How Will the New Canadian Lumber Tariffs Affect U.S. Finished Goods Prices?

In April, the United States Commerce Department took a major step in support of the president’s tough-on-trade posture, imposing duties on lumber products imported from Canada.

Many industry experts are quick to say that the move was not a surprise—some go so far as to state that it was expected.

However, what remains to be determined at this point is how long the tariffs will remain in place, or if they will be rescinded or even be increased in the future. What’s also uncertain for now is how these tariffs will impact future NAFTA-related negotiations. Both the US and Canada have a vested interest in achieving a quick resolution to disagreements over the current NAFTA, and Canadian officials have expressed their displeasure with the imposition of lumber tariffs, hinting that the new tariffs may affect their position on a NAFTA revision.  

At this point, here is what you should know about the Canadian lumber tariffs:

This isn’t a new dispute

The United States and Canada have been at odds over softwood lumber in one form or another since the 19th century. The current dispute, which dates back to the early 1980s, is focused on how much softwood lumber Canadian suppliers can sell in the U.S. and at what price. The two nations have negotiated temporary agreements in previous years; but, the two countries have never settled on a permanent resolution to the conflict.

At the heart of the disagreement is a fundamental difference in forestry ownership. In the United States, forest lands are largely held by lumber companies, while in In Canada, they tend to be owned by the government. American lumber mills contend that Canadian provinces subsidize their industries by charging low royalty rates for cutting trees. US companies have argued that the fees charged by Canadian governments are below market rates, creating an unfair advantage for the Canadians – which Canada strongly disputes.

After the latest deal lapsed, the U.S. lumber industry filed a complaint with the Commerce Department, alleging that Canadian lumber is unfairly dumped—or sold at less than market value—into the U.S. market. The complaint also alleges that Canada heavily subsidizes its timber industry by offering Pacific Coast producers access to wood from government-owned land at below-market prices.

Commerce Department imposed tariffs

In its investigation, the Commerce Department determined that five Canadian companies received subsidies worth 3 percent to 24 percent and ordered equivalent tariffs on each of them.  The penalties will be collected retroactively on imports dating back 90 days. For other Canadian lumber companies, it set a tariff rate of 20 percent.

The tariffs, officially referred to as “Countervailing Duties”, came in below some analyst expectations. CIBC analyst Hamir Patel expected the initial combined countervailing and anti-dumping duties to reach 45 percent to 55 percent, he said in an April 23 note.

“It definitely could’ve been a heck of a lot worse,” said Kevin Mason, managing director of ERA Forest Products Research. “I think a lot of people were bracing for a higher duty.”

The determination that Canada improperly subsidizes its exports is preliminary, and the Commerce Department will need to make a final decision. In addition, the U.S. International Trade Commission must verify the claim that the U.S. lumber industry has suffered injury as a result of Canadian imports. But even a preliminary decision has immediate real-world consequences, by discouraging importers from buying lumber from Canada. The department will issue a final determination in September.

US lumber pricing will be impacted

Prior to a formal announcement by the US government, the mere prospect of U.S. duties on Canadian lumber imports has created substantial price instability so far this year. Lumber futures rose more than 25 percent in the early months of 2017, peaking at their highest point in over 12 years. 

While beneficial for U.S. lumber suppliers, tariffs are expected to result in even higher costs for companies that buy wood, such as home builders, pallet/crating manufacturers, and mattress makers, which use often lumber in box springs. 

Although many industry analysts claim that the impact will be minor, if felt at all, prices have already begun to increase across many finished goods markets—possibly due to a bit of opportunism, and partially the result of increased lumber prices. Whatever the reason, purchasers of lumber materials are feeling the pinch.

While the final outcome is not yet known, what Is clear is that prices on products made from softwood lumber will continue to increase as a result of the tariffs.  Some industries, including pallet and crating producers, have already seen raw material increase of 20 percent to 25 percent; others are experiencing similar increases. Given the emotions and uncertainty surrounding the subject, it is hard to tell what will eventually happen; but, buyers of lumber and lumber based products would be well advised to maintain close communication with their suppliers—and perhaps reach out to some new ones as well. 

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