Effects of Trade Barriers

•Impact on Trade •Impact on Industrial or firm profits•Impact on labor (wages or rate of interest)•Impact on Foreign Direct Investment•etc.

Example: Softwood Trade between US and Canada

Impact on Firm’s profit

• The Users of Lumber and the US-Canada Softwood Lumber Agreement: An Event Study

• Assessing the Impact of Export Taxes on Canadian Softwood Lumber

The Softwood Lumber Agreement

• US Claim– Artificially low stumpage fees – Countervailable subsidies.

• April 1996-Softwood Lumber Agreement finalized. – First 14.7 Billion Board Feet (BBF) of softwood lumber exports

from Alberta, British Columbia, Ontario, and Quebec would enter the US market duty free.

– The first 650 million board feet over 14.7 BBF -tax of $50 per thousand board feet.

– Any further exports were subject to a tax of $100 per thousand board feet.

• Other provinces- Unrestricted access to the US market.

Timeline for the SLA

• Softwood Lumber I: 1982– US authorities decided no subsidy

• Softwood Lumber II: 1986– 15% provisional duty– Replaced by 15% export tax in MOU

• Softwood Lumber III: 1991– Canada unilaterally terminates MOU– Countervailing case filed: Interim bonding requirement– Canada wins appeal against countervailing duty in CUSTA (1993

and 1994)– US revokes duties against Canadian lumber (Aug 1994)– Bilateral consultation process for softwood established

Timeline• Clinton visits Ottowa in post-NAFTA Euphoria (Feb

1995)– Highlights worlds biggest trading relationships– Bilateral trade irritants considered minor– Bilateral Trade at record high

• Late 1995 - Pressure rises on US government to limit softwood exports – progress in consultations

• February 2, 1996: The Coalition for Fair Lumber Imports (CFLI) announces intentions to petition if no pact by Feb 15th

• February 15th 1996: The basic Softwood Lumber agreement announced

• April 3rd 1996: Details on Softwood Lumber Agreement Finalized

Assessing the Impact of Export Taxes on Canadian Softwood

Lumber

Objective

Estimating Export Response in Canadian Provinces to the US-

Canada Softwood Lumber Agreement

Sumeet Gulati and Nisha Malhotra

Canadian Public Policy, 2006, vol. 32, issue 2, pages 157-172

Objective

• In this paper we wish to estimate the degree of trade diversion from named to non-named provinces created by the SLA.

• Did the Softwood Lumber Agreement cause a reduction in softwood exports to the US from the provinces named in the SLA? – If it did, what was the magnitude of this reduction?

• Secondly, did the Softwood Lumber Agreement promote softwood exports to the US from provinces not named in the SLA? – If it did, what was the magnitude of this promotion?

Provincial Effects• Provinces paying tariff (SLA)

– Alberta– British Columbia– Ontario– Quebec

• Export Growth Rates

All Years (1990-2002)

Before SLA (1990-1995)

After SLA (1996-2002

SLA Provinces 147% 119% -8%

Non-SLA Provinces

513% 155% 56%

Methodology-Gravity Model• The basic theoretical model for trade between two countries (i and j) takes

the form of:

– Where F is the trade flow, – M is the economic mass of each country, – D is the distance and – G is a constant.

• Using logarithms, the equation can be converted to a linear form for econometric analysis. The basic model for such a test results in the following equation

ln(Bilateral Trade Flow) = α+βln(GDPCountry1)+βln(GDPCountry2)-βln(Distance)+ε

• (note:constant G becomes part of α):

Gravity Model

• The model often includes variables to account for income level (GDP per capita), price levels, language relationships, tariffs, contiguity, and colonial history (whether Country1 ever colonized Country2 or vice versa). The model has also been used in international relations to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as NAFTA and the WTO.

SLA and Trade: A Gravity Model

• A cross-section ‘gravity’ equation

• xit is log exports from province i to the US (annual)• yit and yUSt are logs of GDP province and in US• disti is the log of distance from province i to the US• RUSt is the US rate of interest• SLA is dummy for SLA provinces - 1996-2001• NSLA is a dummy for non-SLA provinces - 1996-2001,• Ext is the US-Canada exchange rate• Annual data used from 1990-2002.

0 1 2 3 4 5 6 7it it USt i USt t itx y y dist R SLA NSLA Ex u

Table 2: Gravity Model for Softwood Lumber Exports (Canadian provinces to the US)

(1) (2) (3) Log Exports Log Exports Log Exports

Exchange 5.1427 4.3930 3.7139 (1.27) (1.06) (1.15) US r.o.i 0.0402 -0.0488 0.0605 (0.42) (0.35) (0.78) ln(US GDP) -0.8144 17.6712 2.7410 (0.27) (0.86) (0.87) ln(Prov. GDP) 1.1038 1.1052 -1.7204 (9.14)** (9.14)** (0.92) ln(distance) -1.1820 -1.1823 -7.1179 (7.02)** (7.02)** (1.81) SLA 0.1096 -0.0820 -0.1886 (0.23) (0.16) (0.49) NSLA 1.4264 1.2422 1.4125 (3.48)** (2.72)** (4.00)** Year -0.9331 (0.90) Provincial Dummy

NO NO YES

Observations 145 145 145 R-squared 0.83 0.83 0.90

The Users of Lumber and the US-Canada Softwood Lumber Agreement: An Event Study

Nisha Malhotra

Users of Lumber and the US-Canada Softwood Lumber Agreement

Objective• The effect of protection for the US softwood lumber

industry on users of lumber

• Export restrictions on Canadian lumber exports • Lumber using (or downstream) industries and consumers

bear the burden • The U.S. Census Bureau :

– Fees on additional shipments through the SLA amount to more than US$1,000 for the lumber in an average new home.

– For every $50 increase in the price of 1,000 board feet of framing lumber, 300,000 potential homeowners are priced out of the

housing market.

Event Study

An event study is used to examine the reaction of investors to positive or negative news (also called events).

A simple event study involves the following steps: – Event of interest (event window) – Selection of firms– Predicting "normal" return during the event window in the absence of the

event – Abnormal Return=Actual Return-Predicted Return– Estimating the Average Cumulative Abnormal Return within the event

window for all the firms.– Testing whether the Average Cumulative Abnormal return is statistically

different from zero.

Event Study Events of Interest• Feb 2nd 1996: Warning by the US Group

“The coalition for fair lumber imports warned that they would petition the US Govt. to impose duties if no pact is reached by Feb 15th”

• Feb 16th 1996: Agreement in Principle“US Lumber Industry welcomes agreement in principle

over subsidized Canadian Softwood Lumber Imports”

• April 3rd 1996: Finalizing of the agreement“Canada agrees to tax softwood exports to US….”

Source: LexisNexis Academic

Event Study Selection of Firms

Downstream Industry/ Users of Softwood Lumber

• Firms belonging to the groups that are members in American Consumers for Affordable homes (ACAH) form the sample of firms belonging to our downstream industry

• Short listed firms that fell under lumber using 4-digit SICs(home builders, manufactured-home builders and lumber dealers who

supply home builders and manufacturers )

• Checked the website to reconfirm• Centre for Research on Security Prices (CRSP) database

(AMEX, NYSE)

Event Study

Standard market model to predict Normal Returns

• Rit =firm i’s return at date t

• Rmt = The return of the value weighted NYSE/AMEX index at date t.

RitRit = j + j RmtRmt + jt

Event Study •

t=0

Estimation Period (365 days)

Event Window (-5, 5)

t= -396

t= -31