in turn rely on Canadian lumber to build homes. In 2016, Canada’s softwood lumber exports to the United States were worth $5 billion. About a third of the softwood timber available in the United States comes from Canadian forests.

But backlash from the US lumber industry has been fierce, particularly because US companies have a hard time competing with a country that has such an abundant amount of timber on public lands.

American lumber producers believe Canada is unfairly subsidizing its lumber industry by selling timber from its vast public forests to Canadian producers at a very low price. If the government auctioned its timber at market rates, it would cost sawmills more money, and therefore even out the playing field. In the United States, the right to harvest timber on public lands is sold to the highest bidder.

Canadian trade officials have always disputed this claim, saying that the companies get a low price because they also build roads, prevent forest fires, and provide other free maintenance on public lands, so the cost of the United States needs to include the cost of those services.

The difference between this trade fight and those with other countries, like China, is that quite a lot of money is involved, says Chad Bown a senior fellow at the Peterson Institute for International Economics in Washington, DC. The United States imports about $5 billion a year in Canadian softwood lumber. A 20 percent tariff would bring in a lot of money, Bown says, assuming it doesn’t slow down trade too much.

“A billion dollars is a lot of tariff revenue,” he says. Of course, Canada will probably put up a fight, as history shows.

The lumber fight dates back to 1982

The lumber dispute has easily become the thorniest trade issue between the United States and Canada, and many economists believe it goes back to the colonial era.

It really started to heat up, though, in 1982, when the American lumber industry first asked the Department of Commerce to take action against Canadian sawmills. They said the Canadian government was unfairly subsidizing Canadian lumber companies, and that, in turn, was hurting American sawmills. The Commerce Department rejected those claims.

But the second time around, in 1986, the lumber industry succeeded. Commerce prepared to levy a 15 percent tariff on imports. It never happened because both countries came to an agreement: Canada would impose a 15 percent tariff on softwood lumber exports. That lasted a few years, until Canada decided to back out of the agreement in 1991, arguing that it had raised logging prices for Canadian companies.

The US timber industry, which employs about 90,000 people, fought back once again and filed a claim with the Commerce. After back-and-forth negotiations, both countries came to an agreement in 1996, which set a quota on Canadian lumber imports to $14.7 billion a year, tariff-free.

That led to a third case before the Commerce Department, which eventually led to a five-year trade deal in 1996 that merely limited Canadian lumber imports to $14.7 billion per year. That deal expired in 2001.

But in 2002, the Commerce Department levied a 27 percent tariff on Canadian lumber, and Canada took the case all the way to the World Trade Organization. After years of arguing, the two countries finally reached a deal in 2006. The United States returned $4 billion (out of the $5 billion) in tariffs it had collected from Canada since imposing the tariff in 2002. In return, Canada began restricting its lumber exports again. As part of the deal, US timber producers couldn’t file any more cases until one year after the deal expired, which was in October 2016.

They waited two months before filing another unfair subsidy case with the Department of Commerce. The cycle begins again — this time with Trump as the incoming president.

Canadian leaders and US homebuilders are not happy

It couldn’t have surprised Canada that the Department of Commerce would side with the US timber industry — it almost always does. But that doesn’t mean Canada is okay with the decision.

In a statement to the Financial Times, the country’s ministers of natural resources and foreign affairs highlighted the harm it would do to Americans. “This decision will negatively affect workers on both sides of the border, and will ultimately increase costs for American families who want to build or renovate homes,” they said in a joint statement.

And it’s true, a 20 percent tariff on Canadian lumber will raise construction costs for US homebuilders.

The National Association of Home Builders says American mills do not produce enough lumber to meet demand. “Home builders need a consistent, reasonably priced supply of lumber to keep housing affordable for hard-working American families,” said NAHB chair Granger MacDonald in a statement released Monday.

So far, the whole dispute is unfolding just as it has before. The big difference, though, is that the president wants all the credit for it.

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