Friday, January 21, 2022

Real world economy: Biden also supports tariff regime

It’s hard to think of a more stupid thing to do for any president than raising tariffs on a product whose price is well known to consumers and businesses, right at a time when that same president

Edward Lotterman

under intense political fire for rising inflation. Yet that’s exactly what the Biden administration did last week, quietly over the holidays, raising taxes on Canadian sawn softwood imports from 8.99 percent to 17.9 percent.

Of course, there is also politics here. US forest products producers, including those in northern Minnesota, want tighter restrictions on imports because imports here are driving down prices. This is Econ 101.

Wood users, especially home builders, want lower prices, no matter where the wood comes from. However, unlike raw steel, which most households buy little, many families buy lumber for projects large and small. Thus, the rise in prices for slabs and building panels such as plywood is evident to consumers, as opposed to rebars sold in those same large box stores.

Politicians manipulate the pressure from these two groups. In recent decades, the US forest industry seems to have had a greater impact than wood consumers, whether consumers or businesses.

Lumber prices have experienced a historic jump. By early 2021, builders’ associations claimed that higher timber prices added $ 38,000 to the value of the average U.S. new home. Always treat industry numbers with extreme caution, but this has been a historic surge.

Prices tended sideways after about 2012, but fell 30 percent from June 2018 to June 2019. They then stayed roughly the same level until COVID hit in 2020. Prices initially dropped to 2017 levels in April last year. That short drop was replaced by a tear, having quadrupled in the 14 months to June 2021. The crash was nearly as rapid, down two-thirds in three months. In October 2021, they ended up where they were in the spring of 2018.

In large part, the jump was due to the millions of self-employed people who returned home due to COVID buying materials for projects. The hype intensified as the epidemic seemed to subside in 2021. The spike in real estate markets has spurred housing construction.

Wood producers here and in Canada, our largest overseas source today, were initially unable to recover production quickly enough to prevent shortages. However, as production increased, prices fell again. Caution in the face of the wave of delta incidents has added slowdowns.

In the past two days, prices have risen again due to the just announced increase in import duties. Canadian lumber occupies a significant market share, usually from a quarter to a third of the total consumption in our country. So tariffs can dramatically impact wholesale and retail prices.

Those who have studied economics understand that “elasticity” – or how production or purchasing responds to price changes – always plays a role in situations like this. Both supply and demand for sawnwood are considered “inelastic”, especially in the short term. This means that production grows slowly in response to rising market prices, and the amount that users are willing to buy does not change much. This partly explains why we have seen sharp fluctuations over the past three years – rising or falling prices have not affected demand.

Hundreds of Minnesota forestry workers will benefit from tariffs. Hundreds of thousands of Minnesota consumers will pay more. Economists almost always estimate the loss of general well-being as a result of such events. But politics is politics.

All this kerfluffel raises several broader questions. Canada is our closest ally in many ways, and its economy is the most integrated with ours. The cultural and social ties between the two countries are enormous. But trade always has its irritants, and they work both ways.

The Conservative Party of Canada won decisive elections in 1911 under the slogan “No trucks and no Yankee trade!” One result was the absence of a specific trade agreement between the US and Canada for 65 years. During this time, however, the US and Canadian auto industries, which were then almost entirely centered on the Michigan-Ontario axis, became highly integrated. We have always relied heavily on Canadian aluminum imports.

So we weren’t cut off from each other. We became more integrated with CUSTA, a Canadian-American trade agreement negotiated at the request of Canada, which soon became NAFTA when Mexico wanted to join.

But President Donald Trump quickly slammed the door to cordial trade with our northern neighbor, unilaterally imposing tariffs on steel and aluminum for far-fetched considerations of “national defense.” It was outrageous. Canada has been a loyal supplier of these metals during five important US wars, from World War I to our 1991-2021 adventures in the Persian Gulf and Southwest Asia.

Yet Joe Biden left almost all Trump tariffs in place. This raises the very broad question of whether the World Trade Organization is dead, strangled in its crib by its midwife.

From the 1960s to the 1990s, the United States beat drums around the world to transform the weak General Agreement on Tariffs and Trade into a stronger and more inclusive World Trade Organization. He will have real power to resolve trade disputes and impose fines. We wanted this to apply to agriculture, which we ourselves initially insisted not to participate in the GATT.

We got it all – and no sector of the US economy has benefited more than agriculture. However, at the same time, China’s economy grew exponentially, doubling roughly every eight years from 1980 to 2020. This imposed political pressure on world trade.

In 2016, candidate Trump’s platform promised an effective unilateral rejection of what seven previous presidents had tried to get from both sides. When elected, Trump did it.

The irony of the ongoing softwood dispute with Canada is that Canada won the latest in a series of badminton-like complaints filed with the WTO. We could have filed an appeal, but Trump sterilized the appellate court by refusing to approve any candidates. Thus, we are in a position where we have unilaterally violated almost all of the contractual trade obligations that we have made to other countries over the past 30 years.

We need a national two-way talk about what kind of trade regime we want. And there is no chance that such a conversation will be initiated by any of the parties.

Nation World News Desk
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