By Scott Lincicome, CATO.
Recently, a few journalists and (unsurprisingly) the U.S. lumber industry have downplayed U.S. “trade remedy” duties’ potential contribution to skyrocketing domestic lumber prices, noting that current duty rates stand at “only” 9 percent for most imports from Canada – the largest foreign supplier and longstanding target of U.S. trade restrictions. Surely, many factors (most obviously pandemic-induced shocks to supply and demand and a beetle infestation in Canada) are causing the current situation, which is roiling the housing market, but discounting the duties’ effects just because the current rate is relatively low ignores how these duties are actually applied and how both the U.S.-Canada lumber dispute and our trade remedies system more broadly inject significant uncertainty into the North American lumber market and discourage production and cross-border trade.
The bilateral lumber dispute dates back to 1982, with some form of trade restriction – trade remedy (antidumping and countervailing duty) measures or “voluntary” restraints subject to bilateral “Softwood Lumber Agreements” – applied to Canadian lumber imports for most of that time. As detailed in the above link, however, these restrictions changed regularly according to the whims of the governments, the frequently-changing demands of the U.S. lumber industry, and the increasingly-creative methodologies employed by the U.S. Commerce Department’s International Trade Administration (ITA) to calculate the duties. This uncertainly, experts have found, has had long-term effects on investment in new lumber capacity in both countries. For example, Simon Fraser University’s Roger Hayter and colleagues in 2015 surveyed several sawmills in British Columbia and found that “the costs and uncertainties of the trade dispute basically constitute a ‘discount factor’ discouraging long term investments and, equally important, provide strong disincentives for long-term thinking with respect to adding value, product innovation and skill formation.” They further found that the dispute encouraged producers to diversify away from the U.S. market and to buy up American sawmills to avoid the aforementioned costs and uncertainties. As a result, the surveyed producers had little financial incentive to oppose trade restrictions in the future – not exactly ideal for U.S. lumber consumers.
Then there is the substantial uncertainty caused by the U.S. trade remedies system itself. In particular, the United States is the only country in the world that uses a “retrospective” system to calculate final duty amounts paid by U.S. importers of goods subject to AD/CVD orders:
Under the current system, importers must pay cash deposits equal to the estimated antidumping and countervailing duties (if any) applicable to goods that enter the United States at the time of importation. However, the final amount of duties owed may not be determined until much later, after the ITA has examined the details regarding the imports subject to such duties, and after any judicial challenges of the results of that examination have been exhausted. On average, this process can take over three years and can result in the calculation of a final duty amount that exceeds the amount of cash deposited….
Thus, the current 9 percent duty rate for most Canadian lumber actually applies to products imported during the earlier period reviewed (2017-2018), and it could be much higher for lumber being imported right now (based on the “administrative review” currently underway).
U.S. importers, of course, would be on the hook for any resulting increase in those duties:
The retrospective system… has a significant impact on U.S. importers who are responsible for paying the duties. Although they pay cash deposits to cover the estimated amount of duties at the time of importation of the goods, they must carry a contingent liability on their books for an extended period of time, pending final determination of the amount of duties owed. This is particularly problematic for importers of consumer goods, due to the uncertainty it creates for the pricing of fast-moving goods in the retail market.
Unsurprisingly, this system acts as a major “non-tariff barrier” to imports that are subject to U.S. trade remedies duties – regardless of the current duty rate assigned to those goods. First, importers will want to avoid a “contingent liability” that ties up funds they could otherwise spend or invest elsewhere, and smaller, capital-constrained businesses might be unable to afford it at all. Second, as the National Retail Federation explained a few years ago, importers will seek to avoid even the threat of additional duties:
In order to plan and execute their operations and compete effectively, American companies need a regulatory and business environment that provides predictability and consistency. But the U.S. retrospective system creates uncertainty and arbitrariness. When faced with the contingent risk of an AD or CVD case, many American companies simply stop doing business with suppliers in the target country and shift their source of supply to another country. This option is obviously not available when the foreign manufacturer is effectively the only viable supplier of a product that a U.S. company must import for its operations, in which case the company may be forced pull its operations out of the United States entirely and move them offshore.
Exacerbating this uncertainty is the fact that, for products with many foreign suppliers (like Canadian lumber), the ITA doesn’t investigate (and thus calculate duty rates for) all exporters. Instead, the agency samples a small handful of the largest companies and applies an “all others” rate – based on the sample calculations – to everyone else. As such, smaller foreign producers – and their U.S. buyers – have essentially no control over the duty rates that are eventually applied to the products at issue (again, retrospectively!). This is especially problematic given that, as my colleague Simon Lester and I discussed recently, the ITA has been increasingly finding “creative” ways to jack up duty rates during administrative reviews.
As the NRF notes above, this uncertain and arbitrary process leaves U.S. importers with a few options, none of them good for domestic supplies or prices (and thus U.S. consumers). This includes (1) avoiding the targeted country altogether and just paying more for alternative supplies (e.g., in the United States or an un-tariffed country); (2) leaving the U.S. market entirely; or (3) sticking with the targeted country and simply passing on any higher costs – duties paid, legal and monitoring fees, contingent liabilities, etc. – to American consumers.
The system is good for one group, however: the domestic companies that benefit from these non-tariff barriers and therefore lobby to maintain them.
Is all of this the biggest cause of the current lumber mess in the United States? Almost certainly not. Just as certainly, however, the U.S.-Canada lumber dispute is about far more than just a little ol’ duty rate, and we would be better off right now if those duties – and the system that produced them – didn’t exist.
(And this goes for all the other construction materials currently subject to U.S. trade remedies.)
Commentary by Scott Lincicome. Originally published at Cato At Liberty. https://www.cato.org/blog/us-trade-remedies-duties-are-more-just-rate